“IT outsourcing has undergone tremendous changes over the years, and with enterprise customers digging deeper for that extra value and IT vendors looking at innovative service offerings, the industry is in the midst of yet another transformation.” Read More
In the past year, multiple global service providers have engaged in restructuring initiatives that will significantly alter their business model and fundamentally change the competitive landscape. Some of these restructurings include:
Numerous providers have also announced plans around changing operating and talent models. For example:
While this is not the first instance of service provider restructuring, this time is unique because multiple firms have announced programs at essentially the same time. In addition, there is speculation that other global majors will launch business portfolio restructuring initiatives (i.e., carve-outs, leveraged buyouts).
Why is this happening now? The reasons are relatively straightforward. First, many global providers have experienced reduced profitability in traditional “non-core” businesses. This, coupled with increasing competitive intensity and the shifting competitive landscape is resulting in pricing pressures. Second, next generation capabilities (e.g., social media, SaaS, analytics, and cloud) are poised to become the next growth engines, and all leading players are channelizing their investments in these areas. Finally, most global players are moving toward rationalizing their portfolios for focused investments, due to strained management bandwidth and focus.
But these initiatives will create multiple impacts beyond the obvious strategic objectives. Consider this: over the last eight quarters, the operating margins of the leading global service providers (Accenture, Aon Hewitt, Convergys, CSC, HP Enterprise Services, IBM Global Services, Unisys, and Xerox Services) grew the most in Q2 2014. This restructuring trend will likely continue as some of the long-term benefits translate into improved profitability for global service providers.
Improved profitability of global majors will also impact buyers and other service providers. We anticipate increasing focus by offshore-centric service providers on inorganic growth by acquisitions. They are also likely to scout for more collaboration opportunities to build capabilities, particularly in next generation global services. We also foresee buyers aggressively monitoring provider investments to evaluate sourcing model decisions (i.e., build vs. buy).
Interestingly, one of the unintended after-effects of these restructurings is that the offshore-centric service providers have witnessed better revenue growth than the global majors, and thus have improved in their relative rankings by revenue. For example, TCS recently overtook CSC in terms of overall revenue. And other offshore-centric providers are also bridging the revenue gap with their global counterparts. While this ranking reshuffling has been occurring for some time, the global major’ restructuring initiatives and focus on profitability (sometimes at the expense of revenue growth) has further accelerated this trend.
For more details on these restructuring initiatives and their impact on the global services industry, and other information on leading service providers, please refer to our Market Vista™ Q3 2014 report.
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Retail Industry Global In-house Center (GIC) Landscape
The cowboy song by Rhett Akins, “That Ain’t My Truck,” where he discovers his girl has left him for another guy, reminds me of the anti-incumbency bias occurring in today’s global services marketplace. What’s causing clients’ infidelity to their incumbent providers?
I believe many incumbent service providers find themselves displaced today because of three factors.
Incumbent providers should keep in mind that Taco Bell is not fine dining and a trip to Galveston is not the same as a trip the south of France. Just as with relationships between men and women, commercial relationships also need forward momentum. Without making an effort to build a deeper relationship, it will go stale or even go backward. Management changes and employee turnover in the provider organization aggravate this situation.
Clients now have a variety of options when it comes to service providers. Incumbent providers that don’t want to find their clients with another provider’s “truck” are wise to focus on the above three factors.
Also see our complimentary viewpoint, Rising Anti-Incumbency in Outsourcing: Breaking Up Is Not Hard to Do.
Photo credit: Don O’Brien
Digital transformation and regulatory compliance top list of priorities for insurance application outsourcing.
DALLAS, November 21, 2014 — Buyer demand for application outsourcing (AO) in the insurance segment is enjoying a significant surge, with the IT outsourcing spend reaching US$35-40 billion in 2013 and the number of large active insurance AO deals more than tripling over the last five years, driven by investments in digital transformation. Regulatory compliance and mobile applications top the list of discretionary spending priorities, with data management, risk management, cloud and analytics applications rounding out the leaderboard.
Consequently, the service provider competitive landscape is also intensifying, as service providers continue to ramp up their capabilities, invest in innovative technologies, form alliances, and acquire strategic targets to address the growing and complex technology needs of insurance companies.
“Insurers are facing lower interest rates, regulatory compliance challenges, and evolving customer needs, and as a result, they are investing in strategies that improve customer experiences and efficiency,” said Jimit Arora, vice president and leader of the IT Services research practice at Everest Group. “That is why we’re seeing exponential activity in digital services in application outsourcing. In particular, over the next 12 to 18 months, we’ll see huge investments in social media, mobility analytics and big data, cloud computing and telematics.”
These findings and more are discussed in the recently published Everest Group report, IT Outsourcing in Insurance – Annual Report: Insurance world preparing to ride the digital transformation wave. The report provides an overview of the application outsourcing (AO) market for the insurance industry, including key trends in market growth, demand drivers, areas of investment, and implications for stakeholders.
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“The proportion of onshore delivery center set-ups has nearly doubled in recent years as outsourcing service providers have sought to maximize their performance and meet client demands.”
Read More.
Last week both Serco and Capita announced their interim results. Not only did the two companies show a widening gap in terms of financial performance, but they also highlighted diverging business strategies.
Firstly, their financial performance in H2 2014 to date was very different:
Operating margin:
Secondly, the strategic directions of the two companies are diverging:
Interestingly, both companies have also announced changes to their boards:
Serco’s tale of woe began in 2013 when the British government discovered that it had been overcharged by Serco for offender tagging services to the Ministry of Justice (MoJ). The company is still recovering from the fallout more than a year after the issue first came to light, and having repaid more than £68 million of fees and gone through several reviews and management changes. It is ironic that Serco’s new board has chosen to focus on B2G services only, given that the troubles began in a government contract. That said, front line government services is and has always been at the core of the company’s business.
Serco has suffered from failures of governance and risk management. As it rebuilds itself, it will seek to enhance these significantly. In terms of business strategy, it will target growing opportunities in the government sector, as the pressures from aging populations and rising demand for services pushes governments to outsource more. Serco will seek to differentiate itself with its international approach, as part of which it will give its businesses a portfolio of services to go to market within specific regions of the world, to share experience and expertise.
Capita boasts of robust financial and governance structures and highly selective approach to opportunities that it pursues. Robust governance is highly needed given Capita’s aggressive acquisition strategy that has seen it take over more than a dozen companies a year for many years. Even with robust governance problems can still occur. For example, in its eagerness to win more government clients, in 2012 Capita acquired Applied Language Solutions (ALS), which had been awarded responsibility for courts interpreter services in England and Wales. For a while service delivery was less than smooth leading to the MoJ withholding fees in some instances and bad publicity in the press. Overall though Capita has benefited from many niche and strategic acquisitions that it has fully internalized, and which have largely created value and revenue.
There are lessons to be learnt from the performance of the giants of UK outsourcing. Today, one thing that is common to both is the belief that bid and governance structures have to be robust and maintained at all times.
“According to the Everest Group research report, the entire outsourcing market in the LATAM region is pegged at around US$700 to $800 million a year and growing.” Read More.
Wednesday, December 10, 2014 | 10 a.m. CST, 11 a.m. EST, 4 p.m. GMT
Everest Group’s Katrina Menzigian is the featured industry expert speaker for this webinar that takes a close look at what procurement transformation is all about today and how organizations are creating value beyond spend leverage. The session will look at where the opportunities lie and offer examples of how different procurement organizations have identified value along the broad procurement continuum. Anyone from the CPO’s office should register for this webinar!
Presenters:
The 16th century political theorist Machiavelli wrote that there is “nothing more dangerous, or more doubtful of success, than to attempt to introduce a new order of things.” I think we should remember his words as we embark on the journey to embrace the next-generation solutions entering the services marketplace. Next-generation options are now changing the nature of the relationship between buyers and service providers. And there is plenty of significant change for both sides.
The traditional structure of solutions focused on cost reductions, RFPs prepared from a proscriptive perspective, and rigid MSAs included in the RFP package along with process descriptions, service level specifications and pricing exhibits. Value was created by onerous contract terms or traps for the provider.
Next-generation solutions give way to a much more fluid partnership approach to create value. The parties distribute the risks and develop a relationship built on flexibility and innovation. Contractual documents evolve with the discussions and negotiations. In a next-gen deal buyers and providers collaborate on how they might execute the buyer’s business objectives. Together they create value through building a framework for a successful relationship rather than through an onerous contract. The contract reflects the principles the parties agree to rather than predetermined contractual terms and conditions.
This highly collaborative process in developing the commercial requirements of the contract covers such issues as who owns the intellectual property. In many of these constructs, buyers ask their providers to develop or bring intellectual property with the buyer using it on a consumption basis. The discussions and negotiations articulate both parties’ risk, understanding of the business impact and the desired solution. They jointly develop the initial governance model and also participate jointly in refining it over time.
In a relationship developing a next-gen solution, the parties need to discuss — not dictate — the commercial requirements. Competitive tension is far less useful than in the traditional RFP structure where price is the dominant issue discussed. Instead, in next-gen deals, the parties discuss capabilities and design as levers for creating value.
There is another significant aspect that differentiates next-gen relationships. The commercial construct must allow for a journey rather than a destination. As the commercial constructs take place, the buyer often faces substantial change in organizational philosophies, policies and processes. This journey of change can be as daunting and significant as the one the provider must go through.
From our experience in working with clients in these kinds of relationships, the first step toward success is for the buyer to build a robust strategic intent that includes both its objectives and its vision of how to get there. Both parties can then use this strategic intent to keep all parties aligned over time and create a North Star to follow as they navigate through a collaborative but complicated process.
Photo credit: Hartwig HKD
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