Applications Outsourcing Archives - Page 7 Of 7

Video: Outsourcing Implications of Healthcare Payer-Provider Convergence | Sherpas in Blue Shirts

April 10, 2013

In March 2013, Everest Group released a complimentary viewpoint titled “Outsourcing Implications of Healthcare Payer-Provider Convergence.” This viewpoint delves into the technology priorities for payers and providers. Given the complex nature of the technology priorities, this viewpoint brings out the supply-side challenges for organizations and how they can go about selecting the right service partner for their technology needs. In this video, Everest Group’s analyst Abhishek Singh shares some of the key headlines from the viewpoint.

Key Considerations before Shifting to Output-based Pricing in Application Outsourcing Contracts | Sherpas in Blue Shirts

December 17, 2012

Input-based pricing has traditionally been the preferred engagement model for buyers of application outsourcing (AO) services. Their penchant for input-based pricing is indicative of their ability to own more risk. However, when lightning struck in the form of the economic downturn, buyers began revisiting their engagement models to derive the best value from their IT contracts, and in 2009, we saw a surge in output-based pricing contracts for AO services. But the choppy shift was short-lived, and by 2011, buyers opted to play it safe and stick with tested input-based pricing contracts:

AO deal share by pricing model

Although their motivation for moving to output-based pricing was driven by cost and quality aspirations, buyers quickly found the shift was far from easy, and fraught with challenges.

The difficulties with output-based pricing – then and now – include:

Complexity: The setup involved with an output-based pricing model is considerably more complex, as these contracts require transactions to be defined unambiguously and measured over multiple time periods.

Volume uncertainty: Buyers need to be able to predict future volumes to a reasonable level of accuracy, and overall transaction volumes must be sufficiently high for service providers to derive equitable scale benefits.

Process scope: Service providers must have a good understanding of the process in order to price transactions effectively. Additionally, output-based pricing is not suited for processes that are heavily reliant on people skills, e.g., development of cutting-edge technology apps.

Organizational change: The concept of internal charging in a buyer organization may require expectation settings and change management. Further, as benchmarking data may not always be readily available, a significant data collection effort is required during the contract negotiation phase.

Before transitioning to an output-based pricing model, buyers must ask themselves the following questions:

What is really important to me?

What is driving my aspiration to shift to output-based pricing? Is it innovation, or leverage, or cost savings? IT contracts should always be drafted in-line with a buyer’s primary motivation.

How do I define consumption units?

What resource unit should I use for billing? The choice of resource unit reflects organizational context and trade-offs. For example, when pricing a helpdesk offering, a US$/ticket and US$/user supported have distinct and varying impacts on productivity improvements.

How do I manage demand variation?

How can I help control over-staffing or under utilization of resources? Baseline pricing and banded pricing are often used mechanisms for services that are subject to demand variation. For a successful transition, buyers must – as cited above – be able to forecast future volumes with a sound degree of accuracy.

Buyers must also carefully consider when to transition to output-based pricing for AO services. In an application maintenance outsourcing contract, output-based pricing is viable if the environment is mature and stable, and good baseline data is available on staffing, costs, and service metrics such as notice tickets, bug fixes, enhancements, etc. In an application development outsourcing contract, output-based pricing is suitable when the requirements and specifications are clearly defined and agreed.

If your organization has made the pricing model jump, what experiences – good, bad, or ugly – with the transition to output-based pricing can you share with your peers?

Application Outsourcing Market Update 2012 | Gaining Altitude in the Cloud

June 27, 2012

Earlier this year, Everest Group conducted its annual study of high-value Application Outsourcing (AO) deals to gain insight into how a range of parameters correlate with deal activity in the AO market. The study, which is part of our Application Outsourcing Market Update 2012 report, analyzed 320 AO deals across a combination of 17 multinational corporations (MNCs), Tier-1 offshore and Tier-2 offshore providers.

Application outsourcing 2012: key findings

Buyers: Buyers across geographies appeared to be expanding their AO portfolios. Smaller buyers signed a larger number of new deals, and larger buyers leveraged their maturity of engagement with AO service providers to sign a greater number of renewals. While North America continued to hold sway in AO adoption with the largest number of deals, Europe appeared to be a strong engine of growth for service providers, on a year-to-year basis

Service providers: As the AO market grows in size, there appears to be growing similarity between the sales strategies of MNCs and offshore providers. The offshore providers, over the years, have gained strong traction in AO. MNCs appeared to be tweaking their strategies to expand in this market, which has been the mainstay for offshore providers

Cloud computing: Cloud computing continues to be increasingly adopted in AO deals. The major components of the cloud service engagements we analyzed were transformation and implementation of business application portfolios

The new drivers of AO

Overall, the AO market appears to grow from strength to strength. When analyzed on key parameters such as geography, type of buyers, and deal type, the study results deliver interesting insights. From adoption of next generation concepts of outsourcing like cloud computing to the increased flexibility that service providers are showing in designing deals, a number of new AO trends are clearly emerging.

To find out more about these trends and other details on the AO market, please read the Application Outsourcing Market Update 2012 report.

A Clear Sign of Maturation: A Third of All ADM Headcount Serving U.S. Companies Is Now in Offshore Locations | Sherpas in Blue Shirts

May 18, 2012

Just how mature is the offshore market today? Let’s look at overall headcount worldwide serving the Unites States’ ADM requirements as a gauge.

In 2007, approximately 2.2 million IT staff were delivering ADM services to U.S. companies from offshore locations. In 2008, the sub-prime crisis hit and the economy went into a downward spiral. Discretionary spending on fresh custom application development, consulting services, and large transformational IT projects came to a screeching halt. The mantra was one of survival, yet backed by a readiness to accelerate hard when the economy rebounded. While a full bounce-back is arguably yet to happen, 2010 and 2011 witnessed a partial uptick in corporate fortunes in America, and ADM spending picked up again. However, procurement executives were cautious in their approach, and were mandated to make sure no opportunities for further cost reduction were left untapped. Offshore providers’ margins came under attack, and innovative, client-friendly pricing models replaced old ones that buyers simply would have nothing to do with anymore. Since offshore locations offer lower billing rates courtesy of labor arbitrage, many fence sitters on the topic of offshoring quickly became adopters. Clients already offshoring increased their exposures to lower cost destinations like India. As a result, while the overall IT market had almost negligible growth since 2008, the offshore providers kept growing, albeit at a lower rate compared to pre-crisis days.

In 2011, the headcount serving U.S. ADM scope stood at close to 2.6 million. Just under half (~1.25 million) account for in-house employees of U.S. corporations, and 10 percent of these are actually in offshore shared services centers. Approximately 1.3 million FTEs of third party service providers serve U.S. ADM scope. More than half of these are employed in offshore locations such as India and the Philippines. In 2007, about 45 percent of third party ADM resources were in offshore locations. So there has been a nine percentage point increase in offshoring penetration in third party ADM resources serving the U.S. since 2007. Approximately 850,000 of these FTEs supporting U.S. organizations were in offshore locations in 2011, resulting in an overall offshore penetration of ~33 percent of all headcount serving American companies for ADM scope. I expect offshoring penetration to keep increasing, at least for the time being.

With the advent of cloud computing, software-as-a-service (SaaS) has grown exponentially in prominence. Many argue that SaaS is likely to cannibalize custom application development and commercial off the shelf (COTS) software sales, thereby impacting third party providers’ revenues accruing from ADM services. While this may indeed turn out to be true in cases in which clients need very limited customization, for all other situations, custom development is still the only approach. With SaaS necessitating development of multi-tenant applications on emerging cloud platforms, and wrapping pay-per-use pricing and remote access layer around them, it certainly seems like scope for custom application development will increase, this time conducted in-house by software vendors. We may also end up witnessing a host of independent software vendors shipping their internal development work to offshore destinations.

Net-net, SaaS may be a threat to overall application outsourcing, but it is unlikely to erode offshore headcounts, namely programmers who sit and develop, debug and maintain programs in places like India. If anything, developments such as SaaS, cloud infrastructure, big data, analytics, RIMO and the uncertain economy spell opportunities for offshore destinations.

Note: ADM services in the context of this blog include application development, maintenance, the custom development portion of system integration projects, and testing, validation and assurance services.

What’s your Policy to Serve Policy Providers? | Sherpas in Blue Shirts

November 15, 2011

Highlights of Everest Group’s Insurance AO Market Outlook and PEAK Matrix Assessment

2010-11 has been a trying year for global insurers. Even though the industry returned to growth in terms of written premiums, challenges abound. Increasing competitive pressures, changing consumer preferences, need for multiple distribution channels, and a stricter regulatory regime have created a complex operational environment for global insurance companies.

As discussed in one of our recent research reports, IT AO in Insurance – Trends and Future Outlook, outsourcing activity is picking up across insurance business lines (see Exhibit 1 below), with the consolidation in the life insurance segment, and increasing price competition in the property and casualty segment. At the same time, the industry has also witnessed a lot of M&A activity, and faced pressures on underwriting results – which is prompting investments in sophisticated analytics, business intelligence, and consolidation /rationalization initiatives.

Exhibit I:

With significant shifts in buyer adoption trends, the service provider landscape has changed as well. This evolution has presented insurers with a wide array of third-party provider options, as well as the need to assess provider capabilities across key dimensions. Our just published report on Application Outsourcing in Insurance – PEAK into the Evolving Service Provider Landscape evaluated 18 leading AO service providers specific to the global insurance sector. Analyzing the performance and capabilities of these providers, we identified the Leaders, Major Contenders, and Emerging Players on the Performance / Experience / Ability / Knowledge (PEAK) Matrix:

Exhibit 2:

Expectedly, the leading service providers dominate the insurance AO market in terms of revenue, depth of capability, and breadth of delivery footprint. The major contenders are witnessing strong growth in their insurance AO business by adding new accounts and expanding business with existing accounts over the last three years.

However, as economic conditions improve, we expect a much more competitive service provider landscape. Following are the themes we think service providers must focus on to gain and further solidify their leadership position in this marketplace:

Transform orientation to position themselves as “partners” rather than “providers”: With an increasing demand from outsourcing buyers to engage service providers in early product design and development activities, it is critical for providers to develop partnership-based engagement models. These could be in the form of creating joint Centers of Excellence (CoEs) to support product/channel transformation based on select “bleeding edge” technologies, or pursuing a combined go-to-market strategy in emerging areas.

Leverage M&A to build end-to-end capabilities in a market that is moving toward IT-BPO convergence: Outsourcing buyers are increasingly looking to execute broad-based, multi-tower contracts that have both IT and BPO services in scope. This trend is being driven by buyers’ sourcing strategy of forming strong relationships with providers in specific business lines, or portfolio clusters, rather than having different providers for different services. It is therefore critical for Major Contenders and Emerging Players to develop and enhance their domain expertise, scale (across IT-BPO functional areas), and products/services suite to provide end-to-end support. These providers must continue to focus on acquiring greater capability, solutions, frameworks, and tools through M&A activities, in order to address the specific needs of insurance outsourcing buyers.

Re-engineer pricing and engagement strategies to tackle uncertainty in the demand environment: Insurance markets around the globe are experiencing challenges that cause concerns about outsourcing demand. P&C lines are under pressure in the U.S., personal and automotive insurance lines are underperforming in Europe, and catastrophic losses in Asia Pacific (e.g., the earthquakes in Japan and New Zealand, and severe floods in Australia and Thailand) are burdening the bottom-line for insurance majors. While buyers need outsourcing support to effectively navigate through these situations, they have limited budgets and are apprehensive to participate in outsourcing deals that require heavy upfront investment or capex. Providers must therefore adjust their pricing and engagement terms innovatively to create a win-win situation for both buyers and themselves, e.g., pricing based on business outcomes, increasing deal terms in lieu of no upfront transition costs, and offsetting productivity-gain sharing with inflationary adjustments.

For more information, on this topic:

Banks of the Future, Bank Big on Technology: The Changing Applications Landscape in the Global Banking Industry | Sherpas in Blue Shirts

July 21, 2011

A rapidly evolving business environment is causing the global banking industry to rethink the way it leverages technology. Market growth objectives post the recession, the desire to create a globally integrated multi-channel environment, and managing the complexity of new products are placing increasing pressure on global banking institutions to move toward a “bank of the future” paradigm. The transition to this future state requires banks to realign their technology environment and, more importantly, their IT applications portfolio. Recently released Everest Group research report, IT AO in Banking – Trends and Future Outlook, highlights the key drivers causing this evolution. Following is a summary of the three most noteworthy trends we identified:

Increasing focus on customer-centricity: How does the “bank of the future”communicate with its customers? The recently unveiled technology-studded concept branches of Barclays and Citibank offer us a preview.

Barclays Piccadilly Circus branch in London’s West End. Photo credit Barclays

Barclays’ flagship Piccadilly Circus branch in London went high-tech in December 2008 with multiple types of cash machines, an interactive video wall, a floor staff equipped with tablet PCs, and a “premier lounge” with Microsoft Surface technology. Citibank unveiled an even more tech-savvy branch in New York’s Union Square in December 2010, featuring interactive iPad-style “sales walls” that allow customers to purchase the bank’s products through a flip-friendly, touch-screen interface. Other high-tech features include Wi-Fi access, enhanced-image ATMs to deposit checks without envelopes, and 24/7 video chat station for speaking with a customer services representative.

The clear, common underlying theme behind the extensive use of technology at these banks of the future is improving the customer experience. That said, the bank of the future is not just about having high-tech feature-packed branches; it is also about being in contact with the customer through other channels such as the mobile and Internet. Some banks are using Web 2.0-based technologies to service existing customers and reach out to new ones. ABN Amro, ING and Rabobank all have dedicated web-care teams that communicate with customers through social media. Banks are also striving to provide customers with a uniform and convenient banking experience across channels, be it physical branches, web portals, or mobile devices.

Citibank Union Square — Citibank branch at New York’s Union Square. Photo credit: Jay Irani

Managing complexity in banking operations is becoming exceedingly important as banks’ operations expand and the regulatory requirements become tougher. Frantic M&A activity during the recession and the subsequent foray of banks into newer markets such as the Middle East, Africa and Asia, have created large banking entities with many disparate systems that require integration and standardization. Banks are striving to create a unified view of the customer by integrating complex customer data from across geographies and product lines in order to address risk and improve sales effectiveness.

The regulatory environment today is also tougher than ever before. Regulations such as Basel III (which will be phased in from 2013 to 2019 globally), the U.S. Dodd-Frank Act, and the reverse stress-testing requirements for banks in Europe all require banks to be on top of huge volumes of customer data and process it real-time to assess risk. This will require most banks to upgrade their IT backbone, with a special focus on data management and analytics.

Improving profitability has, expectedly, become an important driver against the backdrop of the pressures brought on by the financial crisis. Banks are continually striving to remove redundancies in operations, improve business efficiencies, and achieve cost savings especially in the middle- and back-office activities. Technology outsourcing continues to be a key enabler of all these goals. Cloud adoption is another emerging opportunity by which banks can meaningfully reduce their IT costs and complexity.

Technology is widely regarded as the panacea for addressing the challenges associated with all these themes of customer centricity, complexity, and profitability. Technology is fast changing the way consumers do banking and the way banks do business. Banks are banking big on technology to prepare for the future today, and tomorrow’s IT services leaders are working fervently today to lay the groundwork.

Related Reports:

Sneak “PEAK” into the Banking Applications Outsourcing Service Provider Landscape | Sherpas in Blue Shirts

June 16, 2011

Per our observations of the evolution of the service provider landscape before and after the recession, the single most important factor we have seen for creating differentiation in the IT applications outsourcing (AO) market is significant strengthening of vertical/domain expertise. And recognizing the need for “vertical-specificity” in the AO market, earlier this year we launched an annual research initiative focused on assessing market trends and service provider capabilities for AO in the banking, financial services, and insurance (BFSI) vertical.

One of the first results that emerged from this research initiative was the Everest Group PEAK Matrix for large banking AO contracts. In a research study released earlier this week, we analyzed the landscape of AO service providers specific to the banking sub-vertical. In a world in which everyone and their uncle delivers AO services to financial services clients, this report examines 22 service providers and establishes the Leaders, Major Contenders, and Emerging Players in the banking AO market.

As we congratulate the five Leaders (Accenture, Cognizant, IBM, Infosys, and TCS), and acknowledge the capabilities and achievements of the Major Contenders and Emerging Players, we also want to highlight three inter-related market themes that suggest the PEAK Matrix in 2012 for large banking AO relationships may look significantly different:

Buyer-driven portfolio consolidation: Most banks currently use a complex collection of service providers for their applications portfolio. Decentralized decision-making, global expansion, and large-scale M&A introduced further complexity into their portfolios. Rationalizing the portfolio creates a less complex sourcing environment, enables strategic partnerships with service providers, and also delivers meaningful financial benefit (our analysis indicates that the financial benefits of utilizing fewer service providers can be as much as 22-28 percent on an annualized basis). As more buyers join the portfolio consolidation bandwagon, the larger/more established service providers are winning at the expense of their smaller competitors.

The Matthew effect: Buyer-driven portfolio consolidation is giving rise to the Matthew effect which (in sociology) states that, “the rich get richer and the poor get poorer.” In the context of the banking AO landscape, the Matthew effect translates to “the big get bigger.” Banking AO buyers are placing disproportionate emphasis on domain expertise as a key decision-making criteria for selecting their service providers. Scale influences a company’s appetite to invest in developing vertical/micro-vertical-specific domain expertise, which in turn determines market success, which ultimately impacts growth and scale. This vicious circle of scale fueling scale is increasing the polarization in the marketplace, and could further widen the gap between the Leaders and the Major Contenders and Emerging Players.

Accelerating M&A: In response to the Matthew effect, as the Major Contenders and Emerging Players seek to achieve the next level of growth, mergers, acquisitions, and alliances will accelerate. M&A will play a significant role in service providers looking to achieve quantum leaps in capability and performance. The M&A activity is likely to significantly alter the landscape in the coming months to create a new set of Leaders and Major Contenders, In fact, since we finalized the Banking PEAK, Emerging Player Ness Technologies has already changed ownership.

Given the above three market forces, how much will the landscape of service providers you bank on (pun intended) change in the months to come? Only time and we can tell. Keep watching this space for more!

Related Reports:

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Tag: applications outsourcing

Video: Outsourcing Implications of Healthcare Payer-Provider Convergence | Sherpas in Blue Shirts

Key Considerations before Shifting to Output-based Pricing in Application Outsourcing Contracts | Sherpas in Blue Shirts

What’s your Policy to Serve Policy Providers? | Sherpas in Blue Shirts

Banks of the Future, Bank Big on Technology: The Changing Applications Landscape in the Global Banking Industry | Sherpas in Blue Shirts

Sneak “PEAK” into the Banking Applications Outsourcing Service Provider Landscape | Sherpas in Blue Shirts

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