Poland delivers against quality, not low-cost

By Phil Fersht

Amidst the current economic gloom, it's encouraging to see developing nations continuing to grow their economies, develop their people resources and their industries. A recent article by the Guardian's Ashley Seager discusses the Polish situation, with the government forecasting 3% growth in 2009. 

The fact that thousands of migrant Polish workers are now returning home form the UK is testament to the rapidly-changing global economy.  Over a million Polish migrant workers have moved to the UK over the last 5 years, but that trend is now dramatically reversing as job opportunities in Poland are now more attractive than economies such as the UK, not to mention the falling currency valuation of the pound. 

From my own personal experience, Poland has proved to be a first-class location for high-quality, multi-lingual support, particularly for BPO functions, namely finance, procurement/sourcing and human resouces.  No wonder providers such as Accenture, ADP, Capgemini, Genpact, HCL, HP and IBM have all made significant investments there, in addition to many captive centers that have been established there in recent years. 

Poland is simply not an "alternative nearshore location", as its value-proposition is not driven by scale and low-cost, but by highly-motivated and educated staff, and is a proven first-class hub for multi-lingual European language support. Poland has the potential to be challenging the unique expertise of a country such as Israel, as the country possesses far more potential that simply services as an administrative back office to Western corporations. In many instances, clients have not found significant cost savings using Polish delivery resources - they have used them because of the value and quality tthese bring to a global delivery model.

India's back-office dominates procurement outsourcing

Taking a detour from the Satyam fiasco, we have much better news for the Indian services sector based on brand new data on the procurement business process outsourcing (BPO) market.

Only a couple of years' ago, barely a small fraction of procurement work was sourced from offshore locations such as India.  However, it has now reached almost 70% for all current procurement BPO engagements (see figure 1).  The speed at which procurement work (largely indirect) has been taken on in India is quite astonishing, and reminds me of the pace at which finance and accounting service delivery was developed in India a few years' ago.

Most procurement work is much harder to standardize for enterprises than administrative financial processes, which is testament to the development of Indian services to support these more complex process and technology requirements:

Figure 1: Procurement BPO Global Delivery

Procurement has been one of the slower-growth areas of BPO.  The promise of future savings from managed spend is constantly challenged by the incremental cost of upgrading procurement technology and finding staff with procurement process, technology expertise and local category knowledge.  Most of the earlier contracts were signed as add-on engagements to broader finance and accounting BPO engagements, which provided large wage-arbitrage savings and could offset the lower (initial) cost savings of a procurement BPO initiative.  They were also heavily centered on the manufacturing, hi-tech and consumer goods industries, which could take advantage of the specialist procurement expertise of companies such as Accenture, Capgemini and IBM.  The major impediment was the lack of offshore labor arbitrage that could allow buyers to move into a BPO engagement and make immediate cost-savings.  This has changed dramatically in the space of two short years.  Why is this?

The impact of Satyam on the Indian IT industry

I wanted to share with you a recent press interview on the Satyam situation an it's impact on the Indian and global services industry.

What is the impact for the Indian IT sector because of the Satyam scam? Will Indian IT companies find it more difficult to bag international deals?

PF: The impact is short-term and will pass quickly, unless there is another scandal involving another IT services firm. We believe the negative publicity is largely media hype, amidst a political backlash against offshoring of US jobs in the current economic slump, and international corporations will continue to make the right decisions for their business models to remain competitive. As all the leading IT services vendors have significant Indian staff-bases, there will be minimal impact on the Indian IT sector as a result of this deal. Clients which sign with the Western headquartered firms (Accenture, IBM, HP etc) would have done so whether or not the Satyam scandal had happened. We do not believe customers can easily sever their existing services relationships with Satyam without significant issues re-badging personnel, losing critical operational staff, and the expense and complications of transferring H1B-Visas. It often takes clients two-to-three years to establish an effective working relationship with their service provider and we are concerned with the advice several service providers are giving Satyam’s clients that switching will be quick, easy, uneventful and at minimal incremental cost.

Who will benefit from this entire episode, other Indian IT firms or international counterparts like IBMs and Accentures OR newer geographies and emerging IT service players like Eastern European companies, China, Philippines etc...or will cost considerations out-weigh other concerns?

PF:  We am more concerned regarding the governance of firms from countries such as China and Russia,

The challenge of staying relevant in today's corporate climate

Have been musing over some stats on the plummeting average tenures of C-suite executives:

CEO: A 2007 Harvard Law School study shows that a “manager CEO” of a S&P 500 firm averages 5.5 years of tenure.  Crist Associates’ 2007 Volatility Report also shows the majority of CEOs with less than 5 years of service.

CFO: Spencer Stuart has CFO tenure at 4.3 years - and falling (Crist at 5 for all CFOs).

COO: Chief Operating Officer tenure is shrinking to just under 3 years, with the total number of Fortune and S&P 500 COOs diminishing at a perilous rate.  

CIO: According to the 2008 State of the CIO poll results, a Chief Information Officer’s average time in seat is about 4.4 years, down from 5.1 years in the prior period.

CMO: Spencer Stuart’s annual study shows Chief Marketing Officers at a mere 26.8 months, which is actually up from 23.2 months in the prior year.

CHRO:  Workforce Magazine’s analysis putting an average CHRO in their seat for approximately 3.1 years.  

These stats got me thinking more about how organizations today are rethinking their organizational strategy in a challenging economy where talent management is ever-critical to the business, and non-core functions are becoming increasingly subjected to lower-cost outsourcing solutions.  So why are C-suite tenures all getting shorter? 

Beware of Satyam ambulance-chasers

We’ve been inundated with questions from Satyam’s competitors who have all been eagerly circling the beleaguered service provider’s clients over the past week. As we discussed in our recent piece “Satyam’s Woes Put India’s Services Industry In The Hot-Seat”, we do not believe customers can easily sever their existing services relationships with Satyam without significant issues re-badging personnel, losing critical operational staff, and the expense of transferring H1B-Visas. It often takes clients two-to-three years to establish an effective working relationship with their service provider and we are concerned with the advice several service providers are giving Satyam’s clients that switching will be quick, easy, uneventful and at minimal incremental cost.

While the future of Satyam hangs in the balance, our advice to clients is to remain patient in the short-term before evaluating their future options. Yes, clients should be concerned and seek reassurances from Satyam regarding any imminent service delivery issues. However, they should disregard the propaganda coming from several of Satyam’s competitors, and some of the articles from business publications questioning the viability of offshore outsourcing as a consequence of the Satyam scandal.

Should Satyam be acquired (which we believe likely), then there may be few compelling reasons to move to alternative service providers in the short-term. However, should Satyam start to lose critical staff and their execution suffers significantly, then clients may have little choice but to jump ship and go through the switching pain. Our view is that customers can afford to wait for at least a few weeks to evaluate the situation. It does appear that the Indian government is likely to lend some short-term support to the ailing service provider as it struggles with short-term financial liquidity, so there should not be major cause for panic at this time. Stay tuned for more on this developing saga.

Beware of Myopic Cost Cutting: Use Outsourcing To Be More Competitive in This Economy

 By Phil Fersht

It’s easy for enterprises to panic in this market and jump at outsourcing opportunities, simply with the goal of shedding some cost from the bottom-line. In many situations, clients have jumped at the lowest cost option, and now live to regret their decision. Too many clients we speak with are locked into outsourcing contracts that are miserable experiences they can’t escape for years.

We polled a number of companies at our recent Business Technology Conference. Few felt they were enjoying a collaborative experience with their current outsourcing provider.

Case study: A cautionary tale

One company we talked to—a major consumer products (CP) firm—signed a seven-year IT infrastructure and applications outsourcing contract in 2005 with a global outsource service provider. At the time, the company was offered a significant price cut if it signed up with this service provider for its entire major, IT-managed infrastructure and application service requirements. The client saw a price that was about 10% better than other competitive bids from best-of-breed providers for its infrastructure and applications services.

Two years into the contract

January 5th: time to shake off the gloom

It's time for people to stop panicking about next year.  

On January 5th it's business as usual, companies will be selling and delivering their services, looking for new avenues that will provide them with competitive bite, operational excellence and new ways of surviving in a tough business environment.  We are part of that.  

Yes, some of us will get laid off - several people I know already have, but we'll find new jobs, or new career opportunities - we always do.  We may get a little poorer, but so will everyone else and the cost of living will get cheaper.

End of the day, we function in a world where we have much better technology and communications than we had 6 years' ago, much more mature global delivery models, and a truly global marketplace in which we operate.  The future opportunity for our careers and our businesses has never had so much potential in the long-term, once we get over these short-term hurdles and adjust to a more challenging business environment. Challenges and change breed new opportunities - and the world won't stop while we try to embrace them.  

We have exciting new technologies being developed and a fledgling new industry for developing alternative energy sources.  And we have a new President arriving with fresh ideas and a fresh energy... in just 3 weeks.

It's time to shake off the gloom.  2009 here we come.