Outsourcing Archives - Page 2 Of 9

Why Areas of Enterprise Services Spend Will Increase in 2022 | Blog

December 9, 2021

When looking at the market outlook for services spend in 2022, I see several areas that will change dramatically. It is clear there are two primary drivers for the changes: the post-COVID-19 situation and the need to be more strategic in a digital world. Both drivers will change the way companies need to operate next year, and both will increase the cost to operate. Here is my overview of the coming changes.

If IT Is from Mars, Procurement Is from Venus: 5 Steps to Break the Chasm between IT and Procurement for IT Sourcing

October 14, 2021

It may seem at times that the IT and procurement departments can be on different planets when it comes to IT sourcing services spend. But it doesn’t have to be “us” versus “them.” Read on to learn how to counteract differences in communication styles and behavior patterns, so your entire organization wins.

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How their stars align

Anyone who has set up a new procurement department at a firm with large volumes of untracked indirect spend knows they first need to target the IT department and get involved in their sourcing projects. The reasons are simple – IT has large volumes of spend, generally adopts procurement practices the earliest, and can become the greatest support system in the long-term. The CIO’s office consists of the visionaries who are willing to take high risks of trying something new and are the least process-sensitive of all business units. Often, IT category managers end up closely collaborating with their functional leads, and certain organizations centralize procurement departments in IT. Further, as early adopters, IT prefers to rely on their own intuition and vision and also are willing to serve as highly visible references to other adopter groups in the population (i.e., other business units). Thus, IT is the stepping stone for procurement if they want to establish their foothold in the organization and increase spend under their influence, which is still abysmally low. The typical procurement team is not involved in nearly half of their company’s services spend, as can be seen in the exhibit below.

Procurement influence across indirect spend in Pinnacle Enterprises™ (best-in-class organizations that lead the services sourcing journey) and other enterprises

Source: Services Sourcing Organizational Maturity | Pinnacle Model^® Analysis (Everest Group 2020)

Colliding orbits

However, at the same time, the IT function can be highly demanding. IT is always in upheaval, beset on one side by users and the other by budgets. As in any relationship, IT and procurement tackle multiple such chasms, but their problems range across the same old partnership concerns that exist in modern-day relationships – stonewalling, unsolicited criticism, and the atypical “you never listen to me!” argument. Multiple examples can help prove this analogy: IT and procurement do not have regular meetings (in most organizations, they do not even meet monthly), do not involve each other across stages in sourcing engagements (IT is known to invite procurement late in the sourcing journey, whereas procurement is known to keep IT out of negotiations), and still treat each other as separate entities, instead of working towards a shared goal.

If the two could solve a couple of key issues in this troubled relationship, the IT-procurement partnership can create great profitability for the firm in the long haul. Here are five ways to help strengthen the bonds between these crucial areas:

Support each other’s growth and development: The basic rule of a relationship is that when one is growing at a rapid pace, the other needs to ramp up to provide support. Organizations are being driven to rapidly undertake digital transformation by recent market trends such as migration to cloud services, servitization, and cybersecurity measures becoming the new norm. IT spend is spearheading the growth of an organization, with IT services spend itself expected to reach about US $721 billion by 2025.

Global IT services market spend (in US$ billion)
Source: Everest Group’s Application Services State of the Market Report (2021)

This increase in IT services spend requires procurement to rewire their own agendas from being cost-focused towards becoming more value-focused, and also reshaping outsourcing contracts to ensure long-term success in today’s changed outsourcing environment. Further, at this point of rapid growth, it is imperative for procurement to up its IT sourcing game by becoming more agile and reducing sourcing turnaround time, gaining more category intelligence in emerging technology areas such as blockchain and cybersecurity, getting used to negotiating complex licensing agreements, and adjusting contracts to incorporate recent rate increases requested by suppliers due to the current scramble for IT talent

Stay involved throughout the journey: At the onset of any relationship lies trust, and both parties must build trust and loop each other in all aspects related to the sourcing journey. IT can implement this by undertaking steps such as including procurement at the requirements gathering phase in a sourcing engagement, keeping them abreast about business requirements that can drive supplier capabilities, giving a transparent picture about supplier performance in oral presentations, and ensuring procurement is involved in all conversations about sourcing selection. This deal goes both ways. It is essential for procurement to keep IT onboard for actual negotiation talks and decisions, help price and right-size contracts for deals, and bring category and sourcing intelligence from past successful deals and supplier partnerships

Back each other in times of crisis: While risk management has become key in today’s day and age, occasionally, there are crises that no one can predict. Smart strategies help in such scenarios, for instance, during the coronavirus crisis, many IT and procurement leaders worked together to keep their small- and medium-sized suppliers afloat with early payments and by identifying new areas of cost optimization (e.g., creating negotiation opportunities through internal demand management without harming suppliers)

Listen to each other: Regular communication is key as each party brings in specific skillsets and typically, IT and procurement should have a monthly cadence at the minimum. The results of proper communication can be seen through an example in sourcing risk mitigation – IT brings a better understanding of the contractual risks, such as the possibility of software license audits, while procurement has the experience within contract risk management to ensure suppliers establish appropriate controls and provide contingency plans. In this scenario, IT and procurement can leverage each other’s skillsets to ensure end-to-end risk coverage

Finally, act as partners, and not as boss-subordinates: Traditionally, procurement treats category departments as their end customer and becomes driven towards serving all their needs. However, it is crucial to treat this relationship as a partnership over a boss-subordinate model (where IT is the client and procurement is the department serving them). Procurement should confidently bring in their expertise from strategic sourcing and spend analysis to contracting, benchmarking, and spend management to deliver value within IT. Procurement also should provide constructive criticism towards IT decisions, even if it involves redesigning their buying process

This point is key – but it involves a fundamental shift in the way these two departments view themselves. In my last role in procurement consulting driving value in the IT category at a US-based consumer packaged goods firm, I observed that while procurement worked closely with the IT team (with the procurement team even sitting within the IT office), they were often at loggerheads. Being the subordinate department in this case, procurement frequently had to go the extra mile to ensure the IT department did not make destructive moves, such as revealing the baseline to the supplier at an early stage, or unconsciously leaking to selected suppliers that they would definitely be awarded the contract (and thereby sabotaging procurement’s negotiation strategy in the engagement). Being on the procurement side, I did not understand how IT was suffering due to procurement’s clear invasion into their territory. I can imagine that the IT audience reading this blog can talk in detail about procurement’s insufferable demeanor and uninvited settlement on their home ground. By better understanding their differences, IT and procurement can find common ground and realize they can effectively operate in the same universe after all.

Take our survey to get a complimentary analysis of your IT sourcing practices and learn how you compare against best-in-class, or IT sourcing Pinnacle Enterprises™ across leading global organizations. For further details on how we can support sourcing and vendor management leaders, contact Bhanushee Malhotra, Practice Director, at [email protected].

Surprising Sub-saharan Africa and the Continent’s Growing Relevance for Service Delivery: What You Need to Know to Select Your Next Offshore Location | Blog

July 8, 2021

Looking at offshore destinations for service delivery, Sub-Saharan Africa – particularly Nigeria – is emerging as a surprising location with the potential for forward-looking providers and customers to seize. But what risks come along with the opportunities for doing business in this part of the world? To learn what you need to know to make the right site selection, read on.

Africa does not immediately come to mind as an offshore destination for service delivery. In the past, the main destinations for low-cost offshore centers, both in-house and outsourced, have been India (for broad BPS operations including customer-facing CXM) and the Philippines (for CXM), particularly when the operation requires a good level of English language proficiency.

However, in recent years, the level of interest in Africa as a destination has been growing as enterprises look for cost-effective alternatives to traditional locations and to balance their risk from too much activity in one country/region.

Within Africa, South Africa has been strong for several years, especially for CXM. North African locations such as Egypt, Tunisia, and Morocco have also experienced growth for IT, back office, and language support for French and other EMEA languages. Up until now, there has been less activity in Sub-Saharan Africa (outside of South Africa), but this is starting to change.

Advantages of Africa

Enterprises are now starting to seriously look at Africa as a destination for outsourcing for many reasons, including:

Population – Its huge and youthful population of 1 billion, with over half of the talent pool projected to be under the age of 25 by 2050, makes it a great resource for BPS activities
Government support – In many countries, the government helps to enable global services delivery
Market potential – Many of the large service providers are yet to enter the market or have small scale operations supporting the local market
Infrastructure – Internet and other capabilities are improving. For example, CSquared (a Google subsidiary) announced a four-way partnership in 2017 to build out the shared fiber networks in sub-Saharan Africa
Spending growth – The latest African consumer trends show that consumer spending growth in Africa is projected to rise to $2.1 trillion by 2025 and $2.5 trillion by 2030, according to market forecasts

While interest in the continent is growing, enterprises also should be aware of the following risks:

Talent – Companies will need to invest in growing and developing talent locally by training recent graduates, building a recruitment engine from the ground up, and other activities to create an experienced talent pool. The low talent availability, limited language support beyond English, and high premiums commands also are concerns
Business environment – In comparison to other nearshore European locations, the quality of infrastructure, digital readiness, and safety and security are among the concerns for East and West African countries
Low market congestion – While key players supporting global services in most African countries is currently limited, the entry of a few large companies could easily congest the market and quickly increase costs
Delivery enablers – Limitations with utilities, transportation, meals/catering, stationery providers, office infrastructure quality, and poorer connectivity to domestic and international locations all present risks

Location selection is key

If an enterprise can balance the opportunities with the risks, we believe sub-Saharan Africa could be a wise choice. But selecting the right location is key. In our report from 2020 Africa: Emerging IT-BP Delivery Force, we reviewed ten of the most mature locations assessing talent availability with the financial attractiveness.

The key takeaway: Egypt and South Africa, the two most mature markets, scored well in terms of both talent availability and financial attractiveness. But a surprising entrant in the top right of the chart was Nigeria. While still relatively immature when it comes to BPS, Nigeria’s high level of talent availability makes it a financially attractive destination.

As an example of recent investments in the region, Microsoft invested $100 million to open a technology development center with sites in Kenya and Nigeria in 2018. Three years later, it released a joint announcement with the Government of Nigeria, detailing several projects aimed at intensifying the nation’s move to become a more digital economy.

Other locations driving conversations with enterprises are Ghana and Kenya, both presenting a high level of financial attractiveness but scoring lower than the leaders in terms of talent availability.

1 Reflects market average annual costs for English language delivery for steady state of operations blended across the delivery pyramid and excludes capital expenses related to set-up, transition, expat costs, and of economies of scale for large-scale operations

2 Represents presence of entry level and experienced resources for specific functions blended in a 60:40 ratio

3 Combination of maturity for services delivery, presence of global / regional GBS and service providers, scaled operations, and other related aspects

Source: Country-/city-level investment promotion agencies and global services organizations

All the other locations we assessed, apart from Tunisia and Morocco, rated well in terms of financial attractiveness but were less strong when it comes to talent availability, presenting an issue for any enterprise looking to scale.

Talent forecasts

We believe the level of talent available in Africa, particularly in sub-Saharan Africa, will improve over the next few years as global service providers and enterprises begin operations there, and talent from local operators accelerate their development by working for experienced operators. But it may take several more years to reach similar levels to those seen in North Africa or the country of South Africa.

In summary, sub-Saharan Africa is likely to grow in relevance as an offshoring destination for BPS, and forward-thinking service providers are already investing. As an enterprise, if you are considering the use of sub-Saharan Africa as an offshore delivery location, we would recommend several approaches:

Undertake a detailed assessment of the location to better understand talent availability and how it aligns with your future business and talent needs
- Assess talent scalability as well as the capabilities needed to deliver process or skill-specific requirements
Understand how it aligns with your corporate strategy and CSR commitments
- Africa is the main source of impact sourced workers, a growing area of interest for many enterprises
- Understand how the potential location aligns to target markets for business development. Consider whether the potential location is a key target to grow your business
Conduct a detailed review of the service providers with delivery locations in the region to ensure they meet your requirements, especially in terms of talent and skills availability, cost, and business continuity

For more findings from our recent report, 2020 Africa: Emerging IT-BP Delivery Force, and to discuss Africa as a service delivery destination, please reach out to David Rickard ([email protected]) or Anurag Srivastava ([email protected]).

An Unnecessary Defense of “Indian IT” | Blog

June 23, 2021

The recent headline, Indian IT Firms Set to Slash 3 Million Jobs by 2022 Due to Automation, grabbed attention. But our analysis shows this is nothing more than a catchy title. To learn about the other side of the picture that points to job and hiring growth, read on.

Occasionally, a news article or stray comment will suggest the Information Technology (IT) industry in India faces a stiff battle to survive against an onslaught of automation, cloud, and insourcing. The latest is the claim in news stories that 3 million jobs in India will be lost by 2022. The next day, NASSCOM shared data that suggested the opposite, and a few media outlets issued clarifications.

We had a chance to view an excerpt of the original Bank of America report that found automation is creating millions of new jobs and boosting global productivity. Our initial reaction is that the original story is a combination of faulty or incomplete analysis and lack of context, topped with a sensational headline.

Below we share a more nuanced understanding of the industry to help avoid such storms in teacups in the future.

The Definition of Indian IT-BPS

Media coverage of the Indian IT and Business Process Services (BPS) industry often conflates the India-based talent pool with homegrown industry giants like TCS, Infosys, Wipro, HCL, and Tech Mahindra. The reality is that all firms, including globally headquartered giants like Accenture, Capgemini, DXC Technologies, and IBM (to name a few), have a massive presence in India.

The IT-BPS talent pool in India is employed across the following key segments:

Large service providers like the ones named above, irrespective of where they are headquartered
Mid-tier (e.g., L&T Infotech, WNS, Genpact, Mphasis, Hexaware), and smaller service providers (e.g., Aspire Systems, Maveric Systems, Cigniti, etc.)
Global Business Services (GBS) centers or Global in-house Centers (GIC) established by Fortune enterprises (e.g., Novartis, Bank of America, Shell, etc.) to serve their internal functions
Product development teams of Big Tech giants like Microsoft, SAP, Adobe, etc.
An increasingly rich ecosystem of start-ups that often serve a global clientele (e.g., Zoho, Zeta Technologies, Qure.ai, etc.)
Domestic demand for IT and Business Process Outsourcing (BPO)
Countless staff augmentation firms that serve as aggregators of talent (typically freelance) and help all the other segments meet their staffing requirements

Any analysis that fails to look at the swings and roundabouts between these segments risks missing the mark. For instance, insourcing – a growing trend of using an organization’s own resources instead of outsourcing – often tends to benefit Global Business Services (GBS) organizations at the expense of third-party providers. Automation and technology disruption may pull down demand for a few outsourced services, but simultaneously increase the desire for services in many other categories.

The Facts

Even if we assume for a moment that the term “Indian IT” was used loosely to focus on third-party outsourcers, the facts still do not support the following conclusions:

We estimate the total India-based headcount for outsourcers and shared service organizations (Segments 1, 2, and 3 above) across IT and BPS at 3 million full-time equivalents (FTEs) as of March 2021. The headline of slashing 3 million jobs by 2022 simply does not add up
TCS, Infosys, and HCL have publicly declared their intentions of hiring 40,000, 24,000, and 15,000 FTEs, respectively for FY 22. Capgemini and Cognizant plan to hire 30,000 and 28,000 in 2021. All of this is easily available public information
NASSCOM, in its clarification, estimates that the Indian IT-BPS talent pool expanded by 138,000 FTEs in FY21

Most of the industry leaders we speak with cite the opposite problem. They are facing a glut in demand and can’t hire fast enough. Enterprises are frantically upskilling existing employees to learn new technologies, impacting hundreds of thousands of FTEs across the talent pool in India. These skills do not exist in sufficient numbers externally so laying off current workers and hiring new ones is not an option. If the original report wanted to convey that companies are seeking to replace old tasks with new ones through reskilling, the headline failed to convey this accurately.

The Myths and the Nuances

Myth #1: “Indian IT” survives on doing commodity jobs that no one else wants to do

Reality: The talent pool in India enables many of the world’s most innovative companies to meet their objectives

Yes, the industry might have started to provide labor arbitrage but it sure as heck could not have survived and grown that way over decades. Just to cite a few examples, talent pools in India are supporting the advancement and application of technologies critical for autonomous driving. Software that is required to roll out 5G networks is being built and supported by India-based talent pools, as are platforms that power banking operations for some of the biggest names in the world. Many GICs we speak with mention that the share of commodity tasks in their portfolio is down to 30% (from 70% 10-15 years back). The current reality is a very far cry from the days of Y2K and spammy call centers. It might be helpful for skeptics to visit some of today’s modern India-based development centers and labs. The experience is usually quite eye-opening!

Myth #2: Automation is the equivalent of the Infinity Stone

Reality: Automation takes years and years to get right, and scale. This usually means time to adjust, and more work, not less

No, the RPA God does not snap its fingers to kill jobs. At the current level of maturity, RPA typically eliminates specific tasks. However, it is still some distance away from automating a process (a series of tasks/activities). Further, the scalability of RPA remains a challenge. What works for one type of task or even a series of tasks may not work as the context changes. Yes, automation is getting intelligent through cognitive and Artificial Intelligence (AI). But as anybody who has spent some serious time in the AI world would attest, it takes time to first get the AI-engine trained and usually requires human-in-the-loop (HITL) to complete the process. To be clear, smart automation does increase the productivity of the individual meaningfully and, in turn, lead to process efficiency and other benefits. However, instead of “killing jobs,” it is creating more opportunities for service providers and GICs to serve enterprises more deeply and widely leading to higher demand for labor in India.

Myth #3: Things just die

Reality: In the world of technology, services usually evolve, and new categories get created, replacing old ones

We often hear an implicit (and occasionally explicit) assumption that technology disruption will kill old service categories. For instance, cloud will kill the need for IT infrastructure management, and that application testing is passe. And that’s it – nothing else happens.

In reality, IT infrastructure management is evolving to handle the complexities of hybrid and multi-cloud and is facing an acute talent shortage. There is a shortage of people who can test complex apps that are hosted on the cloud, control software-driven physical devices, or have elements of AI baked into them.

The history of technology shows that every disruption creates its own service model. Enterprise Resource Planning (ERP) systems were supposed to be the death knell for bespoke applications. Instead, they spawned a massive industry of consulting, implementation, customization, and maintenance. Automation to scale will require highly skilled talent to build, monitor, and maintain algorithms and datasets. As the pace of AI and Machine Learning adoption picks up, we are witnessing the expansion of Machine Learning Operations (MLOps) services, which help in the continuous delivery of algorithmic models.

Vindicating the Indian IT Industry

The world of technology is changing, arguably faster than ever before. India just happens to have the world’s largest reservoir of talent that can enable this change. The “Indian IT industry” does not need a sensational headline and it does not need defending. It deserves a deeper understanding that will help us predict and navigate these changes better.

Service Provider Portfolio Strategies: Less Is More in the Next Normal | Blog

April 9, 2021

Historically, large buyers of outsourcing services, i.e., Fortune 500 firms, outsourced their mid- and back-office functions to a single service provider. In the late 1990s, when BP outsourced its business processes to PWC, it was the largest F&A contract in the history of outsourcing, and PWC served BP in multiple geographies. This outsourcing construct was part of a consistent outsourcing wave – many companies outsourced their non-core operations and moved work out to one or two service providers, achieving cost savings as well as the leverage of being able to focus on their core operations.

As outsourcing became increasingly common, buyers began distributing the workload between multiple service providers to create pricing and performance pressure on incumbents. They also started treating their suppliers with a heavy-handed approach, demanding the best price from them, continuously pitting them against their competitors, and expecting optimal service at all times. While this strategy created competitive pressure and mitigated concentration risks, it also led to turf wars between service providers and increased administration costs for companies, resulting in lower efficiency, less control over quality, and ultimately, higher costs as the number of suppliers grew.

Procurement professionals are known to spend their time slicing and dicing through their spend and supply base and observing it from multiple angles to identify ways to drive savings and optimize their supply base. Interestingly, uneven distribution of spend across suppliers and large amounts of tail spend are still key factors that emerge as problems from a thorough spend assessment. Many firms are known to struggle with hidden costs related to non-strategic maverick purchases, which could be better managed if there were clear visibility and alignment on channeling spend through select few suppliers. Additionally, depending on the size of a firm, these purchases can represent hundreds and thousands of suppliers, who are often engaged to fulfill local demands or are part of just a few transactions.

Circa 2020-21, history has returned. Many companies seeking to drive efficiencies across their supplier portfolios are implementing consolidation strategies wherein they are moving towards fewer, more capable service providers. Mostly seen in contact center outsourcing, over the last several years, buyers have been moving away from smaller contracts with multiple providers to a select group of large providers handling larger parts of their operations. There has also been an increase in multi-geography contracts, which indicates buyers are consolidating their global engagements across multiple countries to simplify their operations and offer a consistent customer experience. These large providers (such as Accenture and TCS) can be typically characterized as having a large scale of operations, greater than 100,000 FTEs, a delivery presence across multiple geographies, and greater than $1billion in revenue. As larger service providers have established a global footprint, concentration risks are not a major cause of concern for buyers anymore in outsourcing constructs. During the pandemic, the surge in outsourcing demand accelerated some improvements related to supplier portfolios – a major impact was companies restructuring their supplier portfolios. The pandemic triggered organizations who outsource to increase their focus on risk management, as well as increased their need to digitally transform – which requires a set of new capabilities from providers. As a result, companies are looking for ways to balance needs while reducing costs by restructuring their portfolios. In 2021, 76 percent of companies we surveyed planned to make changes to their service provider portfolios.

In one example of a supplier consolidation activity that we observed in the past, a large software company underwent a supplier consolidation program aligned to its broader supplier relationship management strategy intending to reduce risk to the business, deliver cost savings, and improve supplier performance. Suppliers were segmented in line with the firm’s internal stratification model (strategic, core, and others), which led to the elimination of many tail suppliers, choosing to award business to strategic or core suppliers where they possessed the same or similar capabilities as a tail provider. Throughout the process, the team identified several potential obstacles and built strategies to mitigate them.

Needless to say, supplier consolidation is beneficial for the larger (and more capable) service providers as they receive the bulk of operations from tail providers. Thus, it is not surprising that outsourcing momentum was continuously high despite the pandemic last year for these select leading service providers.

Image source: Market Vista™: 2020 Year in Review and Outlook for 2021

In general, supplier consolidation offers multiple benefits:

Reduced risk: By having a smaller number of suppliers, the exposure to risk through data breaches, financial irregularities, or other risk factors are reduced and can be managed proactively. For instance, a firm in a regulated industry discovered their supplier was undertaking fraudulent billing practices – the supplier was found billing for eight resources on a project when just five were real. This was uncovered when the same five people would show up to meetings, and three names were fictional. Another firm found that their supplier exposed clients to ransomware, causing several systems to be taken offline. In a WFH context, firms are reducing the number of relationships to minimize the potential threats that surface
Cost reduction: When a firm channels spend through suppliers they consider strategic and engage them as partners to the business, it is likely that the supplier reciprocates and makes the firm their preferred customer. This allows companies to get better payment terms, service quality, improved quality of products, and comfort of having never to worry about delivery quality of services. While channeling greater spend, companies can obtain negotiated rates that capitalize on a greater spend with a smaller number of suppliers resulting in lower costs and book of business discounts. We have observed that firms typically achieve 22-28 percent savings purely through supplier rationalization efforts for outsourcing partners
Improved performance: Working with a smaller set of suppliers enables the company to select the best performing suppliers by category and to be able to closely manage performance and easily monitor business KPIs and SLAs agreed with the supplier. It enables the company to define supplier management processes and reporting to track performance and engage suppliers to drive performance improvement activities where gaps are identified through continuous improvement sessions with suppliers
Increased efficiency of operations: By having a smaller number of suppliers to manage, it can improve the performance of the internal supplier management organization, increasing efficiency and leading to reduced internal costs, including supplier management costs and transaction processing costs. Furthermore, the ease of knowledge transfer, use of proprietary technologies, and improved relationship management at a global level are sure shot benefits of moving toward fewer service providers

While undertaking supplier consolidation, a recommended approach is to start from the basics.

Firms generally start by developing an understanding of the supply base to identify the spend and type of work placed with existing suppliers and the departments conducting the work
The next step is to examine the needs of the business for each spend category versus the performance and cost structure of current suppliers. Those that deliver a niche service (for instance, providing a skill set that is not available in the marketplace) may be retained if performance is strong. Consolidation opportunities may exist if certain activities could be performed effectively by multiple suppliers. Balancing competition is important to ensure costs stay in line and there are incentives to perform
Decision-makers need to ask themselves a defining question about the services they are buying. For example, “If I didn’t already own this, how much would I spend to buy it?” Answering this with cost modeling tools and competitive bidding helps build a supplier consolidation strategy by identifying which suppliers should be used for key activities and accordingly renegotiate contracts, to take full advantage of a reduced set of suppliers and greater spend with the selected subset

Throughout this process, it is paramount for a firm to implement governance to ensure that the business is complying with supplier consolidation strategy and supplier cost, performance, and continuous improvement initiatives are effectively managed.

A final crucial aspect in supplier consolidation is overcoming stakeholder reluctance to change by involving them early on in the consolidation process to avoid surprises, and continuous stakeholder education on the organizational benefits of consolidation. Overall, top-down communication is key so that these initiatives are not perceived as a “procurement” project but rather as a strategic business initiative.

Taking all these factors into consideration, are YOU making the right decisions with respect to your outsourcing portfolio strategies? If you would like to discuss your portfolio strategy with our analysts, reach out to [email protected] or [email protected].

Learn more about portfolio strategy in our webinar, The Rubik’s Cube Approach to Designing your Service Provider Portfolio.

Aligning SLAs with Business Objectives – Four Pitfalls to Avoid | Blog

February 5, 2021

Service-level agreements (SLAs) today should be established to ensure that service provider performance aligns not only with mutually agreed-upon terms but with clear benchmarks and service levels that match a company’s business goals. These days, agility and flexibility are central themes for all industries. These themes also influence the methodology for the ongoing management of outsourcing services and the continuous improvement of outsourced activities, functions, and processes.

In this blog, we’ll shed light on how the changing business environment has affected the performance management process, as well as four common pitfalls that companies and service providers should avoid. Although the bones of the process remain intact — such as the definition of service requirements and metrics, identifying business needs and drivers, defining objectives, and establishing accountability for the achievement of the objectives — there are opportunities to adjust to add value.

Why is now the time to reassess?

Let’s first explore why now is the time to re-evaluate SLAs. In the current business climate, companies must get the most out of their supply base. Contracting for specific service levels allows companies to set the standard of service and expectations for service providers. Throughout the supplier relationship, performance measurements become a large driver for how the service is carried out, how the service provided plays into a company’s overarching goals, and if they directly correlate to the cost of the services delivered. IT is now under greater pressure to deliver business outcomes instead of technical outcomes, and SLAs are increasingly evolving to measure quantifiable business outcomes.

How have SLAs evolved?

Over the past few years, we have seen a move from input-based measurement to output-based measurement within SLAs. For example, an input-based measurement could be paying for a certain number of IT headcount to carry out a specific activity, where output-based measurements are focused on measuring results such as how many company users are supported by the IT help desk over a period of time. Output-based measurements help to better align the outcomes with functional objectives. And in some cases, it works to have a blended approach with both input and output-based measurements — allowing for flexibility offers more opportunities to collect metrics that work best for each SLA.

Another interesting shift has been the move toward customer-centric metrics in what we refer to as XLAs, or “experience level agreements.” These measurements focus on if the business outcomes of the service tie directly to end-user satisfaction. The service provider may have delivered on time, but how, in the end, did the customer feel about the experience, and how were they treated? It’s a move from just keeping the lights green to a focus on satisfaction and even delight! In the last several years, we have seen a significant shift in business leaders placing more value on customer experience, whether external or internal customers and these more sophisticated targets reflect that focus.

Finally, we’re seeing that some organizations are creating composite metrics to measure service performance. Composite metrics combine a roll-up of multiple underlying values to arrive at an index – where the key goal is to demonstrate progress on the composite index. For example, you may measure two or three different variables for on-time delivery to make a broader measurement of timeliness as a whole.

Four mistakes to steer clear of when planning an SLA

There are four prominent mistakes that we see IT leaders make when developing SLAs, which may occur before or during contract negotiations and their management.

Poor measurement techniques

One very common mistake is poor measurement techniques, or not measuring performance at all, and therefore not having the data to hold providers accountable or drive improvements. Performance measurement can be a challenge, with data coming from many disjointed sources. While tools are evolving to support better measurement and score carding, many buyers still have a long way to go. SLAs in a contract don’t matter unless both parties share one version of the truth. Everest Group offers strategic engagement reviews to ensure performance is measured and managed throughout the life of the relationship. Our approach to reviewing supplier relationships is to uncover all the details to understand the whys, so you can take practical action.

Setting SLAs that are too stringent

The level of service requested directly impacts the price of the service. It’s important to understand what a reasonable level of performance is in the market to not over-spec expectations. Response times and availability are two examples – there is cost to always-on and fast response. In some cases, that cost may be worthwhile, but the business case should be evaluated to be sure. SLA and KPI benchmarking can be especially helpful here. In fact, price benchmarks are useless unless you understand the associated service levels.

Everest Group helps to guide companies through the drivers of pricing variations. Our price benchmarks are normalized to your company’s context, even when there are multiple, complex factors. Everest Group helps with pricing benchmarks to ensure pricing is appropriate to market rates and unusual SLA’s are not costing you too much.

For those looking for a simple reality check combined with deep market intelligence, Everest Group’s Outsourcing Excellence membership program includes PriceBook. PriceBook is an off-the-shelf reference with insights on price, performance, and delivery metrics as well as drivers that impact the pricing of ITO and BPO services in onshore, offshore, and nearshore delivery geographies. Our pricing analytics as a service retainer adds additional data customization and custom guidance from our pricing experts.

Too many or too complex SLAs

Focus on what matters. Setting SLA measurements takes resources, and you want your service providers optimizing for the right things. We have seen teams with so many objectives that they couldn’t meet any of them, and SLAs are similar. We sometimes see combination metrics that bring together multiple factors. These can be effective if they are similar and well-aligned, but avoid the trap of designing something so complex the average worker can’t understand their own impact.

Ignoring business needs and culture

Internal to the business, it’s important that measurements resonate with the team. We know of one company that moved from NPS (net promoter score) to a letter grade for satisfaction. That language made more sense to their stakeholders, so it worked for them. Simple but impactful. A company that has not focused on external customer satisfaction may not be ready for XLAs. Stick to fundamentals that match business goals.

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Biden Impacts On H-1B Visas And Outsourcing | Blog

November 9, 2020

From a services industry perspective, the main impact of a change from the Trump Administration to a Biden Administration in January 2021 will be the allowed degree of movement of global talent to meet the huge talent deficit in the US. As US businesses eventually come out of the COVID-19 crisis, we will see a more frantic appetite for IT modernization and digital transformation programs, but the US lacks enough talent pools with the skills necessary to deliver those outcomes.

Read my blog on Forbes

How COVID-19 Will Impact IT Services in the Banking and Financial Services (BFS) Industry | Blog

April 28, 2020

The BFS industry started 2020 in a cautiously optimistic mood, hoping for a rebound in global economic growth. But then the COVID-19 outbreak swept the world into a state of emergency. The current challenge is far greater for BFS firms than was the Great Recession, as they need to crack the code of how to deal swiftly with both demand- and supply-side shocks. In this scenario, banks face a dual mandate of:

Playing a central role in stabilizing the economy
Ensuring business continuity to maintain normal operations

Breaking down the impact of COVID-19 on the BFS IT services market

To illustrate the variation in pandemic impact across different BFS lines of business (LoBs), we analyzed the severity of impact and speed of recovery for each line. Our assessment of severity of impact involved modeling factors such as the COVID-19 revenue and profitability impact from both a near-term (3-6 months) and a medium-term (6-12 months) perspective. We gave more weight to the medium-term impact as the near-term uncertainty makes the modeling of impact very difficult.

And we mapped impact severity against the speed of recovery by gauging the time it will take for these LoBs to bounce back to the pre-crisis state; this is a function of the health of these business segments before the crisis, as well as expected changes in customer sentiment and buying behavior once the crisis is over.

Our analysis found that BFS LoBs cluster in four zones, each of which exhibits unique characteristics and will face a distinct set of technology and IT services implications. Taking it counterclockwise from the bottom right quadrant:

Aggressive cost take out – Lying on the bottom right, the LoBs in this zone will face the highest degree of impact; we also expect their pace of recovery to be painfully slow. To aid in their recovery, these LoBs should rethink their operating models and get back to basic principles: focus on the core business of provisioning financial services, think of delivering more value to customers, and move away from non-core elements like engineering or IT services innovation.We expect to see heightened asset-heavy deal activity in this segment, as these LoBs will need cash to invest and rejuvenate growth in select focus segments. And they’ll be looking for financial engineering support through activities such as takeover of legacy assets, shared services carve-outs, and even signing of long-term integrated technology plus operations support engagements that are centered around specific business outcomes.
Modernization –This zone at the top right comprises LoBs that we expect to rebound faster to pre-crisis growth levels. From an IT services standpoint, we expect these LoBs to focus on cost savings in the near-term by seeking price cuts on rate cards and pausing some change initiatives. However, soon enough, these segments will get back to modernization initiatives. Hybrid cloud will play a critical role, as these LoBs will place significant emphasis on digital enablement to fuel their long-term growth.
Growth – Odd as this may sound, we expect these business segments to benefit from the crisis in the near term. For example, as governments across multiple geographies have announced relief packages for small businesses that are facing unprecedented economic disruption, banks are needed to facilitate these SBA loans. Financial services firms that have proactively invested in creating a scalable infrastructure and stronger business continuity plans are better positioned to take advantage of this opportunity by generating significant fee income. Enterprises with large LoBs in this zone will also be on the lookout for inorganic expansion and take advantage of the reduced evaluations. Enhancing customer experience, driving product innovation, and improving agility to quickly respond to market demands will be the key investment themes.
Transformation – This zone comprises LoBs that will recover most slowly from this crisis. Hence, these business segments need to rethink their business models and diversify their revenue mix to sustain themselves in the long term. For instance, retail/consumer transaction banking will face profitability challenges due to reliance on interest-based income, and some of the fee-based commoditized businesses, like retail wealth management, have been under stress due to downward fee pressures. As a result, enterprises with large LoBs in this zone will look to transform themselves and invest from a long-term growth perspective.

Implications for BFS enterprises

At an industry level, we expect BFS firms to completely focus on running the business initiatives in the near term. Our research suggests that banks have put nearly 60 percent of change projects on hold. Most of these suspensions are temporary and will restart once the crisis abates; however, we believe that the prioritization and nature of these change projects will mutate due to a shift in business priorities and budgets.

As an immediate response to the current situation, designing and executing customer assistance programs should be the top priority for BFS firms. In the medium term, the firms’ focus should gradually shift to modernization of legacy systems that slowed down banks’ agility and ability to respond to this crisis. Post COVID-19, BFS firms will need to reimagine their products, pricing, and channel strategies to fulfill evolved customers’ expectations.

Our recommendation for BFS enterprises is to cautiously evaluate their exposure across each of their LoBs and carve out a holistic IT strategy that takes into account not only the near-term implications, but also their long-term business philosophy.

Please share your views on the impact of COVID-19 on the BFS industry segments with us at [email protected] and [email protected].

Are IT Buyers Pushing for Discounts Due to the Pandemic?

April 27, 2020

Not surprisingly, we’ve been flooded with questions about the implications of COVID-19 on the IT services industry over the past two months.

Let’s take a look at the two most prevalent questions.

How are IT contracts being impacted?

Financial distress – such as a dip in revenue generation and restricted cash flow – is forcing enterprise IT to review their IT contracts. Clients are exploring three options:

Putting non-critical projects on hold
Deferring payments to keep critical projects running
Seeking discounts

Their preferred option is putting non-critical projects on hold. Clients are triaging to keep their business-critical functions – like transactions systems, call centers, datacenters, and supply chain systems – running. However, they’re putting non-critical engagements, such as new application development and feature upgrades, on the back burner.

Second in order of priority is deferring payments. We’re seeing deferral requests increase in frequency, especially in distressed industries such as travel, transportation, hospitality, and medical devices. And we’ve seen payment terms going up to 180 days in a few situations. However, an early trend that will soon establish itself as the IT industry norm is balance sheet (or cash pile) financing; vendor balance sheets have started to play a role in enabling billing deferrals and “deploy now pay later” models. For example, Cisco has set up a US $2.5 billion war chest leveraging its balance sheet to help some of its clients defer payments until 2021.

Our analysis shows that vendor balance sheets, both tech products and IT, are healthy. For example:

IT vendors’ (HCL, Infosys, TCS, Wipro, etc.) balance sheet assets over liabilities ratio ranges from 1.3x to 3.5x
Tech vendors’ (Adobe, Amazon, Microsoft, Oracle, etc.) balance sheet assets over liabilities ratio ranges from 1.1x to 3.4x.

And there is evidence that they may dip into them to help their clients out.

The third in priority is seeking discounts. We’re seeing anecdotal evidence of clients seeking discounts on contract value and in a few cases extending up to 50 percent of the annual contract value. But to clarify and qualify this:

The discount discussions are largely focused on time and materials (T&M) projects. Few are around fixed price and managed service engagements, which form a larger share of revenue profile for large IT vendors
And this means that smaller IT and staffing vendors – for which T&M constitutes larger share of the revenue profile – are going to be impacted more than the large IT vendors

Most importantly, we’ve seen enterprises being very flexible and collaborative with their vendors – working closely with them to keep initiatives running.

How will enterprises prioritize and fund IT initiatives during this crisis?

Enterprises are currently preparing their playbooks to navigate the ongoing recession. It’s important to note that recession does not mean that IT initiatives will be broadly deprioritized. Depending on the impact they see on their overall business and their anticipation of recovery, enterprise executives will triage their resources (cash, talent, vendors) to keep critical initiatives running.

Here’s a look at the framework we’re using to help buy-side clients prioritize their decisions:

Rescue business critical initiatives most severely impacted by the recession through financial engineering and aggressive cost takeout
Revitalize revenue-generating business functions that can gain from automation usage and cloud-driven agility
Reinforce the lowest impact portions of the revenue profile through M&A and product launches
Restructure those portions of the portfolio – such as vendors, locations, and talent – that already had redundancy and concentration risk issues

In the coming weeks, enterprises will be using this framework to:

Triage between critical and non-critical IT spends
Build their blueprints for how they will reallocate budgets and engage with vendors
Identify new scope and financial models on which they’ll engage their vendors

Watch this space to see how this playbook evolves. If you have any questions or ideas on other approaches, please write to me at [email protected].

Will COVID-19 Ease the Relentless War for Talent? | Blog

April 21, 2020

While some people in the global services industry think that large scale unemployment and the slowdown in growth due to the COVID-19 pandemic may reduce the talent demand-supply gap, we wholeheartedly disagree. Indeed, we believe that strategic workforce planning has become even more critical for the global services industry.

Here are four reasons why organizations need to accelerate their workforce initiatives right now.

Talent shortages will become acute

A survey we conducted in early 2020 found that, even before the COVID-19 crisis, 86 percent of enterprises considered the talent shortage a key barrier to achieving business outcomes. This situation will further exacerbate. It’s true that the impending economic downturn could lead to even more unemployment and oversupply in the talent market. However, the available skills profiles may not necessarily match organizations’ current and future requirements, especially because highly skilled talent is expected to be retained even during downsizing. Increasing focus on automation and digital transformation will further widen the demand-supply gap for skills, making it difficult for organizations to source suitable skills internally or in the open market. The prevailing circumstances (e.g., the lockdown, financial distress, and health issues) may impact overall talent employability in the open market, further compounding the talent availability issue.

Rapid digital transformation is inevitable, and it will intensify the demand-supply gap

COVID-19 has accelerated digital transformation across organizations. It has not only reinforced the utility of tech-enabled platforms and advanced automation for seamless service delivery during mandatory Work-From-Home (WFH) protocols, but also enabled organizations to react to the evolving business environment and customer needs faster. The impending budget cliff and business model changes will further push organizations to prioritize digital transformation, which will have implications on the talent needed both to drive this change and to deliver services after transformation. Demand for emerging skills will spike even faster, again creating the need for reskilling, alternative talent models, and productivity enhancement. We are already seeing a spike in hiring by companies like Amazon and Google. Some firms are seeing this as an opportune time to acqui-hire – or acquire startups primarily for their talent. Leading global banks, healthcare firms, and manufacturing firms are rethinking their talent strategies.

Supposedly foolproof location and BCP strategies did not work in the face of this pandemic

COVID-19 has exposed key issues with enterprises’ and service providers’ existing locations strategy and Business Continuity Planning (BCP) approaches. Nearly three-quarters of enterprises that have offshore/nearshore GBS centers operate in only one location. Even enterprises with multiple GBS centers have a high concentration of talent in their largest center. Others have developed centers of excellence with large portions of their workforce for a specific function consolidated in a few locations. Less than 10 percent of GBS centers were truly prepared for a seamless WFH model. Companies will need to re-evaluate their redundancy matrices and location/portfolio mixes to achieve a more robust BCP. Some seemingly obvious responses to locations portfolio questions may not apply anymore.

WFH is here-to-stay

A 2017-18 survey by the Bureau of Labor Statistics revealed that nearly 30 percent of the American workforce could work remotely. The extended lockdown in the near term and a high utilization, once the COVID-19 crisis has abated, will likely make WFH an integral component of the overall service delivery model. This change will have significant talent implications – motivation, employee engagement, performance metrics, reporting metrics, communication protocols, and collaboration – which organizations will need to proactively address to optimize productivity and enhance output.

COVID-19 has precipitated a fundamental shift in the way we work. There are underlying opportunities for enterprises and service providers that proactively adapt to the new normal. We believe there are four immediate steps that enterprises must take:

Review your enterprise global workforce strategy
Develop a roadmap for skills development initiatives
Review your locations portfolios and BCP strategy
Build a playbook for integrating WFH and crowdsourcing into your services delivery models

We’d love to hear your thoughts on how the COVID-19 pandemic is impacting talent strategies. Please share with us at: [email protected], [email protected], or [email protected].

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Category: Outsourcing