Category

Outsourcing

HCL Acquires IBM Products – Desperation or Aspiration? | Sherpas in Blue Shirts

By | Blog, Mergers & Acquisitions, Outsourcing

On December 6, 2018, HCL announced it had acquired seven IBM products across security, commerce, and marketing for a record US$1.8 billion. To provide a financial context to this acquisition: HCL, India’s third largest IT services provider, invested about 22 percent of its annual revenue to bolster its products and platforms portfolio – what it refers to as its Mode 3 portfolio – which barely contributes to 10 percent of its annual revenue.

Demystifying the Why

What strategic outcomes could HCL potentially derive from this deal?

  • Cross-sell opportunities: Access to the more than 5,000 enterprises currently using the acquired IBM products
  • Superior value proposition around as-a-service offerings: Integration of these products with HCL’s ADM, infrastructure, and digital services
  • Top-line growth due to recurring revenue streams and expanded EBIDTA margins
  • Fewer dependencies on external vendors: Improved capabilities to bundle internal IP with services can enable HCL to have greater control over outcomes, thereby enhancing its ability to deliver value at speed

 Sounds good…Right?

At first glance, the acquisition may seem to be a strategic fit for HCL. But when we dug deeper, we observed that while some of the IP plugs gaps in HCL’s portfolio, others don’t necessarily enhance the company’s overall capabilities.

HCL acquisitions

This analysis raises meaningful questions that indicate there are potential potholes that challenge its success:

  • Confusion around strategic choices: The product investments point to a strong proclivity towards IT modernization, rather than digital transformation. This acquisition of on-premise products comes at a time when inorganic investments by peers’ (recent examples include Infosys’ acquisition of Fluido and Cognizant’s acquisition of SaaSFocus) and enterprises’ preference are geared towards cloud-based products
  • Capability to drive innovation at speed on the tool stack: To address the digital needs of new and existing clients, as well as to deliver on the promise of as-a-service offerings, HCL needs to repurpose the products and make significant investments in modernizing legacy IP
  • Financial momentum sustenance: With an increasing number of clients moving away from on-premise environments to cloud, it remains to be seen if HCL can sustain the US$650 million annual revenue projection from these products
  • Customer apprehensions: Customers that have bundled these products as part of large outsourcing contracts built on the foundation of their relationships with IBM will likely be apprehensive about the products’ strategic direction, ongoing management, and integration challenges as their IT environments evolve
  • The illusion of cross-sell: It remains to be seen if HCL can succeed in cross-selling digital services for these legacy products, especially in the beginning of its relationship with the 5,000+ clients currently using the in-scope IBM products.

 The Way Forward

The acquisition definitely is a bold move by HCL, which may seem meaningful from an overall financial investment and ROI perspective. However, the subdued investor confidence reflects poor market sentiment, at least at the start. Although this could be considered a short-term consequence, HCL’s investments in these legacy products is in stark contrast to the way the rest of industry is moving forward.

On the day of the acquisition, HCL’s stock price fell 7.8 percent, signaling negative market sentiments and thumbs down from analysts. In contrast, the market behaved differently in response to  acquisitions by HCL’s peers in the recent past.

To prove the market wrong, HCL needs to focus its efforts on developing and innovating on top of these products; developing synergies with its ADM, infrastructure, and digital services; alleviating client apprehensions; and providing a well-defined roadmap on how it plans to sustain momentum leveraging these products over the long term.

What is your take on HCL’s acquisition of these IBM products? We would love to hear from you at [email protected] and [email protected].

The Big Four Accounting And Auditing Firms Are Becoming Challengers In Digital Transformation Services | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Outsourcing

The pivot of third-party services firms to digital is disrupting the entire services industry. Times of disruption always give rise to new competitors, and challengers among service providers can shift share. This is clearly happening now in the demand for digital transformation services. The Big 4 accounting and auditing firms – Deloitte E&Y, KPMG and PwC – are emerging as formidable challengers to Accenture, IBM and the Indian service providers. Here’s what’s happening and what it means for competitors and enterprise customers.

Read more in my blog on Forbes

Trends And Disruptions In 2019 For Third-Party Services | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Outsourcing

I believe we’ll see significant changes in the third-party services industry in 2019. The coming year will bring some major movements and trends, along with disruptions and bumpy roads.

Bumpy Roads in Digital Transformation

This year has been a move from digital transformation pilots to programs, which led to a full-on wave of IT modernization to support transforming to digital operating models. The question we must examine going forward is whether this wave will survive a recession.

It seems likely that the global economy will slow and even the US economy will come down off its heavy heights. If this happens and the economy decelerates, less capital and less discretionary funding will be available to fund companies’ modernization goals. If this happens – and the question is not if it will happen but when – I think it’s likely that it will start to happen in 2019.

Read more in my blog on Forbes

Services Prediction: More Mega Deals Coming | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Mergers & Acquisitions, Outsourcing

An interesting trend is developing in the services industry, reversing the trend we’ve seen for the past five years. I predict that this year, and for the next few years, we will see a modest rise in mega deals – deals with $500,000,000 or more in Total Contract Value (TCV). Where are those deals coming from?

At Everest Group, we watch services transactions closely. Over the last five years, the industry experienced a big move away from mega deals, preferring smaller and smaller transactions. This was then exacerbated by digital rotation where customers were interested in digital pilots – which are small deals. But this year we note a renewal of interest – in some specific situations – for large deals.

Here’s my take on three forces driving mega deals now.

Force #1: IP-Plus-Services Model

One force driving mega deals is where the service provider wraps services around the intellectual property (IP) platform the provider owns. TCS’s book of business of large deals is a good example of this. TCS has an IP platform around insurance and mega deals tied to that platform. The $2 billion-plus TCS transaction with Transamerica earlier this year is a good example. What makes the deal so large? The customer is modernizing its IT by jettisoning its legacy technology and transferring it to TCS for modernization through the TCS platform.

As the services industry pivots to digital models, IP ownership plays an increasingly important role. Automating work diminishes the importance of labor arbitrage, and the profit pool reconfigures around IP owners. The nature of the IP-plus-services model allows mega deals to happen. I expect more of this kind of deal to happen at TCS as well as at providers like Cognizant, which has a similar platform in the pharmaceutical healthcare space with TriZetto. Both TCS and Cognizant are using their investments in IP platforms to differentiate their offerings and capture large contracts.

Where service providers own important IP platforms, I see those as the basis for some very large deals.

Force #2: Leveraging the Balance Sheet

Another source for large deals is providers leveraging their balance sheet to finance a customer’s large-scale IT modernization. HCL and Wipro are good examples of providers using this approach to create very large deals. They use their balance sheets to fund expensive IT modernization deals, including taking over a customer’s legacy assets. This strategy accelerates a service provider’s growth, and I expect to see more mega deals using this strategy.

Force #3: Digital Transformation Programs

This year, we’ve seen digital transformation move out of the pilot phase into full-blown transformation programs. The amount of money customers spend on these transformations is staggering, often hundreds of millions of dollars. The large availability of enterprise funding for transformation is likely to encourage larger deals.

The net result of these three forces? I believe we will see a modest increase in mega deals, and in certain areas, larger deals for the remainder of this year and next year.

I’m not claiming the entire services market is moving to mega deals. In fact, two size-diminishing secular trends that were well underway continue: (1) decomposing the legacy, multi-tower deals to single towers and bidding those out (2) the move from managed services to systems integration and digital work. These trends will continue to create a fabric of smaller transactions.

However, some large deals are emerging. I believe the three forces I described are working against the well-established trends for smaller deals we saw during the last five years.

How To Purchase Services For Digital Transformation | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Outsourcing

Disruptive technologies enable dramatic new ways of doing work and delivering value to customers. Understandably, companies are rushing to implement disruptive technologies to change their business so that they can better serve their customers, employees, partners with new value and lower their total cost of ownership. Achieving this goal necessitates assembling a digital platform. However, few companies have the resources to build and maintain a platform alone, so they need to contract with third-party service providers. Here’s the problem: the classic procurement approach for third-party services doesn’t work with digital transformation.

Read more in my blog on Forbes

How to Drive Alignment with Your Service Provider in Implementing Digital Technologies | Sherpas in Blue Shirts

By | Automation/RPA/AI, Blog, Outsourcing

Companies are on the horns of a dilemma. They signed long-term, managed service contracts for IT or business processes, which took advantage of the savings from labor arbitrage. But now they find that there is significant potential to leverage the new suite of digital technologies that promise improved performance and lower cost. The problem is that that their incumbent service providers often actively resist implementing these technologies, using delaying and obviation tactics, refusing to pass on the savings and/or demanding additional work or other concessions in return for complying. Now that I’ve identified this major issue that many companies face today, let’s look at how they handle this non-alignment situation.

Read more in my blog on CIO

The Evolution of Contracting Models in Testing Services | Sherpas in Blue Shirts

By | Benchmarking, Blog, Outsourcing, Pricing

A large enterprise client recently asked us to confirm whether its belief that the majority of organizations have moved to output- and outcome-based contracting models for testing services was true.

What’s the Reality vs. this Perception?

Our analysis of deals in our extensive database over the last 18 months showed that more than 75 percent of buyers are still contracting for testing services on a fixed price basis. Of those, nearly 50 percent are managed services contracts, where performance is linked to key performance indicators (KPIs.) The other 50 percent are a combination of fixed price and Time and Materials (T&M) contracts. In these types of arrangements, the part of the contract where the scope is clear and well defined is fixed price, and the T&M is for the part of the contract where the requirements are unclear, like testing support during the UAT phase, for change requests, etc.

Market Share for Testing Services

About 10-15 percent of the contracts in our set of deals from the last 18 months are purely T&M contracts where clients ask for specific testing resources.

Only the final remaining 10-15 percent of the contracts are based on output- and outcome- based models.

Deeper Look at Output- and Outcome-Based Contracting Models

While the current percentage of output- and outcome-based models is small – the model is  well-suited for engagements where the majority of work is transactional in nature, the client wants pricing clarity and guarantees, and the service provider has no explicit motivation to improve performance beyond service levels.

In fact, we believe that the transition to these as-a-service models is both critical and inevitable for enterprises with engagements matching these criteria – which exceed 15 percent of our database. Why?

  • They ensure enterprises pay for deliverables, not for time
  • They are more closely tied to enterprises’ business activities, as they provide flexibility and visibility into the expected spend
  • They allow enterprises to remain engaged at a strategic level, without worrying about day-to-day responsibilities
  • Since the pricing is delinked from the underlying number of FTEs, process Improvements are driven by the service provider’s motivation to reduce internal costs and improve margins.

At the same time, output- and outcome-based models pose different types of challenges than other types of contracting options, and enterprises must be prepared to address them to achieve success. For example:

  • Due to their fairly complex structure, these contracting models require sophisticated governance and strong due diligence
  • They are not easily benchmarked, because to ensure an apples-to-apples comparison, the benchmarking exercise needs to normalize for all the underlying environment characteristics
  • In multi-vendor environments where there are more dependencies, moving to output- or outcome-based models may increase costs as providers bake the higher risk into their fees.

In our view, most enterprises going down the output- and outcome-based model path will be best served by phasing in the adoption. Doing so will not only help them reduce risks, but also enable them to appropriately update their systems to process output-based transactions, create and put in place sufficient governance mechanisms for the new contracting regime, etc.

Have you embraced an outcome- or output-based contracting model for your testing services? Are you considering it? Please share your experiences with us at [email protected].

Use the right pricing model for third-party services | Sherpas in Blue Shirts

By | Blog, Outsourcing, Pricing

Which pricing mechanism should your company choose when buying third-party services? What is the optimal contract length? And what is the best way to manage switching costs? These questions are even more important today than in the past because the services industry is switching to new pricing mechanisms for digital services. Understandably, these changes create consternation and confusion for buyers of services.  What comprises service prices? In this post, I’ll explain how pricing works and, hopefully, clear up confusion and help your company make optimal decision.

Read more in my blog on CIO

Trends in Third-Party Service Providers Transitioning To Digital Services | Sherpas in Blue Shirts

By | Blog, Digital Transformation, Outsourcing, Pricing

Third-party service providers are redefining how they compete in the new digital world. The pressure to gain market-leading positions intensifies as the new digital business model threatens to shift market share and upend existing market leaders. At the heart of this new business model is a shift away from labor arbitrage and its FTE pricing to a software-defined model and consumption-based pricing., It’s a new world, and I believe it’s important for companies seeking to buy services to be aware of how of service firms are investing to position themselves for the digital market.

Read more in my blog on Forbes

The CX in CCO has Evolved – How are Pinnacle Enterprises™ Doing it? | Sherpas in Blue Shirts

By | Blog, Customer Experience, Outsourcing, Pricing

There’s no shortage of market discussion around a wide range of customer experience (CX) opportunities and challenges. It’s what everyone in your organization, from IT, to HR, to actual customer care, are talking about. But while ideas about what you should be trying to achieve and why you should care abound, insight on how to actually execute and what delivery outcomes to target is hard to come by.

Use of CCO Services

One approach drawing attention involves the use of contact center outsourcing (CCO) services. The traditional “butts-in-seats” model is evolving to more of a customer experience management (CXM) service model, where outcomes are assessed for impact as much as for cost management. The traditional view has been that the primary value delivered by CCO providers is operational cost savings through efficiencies, labor arbitrage, and scale. But that’s no longer enough. An increasing number of enterprises are raising the bar and looking to their CCO providers for an expanded value proposition targeting digitally-enabled and differentiated CX capabilities. We refer to this engagement approach as Customer Experience Management (CXM) services.

CX Outsourcing Pinnacle EnterprisesTM

We believe that companies really serious about reshaping their brand through memorable CX are more often turning to this new model of CXM services. We call this breed of buyers CX Outsourcing Pinnacle EnterprisesTM. And we believe these enterprises are very intentionally leveraging these advanced CXM services to enhance their corporate-wide CX strategies, and to achieve results more quickly and at lower costs.

We’ve launched a unique study to dig deep and identify how these Pinnacle Enterprises engage CXM services to drive both operational and strategic imperatives for their overall CX strategy. How can this emerging model help enterprises tackle high-value CX objectives such as digital enablement, greater insights on and visibility into consumer wants and behaviors, increased wallet share, and reduced customer effort? What are the mechanisms in play around technology, governance, talent models, pricing models, and others?

This is an all-around different approach to CXM services – a rethinking of which outcomes to target, what to measure, the role of technology, and the new relationship model.

Curious to know what leading CX Outsourcing Pinnacle Enterprises are doing? Want to know where your organization stands compared to others? Everest Group invites you to become part of the research process and take our survey.