- Enterprise IT As-A-Service™
- Strategic Sourcing
- Business Transformation
- Service Optimization
- Service Provider Consulting
“This time is different” are often thought of as the most dangerous words on Wall Street. I’ve been in the outsourcing services industry since 1983 in the early days of outsourcing pioneer EDS. I watched the rise of the asset-intensive infrastructure space. Then I watched the rise of labor arbitrage and the enormous changes that brought to the industry. And now I’m watching the rise of automation, analytics, cognitive, and cloud bring a similar scale of disruption. I know from experience how “this time it’s different” is seductive to believe in the outsourcing industry.
In 1986 when I left EDS, its net return was 22.5 percent – very similar to the top labor arbitrage firms today. It was the height of the first wave of outsourcing. That continued to go on and the industry moved to large transactions and lower margins. That business peaked in the mid- 1990s. From 2000 on, labor arbitrage took over, and the industry went back to smaller transactions with high margins – very similar to the high margins that EDS achieved back in the 1960s and 1970s. Now we’re seeing the rise of the next S curve –automation, analytics, cognitive computing and cloud – and this space is rapidly growing and gaining share. Labor arbitrage is still growing, but it’s slowing, and profit margins are declining.
I’ve recently had private conversations with some industry executives who have been prophesying the death of labor arbitrage. Some leading executives believe the market is in for a massive shift over the next 18 months to five years in which the labor arbitrage space will be completely disintermediated. I think this is unlikely.
So is it different this time?
Like the asset-intensive space, I think the labor arbitrage space will be disintermediated. But just like in the asset-intensive space, which started in 1995-1996, here we are 20 years later, and we still have asset-intensive outsourcing. Yes, EDS was bought by HP and now is combined with CSC, and IBM is still in the game. There’s still a significant infrastructure market.
I expect 20 years from now that there will still be a meaningful market for labor arbitrage, but it won’t garner the same profits as today. And I expect the shift from labor arbitrage will be a slower move than 18 months to five years in terms of having a dramatic and drastic effect on existing workloads.
Having said that, I do expect the value will move to new areas – just as it did in the past as the market evolved. And we’re currently seeing this happen with automation and other digital technologies. Market capitalization and growth should be in the new models, just like it happened for EDS, HP, CSC and IBM.
Good news and bad news
I predict difficult years ahead for the arbitrage business but radical change to the current players. The only industry leader that successfully migrated to the labor arbitrage space from the asset-intensive space was IBM. Likewise, this time I don’t expect many existing arbitrage players to successfully migrate. We saw massive consolidation in the infrastructure space, and I expect to see consolidation in the labor arbitrage space too.
Yes, I understand this time it’s different in that minority shareholder laws in India will create more resistance to consolidation. But I think the change is an irresistible force meeting a little object. I believe that the industry will consolidate, growth will continue to slow and profit margins will come down, just like it happened in the asset-intensive infrastructure space.
At the same time, automation, analytics, cognitive and cloud technologies will shift the industry to new business models, different commercial relationships, different pricing structures, and different kinds of risk sharing – just like it happened when labor arbitrage entered the asset-intensive infrastructure space. The good news is that these new models will bring new providers into the services space. The bad news is I think these differences create a high barrier for incumbent providers when it comes to changing their offerings. So, once again, this time it won’t be different.
Today’s consumers are mobile, self-reliant, and demand faster and more convenient access to information. Thus, it’s not surprising that there was 50 percent growth in the number of contact center outsourcing (CCO) contracts signed in 2014-15 that include chat and social media support.
Tantamount to winning and retaining modern customers in today’s digital world is delivering great customer service. Just think about the astounding success of new age companies such as Airbnb, Amazon, Facebook, and Uber, each of which has differentiated their products and services with an unwavering, unparalleled focus on providing a best-in-class customer experience.
Traditional enterprises are feeling the heat to catch up and transform themselves. As a result, buyers who once outsourced their contact centers solely for cost reduction have started to rethink their customer engagement strategy. Buyers also expect service providers to be a strategic partner in transforming their contact center operations, such as expansion into non-voice digital channels and new delivery models.
So, how can service providers optimize their current operating model to provide a superior customer experience? Insights on emerging, new age KPIs from buyer feedback surveys and interviews conducted by Everest Group during 2014-15 help frame the answer.
Unlike when traditional KPIs were used, buyer perception of service providers’ overall performance today is heavily impacted by four KPIs: relationship management, better insights/analytics, proactiveness, and innovation. As the relevance of these has either increased from the previous year or remained high over the last two years, it’s clear that buyers are increasingly evaluating service providers on new age KPIs. Against this backdrop, we recommend CCO service providers incorporate four action items into their operating model in order to remain competitive.
1. Strengthen relationships through greater governance and coordination across teams
Successful relationship management is the fundamental reason that larger deals have been signed during renewals over the past two years. Fostering strong relationships demands greater governance across buyer and service provider cross-functional teams. CCO providers that are deeply embedded in their client’s business and operational processes are often well positioned to proactively identify undetected challenges and propose relevant solutions. This goes a long way in building mutual trust and transparency between the two parties.
2. Unlock customer insights through advanced data analytics
The ability to provide the right service to every unique customer is the key to building customer loyalty in a world of constant change. While most providers have invested in developing reporting and descriptive analytics solutions, buyers expect them to bring in advanced analytical tools that analyze volumes of unstructured data and provide actionable insights on customer needs and behavior, so they can deliver a personalized customer experience. To remain ahead of client expectations, service providers will need to offer predictive and prescriptive analytics capabilities to understand consumers’ future behavior.
3. Co-create customer value by proactively pitching for implementable solutions
Buyers face an uphill battle to constantly evaluate and improve their business processes to respond to changing market forces. Many buyers with whom we have interacted have highlighted their desire for greater input in that effort from their CCO providers. In fact, clients cite greater proactiveness as one of the key areas of improvement for incumbent providers. As the customer-facing entity for enterprises, CCO providers can assist in identifying specific problems customers frequently encounter. And by leveraging their industry expertise, CCO providers can proactively suggest best practices to buyers and participate in business process improvement initiatives.
4. Build differentiated capabilities by investing in technological product and process innovation
Buyers need to constantly innovate their processes, products, and services in order to retain modern customers who now have a wider range of choices and low loyalty thresholds. Therefore, they expect service providers to bring in technological and process-driven innovation to enable a better customer experience. In order to stand out in the market, CCO providers must invest in building innovative, forward-looking capabilities such as cognitive learning technology and AI-powered assisted automation.
We expect the move toward digital contact centers will prove challenging for some providers and empowering for others. The market has already seen a flow of mergers, acquisitions, and commercial investments in the CCO market in the past year. In order to stay ahead of this wave, service providers must act swiftly to transform their contact centers in order to match the challenging needs of buyers and digital consumers.
For more information on the changing buyer requirements in CCO and their expectations from service providers, please see Everest Group’s Contact Center Outsourcing Annual Report 2016 .
In another blog almost a year ago, I called for a consumption-based pricing mechanism for automation. Like the software industry has proved, I believe the concept of moving away from a traditional software license structure to a SaaS basis makes sense in the automation space. Instead of paying for a robot, a company would just pay for the usage of that robot or automated engine.
Even if a company doesn’t want to use a SaaS model, robots could be resident on its internal server but the company would still pay only for usage of the robot. A consumption-based model would reduce the time in the adoption cycle and overcomes the artificial constraints companies often have with licenses.
If I have only one robot, I would have to queue up work and wait for the robot to get to it. Why would I do that? Why not launch all the robots I need to get the work done immediately and compress my cycle time? And why not pay for that usage rather than contort myself to make use of a single robotic or cognitive instance? It doesn’t make any sense to the user. That inefficiency potentially reduces the usefulness of the technology. It also reduces the market share that a software provider can capture.
Automation Anywhere, one of the largest automation providers, has launched something called the Bot Farm, which provides exactly this capability. Its bot farm allows companies to buy robotic process automation (RPA) tools on a usage basis rather than on a capacity or license basis.
I believe Automation Anywhere will be rewarded in the marketplace by greater share and profitability. More importantly its customers will benefit because they can buy what they want, when they want it, without stranding large amounts of capital on tools that they only use part of the time.
Automation Anywhere’s model is an extremely important development in the marketplace, and it’s good to see that a major automation provider has moved to attack the constraints.
For the last 30 years, companies have built shared service organizations, and IT shared services units have been the best known of these. IT shared services have created a lot of value for companies, delivering high-quality, low-cost IT capacity. But today they’re almost like zombies – resembling a body that’s alive but really isn’t. How did this happen, given the value that IT shared services have created for companies for many years?
The way IT shared services created value is through a series of functional disciplines such as infrastructure discipline, security discipline, applications maintenance discipline, applications development and project management discipline. IT shared services was tasked with and delivered high-quality, low-cost capacity in those disciplines.
The problem for IT shared services is that the world is waking up to digital transformation.
As the capabilities of the digital revolution become apparent, it’s clear that IT is integral to how companies or business units compete and win in customer experience and market share. However, the expectations for IT have shifted. Instead of providing access to a low-cost, high-quality utility or function, the focus now is to integrate technology into day-to-day business in a different and more compelling way – and doing it fast. And the innovations in cloud, infrastructure as a service, SaaS, etc. deal neatly and well with alignment and speed issues.
IT cost and reliability are still important, but businesses now focus on customer needs and experience and the speed at which IT can respond to those needs. Today, in the functional-disciplines model of IT shared services, projects often take a year to 18 months. This is unacceptable to business stakeholders focusing on customer experience and value.
The challenge of IT aligning with the business stakeholders and operating at speed is killing shared service organizations, as they are not designed to deal with alignment or speed issues.
So the question is: Can we operate IT shared services in today’s environment? There’s a line of thought that says, no, not in the way they are currently constructed. Rather than organizing by functional disciplines, organizations need to align technology services directly with the business units along service lines.
In many leading organizations today, business units are no longer buying IT services such as data center, application development, security or other functions from centralized IT. They are standing that down and, instead, aligning the technology end to end into the business units. This is an IT-as-a-Service model.
This model slices through layered IT organizations, reorganizing services according to business functionality. The result of the tight alignment between IT and the business is far more flexibility to move quickly to adopt new functionality and also scale IT consumption to actual usage. The model is very close to functionality on demand.
The IT-as-a-Service model is powerful. As it grows in responsibility, I believe it will completely disrupt IT shared services as we know it.
At this point in time, every CIO knows that the cloud is a more agile, faster and cheaper place to be. But they have a tremendous amount of technical debt in legacy ecosystems, which, so far, has proved to be largely resistant to moving into cloud. There are a lot of companies, like AWS, that will help you — for free — evaluate your applications portfolio and help you calibrate which applications can move to the cloud. So it’s not that we lack the knowledge or the technology to migrate to the cloud. The problem is that the people that manage legacy ecosystems resist their moving to the cloud.
Organizations are passive-aggressive toward change. By that I mean that everyone gives lip service to migrating to the cloud, but they see their job as telling the CIO the problems you’re going to face (security or performance, for instance) and why you can’t do whatever action you want to do. They will eagerly tell you that you’ll have problems, you can’t do it, or it will be very expensive.