Service providers often ask Everest Group for advice on how to grow their business faster. We usually find that their starting-point perspective has a pitfall. They fall for the seduction of new logos.
The problem with this growth strategy is that it’s very difficult to win a brand new customer without “privilege.” Privilege is not a well-understood concept, but basically it requires that your company has an existing relationship with a customer. Where this is not the case your company will have to prove that it is credible, different from competitors and special. Specialness is the depth of understanding that you have in the uniqueness of the customer, an industry or a function. Obviously it’s easier to build this within an existing client base.
In most service industries, companies can grow three to four times faster in their existing client base than they can by adding new clients. Why? Because they already have a relationship, and the customers understand that the provider is “special.”
The master of this strategy is Cognizant. They are great at enlarging the “mine.” To do this, they sell more to their existing stakeholder groups, creating new mines in that client base. They are very adept at befriending and really understanding CIOs, CTOs and department managers’ needs where they already serve a client.
The first thing they do is look for a new mine in an existing customer. They first service HR, accounting or another stakeholder group and learn how best to service them. Based on the depth of understanding of industry or function they get from serving that stakeholder group, they are more credible in the open marketplace than their competitors. By growing fast and broadly in their existing client base, they build a richness of how to service clients and what each client’s real issues are. And they build real stories that make them much more credible. It’s that experience and credibility that make them special.
Cognizant also organizes its business around this methodology. For example, they put more people into their customer accounts than many other providers. Why? It’s their growth strategy:
- They have more people at the customer location to help outsell their competition.
- When they go to start a new mine, they can move in people who already know the customer rather than bringing in people from the outside.
- When they go to get a new logo outside their customer base, they are able to bring in people with direct experience. And they don’t violate the existing customer’s need for consistency because they have a surplus of people in the account. So the customer doesn’t lose key people; they lose one of three key people, not the one key person.
Our advice is that your company’s growth strategy should follow the Cognizant model. Deemphasize new logos and instead focus on growing business with existing accounts. As you build depth, experience and credibility from these experiences the new logos will be much easier. Besides being a proven strategy, the good news is that your cost of sales will be lower if you adopt this strategy.
I talked recently with one of the biggest losers among service providers. They had just been through a competitive RFP process as the incumbent provider. They worked tirelessly to martial the firm’s resources to get both the external and internal sale and get executives lined up. Their sales team was engaged. There were a lot of hidden costs, plus significant travel costs and deals to be brokered. And there was some relationship strain from the customer forcing them to be more competitive in their bid.
Then came the news that they came in second — the biggest loser.
Unlike the TV program where the biggest loser is a winner and receives a reward for huge weight loss, all there is for a bidding provider that comes in second place is a chest wound in the form of several million dollars in pursuit costs with no return.
What can be done to avoid being the biggest loser? That’s a question service providers ask us, and we work with them on becoming more competitive. I think there are several ways to approach this.
1. Is your company qualified?
First of all, if you want to win, don’t pursue situations where your company is not likely to win. That sounds like a no-brainer. But how do you know if it’s qualified? Here are some of the main aspects to consider:
- Does your company have a preferred relationship with the customer? Does the customer already know you? Are they unhappy with the incumbent provider? (Don’t kid yourself; there’s always an incumbent.)
- Did you help shape the problem? Or are you responding to someone else’s shaping of the problem?
- Do you know if your bid will be compelling? Do you know if you’re high priced? So many providers bid, knowing that others have a lower price, and go through the process of trying to persuade the customer that the higher price is because they’re better. That’s hard to do. There’s a higher probability of losing in that scenario.
- Is your company distinctive? Are your capabilities and offerings differentiated? Will the customer recognize your company’s difference and care about it? Is your company’s specialness worth a premium?
2. Do you have a surplus of opportunities?
It’s tempting to run to every RFP or opportunity, but my advice is not to do this. Your company must be very disciplined not to run toward all opportunities, no matter how much they sparkle. It’s hard to pass them up, particularly in the face of an industry experiencing slow growth.
Marvin Bower, who was the guiding influence at McKinsey from 1933 – 2003, counseled that you can’t be selective about customers unless you have a surplus of opportunities.
If you’re not sitting in the midst of a surplus, then you won’t benefit by reading the rest of this blog. Basically, your company must compete on every opportunity, so you may as well resign yourself to the fact that for an uncomfortable amount of time your company will be the biggest loser and come in second.
But if you can generate a surplus of opportunities, my advice is first to categorize your opportunities and then rig the playing field.
3. Categorize your opportunities
You need to sort your opportunities into two categories: those that you’re not likely to win and those where you realistically have a good chance to win. From the first day you begin talking with the potential or existing customer, you must be ruthless in qualifying how serious the chances of winning are. Once you recognize the opportunity is one your company is not likely to win, you need to step away.
You have to be ruthless in being willing to do this. And the sooner you make this decision the better off you’ll be.
4. Rig the playing field
My observation is that the majority of the work for the best providers comes from privileged environments where they either don’t compete or they “cheat” — that is, they make sure they compete on an unfair playing field where they get to run downhill and downwind against the competitors trying to dislodge them from opportunities.
There’s a famous sports adage attributed to several famous athletes: If you ain’t cheating, you ain’t trying. In the case of opportunity bids, the cheating isn’t bad. You simply rig the playing field so that your company appears to be special among the competitors. Perhaps you own IP, for instance. Or perhaps you have an existing relationship with the customer. The best way to cheat is to make sure the work never goes to the open market for bids. How do you do that? Make sure the customer sole sources it.
So here’s the formula for not being the biggest loser: make sure your company is distinctive and that the customer can recognize it, make sure you have a surplus of opportunities, qualify the opportunities all the way through the discussions and be disciplined in walking away from those where you don’t have a clear chance of winning and then rig the playing field.
It’s a curious conundrum. Finance and Accounting Outsourcing (FAO) has proven its ability to deliver savings of 30-45 percent, and usually provides other non-financial benefits such as better transaction documentation/auditability, faster and richer reportability, and dynamic workflow.
So why are FAO transitions far more hesitant and spasmodic than those of Information Technology Outsourcing (ITO) or other Business Process Outsourcing (BPO) functions?
The answer may reside among enterprises’ subject matter experts (SMEs), who may unintentionally disrupt the FAO progression. Now, before CFOs, controllers, or accounting directors raise their arms in protest, let me explain.
Consider that F&A, with its inflexibly cyclical, month-end, quarter-end, and year-end closing peaks, regularly places a significant and critically important load on SMEs plates. Is it any wonder that they request breathing room – sometimes of several weeks, or even months – between outsourcing exploration and execution, so they can focus on top-down priority projects?
Consider that F&A has the potential to immediately impact stock price or create the possibility of legal proceedings, thus negatively affecting the business to a far greater extent than any other function. Is it any wonder that SMEs, often inadvertently, spawn enough fear, uncertainty, and doubt about missing internal and external reporting cycles, and thus raise the “real and present danger” flag about outsourcing unless certain components are de-scoped?
Following is Everest Group’s advice for avoiding or counteracting SMEs’ derailment of FAO plans:
- Acknowledge that value is greater in FAO than in most other functions, and it is worth the extra effort
- Recognize competing demands, and adjust the timeline and/or add extra external resources to compensate
- Invest time in reference calls and site visits to build comfort that FAO works elsewhere in equally complex environments
- Commit internal SMEs’ time to explore the intricacies of their areas directly with service provider SMEs to build comfort that FAO can work in their own environment
- View demonstrations of workflow, intelligent document management, and other service provider tools to help drive excitement for a better way
- Where de-scoping occurs, consider it a first step to future expansion, rather than a “deal killer”
- Engage senior leadership including key client stakeholders early and often to witness the value potential and garner their support in driving past obstacles
Have your organization’s FAO plans been disrupted by internal forces, either unintentionally or purposefully? Do you firmly believe that outsourcing in all but the most basic activities is too risky for F&A? Please share your experiences and perspectives with other readers!
In the global services industry, cost benchmarking is a method enterprises use to compare their outsourcing cost competitiveness against those of similar organizations. Yet, in Everest Group’s experience and observations, businesses all too often erroneously view salary benchmarking as indicative of overall expenditures.
While salaries constitute the biggest component (60-70 percent) of operating costs, salary benchmarks fall short of providing the requisite insights, as higher salaries don’t necessarily mean higher overall costs. There are multiple other factors driving costs. The top three factors driving outsourcing operating costs, other than salaries, are:
- Pyramid and talent model
- Scope of work
- Non-compensation cost
These factors are specific to companies’ context and typically depend on their positioning. In addition, there are market-driven forces impacting costs, such as attrition, wage inflation, and the exchange rate in different countries.
A typical benchmarking exercise takes all these factors, and others, into consideration.
Following are three cost benchmarking best practices.
Best practices of cost benchmarking
Take a holistic view
Cost benchmarking should consider a comprehensive set of factors effecting cost. Everest Group classifies these components into three broad buckets:
- Compensation-linked costs (e.g., salaries, benefits)
- Non-compensation costs (e.g., real estate, technology, support staff, transportation, recruitment, and training)
- Policy levers (e.g., delivery pyramid, support staff leverage, and space usage)
An ideal cost benchmarking takes a holistic view across all three categories.
Identify underlying cost drivers
By definition, cost benchmarking determines differences within the market. However, on their own, these differences offer limited insights. To discover opportunity areas for cost optimization and subsequent calibration, enterprises need to identify the underlying drivers of differences.
For example, if an organization’s real estate costs are higher than the market average, benchmarking should identify whether it is due to rentals, space per seat, seat utilization, or a combination of these factors. Similarly, for companies with higher support staff costs, benchmarking should identify if it is driven by higher support staff salaries, skewed support staff ratios, or both. There are multiple such costs elements (e.g., transportation, recruitment, training) for which benchmarking could help identify the underlying drivers for calibration.
Even in situations where cost drivers are identified, it is critical to ensure like-to-like comparisons in order to derive meaningful conclusions. For illustration, in the real estate example above, economies of scale can result in different real estate costs for a 100 seat center and a 1,000 seat center.
Thus, organizations should normalize data along key dimensions impacting the cost. Typical dimensions to normalize include:
- Locations (e.g., onshore/offshore, Tier-I/II/III)
- Scope of work (e.g., ITO/BPO, front office, back office)
- Nature of work (e.g., transactional, complex)
- Player type (e.g., GIC, service provider, specialist)
- Scale (e.g., mid-size, large scale)
Cost benchmarking is not an easy, close your eyes and toss the dart exercise. Benchmarking that fails to take a comprehensive view of cost, identify underlying drivers, and normalize data runs the risk of making misleading comparisons that may lead to flawed results.