EPAM, a midsize, $800+ million service provider, is growing faster than the market. And it’s achieving this notable status in a mature application space where others have struggled and also in a services world that favors scale and size. What is its secret for beating the odds and seemingly defying gravity?
At first glance, EPAM shouldn’t be able to succeed. Its customer base is large enterprises with mature sourcing models. And although it has an arbitrage value proposition, it uses Eastern European resources, which are more expensive arbitrage than available in India. Yet it achieves attractive margins and is quickly growing.
EPAM succeeds because it has a highly differentiated value proposition around its talent model, client intimacy and capabilities. It’s a compelling story.
It delivers against the traditional pyramid offshore factory model with its incumbent churn. EPAM provides, instead, talent from Eastern Europe who have deep engineering skills and are more technically savvy. Once it puts a team in place, it keeps that team in place; so there is low turnover in staff. This positions EPAM as better understanding its clients and bringing a more stable, higher-productive, knowledgeable team than its competitors, with deep customer and technical knowledge. They don’t take over all the operations; they focus on highly technical applications that tend to be mission critical.
EPAM succeeds because it hits the market with the right differentiated story and a set of capabilities, messaging and business practices that align well for large, mature companies. In today’s mature market, EPAM presents a nice counterpoint to the big Indian firms. And they are taking share.
“Sir, sir – a monkey pooped on your shoe!” was the first thing that brought my attention to the large, wet mound on my casual walking shoe.
Ick. Not a convenient development when walking around Connaught Place in New Delhi.
Interestingly, the next thing I heard was “Shoe shine – only 500.”
Despite the jet lag, I was able to immediately recognize the scam. The fact that the same person who pointed out the poop before I noticed it also happened to have a shoe shine kit was a pretty good clue. Never did see the accused monkey, although I strongly suspect it was actually the person who I begrudgingly paid INR 500 for that shoe clean-up and shine!
I filed it away as a humorous lesson and forgot about it until mentioning it some colleagues in our India office the next week. They were aghast and surprised that I would pay so much for the shoe service (about US$10 at the time, and 20% of the value of the shoes – which I had never previously considered deserving of a shine). From their perspective, I had paid far above market value (10-15 times the market rate) and should have negotiated the price down. From my perspective, I had no idea of the market price and just wanted the issue fixed quickly despite knowing the painful truth that the source of the problem was also the solution to the problem.
I was recently reflecting on this for reasons completely unknown to me (er, might have come about while changing a baby diaper…you get the idea). I was struck by the fact that my colleagues, the shoe shiner, and I all had different thoughts upon the value exchange. In an effort to demonstrate exactly how much I over-analyze life, I distilled this to three lessons.
1. Value is relative
The shoe shine from my perspective cost US$10 and allowed me to get back to enjoying the sights and sounds of Delhi. Frustrating, but well worth the money from a functional perspective that had nothing to do with the shoes themselves, but rather to remove a nuisance and enable me to do other things. From my colleagues’ perspective, it was 10x the market rate. From my experience, it was about 2X the market rate (US$5) in the U.S., so I did not mind the rate too much. If I had been asked to pay 10X the U.S. rate or US$50, I would have resisted and likely gone ballistic. For the shoe shiner, ignoring raw material costs of the poop, it was tremendous profit and a highly valuable exchange.
Depending upon one’s perspective, the financial price of a value exchange and the utility from the value are viewed differently.
No wonder we struggle to put a price to value in outsourcing!
2. Attribution of value creation is contextual
Although the shoe shiner definitely helped solve the issue and did so quickly, I could not be pleased with the value received; the context of the need for the services completely undermined his shoe shining contribution.
If this had not been a scam and I accidentally stepped into something and a shoe shiner happened to be nearby and solved the issue, then I would have thanked him profusely and happily paid the INR 500. However, instead of thanking him, I left grumbling and scowling because of the context in how the value was created for me.
In other words, if you cause the problem, your perceived value in solving the problem is less than if you solve problems created by others.
3. Perception of value is as much about experience as results
After starting to reflect on this, I pulled out these old shoes (see photo), which I have not worn much in recent years. Ironically, they look pretty good. In fact, I believe the leather is softer and better looking than when I first bought them. They have also avoided collecting as much dust as before the unplanned shoe shine.
In other words, they benefited from the shoe shine and it appears to have been a decent shoe shine.
But I can’t give the shoe shiner any credit for this because the experience was such a turn-off.
So, solve the problem, but also ensure the experience of problem resolution is appreciated by the recipient.
Outsourcing is fundamentally a service provided by one complex organization to another complex organization. The situation is ripe with many factors (mis-communications, mis-aligned stakeholders, budget pressures, turnover, etc.) to limit the chance for perceived value exchange between organizations. Although we need to ensure the work completed creates value, we should not forgot that how we treat each other and manage our interactions can completely undermine the appreciation of value. If you solve a problem, don’t expect credit if you created the problem – solve problems beyond your scope. If you solve a problem, don’t expect much credit if the experience is suboptimal – own the problem and the service experience.
Insights from the NOA “Benchmarking” Special Interests Group with Everest Group
Benchmarking is a worthwhile endeavour. When conducted properly, the practice will give you a baseline indicator of where your business is currently, where it is headed on its current trajectory, where you need to be to maximise gains and how you can get there.
Benchmarking can also act as the catalyst for a more fruitful long-term outsourcing relationship, by highlight areas that must be focused on moving forward. On the other hand, it is not the solution to every problem that relationship might have. The term is frequently misunderstood and the practice is even more frequently misused.
At the NOA’s Special Interests Group on Benchmarking in association with Everest Group, benchmarking experts led a roundtable discussion on when benchmarking is necessary, how it is best carried out and what the practice does to help business relationships between clients and their providers.
Sole sourcing can deliver multiple benefits, including reduced cost- and time-to-decision, elimination of the need to manage a large portfolio of providers, and likelihood of reaping greater value from a closer relationship with a single services delivery partner. Yet the sole-source process can quickly unravel if not carefully designed and managed by the buyer, even (or perhaps, especially) when a strong relationship between the buyer and provider already exists.
Several factors are critical to sole sourcing success.
Deepen the relationship
While mutual respect, aligned interests, commitment, and trust are critical in any outsourcing relationship, they assume greater importance in a sole-source situation. Why? Buyers look to sole source to achieve collaborative, insights-based solutions, rather than merely receiving a table stakes collection of transactions. Buyers achieve this by openly sharing their desired outcomes and concerns, and building an outcomes-focused, value-oriented foundation during the solutioning and negotiation process. This depth of relationship must be nurtured throughout the tenure of the engagement. This applies whether looking to transform the relationship or simply update it. Alignment of both organizations to the objectives is key to a successful sole-source.
Engage senior leadership
Senior leadership from both the buyer and supplier need to set the initial goals for the relationship as they deepen it, and then continue to reinforce the desired outcomes to their teams throughout the sole sourcing process. Institutionalizing these objectives will ensure that they become the parameters that guide behavior in all interactions. This takes significant and persistent effort at all levels, and will require some spot coaching to realign team members who fall back to the old ways of doing things.
Get approvals early and often
Given their role as stewards of an enterprise’s activities, boards of directors may balk at the idea of sole sourcing. To avoid delays and additional fact gathering expenses – and even the requirement to tender an RFP to multiple providers – the buyer should present the opportunity to its board as early as possible in the process. The buyer must understand the concerns the board might have around the value of a competitive process, and address them through external benchmarking, leveraging current market information about suppliers and services, and a thorough understanding of the value of the current relationship. An early confirmation from the board that this is worth considering will avoid wasting time, resources, money, and momentum.
Don’t boil the ocean
As one of the key advantages of sole sourcing is time-to-execution of the agreement, buyers need to focus on three factors during the sourcing process: a strong, solid, and accurate business case that is easily explained to the organization; confidence (through benchmarking and external validation) that the service provider, scope, and pricing are market-competitive and aligned to the desired outcomes; and a robust contract that focuses negotiations on the most relevant terms.
Develop a robust business case
To attain buy-in from senior leadership, the board, and the overall organization, the buyer’s business case must include: a baseline to demonstrate the full current service delivery costs; projections for the contract duration; dynamic modeling for real-time solutioning; an accounting of direct cost, business, and strategic benefits; and multi-dimensional risk measures. The business case must include a comparison to a competitive process, ensuring that the organization understands the value of the sole-source. And while it must cover all these bases, the resulting information must be presented in a clear, simple, direct, and compelling manner.
Compare to ensure value
The onus is on the buyer to ensure that the scope, pricing, and value are reasonable. As the buyer, you need to know what you want from the provider’s services, and how they’ll help you achieve your goals. After analyzing all through a market-comparative lens, you should work hand-in-hand with the provider to set specific (and quantifiable!) solution targets, making it clear that under-achieved goals may re-open a multi-provider sourcing process.
Focus the contract and negotiations on truly important factors
By taking ownership of the engagement process to set specific milestones and goals, the buyer maintains control of the decision and problem solving involved in reaching the goal, and eliminates any ambiguities relating to timing, scope, responsibilities, metrics, and targets. But a bit of buyer beware: Everest Group has identified 31 relevant contractual terms that sourcing negotiations should address.
For more specifics on attaining sole-sourcing success, please read our paper, “Sole Source Outsourcing – Ensuring a Successful Outcome.”
Every service provider is looking for the one, simple thing they need to do to change their growth trajectory. They think they may need to change their messaging or perhaps they should incorporate automation into their finance and accounting offering. Or they think moving from FTE-based pricing to transaction-based pricing will grow their business. If a silver-bullet answer existed for the question of how to grow a service business, it would be a wonderful thing. But here’s the sad truth: none of these actions will change the game.
Insanity is doing the same thing again and again and expecting a different result. Are service providers going insane? It appears so, since they keep looking for simple, one-dimensional answers over and over again. I think by now they should be willing to step back and realize that their growth problems are much bigger than getting their messaging right or delivering the right combination of offshore and onshore resources or even adding a host of new service offerings in cloud, as-a-service, digital and automation platforms.
We talk with providers that are very enthusiastic about their new offerings and say they’ve signed dozens of new deals. But when we ask how much revenue comes from the new deals, the answer paints a very different picture. Often these are small sales, pilot situations and small revenue with the hope that they will grow into something larger. That may be where the market is heading, though not always.
Does a provider’s future success depend on moving to new technologies, new offerings? Providers need to recognize they can drive bigger sales by focusing on well-established areas that customers are already buying. For example, businesses will spend small amounts of money experimenting with cloud and social media, but they will spend huge amounts of money extending their CRM system so it supports the provider’s new offering. Evolving established technologies drives much larger revenue than experimenting with new technologies or new business models. That said, this still won’t change the game.
I believe providers need to stop their insane search for silver bullets and look, instead, at the fundamental tenets of how their customers perceive them and then change the nature of those relationships.
Providers that want to change the trajectory or the nature of their customer relationships and move into a deeper relationship on a larger scale likely need to change how they treat customers. Today’s customers want deeper, more intimate relationships.
But when we at Everest Group talk to providers about this reality, we find very few service providers are willing to step back and do that. Providers tell us they can’t afford to allocate more resources to customer relationship development and customer care functions because their cost of sales will rise too fast. So they just keep treating customers the same way but expecting a different outcome.
The dilemma for service providers is that they have a shareholder mandate to drive growth today. Sure, they get rewarded for growth in the current quarter, but their future ability to drive growth depends on their ability to position themselves should new technologies catch hold. When that happens, having already established deep, intimate relationships with customers will drive growth.