In a recent blog I noted that there is a new wave of shared services activity. But don’t dismiss that news with an assumption that new starts in shared services just means taking a slice of business away from third-party service providers. Here are my tips for shifting this potential business loss to a new revenue stream.
Tip #1: Be patient
If a company has decided to go down the shared services path, your trying to convince them to use purely outsourcing is not likely to succeed. However, we know that over time companies that decide to embark on a shared services journey later decide to use third-party providers in their shared services mix, to a lesser or larger degree. So be patient. These activities take years to develop.
Tip #2: Be an ally
Don’t be an enemy of their decision to take the shared services path. Instead, be an ally and assist them on their journey. You can help them build out their shared services approach and use that relationship to identify where they could use a third party for part of of the services.
Tip #3: Cede control
At some point a shared services unit probably will adopt a hybrid approach to services. Even so, companies moving to shared services inherently favor maintaining control; so the types of services you offer them should be designed to allow them to exercise control.
Much of the outsourcing model is about giving the provider control so the provider can operate in an efficient manner and give the customer a low price. That approach won’t work in a hybrid shared services model. Instead, take an approach along the lines of “Let us help you craft control” so you can participate going forward.
At the request of a BPO provider, we did a fairly exhaustive study of all vendor/provider-funded innovations and their impact on the business growth. The data were startling. Our study clearly revealed that the hundreds of millions of dollars that providers invested in innovation yielded very disappointing returns. Although they often succeeded in taking their innovations to market, they realized only scanty returns and not the kind of return that creates a differentiated accelerated growth. Why is that? Were their hopes too ambitious?
The biggest culprit in the poverty of their return on investments is that those investments didn’t have the necessities for success built into their DNA. What was missing? In many cases innovation initiatives don’t resonate with existing and prospective clients because they simply don’t meet the clients’ needs. In other cases the offerings require a different kind of sales discussion as the provider tries to sell something the client isn’t looking to buy. In both cases this creates a difficult sell and largely proves unsuccessful.
Strategy for innovation that leads to business growth
As I explained in a previous blog post about innovation agendas, these disappointing outcomes from provider-funded innovation initiatives often start with trying to design a solution for multiple clients rather than innovating on a single client’s defined needs. Providers fall into the seduction of believing it makes sense that just because one client wants a particular innovation other clients also will want it that way.
Further, building things in a vacuum away from a client is not helpful and tends to result in outcomes that are off target.
The path to innovation that accelerates growth lies with the provider working closely with clients to define their needs and then bringing the provider’s capabilities to meet those needs. It’s a powerful strategy that results in much deeper client satisfaction.
It also allows a provider to deal with the issue of changing influence structures that we’ve noted in previous blog posts, where the business stakeholder is now more influential in defining a client’s business needs and driving investment and work that goes to third parties.
Providers that interact with business stakeholders to address their needs find the effort pans out and they can move to more impactful innovations that the client will be ready to fund.
And that’s a recipe for explosive growth.
Photo credit: Matter Photography
I must confess I look askance at how some services customers think. They want to keep their cake and eat it too. But it’s batty and preposterous to think you can have something both ways if the two ways conflict.
We’re seeing schizophrenia in the marketplace. Customers look to the provider community for insight and innovation to deliver services and functionalities that will change their business. Typically they say, “Bring us ideas about how we can change our business. But don’t just bring us ideas — show us that you’ve used these ideas in other clients of similar size and scale to us. Show us that these ideas have generated substantial business impact. And bring us people that have implemented and successfully delivered these services to our peer companies. BUT DON’T TAKE ANYTHING OF OURS TO THE MARKETPLACE.”
They demand complete protection about not taking to the market any of their intellectual property (IP) or any ideas generated while the provider works with them, yet they refuse to do business with any provider that hasn’t done this for other companies.
At a minimum, such a customer is intellectually dishonest.
This schizophrenic behavior underlines a fundamental dilemma of using third parties on innovation and creating competitive advantage. It ensures that if, in fact, vendors or providers stay true to these demands, they can only re-use insights and actions that are not compelling and don’t drive competitive advantage.
But customers insist that they only want to buy things that drive insight and competitive advantage, which forces providers either to be dishonest and, in some way, skirt around these commitments or to be uncompelling. The customer’s preposterous demand puts the provider in a dilemma with no possible good outcome.
As a customer, when you select a provider that brings you compelling ideas that they implemented elsewhere and that provide tremendous competitive advantage, then you must expect that they may well be violating commitments to other customers and they will take ideas generated with you elsewhere too. So you’re effectively dealing with a dishonest organization.
If they’re honest, they can only provide things that don’t create competitive advantage. And if they’re dishonest, then why are you buying from them?
So what’s the answer to this dilemma? Please post your comment on your experiences in this area.
The lack of innovation from service providers is a constant and mournful refrain echoing around the industry. This plaintive and mournful dirge reminds me of Sisyphus, who was cursed to endlessly roll a boulder up a hill, only to watch it tumble back down, never achieving satisfaction. Likewise, the unending efforts of service providers to provide innovation to their customers seem similarly futile, resulting in the same frustrating lack of satisfaction for either provider or customer.
Why are these efforts doomed?
Service providers and their customers have different goals. Providers invest in initiatives that drive growth or improve profitability for the provider. Customers want lower cost, increased productivity and more functionality. These goals seldom align and the parties often work at cross purposes.
What do we do about it?
The answer is that the customer must take the responsibility for defining the innovation agenda. The customer must outline what will be impactful and make a difference in its business and then share that agenda with the service provider. Whatever the issue is — reducing receivables, stock-outs in retail, more productivity, faster time to market — the customer must illuminate and define the target for the provider.
What if the provider is reluctant to pursue the innovation agenda?
Our experience is that providers often are willing to fund innovation and work across the customer’s agenda when it’s clear that it will make a difference to the customer. In these situations, the exercises in innovation lead to higher customer satisfaction and also lead to an extended contract or changing the relationship in mutually beneficial ways for both parties.
But a provider may be reluctant to pursue some aspects on an innovation agenda. An example is driving increased productivity in the provider’s organization. In a world of (P) Price x (Q) Quantity = Revenue, the provider wants to keep Q as high as possible, and productivity issues bring quality down.
From the provider’s perspective, there are two categories of innovation:
- Those that the provider wants to pursue and naturally aligns with (the opportunities that give new revenue opportunities or better industry insight)
- Those that the provider likely won’t want to pursue (things that negatively affect its commercial environment, especially its productivity).
To avoid continuously pushing your innovation boulder uphill, keep the provider’s perspective in mind. If your innovation agenda focuses on category #1, you can expect a rewarding discussion around the areas where you and the provider are aligned. But you will need to take a much more active role in driving the category #2 initiatives that are not aligned with the provider’s interests.
Photo credit: Kristina Alexanderson
We’ve noted several instances in our research and consulting practices where providers’ behavior reminds me of an old Mac Davis song. The lyrics proclaim that he no longer has a girlfriend but he never gets lonesome because he treasures his own company and that it’s hard for him to be humble because he’s perfect in every way. It is remarkable how self-confident service providers become when they have the dominant market share in their space. They become so enamored of their position that they don’t notice their clients start to resent them.
Sure, there is much to admire about these providers. They have had great growth, enjoy great profitability and clients invite them to do important things in transformational ways that they could only have dreamed about a few years ago. Thus, borrowing from the song, they think they’re perfect in every way. This leads to unintentionally expressing a level of arrogance.
The arrogance is displayed as the account team talking about their company instead of the client’s business. And account teams start trying to shape the solution or services and dictate to the client. They tell the client, “We’ve got a great idea; you should do this.” Clients resent this provider behavior.
Clients prefer account teams with this kind of approach: “Oh, you have a problem over here. We’ll help you with that.”
These service providers have also invested a lot of money in innovation. But we recently conducted a study on innovation investments across a wide variety of providers and found that very little of this money was rewarded in terms of the provider’s growth or profitability. So what went wrong?
Clients don’t want factory-centric service delivery
In analyzing these situations of arrogance and low return on innovation investments, we note that they share a common foundation: the provider bases its solutioning and delivery approach on centralized “factory” control. Historically providers demonstrated they had a good service factory, and clients put into their provider’s factory the work appropriate for the factory.
The factories include centralized innovation centers where providers pick up ideas from clients, refine them and then take them out to other clients. The problem with this approach is that the provider develops the ideas in a vacuum and then believes that they fit the entire industry. The provider believes it is cleverer than clients. But the ideas don’t fit other clients well enough. So it’s very high risk, and our study shows it’s proving to be spectacularly unsuccessful.
Today’s customers look to do things differently and want to invert the factory model to shift the power of running the factory to the client account. But this is very difficult for providers to do; it takes a long time, imposes a different listening culture and the providers don’t give up control easily. In addition, there must be clear accountability in place to hold the client responsible for the resources provided and accountable for the provider’s profitability.
Another way for providers to deal with this situation is to eliminate the central innovation center and start innovating out in the clients’ locations. In this model, the provider is positioned much closer to reality, listening to and responding to client needs and extending that into innovation efforts rather than making big bets from a centralized position.
This model requires having more of the provider’s people at the client’s site. And they must be empowered to make decisions about where to invest, make pricing decisions and make quality decisions, rather than going back to the factory head and solutioning decisions. So it’s much easier for the client to do business with the provider, and the provider can react quickly and flexibly to client needs.
Our observation is that providers that adopt this approach and place empowered account teams at the client’s location not only eliminate the resentment of clients but also have the added benefit of rapid growth. Where services are structured so that the account team must go back to the central factory for solutioning decisions and permissions, the provider will struggle to grow.