Outsourcing Archives - Everest Group

The Contractual Cornerstone of Generative AI’s Success in ITO and BPO Deals | Blog

September 12, 2024

In the current evolving technology landscape, generative AI (gen AI) has been leveraged as a transformative force, promising opportunities for innovation and efficiency, in most of the contemporary IT and BPO services deals.

Proposing gen AI in the solution is no longer considered as a differentiator for service providers but has become a table stake in the past two to three quarters. In line with the evolving nature of gen AI, contractual language must also adapt swiftly to address the unique challenges and opportunities presented by these solutions in information technology (IT) and business process outsourcing (BPO).

Here’s our take on which critical contractual considerations must be prioritized during the contracting stage, to improve the effectiveness of such solutions in services engagements.

Reach out to us to discuss this topic further with our expert analysts.

Critical contractual aspects for gen AI sourcing

Ensuring robust contractual clauses in service agreements is paramount for the success of any partnership involving gen AI solutions. While numerous factors come into play, the following critical elements should be considered in the framing of any contract to establish a solid foundation for collaboration:

Input data treatment: The legal landscape surrounding gen AI is as complex as the technology itself. Enterprises must navigate a maze of industry-specific regulations and regional laws that directly impact data procurement and model training. Enterprises need to actively monitor the origins of input data to ensure it has been legally procured. Contracts must explicitly define the sources of data—whether they are server logs, IT service management (ITSM) ticket dumps, or other proprietary datasets. The nature of this data must be clearly understood whether it is proprietary, copyrighted, or sensitive. The risks associated with potential IP infringement cannot be overstated, and enterprises must protect themselves by incorporating robust clauses. Aligning and outlining data handling protocols with the vendor is essential to safeguarding data privacy and security. Contracts should define a clear RACI matrix for how data will be managed

Large language models (LLMs) and 3rd party original equipment manufacturers (OEMs) leveraged: The parties should have clarity on the LLM which will be used for the solution. Will it be an open-source model, a pre-trained model, or a custom-built one? Additionally, is there clarity on who will procure the LLM and any associated tools—the vendor or the client?

Acceptance criteria: Defining the Definition of Done (DoD) and acceptance criteria to agree upon the tasks that must be completed, to consider the unit of project delivery to be successful is of utmost importance, especially when the vendor is managing the project delivery. Tracking and monitoring progress towards these goals can be effectively managed by having robust service level agreements (SLAs) and key performance indicators (KPIs) in the contract

Commercial construct: a critical consideration for parties engaging in gen AI services is the commercial construct. Options include time and materials (T&M), fixed fee, or per-use case. Exploring outcome-based models, even in a hybrid approach, can also be a valuable avenue to align incentives and measure success based on the desired results

Selecting the desirable considerations will make a significant difference in procurement

When procuring gen AI solutions, the contracts governing these deals are not merely administrative formalities—they are strategic instruments that dictate the success or failure of the entire initiative. To truly capture this potential, enterprises and service providers must iteratively refine contractual clauses, ensuring they align with the unique demands and risks associated with implementation.

In conclusion, sourcing gen AI solutions is a high-stakes endeavor, with contracts serving as the linchpin for success. Enterprises and service providers must adopt a strategic approach to these agreements, emphasizing and negotiating critical clauses to ensure optimal outcomes. By meticulously crafting contracts that address critical aspects, both players can navigate the complexities of gen AI sourcing and position themselves to maximize the benefits.

Everest Group partners with both enterprises and leading IT service providers on mandates related to pricing strategies, productivity gains, and pricing impact related to gen AI.

If you found this blog interesting, you can read our Meeting The ROI Bar: Client’s Expectations For Generative AI In IT Outsourcing Deals | Blog – Everest Group (everestgrp.com) blog, which delves deeper into the topic of gen AI.

If you found this blog interesting and you want to discuss this topic in more detail or for a detailed analysis, contact us at [email protected], or please contact Prateek Gupta and Swapnil Pamecha.

Five Key Steps Buyers Should Take to Optimize Services Contracts | Blog

September 12, 2024

In today’s competitive business landscape, maximizing value in outsourced services is crucial for buyers to achieve savings objectives and maintain a competitive edge.

This blog delves into strategies to ensure cost efficiency and foster high-value vendor partnerships, providing a comprehensive focus on these approaches to vendor engagement, which in return can drive significant outcomes and enhance a firm’s overall performance.

Reach out to us to discuss this topic further with our expert analysts.

Role rationalization and skill-tier categorization: When sourcing teams lack a well-defined rate card structure, they struggle to compare vendor rates effectively, potentially leading to value leakage.

They should maintain a standard catalog of roles with clearly defined experience range and categorize key skills in tiers such as Standard, Premium and Niche skills, in which depend on existing technology landscape.

While comparing multiple vendor rate cards, this grouping will ensure clarity on pricing premiums and transparency in skill categorization. Notably, those who engage in role rationalization process with external benchmarking firms can potentially achieve overall cost savings up to 20-25%.

In one deal scenarios, Vendor A charges $100/hour for .Net developers and $125/hour for full stack developers, with a 25% price premium on premium skills. This leads to overall cost savings for the enterprise buyer. On the other hand, Vendor B charges $110/hour for .Net developers and $120/hour for full stack developers, with only a 9% price premium, but resulting in a higher total cost.

Value leakage audits: Increasingly buyers are engaging third-party benchmark firms to conduct value leakage audits. These audits help determine if vendors are complying with contracts, invoices are billed correctly, service fees are competitive with respect to scope, and service credits are being applied properly by vendors.

Including a price benchmarking clause: Buyers often include a benchmarking clause in their Statements of Work (SoWs) with vendors. This clause specifies the terms and conditions for benchmarking service fees to ensure they remain competitive with market rates. It may be a recurring annual exercise where the enterprise engages an external firm to seek benchmarks during the contract tenure.

Tracking comprehensive metric scorecard: Traditional metrics include Service Level Agreements (SLAs) and Key Performance Indicators (KPIs) related to savings, process improvements, and innovation. However, buyers are now including Experience Level Agreements (XLAs) and Objectives and Key Results (OKRs) in scorecards which offers a more holistic view of vendor performance by focusing on service quality, business alignment, and value realization.

Standardized measurement practices: Alongside implementing scorecards, buyers are establishing robust measurement practices to ensure accurate and fair vendor evaluations. These practices include defining clear data collection methods, implementing customizable metrics, and conducting regular audits. This flexible, iterative approach helps buyers identify value-creation opportunities, address performance gaps, and cultivate high-value vendor partnerships.

If you found this blog interesting, you can now register for our The Evolution Of Next-gen Customer Engagement Platforms | LinkedIn Live – Everest Group (everestgrp.com) event on September 26.

To discuss this topic in more detail or for a detailed analysis, contact us at [email protected], or via Shatakshi Pandey ([email protected]), Geetesh Makkar ([email protected]), Amy Fong ([email protected]) and Prateek Gupta ([email protected])

Unlocking the Value of Third-party Risk Management | Blog

July 23, 2024

Organizations are increasingly relying on third parties for various functions to cut costs and leverage external expertise, which can introduce significant security risks. This blog explores how effective third-party risk management (TPRM) is crucial for identifying, analyzing, and controlling these risks, ensuring protection against potential breaches and vulnerabilities. Read on, or get in touch if you have specific queries on this topic.

In the rapidly evolving business landscape, there has been a significant transformation in the way businesses operate. This shift includes moving away from traditional methods and adopting SaaS/cloud services, increased remote work, etc., which has led many organizations to rely more heavily on third parties for various functions, ranging from marketing to manufacturing. This approach not only saves costs but also provides a straightforward means to leverage expertise that the organization might not have in-house.

While outsourcing to third parties can help organizations enhance operations efficiently, it also introduces the risk of security breaches. Each third party/vendor has the potential to introduce vulnerabilities by expanding access points into the organization’s digital footprint. Moreover, these third-party attacks and breaches are difficult to detect and more expensive to mitigate compared to a regular incident.

To manage and mitigate these risks, organizations implement third-party risk management (TPRM) programs or strategies, which is the process of identifying, analyzing, reducing, and controlling the risks that are associated with outsourcing to third-party service providers or suppliers. These third parties could include contractors, sub-contractors, vendors, suppliers, joint ventures, business channels, and any noncustomer entity with which the organization has established a relationship to outsource certain functions. The scope of TPRM programs depends on many factors, including regulatory guidance, industry, etc.

Key factors influencing the evolution of TPRM (not exhaustive)

Growth of remote work and expanding supply chains
Rising prevalence of third-party vulnerabilities
Increasing Cyber threats and regulatory expectations
Complex inter-organizational processes
Lack of up-to-date inventory and security patches

Given the complexity of implementing and managing a TPRM program, it is crucial to understand the best practices and key parameters that influence the sizing of TPRM services. We have observed enterprises often facing challenges in rightly sizing the TPRM ecosystem due to the involvement of multiple factors. Among these, we understand that the number of vendors, their size, and their control lists significantly influence the scope of managed services and, consequently, the managed services pricing.

Challenges faced by enterprises while developing the TPRM program: (not exhaustive)

Lack of standardization: Inconsistent risk assessment methodologies and varying levels of risk tolerance across different departments can lead to fragmented TPRM practices
Data quality and integration: Poor data quality and challenges in integrating data from multiple sources can lead to inaccurate risk assessments and monitoring
Regulatory complexity: Navigating the complexities of various regulatory requirements across different regions and industries can be challenging, especially for global enterprises
Dynamic risk landscape: The ever-changing risk landscape, with new threats and vulnerabilities emerging regularly, requires continuous updates to the TPRM framework, which can be resource intensive
Risk prioritization: Deciding which risks to address first, especially with limited resources, requires a clear understanding of which third parties pose the greatest risk and which areas of risk are most critical to the enterprise

Best practices for third-party risk management

Vendor inventory: Maintaining a detailed record of all third-party vendors associated with the organization helps organizations gain insights into the scope of their external partnerships, making it easier to manage and assess risks effectively
Vendor classification: Classifying vendors into critical tiers can be done based on the level of access/ integration, the risk factor they introduce, and their impact on business operations. This can help organizations to prioritize their risk management efforts
Risk assessment: Risk assessment involves evaluating the potential risks associated with each vendor relationship, such as cyber risks, operational risks, financial risks, compliance risks, etc.
Risk mitigation: Once risks are identified, strategies for risk mitigation should be enforced, such as contractual provisions, security audits, or monitoring activities to reduce the identified risks
Developing risk management framework: Establish clear Policies and Procedures for vendor risk management, including assessment methodologies, reporting requirements, and escalation procedures
Leverage technology, tools, and automation: TPRM tools can help an organization to automate risk assessments, evaluate vendor performance and monitoring, etc., which ultimately enhances the efficiency of the risk management program. They can also provide insights into vulnerabilities and compliance gaps, making it easier to take appropriate actions
Continuous monitoring: Continuous monitoring of vendor relationships is vital to ensure that risks are managed effectively over time. Regular review of vendor performance, security posture, and compliance with contractual agreements should be performed. This proactive approach helps in detecting and addressing emerging risks before they escalate into critical issues

Delivery models for TPRM

We’ve observed service providers to typically offer below delivery models:

Build and transfer: Service providers develop only the TPRM framework and capability for the client, which will be ultimately transferred to the client’s team
Managed services: Service providers manage the end-to-end operations of the TPRM program as per the defined SLAs
Staff augmentation: Service providers offer only the skilled resources to the client for their TPRM program
Project-based: Service providers access the third parties of the client for a fixed cost or on a T&M basis

Key factors impacting the criticality of TPRM

Number of vendors: Organizations with a limited number of third-party suppliers can be managed relatively seamlessly, but as the number of suppliers grows, the process needs to be handled more strategically and centralized with a well-defined framework
Size of vendors: Organizations with a higher number of small-sized third-party vendors could be at greater risk compared to organizations with large-sized third-party vendors
Nature of vendors: The type of services provided by third parties also could impact complexity, particularly if they involve sensitive data handling, regulatory compliance, or core business operations
Regulatory environment: The regulatory requirements governing the industry and geographic regions in which the organization operates can impact the complexity, as non-compliance of these regulations can lead to legal and financial repercussions

Pricing models observed across TPRM-managed services

Fixed fee: Most of the service providers follow a fixed fee model for TPRM-managed services based on the number of vendors, number of assessments, complexity of the third parties etc.
Unit-based pricing: Few service providers bill customers based on a per-unit model, such as per assessment, per third-party vendor, per control, etc.

For insights on the TPRM framework, pricing, and benchmarks, please reach out to Ricky Sundrani, Vinamra Shukla, and Vamsi Krishna. You can also access our supplier management toolkit that outlines key steps for risk management in outsourcing, or catch up on the latest risk management insights in our webinar on demand, Mitigating Supplier Risks: The Power Of Advanced Tools And Technologies.

Enterprise Generative AI Adoption: Risk Evaluation for Competitive Advantage | Blog

October 31, 2023

The adoption of generative AI technology poses four major types of threats to enterprises: data privacy and security, reliability and explainability, responsibility and ownership, and bias and ethics. By assessing current risk levels and implementing practices, tools, and systems to manage these challenges, enterprises can realize the most value from this transformative technology. Learn more about evaluating generative AI risk to gain an edge in this blog. Learn more about our Generative AI Risk Assessment.

Generative Artificial Intelligence (AI) has captivated popular imagination like nothing else, promising a future filled with endless possibilities. For the first time, this technology can create art, synthesize human voices, and generate human-like responses to questions.

Open AI’s ChatGPT triggered the mainstream adoption of generative AI, racking up more than 100 million monthly active users within just two months of its launch. Today, more than 300 startups are developing various generative AI-related applications.

Enterprises globally have recognized generative AI’s emergence as a watershed moment and are scrambling to identify the best way to leverage its capabilities. Numerous use cases across industries and functions have already emerged and are being piloted.

Many technology providers have incorporated generative AI as an integral part of their solutions, and others are forging relevant partnerships to jump on the bandwagon.

However, while many organizations are excited about long-term generative AI adoption, few fully consider the potential risks. In this blog, we will delve deeper into the importance of generative AI risk assessment.

To realize maximum value from generative AI adoption, enterprises must undertake a structured incremental approach (as illustrated in Figure 1). This framework involves prioritizing use cases, assessing adoption risks, identifying suitable providers, adapting existing operating models, providing effective governance and change management, and reviewing performance against expectations.

Figure 1: Generative AI adoption framework

Generative AI risks

Generative AI’s ease of usage has accelerated its adoption, highlighting both its value and its risks. Broadly, generative AI risks can be grouped into four categories: data privacy and security, reliability and explainability, responsibility and ownership, and bias and ethics (as shown below in Figure 2).

Let’s look at how these risks typically manifest and some examples:

Data privacy and security: Regulatory fallout from undisclosed data collection and retention is a key issue with generative AI models. This stems from the practice of developing AI models that can address a broad range of topics, rather than training data for a specific purpose. Further concerns include employees inadvertently sharing confidential enterprise data through user prompts or training data. In some cases, unfiltered prompts may allow employees access to data beyond their purview. From a cyber threat perspective, generative AI raises the risk of data breaches through malware, phishing, and identity theft

Samsung employees pasted confidential source code into ChatGPT to look for errors and optimize the data, inadvertently adding it to ChatGPT’s training data pool that can possibly be accessed by others.

Reliability and explainability: The quality and representativeness of training data greatly influence the accuracy of output produced by generative AI models. Deficiencies in the training data manifest as errors in generated content that may have serious legal ramifications beyond eroding customer trust. Furthermore, in the absence of required information, generative AI models may even fabricate information to answer a question. This leads to a false sense of expertise and can mislead the average user. Without a confidence score that estimates the likely accuracy of the generated content or some other equivalent mechanism, enterprises will need to develop and operationalize fact-checking of AI-generated content

During Microsoft’s Bing chat demo, the search engine was asked to analyze earnings reports from Gap and Lululemon and in comparing its answers to the actual reports, the chatbot missed some numbers and made some up.

Responsibility and ownership: The legal ownership of a piece of content produced by generative AI raises complex questions. Does it belong to the enterprise that licensed the generative AI product or the company that owns the generative AI product? Moreover, do individuals or organizations whose content was used to train the AI model partially own any subsequent content produced by the AI? These legal quandaries currently lack clear answers. An evident problem is generative AI producing output that contains distinct and identifiable pieces of Intellectual Property (IP) owned by others. This can lead to potential legal fallout for the entity that deployed the generative AI model. Enterprises need to work with their legal teams to evolve their IP management amid widespread generative AI adoption

“Zarya of the Dawn” is a graphic novel written by Kris Kashtanova who used an AI based image generation software called Midjourney to create illustrations for the novel. After having initially given full copyright protection for the novel, the US Copyright Office later restricted the copyright to only the text and the arrangement of the illustrations and not the illustrations themselves. The justification provided was that copyright protection could only extend to human creators.

Bias and ethics: An AI trained on biased data will propagate those biases, potentially leading to the generative AI producing discriminatory and stereotypical content. Failing to identify and preemptively remove such content through effective moderation can lead to severe reputational and legal ramifications for the enterprise and the generative AI provider.

Widespread generative AI adoption has the potential to ramp up carbon emissions from training and operating AI models. This can have significant implications for an enterprise’s Environmental, Social, and Governance (ESG) goals

In a study conducted by Bloomberg on Stable Diffusion (an AI-based text-to-image software), the rendering of more than 5,000 images for people with high- and low-paying jobs was full of racial and gender stereotypes. The results indicated men and individuals with lighter skin tones accounted for most high-paying roles.

How can enterprises assess their risk exposure to generative AI?

While the risks emanating from generative AI usage are notable, its benefits are too significant for enterprises to ignore. Consequently, enterprises that can leverage generative AI’s strengths while effectively mitigating its risks will outperform their peers. To effectively draw up a risk management plan for generative AI, enterprises need to first assess their current risk exposure to generative AI.

Everest Group has developed a multi-dimensional risk assessment framework (see Figure 3) to help enterprises take stock of their current risk profile for generative AI adoption. This framework is deployed through a tool that comprises 21 questions spanning the four risk categories mentioned above.

Figure 3: Everest Group’s generative AI risk assessment framework

Responses provided by the enterprise across the four categories are weighted and aggregated to arrive at a risk score (see Figure 4).

Figure 4: Generative AI risk assessment outcomes

Evaluating the risk exposure from generative AI is a necessary step to successfully implement and leverage generative AI to create value for customers. Incorporating appropriate risk management practices, tools, and mechanisms in the generative AI ecosystem can instill the confidence needed to take bigger bets, create differentiation, and fully harness this transformative technology.

Deploy our Generative AI Risk Assessment Tool. To discuss this tool and generative AI adoption strategies, please reach out to: [email protected], [email protected]; [email protected]; [email protected]; [email protected].

Check out our 2024 Key Issues webinar, Key Issues 2024: Creating Accelerated Value in a Dynamic World, to learn the major concerns, expectations, and trends for 2024 and hear recommendations on how to drive accelerated value from global services.

Key Issues 2023: Assessing the Global Services Industry’s Performance Against Expectations | Blog

October 20, 2023

The global services industry’s confidence waned in 2023 after a banner post-pandemic year. Leaders were more cautious and prioritized cost optimization. To gain valuable insights into how the year unfolded compared to expectations, read on.

Participate in the Key Issues Survey 2024 to better understand the current thinking of industry leaders across the globe.

Coming off a bumper year in 2022 with double-digit growth driven by pent-up demand after the pandemic, the global services industry entered 2023 with macroeconomic uncertainty clouding the forecast.

As a result of these concerns, global leaders adopted a more cautious stance going into this year, according to Everest Group’s annual Key Issues survey of over 200 global leaders across industry enterprises, Global Business Services (GBS) centers, and providers.

In the survey, price and cost margin pressures ranked as the top business challenge expected in 2023, and subsequently, cost optimization emerged as the highest business priority for the year.

As 2023 nears an end and leaders start planning for 2024, let’s reflect on how the year fared against global services industry expectations of the industry.

1. Macroeconomic uncertainty subdued industry growth in 2023

In the face of macroeconomic uncertainty, most industry leaders felt cautiously optimistic about 2023. True to their expectations, results from the first three quarters of this year indicate subdued industry growth similar to the pre-pandemic numbers. A mix of macroeconomic concerns, rising prices, fiscal tightening, and geo-political tensions have resulted in a slowdown in customer demand and growing margin pressures on the global services industry. While revenues grew, the escalated cost and price pressure resulted in stagnant or even declining operating margins for most providers, as presented in Exhibit 1.

Exhibit 1: Key financial metrics for providers for 2022-23

2. Talent demand and supply mismatch eased but remain challenging for niche skills

With attrition at an all-time high and growing industry demand, talent supply continued to fall short of the demand in 2022. The talent/skill shortage was the top concern industry leaders highlighted as part of the Key Issues Survey 2022. However, as the industry prepared for the looming uncertainty in 2023, these concerns took a back seat. In line with the industry expectations, the talent situation eased in 2023. Data for the first half of 2023 show that attrition rates have declined, and most delivery geographies are reporting a narrowing talent demand-supply gap. An assessment using Everest Group’s proprietary Talent Genius^TM tool indicates talent demand for delivery of IT and contact center services has declined substantially compared to 2022, as shown in Exhibit 2.

Exhibit 2. a: Talent demand across select countries for delivery of IT services indexed to January 2022 (Jan 2022 = 100)

Exhibit 2. b: Talent demand across select countries for delivery of contact center services indexed to January 2022 (Jan 2022 = 100)

However, this improvement in talent supply has not applied to all global services, especially those requiring niche skills. Digital and next-generation technology services continue to witness a mismatch between talent demand and supply. This disparity is especially true for emerging skills like generative Artificial Intelligence (AI), where talent supply is even more limited. Preliminary estimates by Everest Group show that only 1% of AI talent has expertise in generative AI, pushing companies to focus on upskilling and reskilling their employed talent pools to bridge this gap.

3. Offshore locations and tier 2/3 cities are being considered to optimize costs

To manage growing cost pressures, a key strategy for global leaders entering 2023 was continuing to leverage offshore locations and exploring alternative delivery strategies, such as leverage of tier 2/3 cities. Global services trends in 2023 resonate with this approach. Offshore locations like India continue to be the destination of choice for global service delivery, given the significant cost arbitrage opportunities. Similarly, enterprises and providers alike are more enthusiastically exploring tier 2/3 locations driven by needs of cost savings, talent access, employee preference, and market competition management. Exhibit 3 shows how the leverage of tier 2/3 cities witnessed growth in 2023.

Exhibit 3: Trends in center setup across Tier 1 and Tier 2/3 locations (2022-23)

4. Provider bill rates increased but at lower levels than expected

Despite the prevailing macroeconomic pressures, providers maintained optimism about bill rate increases in 2023, although they were expected to be at a lower rate than in 2022. Unlike other economic downturns, provider bill rates have continued to show positive growth despite the growing cost and price pressures in the first seven months of 2023. However, with the macroeconomic scenario hitting much harder than expected, input-based pricing has been subjected to hard negotiations. This has led to muted growth (0.5-2%) in bill rates across different functions, much lower than provider industry expectations going into 2023. For example, provider bill rates for traditional applications skill delivery in offshore regions grew by only 0.5-1% compared to the expected growth of 2-5% from January to July 2023.

5. Provider portfolios underwent significant rebalancing and consolidation to ensure better deal terms

Enterprises reported much lower satisfaction with providers in 2022 compared to 2021 when providers played a key role in supporting enterprises in navigating the pandemic. The leaders cited a lack of innovation and communication as the key reasons behind this dissatisfaction. Consequently, procurement leaders expected a significant change in their provider portfolios. Additionally, with macroeconomic concerns clouding all strategies, enterprises looked to consolidate and rebalance provider portfolios to negotiate better deal terms with limited providers. As expected, 2023 witnessed a shift in provider portfolios, with major providers winning deals that had vendor consolidation components.

6. Investments in strengthening the digital core are a priority over moonshot endeavors

Prioritizing resilience through uncertainty, the focus of the global services industry continues to be on pragmatic digital investments like cloud solutions, cyber security, analytics, and automation. While the advent of newer technologies like generative AI has created an industry buzz, the primary focus continues to be on strengthening the digital core and building a resilient technological foundation. Most industry verticals continue to wait and watch before diverting constrained resources to newer projects with limited use cases and industry adoption.

As 2023 comes to a wrap, the global services industry is at the forefront of another transformative shift – the need to create value and the need to create it fast. This becomes especially imperative as technological advancements like generative AI threaten to shift the industry’s current equilibrium and potentially start the next phase of a technological revolution. The global services industry must adapt swiftly to stay ahead of the curve.

Participate in our Key Issues Survey 2024 to capture the pulse of Information Technology and Business Processing industry leaders across the globe and uncover major concerns, expectations, and key global services trends that are likely to amplify in 2024. To discuss further, or for any questions, reach out to Ravneet Kaur or Hrishi Raj Agarwalla.

Don’t miss the Key Issues 2024: Creating Accelerated Value in a Dynamic World webinar to gain valuable insights into 2024.

Unleashing the Power of Generative AI in Procurement | Blog

August 25, 2023

Integrating Generative Artificial Intelligence (GAI) into Source-to-Pay (S2P) processes can reshape procurement operations. Our survey of procurement professionals found the technology holds great potential to transform spend analytics and cost optimization while increasing efficiency and saving time. To delve into the research findings and understand the potential benefits of Generative AI in procurement along with its challenges, read on.

View a virtual event featuring a free-flowing discussion by our experts on the potential benefits, challenges, and considerations of incorporating GAI into the sourcing landscape: The Possibilities for Generative AI in Sourcing.
To learn about use cases and the potential of GAI technology, watch our webinar: Welcoming the AI Summer: How Generative AI is Transforming Experiences.

In today’s dynamic landscape, leveraging cutting-edge GAI technology holds the promise to revolutionize procurement processes and enable organizations to stay ahead of the competition. By seamlessly integrating advanced algorithms and machine learning, GAI has the power to transform Source-to-Pay (S2P) processes, taking procurement to unprecedented heights of efficiency, accuracy, and innovation.

To understand how procurement professionals view the usage of GAI in procurement, we surveyed a diverse group of procurement experts, including Chief Procurement Officers (CPOs), category/sourcing managers, contract managers, supplier relationship managers, and various other executives.

Our research aimed to comprehensively assess GAI’s potential impact on procurement. In this blog, we examine the implications of GAI within the S2P framework based on the survey results and our expert insights from diligently monitoring this evolving landscape.

Potential for generative AI in procurement

GAI’s capabilities offer tremendous potential across multiple facets of S2P activities, leading procurement professionals toward elevated levels of efficiency and productivity.

The survey revealed that the majority of respondents believe that GAI will have the greatest impact on spend analytics and cost optimization. Additionally, a considerable number of procurement professionals recognized GAI’s potential for supplier identification and qualification. Contract management also emerged as a noteworthy area for GAI adoption.

Source: Everest Group quick poll on Generative AI in procurement

Let’s explore the potential implications in these areas:

Spend analytics and cost optimization – GAI can help procurement professionals crunch through colossal datasets at an unparalleled pace, unveiling patterns and insights that would be unattainable through traditional means. By analyzing historical spending trends and market fluctuations, GAI can enable organizations to make data-driven decisions, optimize budgets, and identify opportunities for cost reduction
Supplier identification and qualification – Supplier identification can be a daunting task, with a myriad of variables to consider. GAI can swiftly scan through vast supplier databases, evaluating factors such as financial stability, performance history, regulatory compliance, and other important aspects for the organization. This not only expedites the supplier selection process but also enhances overall supply chain resiliency
Contract management – Manually managing contracts is prone to errors and inefficiencies. GAI can aid in drafting, reviewing, and updating contracts by extracting relevant clauses, identifying potential risks, and ensuring alignment with regulatory requirements. This level of automation can significantly reduce administrative overhead and enhance contract accuracy

Benefits of Generative AI in procurement

Integrating GAI into S2P activities can deliver many advantages that can reshape procurement operations. In the short term, GAI can provide immediate benefits by accelerating decision-making, reducing manual labor, and enhancing data-driven insights. Over the long term, GAI’s continuous learning capabilities enable it to refine its processes, adapt to evolving market dynamics, and become an indispensable partner in strategic procurement planning.

Almost all the procurement professionals surveyed stated that increased efficiency of procurement processes is seen as the major benefit of using GAI in procurement. GAI also is touted to play a key role in improving decision-making accuracy.

The survey found respondents believe GAI will deliver the following five key benefits:

Increased efficiency and time savings – Automating routine tasks with the help of GAI can free up procurement professionals’ time to focus on strategic activities, leading to faster cycle times and improved productivity
Improved accuracy in decision-making – GAI’s ability to analyze complex data and generate insights can help in making more accurate decisions, minimizing human biases and errors
Better risk management and compliance – Data analysis enabled by GAI can highlight potential risks posed by suppliers, enabling proactive risk mitigation strategies to be put in place and ensuring compliance with regulations
Cost reduction and savings – By helping procurement professionals optimize spending patterns and negotiate better contracts, GAI can contribute to significant cost reductions and overall savings for the organization
Enhanced supplier collaboration and relationship management – GAI can enable proactive scenario planning, data-driven insights into supplier behavior, and customized contract generation. It can streamline negotiations and nurture long-term partnerships

Challenges of using Generative AI in procurement

Despite its transformative potential, integrating GAI into procurement presents several challenges. Next, we explore the multifaceted issues that procurement professionals might encounter when harnessing GAI’s capabilities within the intricate procurement landscape.

Most survey participants viewed the difficulty of integrating GAI with the current procurement systems and processes as a major obstacle to adopting GAI in procurement operations. Data input quality and availability followed as the next major impediment. Furthermore, the precision and reliability of responses generated by GAI is a concern, suggesting this also could pose a substantial barrier to successful adoption in procurement.

Integration with existing systems and processes – Adapting GAI to fit seamlessly within an organization’s existing procurement systems and processes can be complex and requires significant technological integration
Data input quality and availability – The accuracy of GAI’s insights heavily depends on input data quality and quantity. Inaccurate or incomplete data can lead to unreliable outcomes
Accuracy of GAI responses – While GAI is highly advanced, it may still generate inaccurate or irrelevant responses, particularly when faced with complex and nuanced queries

Along with these challenges, navigating legal and regulatory frameworks, especially in industries with stringent compliance requirements, presents additional barriers to deploying GAI in procurement.

GAI’s potential in procurement is vast and transformative. By leveraging its capabilities across spend analytics, supplier management, contract optimization, and other S2P activities, organizations can reap numerous benefits. However, challenges about integration, data quality, accuracy, and regulatory compliance must be addressed for successful implementation.

As the procurement landscape evolves, its future lies at the intersection of the expertise of procurement professionals and effectively utilizing AI’s capabilities. Augmented procurement, where AI assists procurement professionals in decision-making, strikes a balance between harnessing AI’s efficiency and preserving human judgment, creativity, and intuition.

Everest Group will continue to follow the evolution in this space. To discuss the potential of Generative AI in procurement and S2P processes, please reach out to [email protected].

For Growth Objectives, Select A Service Provider Suitable For A Deeper Partnering Relationship | Blog

August 29, 2022

Companies that contract with third-party service providers to build and evolve digital platforms that help them compete must understand that this calls for a different kind of relationship. A partnering relationship with a deep commitment between both parties. A much more dynamic, fluid relationship. Not an arm’s length relationship with a provider that focuses on driving efficiencies. Unfortunately, not all service providers are equally strong in this kind of partnering relationship.

Is the Request for Proposal in Procurement Dead?

May 27, 2022

Despite its historic success, the Request for Proposal (RFP) in procurement may be dying in today’s fast-moving environment. Alternatives are emerging that deliver greater flexibility and agility, leading to more innovative solutions. But RFPs still have life left to get the best pricing when comparing similar commodity services. To learn the best practices, read on.

You can also contact us to discuss further or ask questions.

While RFPs have successfully delivered great business results for decades, a growing sentiment is that the process has its limitations, especially in complex deals. In seeking proposals for services, no perfect model exists for finding the best solution and balancing cost, quality, and risk. The sourcing approach always relies heavily on the skill and experience of the specialists delivering the activity.

Some of the shortcomings we see in using the RFP outsourcing services process include:

RFPs are slow – The sequential approach from gathering business requirements through to contracting can take more than six months for most complex procurements, which is a disadvantage in high-speed environments. Best-in-class organizations take far less time for the same activities in IT strategic sourcing initiatives, completing the process in nine to 10 weeks, according to our IT Sourcing Pinnacle Model Assessment
RFPs lack agility – Buyers can become tied into less-than-optimal solutions because they fear adjusting or adapting the requirements will lead to a lot of reworking and additional time communicating with suppliers. Customer concerns that the whole process might need to be restarted if they make changes limits flexibility
RFPs make direct comparisons difficult – An RFP can be effective in comparing pricing on a consistent set of business requirements where exact specifications can be documented.

However, using an RFP submission is not of value when comparing like-for-like services that can be delivered in multiple ways while still meeting Key Performance Indicators (KPIs) or Service Level Agreements (SLAs). Using an RFP can lead buyers to make decisions purely on price and not on the fitness for purpose of the solution offered

Most procurement and sourcing teams know the traditional RFP process has its restrictions, so why is it still being used?

Procurement, finance, and senior leadership teams who traditionally prefer to look across a set of “line-item costs” and compare suppliers to make a selection are comfortable with the RFP process. It is clear who is offering the best price, even if it does not help identify the best solution.

Other more informal approaches may leave procurement teams open to allegations that a “proper” process was not completed. It is important to have an audit trail of procurement activities for many reasons including compliance. The RFP is seen as a very robust and traceable way to conduct a procurement event.

Alternatives to the request for proposal in procurement

To address some of these issues, procurement teams are using alternatives to the traditional RFP approach that can either stand alone or be used alongside a traditional RFP in outsourcing services. A few emerging approaches we see are:

Joint solutioning sessions – The buyer and selected suppliers work collaboratively to develop a solution to address a business problem or opportunity. As an example, a leading agriculture company conducts regular solutioning workshops with suppliers to shape requirements for white space IT Research and Development (R&D) solutions. Generally, this format works best for newer services but is not recommended for commoditized solutions such as Application Management Services (AMS)
- Pros – A collaborative approach where a solution is shaped in partnership with the supplier is more effective at addressing a dynamic set of requirements and allows suppliers to include all elements, including value-add services and technology as part of their solution
- Cons – This method does not allow for comparisons between suppliers as each solution delivered is unique. Conducting multiple workshops across suppliers poses the risk of information asymmetry, while conducting one workshop may discourage suppliers from sharing ideas. Further, suppliers can tend to get sales-oriented across workshops and preferred suppliers with leadership presence in the workshop, more skin in the game, or better connections may get an undue advantage
Pilots – Running a pilot with a supplier to test a new concept/model
- Pros – Works well with an incumbent and when the solution can be quickly deployed into operation
- Con – Ineffective when looking to bring in new suppliers, and costs are high to implement a pilot that may not progress to operation
Reverse auctions – Traditionally used to source simple services or goods, reverse auctions are becoming increasingly popular in outsourcing services. However, the complex and dynamic nature of e-auctions requires robust technology and advanced supplier training.
- Pros – A proven way of getting competitive pricing for commodity products
- Cons – Not suited for extremely complex service procurement where the method of delivery is not comparable across solutions offered. An unclear process or underlying assumptions can lead to an unfair bid comparison. Therefore, the process must be standard with clearly laid out assumptions for all stakeholders

Examples of outsourced services well-suited for auctions

Source: Everest Group, The Effective Use of E-auctions in Outsourced Services

Agile sourcing recommendations

When deciding if an RFP is required as part of a procurement event, it is important to weigh if the ability to compare pricing across consistent deliverables is first, important, and second, possible. If the answer to both of these is “no,” then an alternative solution may be more appropriate.

In cases when an RFP is required either to meet internal requirements or to compare across like items, we see an increased focus on “agile sourcing.” This method is less sequential or waterfall-like and more agile, similar to approaches used in project management and software development.

We will cover more on this topic in the coming months, so stay tuned for future blogs. For now, let’s look at the following best practices we have observed in an agile model that shorten the RFP process while driving increased value:

Run pilot projects with suppliers before awarding additional spend
Share a standard list of obligations in the pre-contract phase
Provide suppliers with all details, accessorial charges, and potential changes during the RFP process
Initiate supplier discussions earlier and more frequently
Conduct one-day supplier workshops instead of lengthy discovery and selection processes
Reduce multi-page proposals to single-page templates to clearly explain requirements and engagement
Keep suppliers involved for as long as possible. Procurement can discuss terms and conditions with all suppliers, not only the ones they will contract with
Run the initial round of negotiation and contract drafting in parallel to the sourcing process
Ensure constant interaction occurs across the sourcing lifecycle between the buying organization and the supplier to develop the contract collectively and incrementally

No standard approach exists for skipping steps in an RFP. Each sourcing exercise is unique and procurement leaders typically rely on their teams’ expertise to decide on the sourcing methodology.

While times are changing, RFPs are still alive and have their place for commodity items where the costs for like-for-like items need to be compared. But the age-old process may no longer be suitable for complex services deals where innovation is key. To move into the future, sourcing teams should start evaluating alternatives.

To discuss RFP outsourcing services further, please reach out to [email protected] or [email protected].

Learn about current outsourcing pricing in our webinar, Outsourcing Pricing: 3 Pitfalls and 2 Unknowns Enterprises Need to Know in 2022.

Konecta-Comdata Merger Creates a Business Process Outsourcing (BPO) Giant – What Does it Mean for the CXM Market?

May 18, 2022

The planned merger announced last month between Konecta, the leading provider of Spanish-speaking Customer Experience solutions, with Italy-based customer management provider Comdata will create the sixth-largest player by revenue in the customer experience Management (CXM) BPO sector. This consolidation will intensify competition in the attractive CXM market, with the combined entity commanding close to €2 billion in revenues and €300 million in EBITDA. Read on to find out what this big deal will mean.

Creation of a global champion

Comdata

Global CXM provider Comdata offers end-to-end management solutions (acquisition, retention, customer service, technical support, and credit collection) in 30 languages across four continents and 21 countries with its network of 50,000-plus agents. Headquartered in Milan, it served more than 670 clients in 2021, generating revenue of approximately €980 million.

Konecta

Konecta, acquired by Pacheco together with the company’s management team in 2019, is a leading tech-enabled end-to-end CX BPO player in the Spanish-speaking markets. It has successfully integrated different companies such as the Brazilian Uranet and the Spanish Rockethall group, reinforcing the company’s leadership in Artificial Intelligence, digital marketing, and big data solutions. In 2021, it generated revenue and EBITDA of approximately €918 million and €148 million, respectively.

Combined entity

Subject to approval by authorities, the merger is expected in the third quarter of 2022, creating a global CXM leader capable of providing the “best shoring solution” to local, regional, and global clients in 30-plus languages across industries such as finance and insurance, technology, telco, retail and e-commerce, utilities, and healthcare.

The combined entity will be headquartered in Madrid (Spain), jointly chaired by the CEOs of Konecta and Comdata. It will serve more than 500 large corporations across Europe and America, leveraging the expertise of 130,000-plus employees. According to a statement by the companies, “the new group has a solid financial structure and will take advantage of its position in Spain, Latin America, Italy, and France to deploy all its commercial and operational capacity in its strategic markets. In addition, it will have additional capabilities to fuel its growth in the North American market and throughout Europe.”

Key drivers of the merger

The advantages of this deal are:

Expansion in Latin American and Spanish markets: The combined entity will become the market leader in Spain and Italy with a strong presence in Latin American domestic markets such as Mexico, Colombia, Brazil, Peru, Guatemala, Argentina, and Chile. It will have over 500 large corporate clients in Europe and Latin America. The new company will enjoy the advantage of Konecta’s strong dominance in the Spanish market, where Konecta has been aggressively expanding in the past few years, especially by acquiring four different Spanish companies that were part of the Rockethall Group in 2020. In these markets, the joint company will have a significant role in telecom, BFSI, utilities and energy, the consumer goods sector, and several big tech and new economy global brands
Enhanced delivery capabilities in Latin America: Labor-cost pressures, the talent shortage in onshore North America, and the desire to relocate some offshore operations closer after the pandemic have increased Latin America’s attractiveness for nearshore delivery capabilities. Some of the latest examples include Transcom’s re-entry in Colombia; new sites opening in Trinidad and Tobago by Teleperformance, iQor, and Valenta BPO; and itel’s acquisition of Emerge BPO with employees in Guyana and Honduras. The combined entity will have strong nearshore delivery capabilities to support US clients, including 20 sites in Colombia and seven in Mexico, offering a multi-country delivery model across the entire LATAM region
Differentiated customers: Both Konecta and Comdata are leaders in their respective local markets. The majority of Konecta’s revenue comes from Spain, Portugal, and Latin American regions, with Comdata having a strong presence in Italy, France, and some Latin American countries. Overall, the client overlap between both service providers is very limited, reducing the revenue loss due to cannibalization
Operational synergies: Buyers’ preferences when outsourcing CXM have evolved from the traditional levers of cost and scale to now prioritizing digital CX capabilities, end-to-end integration, and value-added services in their portfolio. This merger will allow the sharing and cross-selling of certain specific CX transformation capabilities such as Comdata’s C-suite tools, expertise in Voice of the Customer (VOC), and consulting and operational redesign services with Konecta’s content and performance marketing and conversational commerce offerings. Through its Uranet subsidiary in Brazil, Konecta also owns platforms for customer journey orchestration, knowledge management, and contact center infrastructure

Competition among other global providers

With US$2 billion in revenue and 130,000 agents, the combined entity gives tough competition to other global CXM providers such as Teleperformance, Sitel, and Concentrix. Below is a look at the capabilities of these global providers in comparison to the combined entity.

	Teleperformance	Sitel	Concentrix	Konecta+Comdata
Revenue	US $8.4 billion	US $4.3 billion	US $6 billion	Approx. US $2 billion
FTEs	420,000+	160,000+	290,000+	130,000+
Languages	265+	50+	70+	30+
Countries served	170	40	40+	24

Considerations for buyers

Although organizations have the best intentions to use mergers and acquisitions to supplement their organic efforts, they generally underestimate the risks such as failure to achieve synergies, lack of due diligence, and security and integration challenges. Business leaders have often recognized people, culture, change management, and communication as the top reasons for integration failure. Lack of adequate change management policies can affect the organization’s governance and accountability structure, cause stress and uncertainty for employees, and decrease productivity for businesses, ultimately impacting service quality and timely delivery.

Future outlook for the CXM market

With Sitel’s acquisition of Sykes and Webhelp’s acquisition of OneLink BPO and Dynamicall in 2021, the trend of consolidation among CXM market players is gaining traction. Consolidation enables service providers to work with large clients across multiple delivery countries and end markets, a capability that is rising in importance for CX clients. It also enhances service offering portfolios and technology capabilities by serving as a one-stop-shop for buyers for all CXM needs.

This deal also represents an opportunity for buyers to reexamine their vendor portfolio since certain service providers might now be better positioned to support their clients across multiple locations and processes, representing an opportunity to optimize their portfolio with fewer providers to achieve operational and cost efficiencies.

To discuss the CXM market landscape, please reach out to David Rickard, Vice President, BPS, [email protected], Divya Baweja, Senior Analyst, BPS, [email protected], or contact us.

You can also learn how expanding and developing businesses are attracting technology-focused workers to help execute existing and evolving digital transformation, adopt new processes, and innovate. Join our webinar, How to Effectively Attract and Drive Productivity within the Tech Workforce.

Increased Deal Activity in Revenue Cycle Management (RCM): What is the Winning Formula? | Blog

May 10, 2022

Health systems are increasingly seeking competitive proposals post-pandemic to outsource Revenue Cycle Management (RCM) and get the best prices and innovation in contracts. Learn what enterprises want and how providers can win these RFPs.

Why has outsourcing gained traction in the Revenue Cycle Management (RCM) market?

The hospital revenue cycle process was not immune to the many changes COVID-19 brought to the US healthcare provider ecosystem, causing health systems to significantly shift operations to survive.

Challenges such as financial pressure, regulatory changes, the quality care and patient experience focus, and digital penetration pushed health systems – who traditionally prefer to keep operations in-house – to look outside for support. This drove more than 10% year-over-year growth in sourcing in the RCM market in 2021, and the strong contracting activity continues to gain traction this year.

Several health systems, including MarinHealth, Baptist Health, SSM Health, and Bassett Healthcare, have entered into outsourcing agreements with third-party vendors. However, unlike most past arrangements when sole-source was the dominant sourcing model, RFP-led sourcing is now the preferred model for healthcare providers in the post-pandemic world.

Exhibit 1: Split of new Revenue Cycle Management (RCM) services deals in 2021 – sole-sourced versus RFP-led

Source: Everest Group’s coverage of 32 major RCM services outsourcing providers

Why do healthcare providers prefer RFPs?

Key factors driving health systems towards a competitive route over sole-sourced are:

Unlike the pre-COVID era, when outsourcing was, typically, limited to a revenue cycle function or segment, the new deals coming in the Revenue Cycle Management (RCM) market are broad-based and many times encompass the end-to-end revenue cycle needs of healthcare providers. Given the size and scale of such deals, healthcare providers prefer the competitive route to get the best possible deal
While cost used to be the primary decision-making driver, health systems are now emphasizing deal aspects such as innovative pricing (wanting third-party providers to have skin in the game) and offering diversified delivery network, innovation pool commitment, and compatibility with existing infrastructure, including experience of working with platforms such as Epic
With hundreds of outsourcing providers in the RCM market, health systems know they can shop around to get the best deal

Key decision-making parameters for health systems in a competitive bid

Healthcare provider enterprises are looking for service providers who can provide end-to-end services covering the entire gamut of Revenue Cycle Management (RCM), rather than discrete, siloed services.

From a decision-making perspective, below are some of the key parameters that enterprises look for when selecting a potential service provider, along with their relative importance rated on a scale of 1 to 10:

Exhibit 2: Level of importance of key buyer decision-making parameters for outsourcing Revenue Cycle Management (2021)

Source: Everest Group’s coverage of major Revenue Cycle Management (RCM) providing enterprises

Service providers need to pay special attention to how they position themselves effectively in the extremely competitive RCM market. The two main levers determining a winning proposal are:

High-quality, well-structured proposals that demonstrate a deep understanding of the client’s needs
Commercial proposals that are well aligned with the client’s budget and offer flexible payment terms

As competitive RFPs rise in the RCM market, providers who can create a differentiated value proposition and align their strategies with the enterprise’s vision will succeed in securing these lucrative deals.

To discuss Revenue Cycle Management (RCM) reach out to us at [email protected], [email protected], or contact us.

Learn more about RCM operations in the healthcare industry in our video, Revenue Cycle Management RCM Operations – Emerging Opportunities & Strategies.

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Category: Outsourcing