Ten Lessons for Avoiding Outsourcing Disasters

By Phil Fersht

Many enterprises are now leaping onto the outsourcing bandwagon as they come to grips with the economic meltdown. More than 10% of mid-to-large enterprises are moving into application and business process outsourcing engagements for the first time.

Having spent several months focusing on survival strategies to ride out the recession, organizations are now turning to outsourcing, expecting an easy way to carve out operating cost. However, outsourcing initiatives that aren’t diligently evaluated and executed nearly always have the opposite effect, resulting in increased costs, business disruption, and embarrassed executive sponsors. How can enterprises moving into large outsourcing engagements for the first time avoid such outsourcing disasters?

1. Don’t just focus on core versus non-core, but evaluate what is fit and ready

Simply evaluating which processes you want to outsource isn’t enough. As attractive as outsourcing them might seem, not all processes are fit or ready to be moved. You must ensure that processes are well documented, stable, and standardized enough to make them outsource-able. Otherwise, you could spend millions of dollars on consulting fees getting into condition to outsource.

2. Don’t jump at the lowest priced offerings

In this tough market, a multitude of providers are willing to undercut everyone to win your business. Remember, you are looking at a 72-month-plus rather than a 12-month roadmap. Focus on how the providers will leverage technology and process expertise to drive value beyond offshoring of labor. Moreover, ensure there is a good cultural fit between the provider you select and your firm. Ultimately, you should seek a partnership that vests the outsourcer in the venture’s success and not simply a contractual agreement defined by penalties and service levels.

3. Temper executive expectations

Corporate leaders are frequently exposed to outsourcing stories where firms have driven out loads of cost through deep global partnerships with outsourcing providers. In most cases, it takes years to reach such remarkable success. Play down the possible business benefits until you have thoroughly examined and evaluated what’s possible and what’s not. Otherwise, you could end up being the bearer of bad news and losing confidence from your leadership.

4. Collect experiences of peers in other organizations

Because executives and the outsourcers are under pressure to impress, publicized examples of outsourcing engagements tend to conceal the truth. Get under the covers to discover the real experiences your peers in other organizations are having with outsourcing engagements. Attend some intimate focus groups to learn more about what really goes on with outsourcing. Peer forums, such as those at AMR Research, or industry networks, such as the IAOP (International Association of Outsourcing Professionals), or the SSON (Shared Services and Outsourcing Network) are good venues where where executives share advice on how to steer outsourcing efforts toward success and away from common pitfalls.

5. Think about future flexibility

Companies must consider how potential acquisitions or divestitures might impact outsourced business processes, or vice versa. Discuss these issues with senior management before finalizing any transactions, as many outsourcing engagements are highly expensive to undo in the event of M&A activity.

6. Think about your internal learning

Once you outsource processes, you may also lose the knowledge and expertise still needed to improve them. Make sure you understand the value of this knowledge before taking it out of the enterprise. In the same vein, if you are engaging a service provider over a long period, ensure your existing staff can learn from its experts too. For example, retaining up-to-date internal skills in SAP Business Warehouse can be a valuable asset for your organization, whether you outsource related processes or not.

7. Think about the strategic value of IT

Too many firms have been treating their IT function purely as a cost-cutting mechanism in recent times. In cases where IT plays a purely administrative role, it makes sense to drive out as much cost as possible. But in many other cases IT is inherently embedded in the future success of the organization. For example, a retailer may expect to generate over half its revenue through e-commerce, and that number may be growing as consumers shift further toward buying online. Since competition is high and differentiation is critical to success, retaining specialized IT expertise in developing, implementing, and maintaining e-commerce technology is crucial to success. Risking this by outsourcing could well be taking away a powerful revenue-generation capability for the future.

8. Evaluate the impact to the local community

In this economic environment, local media and politicians tend to frown upon any type of offshoring outsourcing. You must maintain the utmost discretion during the evaluation process and prepare a concise communications plan both internally and externally when you decide how to proceed. You may need to invest in a consultant with specific experience with outsourcing matters. Advisors such as Alsbridge, Deloitte, Equaterra and PwC and W Group have experience with such issues and can also help with broader outsourcing strategy.

9. Anticipate the impact to your corporate culture

Moving work outside of the company, and bringing an outsourcing service provider’s staff to work with you, can impact your culture dramatically. Work hard with your transition team to assimilate your internal staff with other work cultures. Hiring a staff with outsourcing governance experience is especially valuable in this case. You should organize a series of change management workshops to educate all staff that the outsourcing engagement will affect. These should cover how to work with foreign cultures and attitudes, in addition to how roles and responsibilities must change to operate effectively in an outsourced environment. Just because one of your staff was effective at managing a team of 50 developers doesn’t man she or he will be effective at managing a service provider relationship. Outsourcing consultants, especially those with large change management practices that focus on outsourcing such as those mentioned above, can often help with these initiatives. For example, Deloitte Consulting has a human capital consulting practice that serves this purpose.

10. Focus on broader outsourcing governance across IT, supply chain and financial processes

Managing offshore staff and dealing with complex transition and change management issues often pose the same challenges for leadership, whether they’re managing a supply chain, finance, or IT engagement. Many progressive organizations with ongoing outsourcing engagements underway are setting up broad senior-level governance organizations that have oversight across all outsourcing activity across all business functions. This enables these synergies across business and IT processes to be explored and maximized.

Conclusion

As the lessons above outline, the impact of outsourcing cuts far deeper than merely entering into a transaction with a service provider. Corporate leaders need to focus on their people, processes and technology in tandem when they evaluate and execute their outsourcing opportunities. Experienced outsourcing practitioners often use the “30% rule of thumb” when they evaluate an outsourcing business case: Simply put, if you’re not taking more than 30% of cost from the bottom-line, it’s probably not worth the upheaval to your business. Adhering to these 10 lessons should help you make that 30% worthwhile, if that’s your chosen path.

Forget outsourcing, it's all about co-learning these days

Whenever we hear about an engagement involving a service provider, the immediate reaction is "how many people are being laid off, and what are the expected savings".  We need to move away from that attitude with some of the new wave of engagements we are seeing in this economy. 

We're operating in an world where firms need to focus on what they're really good at, and ensuring they can deliver their wares to market faster, smarter and at lower-cost.  This means firms need to embrace the skills and talent they need to make it possible, and forge partnerships with other firms to maximize their opportunity and market efficacy.

One prime example of this is the new partnership between UK-based industrials magnate Invensys and leading IT-BPO service provider Cognizant.  Invensys wants to focus on on its core competency of product definition and architecture and developing its industrial automation platform, with Cognizant being its technology partner for product development.

This engagement proves especially convenient, as the majority of Invensys' R&D staff work in the same building as Cognizant's facility in Hyderabad, India.  Cognizant will immediately hire 400 of them, with a further 100 being added in the coming months.

Invensys benefits from Cognizant's processes, tools and estimation methods and increased talent capacity, and Cognizant can come-up-to-speed faster as a serious technology and BPO services provider in the manufacturing space. This deal also frees up money for Invensys to hire onshore and offshore people in product management and consulting in its core business of control & automation.

Invensys can now focus more on the customer-interaction side, with Cognizant as an execution engine. Invensys will also be able to leverage Cognizant 2.0’s knowledge management tool, which has been active for 3 years' now, where its practitioners can access process maps, industry solution templates and pre-packaged application accelerators.  Moreover, they get to collaborate with experts across Cognizant's global enterprise.

Invensys can focus on where it's best, and Cognizant can make a surge into the manufacturing industry.  Invensys will learn from Cognizant's technology skills and Cognizant from Invensys' manufacturing process and operations prowess.  Jobs are not lost, and existing employees are going to enhance their careers with new industry and technology knowledge.  If this partnership works, both firms will end up creating more jobs to support their expanding business portfolios. 

Outsourcing?  Sounds more like a co-learning exercise to me.

Everything you need to know about Supply Management BPO (but never dared to ask)

Folks - we're staging a webinar entitled "Supply Management BPO: Why Business and Technology Transformation is Critical for Long-Term Success". 

Joining me will be Ruby Jivan, BP's Procurement Operations Director, who has a lifetime of experience with global procurement delivery and more recently with BPO; Mickey North-Rizza, AMR's supplier relationship management guru (who also has a lifetime's experience in procurement).

Date:  Wednesday 22nd July

Time:  12.00 EST, 5.00 PM GMT, 6.00 PM CET.  1 hour.

Speakers:  Ruby Jivan, Procurement Operations Director, BP; Mickey North-Rizza, Research Director, Supply Chain Management, AMR; Phil Fersht, Research Director, Global Business Services & Outsourcing, AMR.

Register here

Abstract:  Phil Fersht and Mickey North-Rizza will discuss the latest market dynamics in supply management business process outsourcing, based on data from over 200 live engagements and multiple demand-side customer studies. They will discuss the challenges facing enterprises with supply management today as they tackle global delivery issues and whether outsourcing is a true option for them to provide access to new technology and process acumen. They will also touch-upon the service provider landscape and competitive dynamics fueling market growth. Ruby Jivan will talk to her own experiences with Supply Management BPO as head of global procurement operations for global energy magnate British Petroleum.

Attendees will be afforded time to pose questions after the webcast.

We look forward to hosting you on 22nd July.

Outsourcing drivers in today's climate: large companies want to globalize, mid-sized companies seek expertise

By Phil Fersht

We wanted to share some recent dynamics from our new survey of outsourcing adoption intentions in mid-2009.

While the onus on firms today is to drive out as much cost as they can from their businesses (close to four-fifths view cost-reduction as the primary driver for outsourcing), other factors are becoming crucial for companies’ planning as they evaluating outsourcing business models, notably globalizing their businesses more effectively, re-engineering business processes, and accessing expertise from service partners.

If there's one thing this recession taught us, it is how integrated global economies and markets are today, how businesses need to adapt to move in and out of diverse regional markets, and how they must make rapid decisions to invest or divest global service / product lines in order to prosper. While some firms are find it hard to make radical decisions in this downturn, others are clearly addressing how critical it is to operate as a global business, and this is especially the case with large enterprises ($3bn+ annual revenues), with 60% of enterprises viewing this as a very important factor in their outsourcing decision making:

Key drivers behind outsourcing uptake in today’s economy

 

In addition to globalizing their businesses, over half of the large enterprises (54%) are considering outsourcing as a vehicle for re-engineering their business processes. Many firms have used the recession as an opportunity to focus heavily on eliminating wastage and streamlining poor process flows, for example using Six Sigma methodology, which has effectively put them in a much healthier position to move into outsourcing environments that can be underpinned by robust ERP and standardized processes. Outsourcing can provide a valuable change-agent for enterprises to drive these fundamental transformative measures through to fruition.

Many firms in pre-recessionary times have not been so diligent, opting for "lift and shift" outsourcing engagements whereby they transfer job functions from onshore staff to lower-cost offshore labor, with limited upfront process re-engineering. Inefficiencies are magnified several times over in an outsourced model, and customers must focus on a 72 month program of transforming process, investing in new technology platforms, and not a short-term 24 month “cost take-out” exercise, where they leverage a service provider to take on their back-office baggage and grant them cost-savings.

While large enterprises are clearly focused on improving their processes during outsourcing, only a third of mid-sized companies ($750m - $3bn annual revenues) view process transformation as a very important factor, while 45% cite their need to access new skills as very important. For example, many of our mid-sized clients are seeking to move into broader managed service agreements to gain better (and more cost-effective) access to application development skills, where they can develop long-term relationships with service provider talent than can work onsite with existing staff, in addition to providing low-cost support from offshore locations.

So what can we expect next for the Outsourcing Industry?

As the fog slowly lifts from the recession, companies are focusing more than ever on cost-containment, and outsourcing clearly is a vehicle for driving out expense from the bottom line.

However, it needs to be combined with ongoing business transformation initiatives, and too many companies in the past have tried to exploit outsourcing to take out too much cost too quickly and been made to pay the penalty. Our data clearly indicates outsourcing will be (and already is) coming back with double-digit growth over the next few months, however, we do not expect to see as many mega-deals as yesteryear. They will be largely cautious, smaller-scope engagements, focused on lower up-front capital expenditure, supported by low-cost offshore and nearshore resources. The advent of SaaS/BPO promises to help deliver these principles, but we’re only at the beginning of the new wave of Opex-based outsourcing delivery.

Supply Management BPO on the verge of overheating

By Phil Fersht

As analysts, its easy to get excited with high-growth markets, but supply management BPO's different. 

While the market has grown exponentially, and a 30% increased expenditure last year is eye-opening, the nature of these engagements doesn't give us confidence that this market will sustain its growth trajectory unless customers think beyond short-term labor arbitrage, and service providers introduce significant process and technology enhancements to the early adopters to help them optimize their delivery.  This "lift and shift" model could well result in customers losing more than they save.

Why are we arriving at these conclusions?

Our research study of the supply management BPO market reveals the industry surpassed $1.2 Bn in expenditure for the first time in 2008, at an annual growth increase of 30%, with 47 new engagements signed. The core reason for this uptake is the increased availability of low-cost offshore services for procure-to-pay and strategic sourcing support, with 72% of services being delivered from India for largely North American and European organizations. This was barely 20% three years ago, which reflects the rapid change in this market toward an offshore-supported delivery model.

This low-cost labor arbitrage is enabling new contracts to be established with limited upfront costs. Several new engagements have been executed with immediate cost reduction, with the service provider streamlining the costs over the course of the contract. In past years, many enterprises evaluated supply management BPO options and were put off by the upfront investments in technology to optimize managed spend. But now firms interested in short-term savings can take the plunge without the price tag. While such myopic behavior can result in serious future ramifications, it’s a reflection of today’s corporate attitudes to slash costs immediately and delay longer term business optimization strategies, such as rolling out better procurement technology available in ERP systems and investing in lean process transformation.

Eighty percent of all current supply management BPO engagements (see figure below) are focused purely on service providers providing staff and rebadging customer employees to deliver process work, with no enablement of the underpinning supply management technology. While this can deliver some short-term savings to the customer through lower cost labor, it’s challenging to transform a global process effectively without tying it to the underlying technology workflow. If the customer persists in a process-only global operating model, the chances are resulting inefficiencies through managing remote staff will eradicate these initial savings over time. Moreover, the service provider will struggle to develop delivery models it can use across multiple clients if it fails to develop its own technology-enabled supply management workflows. Like all types of people-centric BPO activities, if one service provider is only making money providing cheap labor, another will eventually come along and undercut the price even further.

Procurement Technology Strategy for Supplier Management BPO engagements

The key is for both companies and their service providers to develop their technology strategies and platforms at the same time they’re developing their BPO strategies. This will enable the customer to develop more efficient process flows that are tied to the technology platform.  Both are essential if customers are going to reap cost savings through better managed spending in the future.  In more mature BPO areas, such as finance and HR, most of today's engagements now entail some degree of technology enablement to move the work into an externalized outsourced environment. 

Even though companies may be saving a few dollars now through low-cost labor, these costs will sprout back if they fail to follow through with better processes and technology. We believe that if companies fail to follow this more diligent approach, this aggressive growth will quickly slowdown as too many buyers end up spending more than they hoped they would save. The reality is that once costs creep back in, the a trend to backsource supply management processes may begin.

As always, we love to hear your views on how you see this space developing and what needs to happen to get beyond these teething problems.

You can also read more about this market in our new report "The 2009 Supply Management BPO Landscape: Short-Term Body-Shopping Trumps Business Transformation"

Globalizing the business is the key to outsourcing today

By Phil Fersht

As we discussed last week, it's clear that many companies will continue to move into outsourced business environments, despite the recession and political pressures to keep work onshore.  While some firms find it hard to make radical decisions in a downturn, others are clearly seeing how critical it is to operate as a global business.   If there's one thing this recession taught us, it's how integrated global economies and markets are today, how businesses need to adapt to move in and out of diverse regional markets, and how they must make rapid decisions to invest or divest global service / product lines in order to prosper. 

Outsourcing doesn't provide all the immediate answers, but it does help create the vehicle for clients to become more nimble and capable at a global level.  The following data from our new survey reveals some key indicators that help us unravel how outsourcing adoption will take shape over the next couple of years, as business adapt to this new market environment:

Reducing operating costs:  obviously, the overriding factor when companies outsource.  And while there's a clear land-grab on for new client contracts by service providers, they all offer varying degrees of cost-savings these days.  Most smart businesses are evaluating service partners based on what they bring to the table beyond mere cost savings.  Once they are evaluating a short-list of 3 or 4 partners, 5% price differentials are unlikely to swing the balance. Hence, the real differentiators move to other core factors, namely business transformation acumen, and finding the right global partner to help establish more effective global business operations.

More effective global operations:  using outsourcing to globalize business operations more effectively is becoming much more widely discussed during outsourcing evaluations today, with over half of the enterprises interviewed specifying this as a very important driving factor.  Moving onto a global HR platform, whereby companies have a much better handle on their global employee-base, or having a much more integrated global cash-flow cycle, or leveraging customer service support in foreign markets, are all examples of how outsourcing services can add global value to businesses today.  Service partners which can demonstrate they are first-class global operators themselves are in a great position to find clients eager to benefit from their global delivery resources and experiences.  At the same time, clients need to fully evaluate their overall global business goals and test their potential service partners to determine whether there is a good cultural fit and overall understanding of their business. 

Transforming processes:  The "T" word has been banded around lightly in recent years, but getting one's base process in order is vital when outsourcing successfully. 50% of enterprises now see this as a very important driver when considering outsourcing. We've seen far too many "lift and shift" outsourcing engagements whereby clients transferred their existing back office to a service provider, and all the things that were being done badly were (and still are) magnified several times over in an outsourced model.  Many firms have used the recession as an opportunity to focus much harder internally on eliminate wastage and streamlining poor process flows, which has effectively put them in a much healthier position to move into outsourcing environments that can be underpinned by robust ERP and standardized processes.  Other firms have not been so diligent, and are looking for providers to take on their back-office baggage and grant them cost-savings.  In these situations, there is a strong onus on the service provider to help its clients refine their processes, otherwise they will struggle to realize any savings, and the provider will struggle to develop a common set of processes it was delivery to multiple clients via a utiliy model.  The provider needs to develop structured process re-design programs, it can deliver services to these clients without the need for costly consulting resources. If the service provider fails to help drive the transformation in tandem with the client's governance leadership, the engagement is unlikely to reap many rewards for either party.

All-in-all, businesses are clearly thinking about driving out as much cost as they can, but the onus is moving towards real business transformation as a follow-on objective.  There are a host of service providers out there which can deliver a quick cost-saving scenario, but only a small handful which can truly go beyond that to deliver ongoing quality and cost-optimization.

You comments are - as always - more than welcome.  We will be drawing on more findings from our new survey over the following days.

Wipro and Oracle partner to blow-up the BPO delivery model

Folks - we can exclusively reveal to you today that Wipro BPO and Oracle are shortly going to announce a partnership dubbed "simPlify", whereby Wipro will deliver PeopleSoft HR to both mid-market and high-end clients via a hosted utility BPO service, that will cater for 20 major countries.  They will also partner with The Hackett Group as part of the arrangement to provide performance benchmarks for HR processes.

The mid-market play is a true move towards "one-to-many", whereas the enterprise play will be a more customized approach.  Clients will need to invest a minimal initial outlay to move into a "pay as you drink" model, based on a per-employee-per-month pricing, to receive PeopleSoft-based HR delivery services, most notably payroll.  The industry has been crying out for this for years, and Wipro and Oracle have broken the mold by putting together a delivery model for the mid-market that clients can move onto without huge upfront costs. 

Moreover, the yawning chasm of mid-market HR service delivery, which has been under-serviced for PeopleSoft-based HR services in a utility BPO model, is now being filled.  ADP, Ceridian, NorthgateARINSO and others will look warily at this move, which threatens to blow-up the traditional model, that has been often plagued by expensive implementations, long inflexible contracts and poorly integrated software.  Not to mention Wipro's services competitors which are vying for increased share in the HR BPO market, namely ACS, HP, IBM, Infosys and TCS. Clients in this environment simply cannot shell-out multiple millions to get global payroll and HRMS - managed services with limited Capex is their only real choice today.  Bringing hosted software into the BPO model is the answer, and this is a true game-changer in the industry. 

Wipro will absorb much of the client implementation costs as they move onto this solution, which they will host across their delivery hubs in India, Latin America, the USA and the UK.  They will look to roll-in China and Japanese delivery later in the year.  Wipro will provide clients with Level 1, 2 and 3 support, with Oracle level 4.  The pair have also incorporated benchmark data from The Hackett Group to help clients assess their performance levels, which is embedded in the software at no additional fee.

More to follow with this trend... the next question is how the incumbent service providers will react, and, interestingly, whether this will put more urgency on Workday to make its BPO partnership move.  In addition, we can certainly expect similar BPO/hosted software partnerships to spring up in other BPO disciplines, notably supplier management and finance.

Pictured left-to-right:  Puneet Chandra (Wipro), Tibor Beles (Oracle) and Ashwin Bhatia (Wipro) announcing the partnership to a certain analyst at the European Shared Shared Services and Outsourcing Week show in Budapest earlier today.

Exclusive: Outsourcing poised to rebound

By Phil Fersht

I wanted to share a few early snippets from our global sourcing adoption study, which we've been running over the last 2 weeks.  And thanks to Global Services Media, Vinnie Mirchandani, Jason Busch, William Mougayar and Dennis Howlett, who have all contributed in helping us reach close to 700 respondents, of which we had 127 enterprise buyers for IT, supply chain, finance, HR and other BPO services.

Here's the high-level view on where enterprise buyers will be investing / dis-investing over the next 12 months:

Sourcing plans over the next 12 months 

Key trends of note:

Applications outsourcing (AO) to resume similar uptake as pre-recession era, with 8% of buyers moving into AO deals for the first time.  42% if existing AO buyers will increase scope, with only18% decreasing.

IT infrastructure outsourcing shows a similar aggressive trend to AO, with a similar number increasing/decreasing scope.

Finance & Accounting BPO will resume it's pre-recession surge, with 13% looking to make their first venture in an F&A BPO model, 30% of existing buyers increasing scope, and only 17% decreasing.

HR Outsourcing will be more modest, with 10% looking at payroll-based HRO for the first time.  However, the same number of current HRO buyers that are increasing scope will also be decreasing.  Clients who have adopted HRO seem to be sticking with what they have already outsourced, as opposed to bundling more processes.

Procurement shows steady potential, though a lot less pronounced than F&A BPO, and KPO is being evaluated by 8% of buyers.  KPO seems to be more project focused still, which buyers working out what works as opposed to increasing scope at this stage.

Thanks to all of you who took the time to complete the study.  You will receive an article highlighting the main findings shortly.  Comments/questions always welcome.  pfersht@amrresearch.com

Supplier Management BPO breaks a billion

I wanted to share a few early snippets from our forthcoming market landscape on Supplier Management BPO services, which is due to hit the shelves next month.  We've defined this market as managed strategic sourcing and procure-to-pay services, the bulk of which are indirect procurement services, but also includes some direct strategic sourcing and supplier management analytics processes.

And we can exclusively reveal here, that the market surpassed a billion dollars in expenditure for the first time last year with a 30% hike in expenditure on new multi-scope BPO contracts:

So what's driving this growth?

Major shift of indirect procurement work to India.  The labor arbitrage is enabling new contracts to be set up with limited upfront costs as a result of the lower cost labor.  Several new contracts have been implemented with immediate cost-reduction, where the service provider has streamlined the costs over the course of the contract.  In past years, many firms evaluated supplier management BPO options, but were put off by the upfront investments in technology to optimize managed spend.  Now they can mitigate this investment risk.

More service providers scaling up and offering supplier management services.  While the incumbent service providers, namely Accenture, Capgemini and IBM, have all ramped up their global delivery resources and scaled their businesses, the entry of new offshore-centric service providers, keen to take on deals at low-cost to kick-start their operations, has significantly driven growth over the last 2 years.  For example, Corbus, Infosys, TCS, Wipro and WNS have all picked up market share, and we now have HCL/Xerox and Genpact competing for deals.  I'll reveal the market share shoot-out in the report, and there are a few surprises...

What's the outlook for this year and beyond?

We've experienced a lull in all outsourcing activity since the recession hit, as companies delay decisions and wait to see how their competitive position unravels as the fog lifts.  However, we expect some marginal improvement in new deal activity this quarter, with a marked increase in Q3 and Q4, as many delayed projects get the go-ahead.  Early indication from our new adoption survey already indicates aggressive BPO and ITO intentions for later 2009/2010.

Will this market continue to grow in the long-term?

My short answer is yes, but with some caveats.  80% of current live engagements are largely people-process "lift and shift" deals, with limited process transformation and tie-in to new procurement technology investment, which is essential if customers are going to reap cost-savings through better managed spend in the future.  While they may be saving a few dollars now through low-cost labor, these costs will sprout back if they fail to follow-through with better processes and technology.

What do you think?

Why No Regulation of Offshoring: Untangling the Gap Between Rhetoric and Action

Professor Bob Kennedy, who heads up the William Davidson Institute, a non-profit research and educational institute that focuses on business and policy issues in emerging market economies, has been keeping very close tabs on regulatory issues with offshoring.  I asked Bob to contribute his recent experiences and views with us.  Bob also has a new blog up and running entitled "Services Shift", and has recently released his new book, adorning the same name.  Over to you Bob...

Picking up on Phil’s April Fool’s day post, I wanted to share a few thoughts on why we see lots of anti-offshoring rhetoric from politicians, but (thankfully) very little actual policy.

There is certainly a heavy demand from the man on the street to “do something.” It’s easy to understand why. We have become accustomed to trade in manufactured goods and natural resources. But manufacturing accounts for only about 15% of US employment, and developing countries generally enjoy a fully-delivered cost advantage of 10-30%. This is disconcerting for developed country workers, and we frequently observe moves against trade in manufactured goods, such as spurious anti-dumping actions and “buy America” provisions in various pieces of legislation.

Services, by contrast, account for about 78% of U.S. employment, and developing countries enjoy delivered cost savings of 40-70%.

SaaS: Outsourcing out-of-control?

SaaS is effectively the same as outsourcing - you're handing control over business processes to a third-party service provider.  However, while SaaS delivery shares many similarities with outsourcing as a delivery model, there are serious caveats customers need to consider.

For today's business executive, it's easy to get excited by the potential of SaaS-based offerings. The low-cost upfront investment and pay-by-the-drink pricing can quickly get you the business services you need without the painful customization and implementation impediments of yesteryear.  There is no more fretting whether your IT department has the expertise or resources to implement, develop and maintain the application.  Bottom-line, SaaS creates a business utility service that is revolutionizing the software and outsourcing industries (see Figure 1), especially in the worlds of the manufacturing, marketing and HR executive. 

Figure 1:  SaaS and BPO delivery creeping into the Enterprise Software Purchasing Model (Click to enlarge)

 

So what are the similarities and differences between SaaS and Business Process Outsourcing?

SaaS is like outsourcing because you're handing over control of service-delivery to a third-party and relying on it to look after the day-to-day operational delivery.  You’re also not paying anything for housing your data. But does low-cost mean low-risk?

Data concerns:  What concerns me with SaaS delivery is the lack of provisions for compliance, business continuity, security and privacy of data.  Moreover, there is often a far-reduced level of control over data and processing, for which a well-crafted outsourcing contract caters.  Outsourcing goes to great lengths to stipulate where data resides, how it is protected, who has access, which measures are in place to accommodate political or natural disasters, and how data management complies with regulations.  In addition, outsourcing providers are SAS 70 compliant, but are all SaaS providers?  With SaaS, data is being processed in the Cloud. But does the Cloud have parameters? Does a SaaS contract have any reference to where cloud is located?   These are questions you must ask when exploring these models.

Governance concerns:  The massive appeal of SaaS to outsourcing service providers is the reduction in customization for new customers, which makes their services less appealing from a price perspective.  The outsourcing Holy Grail is the one-to-many model where they can delivery common processes to multiple clients in a standard format.  SaaS delivers that model in spades.  If outsourcing service providers can acquire successful SaaS applications, they could hit a home-run with a utility delivery model, especially for business processes where buyers are willing to standardize onto a vendor model, for example payroll, general accounting, performance management, or CRM. 

Hence, customers looking to procure SaaS will have to change their business processes to fit with a SaaS offering. They do all the transformation at their end, hence this entails a very different focus on transition into a managed service model.

SaaS is simply too easy: what worries me is the lack of any upfront investment, and how that impacts the governance over that business process.  It is a serious step for companies to enter into an outsourcing engagement, with significant change mangement required to establish governance over those outsourced processes.  With SaaS, companies can sign up, flip a switch, and they're up and running with zero upfront investment.  Does this mean they are going to invest nearly as much attention on governing these processes?  My experience so far is no.  Companies move into SaaS because it is cheap and easy, and often overlook the internal business transformation they need to go through to manage these processes effectively in an outsourced environment. 

Outsourcing is a big investment, and the customer has to earn its savings overt time, while the service provider needs to earn its investment over time.   SaaS is not a big investment for the service provider, but it should be treated as the SAME investment for the customer.  If not, you could end up with an outsourced environment with no controls... not a situation that is going to be healthy for your business in this market.

Outsourced from Africa

I feel like I'm becoming a travel journalist these days, but we're seeing some very interesting locations get themselves onto the global sourcing map.  Enter South Africa and the picturesque coastal hub of Cape Town, which is primed to challenge for UK and European BPO services.

As the 21st century dawned, South Africa sought to expand its economy with one of the focal points being the English-speaking workforce. Problems existed in the value proposition to potential European customers, most notably in the high cost of telecommunications. Like the dismantling of the Berlin wall, deregulation and the elimination of the telecommunications monopoly have propelled the nation into a rising star as an offshore location for customer care and BPO work.

For several years, the battle raged with the push/pull between economic development and the predominantly government-owned sole telecommunications provider, Telkom. Competition was injected into the industry with the first competitor, Neotel, commencing service in November of 2007. The government has been committed to reducing costs and implemented notable tariff reductions.

Guatemala: Bananas, Green Tomatoes... and BPO

 By Phil Fersht

We've been debating the opportunities for Latin American countries to take on outsourcing work for a while now, and spending a few days in Guatemala has confirmed, beyond doubt, the potential of the region. 

I had the pleasure of visiting Capgemini's facility, which is quickly ramping up customer-facing finance, accounting and procurement work for Coca-Cola Enterprises.  I am going to write more about this engagement in due course, but the hybrid nearshore/offshore operating model for Finance and Accounting and Procurement is showing strong signs of being the way forward for the industry.  This is also the case for many global strategic sourcing, supply management and HR BPO engagements.  For example, Coca-Cola Enterprises is sourcing neashore work to Capgemini's centers in Guatemala and Krakow, and using its Chennai operation to support these centers with non-customer facing processes. 

Guatemala's population itself is only 13.7m people, with 40% based in urban areas, however, it is the largest Central American hub with strong potential to source activities to neighboring countries, such as El Salvador and Nicaragua (see graph below) to compliment serices and keep costs low.  What impressed me most meeting many operations agents and managers was the easy-to-understand English intonation, the obsession with process, the youthful energy and the discipline. 

HR outsourcing in this recession... why this makes sense for many global firms

By Phil Fersht

While many firms are hunkering down tryng to ride out this turbulent year, we're also seeing an increasing number of multi-national companies use this time to develop business support infrastructures that can scale quickly with the needs of the business.  It's not all about cost-reduction - it's about being nimble, and having a firmer handle on accessing critical data on your staff at a global level. 

As we discussed at the beginning of the market crash, more than 50% of employees in major multinationals now reside outside of the corporate home country (source Mercer / Harvard Business School study, 2008).  The pressure to standardize policies and processes, manage increased workforce mobility and compliance issues is greater than ever, and the current market volatility and uncertaintly is exacerbating the need for corporate leadership to get a tighter grip on managing their global workforce.  For example, many large retailers and consumer goods firms have increasing numbers of employees working in low-cost locations, such as China, Vietnam, Thailand and the Malaysia.  How can corporate management keep a handle on where staff are, how much are they getting paid, and how are they adhering to local regulations in a market where they may need to staff up or down at a moment's notice?

Consequently, many senior HR executives are stepping up into global roles, but are failing to divest of their localized issues.  According to the Mercer / HBS study 45% of HR executives have moved into global roles over the last two-to-three years.  However, while roles are being structured globally, most of the HR executives have been struggling to get away from dealing with local and regional issues.  For those working in global roles today, 9 out of 10 have less than 3 years experience and a failing to move away from their previous localized job roles.  Hence to need for HR administrative support at a global level to help companies develop effective global payroll, benefits administration, workforce data analytics, compliance and recruiting operations has never been as intense with today's market conditions.  So what can we expect to see happening in the coming months with HRO adoption?

As Figure 1 illustrates, the multi-process HRO market grew by 24% in 2007 and is ontrack to maintain  single-digit growth-rate throughout 2008 and into 2009:

Figure 1: Multi-process HR Outsourcing Contracts, 2002 - Present

 

The core question now is centered on whether the deepening global recession is going to impact this market growth. While some engagements will inevitably be put on hold as a result of conflicting corporate priorities, the upward growth trajectory of this market will continue throughout 2009 and into next year as a direct result of the following factors:

Global Delivery’s Next Big Thing? Egypt Makes a Play

Hello all -- Salam Alaikum -- Dana here. Welcome to Cairo. I’ve been snaking through traffic and shiny service delivery centers this week as a guest of Egypt’s Information Technology Industry Development Agency (ITIDA). We’re a motley assortment of analysts and advisors, global tech companies, local service provider upstarts, and government officials, all discussing the relative merits and drawbacks of technology and BPO service delivery out of Egypt.

Can Cloud transform Outsourcing?

By Phil Fersht

What I detest most about recessions is when firms put all their focus on short-term cost-reduction measures and take their eye off the ball with initiatives that can reap much more lucrative efficiencies over a longer period.  I am somewhat hopeful this recession is a little different: shaving a few percentage points off the bottom-line is unlikely to make a huge difference when your very survival is at stake, and several companies are exploring more radical, longer-term strategies that will lift them above the depressed morass.  Moreover, many smart executives are seeking to tie themselves to longer-term projects that give them added job security and enhance their own roles in changing times. 

Cloud computing has all the attributes and potential to support a global outsourcing environment with lower infrastructure costs, lower energy costs from eliminating hardware boxes, and much better scaleability to provide computing resources to meet demand in an unpredictable global market.  My view is that we are in a global delivery continuum, where many organizations will originally evolve from crude BPO environments (a lot of lift and shift), explore SaaS delivery to optimize that environment, and ultimately dabble with SaaS apps that be deployed in a Cloud "plug-in" model.  A flashy diagram will likely ensue, but that's the nuts-and-bolts of how this continuum will eventually play out.  Bottom-line, those service providers which persist in a labor-arbitrage-only service model and ignore the benefits and cost-efficiences of SaaS and Cloud, will get left behind.

"I just knew the mainframe would make a comeback", said an excited industry veteran on Cloud computing recently. He's actually right, but the difference in today's world, is we are creating the applications and the development environment to run real business applications in a cloud environment.

We're not there yet, but smart organizations need to start exploring service provider relationships where Cloud is on the horizon.  Cloud computing is not only rapidly emerging as an infrastructure option that is relatively inexpensive; it is also becoming a buyers' market.

Cloud has come a long way since being a small blip on the radar in 2007 when the likes of Microsoft, HP, Google

NASSCOM: Pushing the Reset Button on an Industry, But Hush-Hush on Satyam

We are priveleged this year to have AMR's own Dana Stiffler at the NASSCOM show in Mumbai.  What a time to be at the heart of the Indian services industry with the recent Mumbai terror events, the Satyam saga and the current economic crisis...  How is India Inc. responding? Over you to Dana:

NASSCOM President Som Mittal opened the group’s 17th annual leadership conference with praise for the resilient city of Mumbai, as the packed house observed a moment of silence for the victims of the city’s terrorist attacks last November. It’s a watershed moment for NASSCOM and the industry in general and Mr. Mittal struck just the right tone in his opening comments: cheerful, welcoming, resolute. Addressing the attacks and Satyam’s challenges up front, he told us it was time to reset expectations.

As for specifics, Mr. Mittal announced that NASSCOM will reconvene its ethics and governance committee. He also highlighted green technology as a new opportunity and responsibility for NASSCOM members, and reminded the group that NASSCOM’s work is now truly a global affair. Members from 22 countries are participating this year. 

Cisco CEO John Chambers delivered the event’s keynote. Mr. Chambers proved the ideal man for the task, given the ups and downs he’s experienced in his tenure at Cisco. His umbrella topics were global competitiveness and collaboration, accompanied, naturally, by a big plug for Cisco’s TelePresence technology. But it was his anecdote about Jack Welch telling him that “you’ll never have a great company until you have a near-death experience” that probably resonated best with the audience, most of whom have never been through a major downturn.

Indian Minister for Commerce and Industry Kamal Nath came next, charging NASSCOM to use the global economic crisis as a time to look inward to the Indian market opportunity. India’s IT sector has been heavily export focused, the largest players even more so. This has left much of the Indian IT opportunity, especially at the enterprise level, open to rivals IBM and HP. I agree with Minister Nath that Indian IT needs to be stronger domestically for another reason as well: the multinationals we work with all have emerging market IT strategies. Today, Accenture, HP, and IBM are better-positioned to advise on and support these operations than Indian service providers.

Then, finally, the session I had been anticipating the most: a panel discussion featuring Vineet Nayar, Nandan Nilekani, and S. Ramadorai, top executives of HCL Technologies, Infosys, and Tata Consultancy Services, respectively. TPI’s Dennis McGuire was there for buyer insight and color commentary as well. I was less interested in what the panel had to say than in how they would said it. Indeed, it was fairly predictable, if reassuring stuff – there is no question these companies will be around for the long haul. All agreed that there is a lot of efficiency to be wrung out of current operations and that uncertainty and volatility are the new normal. Mssrs. Ramadorai and Nilekani talked about deepening client relationships and helping them leverage existing scenarios while Mr. Nayar made no bones about aggressively seeking market share, i.e. “eating someone else’s lunch.”

Presumably it is Satyam’s lunch that we are talking about. But we didn’t talk about Satyam -- none of the panelists even mentioned the company’s name, though the moderator did in a few joking asides. Of the ten or so questions from the floor, none were about increased client concerns with vendor financial transparency and viability.  The panel missed a major opportunity, perhaps the event’s only main stage opportunity, to address the biggest elephant in the room.

And so, while NASSCOM’s first day was reassuring, even inspiring, on many levels, there’s a lot more that needs to be said. I look forward to your comments and questions as the event unfolds -- tomorrow brings the likely emergence of said elephant as I’m having breakfast with NASSCOM leadership and participating on two panels. Stay tuned.

We are priveleged this year to have AMR's own Dana Stiffler at the NASSCOM show in Mumbai.  What a time to be at the heart of the Indian services industry with the recent Mumbai terror events, the Satyam saga and the current economic crisis...  How is India Inc. responding? Over you to Dana:

NASSCOM President Som Mittal opened the group’s 17th annual leadership conference with praise for the resilient city of Mumbai, as the packed house observed a moment of silence for the victims of the city’s terrorist attacks last November. It’s a watershed moment for NASSCOM and the industry in general and Mr. Mittal struck just the right tone in his opening comments: cheerful, welcoming, resolute. Addressing the attacks and Satyam’s challenges up front, he told us it was time to reset expectations.

As for specifics, Mr. Mittal announced that NASSCOM will reconvene its ethics and governance committee. He also highlighted green technology as a new opportunity and responsibility for NASSCOM members, and reminded the group that NASSCOM’s work is now truly a global affair. Members from 22 countries are participating this year. 

Cisco CEO John Chambers delivered the event’s keynote. Mr. Chambers proved the ideal man for the task, given the ups and downs he’s experienced in his tenure at Cisco. His umbrella topics were global competitiveness and collaboration, accompanied, naturally, by a big plug for Cisco’s TelePresence technology. But it was his anecdote about Jack Welch telling him that “you’ll never have a great company until you have a near-death experience” that probably resonated best with the audience, most of whom have never been through a major downturn.

Indian Minister for Commerce and Industry Kamal Nath came next, charging NASSCOM to use the global economic crisis as a time to look inward to the Indian market opportunity. India’s IT sector has been heavily export focused, the largest players even more so. This has left much of the Indian IT opportunity, especially at the enterprise level, open to rivals IBM and HP. I agree with Minister Nath that Indian IT needs to be stronger domestically for another reason as well: the multinationals we work with all have emerging market IT strategies. Today, Accenture, HP, and IBM are better-positioned to advise on and support these operations than Indian service providers.

Then, finally, the session I had been anticipating the most: a panel discussion featuring Vineet Nayar, Nandan Nilekani, and S. Ramadorai, top executives of HCL Technologies, Infosys, and Tata Consultancy Services, respectively. TPI’s Dennis McGuire was there for buyer insight and color commentary as well. I was less interested in what the panel had to say than in how they would said it. Indeed, it was fairly predictable, if reassuring stuff – there is no question these companies will be around for the long haul. All agreed that there is a lot of efficiency to be wrung out of current operations and that uncertainty and volatility are the new normal. Mssrs. Ramadorai and Nilekani talked about deepening client relationships and helping them leverage existing scenarios while Mr. Nayar made no bones about aggressively seeking market share, i.e. “eating someone else’s lunch.”

Presumably it is Satyam’s lunch that we are talking about. But we didn’t talk about Satyam -- none of the panelists even mentioned the company’s name, though the moderator did in a few joking asides. Of the ten or so questions from the floor, none were about increased client concerns with vendor financial transparency and viability.  The panel missed a major opportunity, perhaps the event’s only main stage opportunity, to address the biggest elephant in the room.

And so, while NASSCOM’s first day was reassuring, even inspiring, on many levels, there’s a lot more that needs to be said. I look forward to your comments and questions as the event unfolds -- tomorrow brings the likely emergence of said elephant as I’m having breakfast with NASSCOM leadership and participating on two panels. Stay tuned.

Want to offshore yourself?

IBM is now offering employees, who would otherwise face layoffs from their North American jobs, the chance to work abroad through 'Project Match'. Destinations include Argentina, Brazil, China, Czech Republic, Hungary, Mexico, Poland, Romania, Slovakia, Slovenia, South Africa, Turkey, and United Arab Emirates. IBM will also help with moving costs and provide visa assistance. While some cynics will sneer at this scheme, at least Big Blue is doing something proactive to support at-risk staff, and also promote moving much-needed onshore talent into their emerging country delivery centers. Furthermore, maybe they'll pick up some good work habits and bring them home to the States when the economy improves?

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.