Experts in the global services terrain

In October 2013, Philips started to transform its IT infrastructure to a truly consumption-based model on the cloud. Alan Nance has been leading this activity in strong collaboration with Philips Procurement. Per the model, service providers charge no start-up or termination fees, and Philips pays only for what it uses. These terms are set out in a charter which all of Philips’ major IT infrastructure providers have signed up to.

One year on, I caught up with Alan to learn more about the transformation and progress to date. The full text of the interview has been published in a new Everest Group report called “Practitioner Perspectives.” In this blog I share some highlights from the interview and look at some of the key drivers for change at Philips.

These drivers include financial synchronicity, elimination of IT infrastructure Capex and speed to market.

Financial synchronicity is needed to bring IT costs in line with corporate revenue. The ultimate aim is to eliminate fixed IT costs altogether. Philips is on the way to achieving this goal. Although the transformation to consumption-based computing is still in its early days, Philips has already cut €30m of fixed costs – they have another €380m to go.

Synchronicity also applies to product development and speed to market – IT working in step with product requirements and with no Capex. One example is taking Philips’ Smart Air Purifier to China in three months. Philips’ speed to market ambitions in this case were achieved by working with Alibaba, which supports the air purifier’s mobile app on its cloud infrastructure. The app allows users to remotely monitor and manage air quality in their homes in real-time. By using Alibaba’s cloud, Philips took the product to a major new market without the need to set up new facilities such as a datacenter, in China. It tapped into Alibaba’s local presence and capabilities.

Philips’ infrastructure transformation has not been without challenges. Examples include:

  • Ensuring that service providers’ offerings meet regulatory compliance requirements in different countries
  • Developing a capability to monitor, assess and act on the impact of external changes on live services and operations
  • Evaluating products and services for inclusion in Philips’ cloud catalog – this has been more manual and time consuming than Alan expected

Then there is the need to re-skill staff. Some of the people who are good at design, build, run, and operate need to apply their skills in different ways, such as, in the service design discussion with the business and selecting the right components from Philips’ catalog. Some people have been able to make that transition, and some have not.

Despite the challenges, Philips is boldly going where few companies have gone before – a truly consumption-based computing model that is pushing the boundaries of services contracts and outsourcing. As to why Philips is opting to pursue this model, the answer is provided to us by its business model. Firstly, Philips is creating more and more products that have interactive components with some form of data sharing between central systems and apps on smart handheld devices and mobile phones. Examples, as well as the smart air purifier and its mobile app, include tools for sharing medical information between doctors and patients, and Cloud TV which streams TV channels over the Internet to Philips smart TVs. This comes with an app that lets Dropbox users view their photos, videos, and music stored online. Cloud and consumption computing are ideal for supporting this business.

The need for agility is underlined in other aspects of the business; Philips is separating its lighting business from its health technology business. The consumption-based computing model is going to make it easier to separate the two companies as resources get divided between the two new entities with little infrastructure Capex impact on Philips. There are also acquisitions, the most recent being that of Volcano Corp., the US medical imaging company that Philips is acquiring for $1.2bn. An agile infrastructure would allow it to incorporate new acquisitions into its main business quickly.

Philips has recognized the role of infrastructure in business agility and is acting upon it. There are very few other companies that cannot benefit from Philips’ model. More and more products and services are being complemented with social and digital interaction channels and mergers, acquisitions and divestments are a business reality. The questions is why are not more companies following in Philips’ footsteps?

A conversation with Alan Nance, Vice President Technology Transformation at Royal Philips – the first of a new Practitioner Perspectives Series can be accessed by Everest Group registered users here: https://research.everestgrp.com/Product/EGR-2014-4-O-1350/Practitioner-Perspectives-Alan-Nance-Interview.

Over the past several years, Asia has been leading the offshore growth momentum in provision of English-language contact center services. But recently, there has been a steady movement towards nearshore delivery of these services to North America, particularly the United States. Nearshore, in the context of this discussion, primarily refers to Latin American locations that have the advantage of being in the same time zone as North America and share cultural similarities.

Central America and the Caribbean are also gaining importance as part of this burgeoning group. Cities like San Jose, Guatemala City, and San Salvador have established themselves in this market, while locations such as Santo Domingo (Dominican Republic) and Montego Bay (Jamaica) are emerging as strong contenders. What makes this geography unique when compared with the rest of Latin America?

Overview of the nearshore contact center market

Distribution of contact center industry 2014

The figure above depicts the nearshore contact center market in terms of FTEs among Central American and Caribbean locations. As is shown, well established Costa Rica and Guatemala comprise 50 percent of the market, while El Salvador, Panama, Dominican Republic, Jamaica, etc., make up the rest of the pie as emerging locations. Consistent with trends observed in other regions of the world, global/regional service providers are the primary adopters of the emerging areas, while buyers’ global in-house centers (GICs) continue to be concentrated in established locations like Costa Rica and Guatemala.

And out of the confluence arises talent

The key attractiveness of this geography lies in its talent pool. Most of these locations offer large relevant graduate pools, especially for Spanish language delivery. However, challenges with employability of talent for English language skills affect the scalability potential in the region, especially for emerging locations. To overcome this issue, companies typically augment the graduate pool with part-time university students and high school graduates not pursuing further education.

An interesting trend emerging in these locations is that the service providers have tied-up with investment promotion agencies and other government bodies to set up language training institutes. Other providers have adopted staffing models that enable constant access to the best talent in the country. One example involves co-locating the contact centers within university campuses. Part-time university students are employed as contasct center agents, and are given incentives in the form of subsidized tuition fees. This arrangement also helps reduce attrition, which is a constant challenge in the contact center space.

In addition, many locations are taking proactive steps to increase the visibility of the nearshore contact center industry, and make it an attractive and viable employment option. For many, these jobs create the difference between poverty and prosperity. It is no wonder, then, that the Dominican Republic has been dubbed “The Call Center Republic.”

Everest Group has conducted a deep-dive analysis of this region, covering the current nearshore contact center landscape, relevant talent pool, and costs and risks associated with setting up operations. For more details, please see Everest Group’s latest report,Central America and the Caribbean Answer the Call for English-language Contact Center services.”

I’ve observed an unusual acceleration of new activity here at the end of the year — a season when global services initiatives activity traditionally tapers off dramatically. It looks like this year the industry is getting a big Christmas / New Year’s present of accelerating sales. What’s the reason for this strong uptick in new initiatives, so unusual for the November-December season? It’s a little too early to tell, but I believe two big factors are driving the uptick.

Reason for joy

Both reasons are a result of the end of uncertainties in two big areas of the market. With more certainty, organizations are moving forward.

Reason #1

The first reason is the North American economy is finally starting to give organizations confidence to open their wallets and spend on transformational activities. With the GDP expanding and the U.S. economy on a much sounder footing in the third and fourth quarters, companies are kicking off new initiatives. When the economy was uncertain, organizations didn’t focus on structural changes; but with a rising economic tide, the services boat seems to be floating better.

Reason #2

The second reason for the unusual activity at this time of year is that the cloud experiment is over and organizations now have a clear path for what they want to do with cloud and other new-generation technologies.

For three years organizations have been diligently piloting cloud and new-generation technologies. We’re now at a point where organizations have sufficient confidence in the technologies themselves, whether it’s digital, mobility or cloud. So organizations are willing to adopt these technologies on a greater scale.

From false starts to strong finish

2014 has been a strange year with several false starts for the services industry. But we’re observing a strong finish. Combined, these two new certainties around the economy and new technologies are creating the long-awaited uptick in new global services. So it looks like it will be a very happy Christmas and a wondrous new year.


Photo credit: Matthew Paulson

Managing attrition has always been a priority for business leaders in global services, and its importance continues to increase over time. Given rising competitive intensity for talent, especially in mature markets, attrition continues to consume significant mindshare of senior executives and HR managers. The key challenge has always been to quantify the actual impact of attrition on their companies’ operations.

Everest Group has developed a quantitative framework to identify the financial impact of attrition, by evaluating both costs and benefits (see Exhibit 1). Attrition impacts two key parameters of business – direct attrition-related costs (e.g., expenses on recruitment, employee onboarding/training, and employee pay-outs) and productivity loss/revenue leakage. Although the benefits associated with attrition are often not fully understood, mature firms have been able to achieve lower employee costs per FTE by adopting strategic and policy-level levers.

Financial Impact of Attrition

Based on this framework, we define “good” attrition as the average annual employee turnover rate at which an organization has a net financial gain for its operations. Everest Group’s analysis indicates a good attrition rate in an India-based English language contact center is 25-30 percent annually (see Exhibit 2). Firms with a lower or higher turnover rate incur net costs.

Good attrition rates are influenced by both market- and company-specific factors, and vary by function and location. For instance, the Philippines has an attrition rate range similar to India’s for contact center services, but a much lower one for IT services. Operations in Eastern Europe and Latin America usually have a much lower rate of good attrition compared to Asia across all functions.

Direct cost and benefit of attrition

It is noteworthy that firms usually experience attrition-related benefits for work in which efficiency and standardization are key considerations. In complex and judgment-intensive work, it is often desirable to have a very limited attrition. Furthermore, the benefits of attrition are relatively easier to achieve in moderate- to large-scale and growing operations. Small-scale and low growth operations need to consciously develop employee career paths to mitigate the challenges of higher people costs associated with a stagnant workforce.

Business leaders and HR managers can benefit by adopting this quantitative approach to assess the impact of attrition on their operations. To gain maximum value, they should institutionalize metrics to fully estimate – ideally capture – both the costs and benefits of attrition. Business managers should also identify the level of attrition that is good for their operations, and plan for it in their annual budgeting and forecasting cycle.

For more details on this topic, please refer to our recently released report, How Much Attrition is “Good” Attrition?

 

As the services industry struggles more and more with growth, providers naturally think: “We’ve saturated the large clients, so let’s go to the midmarket clients. After all, there are so many more midmarket companies than large ones. So if we can sell to midmarket companies, happy days are here again. We can reignite our growth curve and continue to grow at the pace we want to return to.” Unfortunately this violates the Dillinger principle.

When John Dillinger — an infamous gangster and bank robber during America’s Great Depression — was asked why he robbed banks, he replied, “That’s where the money is.” By analogy, that is why the services industry rarely are able to take services designed for large enterprises and build successful growth strategies in midsize companies — they don’t have the money.

As any number of providers have found out, it costs a similar amount to sell to midsized companies as large ones; however, the resulting contracts are much smaller. Furthermore, the provider has very little ability to scale that relationship to a large footprint as it could do with large companies.

My observation is that the providers that attempt to shift from large enterprises to the midmarket in an attempt to reignite growth almost always fail to achieve their goals. It’s complicated, expensive and time-consuming to sign up midsize clients. And there is lower profitability because the cost of the sale and the cost of client interaction overwhelm the potential profit.

Unfortunately, the idea of heading into the midmarket and finding a big services market is consistently disappointing.

Page 1 of 10212345...Last »