Tag: cost competitiveness

What Venture Capitalists Can Teach Us about Driving Transformation | Sherpas in Blue Shirts

The current way we buy complex services through a purchasing department is to come up with elaborate detailed requirements, which often can only be implemented over several years. We put these out to bid, forcing the vendor community to respond with far more detail and waterfall project plans laying out in excruciating detail how they will architect and migrate this environment to the new desired state. We then conduct the services version of the limbo dance – how low can we go – where providers compete the price of the solutions. But there is a huge fallacy in this procurement methodology.

We have a long history of unhappy results from this methodology, a body of work spanning 10 to 15 years demonstrating that these procurement efforts mostly result in unmet expectations, cost overruns, and evolving service levels. This is insane. Insanity is doing the same thing again and again and expecting a different result.

The fallacy of the procurement methodology

By using this methodology, we effectively try to articulate a transformational journey in an overly precise way even though we have only a limited understanding of both the existing and future environments. The result is exercises in creative writing with overly precise work plans and cost estimates. The only thing we can be sure of is that the plans are wrong because of the lack of information (no matter how much time we spend on the plans), and the fact that the world changes during this timeframe. So we’re guaranteed to be wrong.

Therefore, our preferred way to purchase services is flawed. It pretends that we know with precision things we don’t know and it does not adequately accommodate for the nature of change in technology, business process and business conditions.

What can venture capitalists teach us?

For years VCs have faced a similar problem. How do they develop breakthrough, compelling new technology products, fund them, manage them cost-effectively and, most importantly, how do they get to great offerings?

They achieve these objectives by accepting that, although the vision for the journey can be had, the length of the journey is unknown, the amount of money required to accomplish is unknown, and the exact nature of the end product is also unknown.

This is very similar to the problem we find in most service transformations. We know the direction we want to head, but we can’t describe accurately and precisely where we’ll end up, can’t quantify how much it will cost, don’t know how many resources it will take to get there or how long it will take to get there. All of these factors vary. Yet, using the procurement methodology, we pretend we know these details and set up artificial constructs.

Applying the VC principles to transformation services

Why don’t we do what the venture capitalists do? First of all, they break the project down into a series of gates. The only detailed road map is the one between where you currently are and the next gate. That requires a detailed plan. One of the parts of the plan is to develop a plan for the next gate.

Using VC principles, the vision and the dimensions of what you want to accomplish are clearly stated. For example, “I want to bring the cost of IT down by 40 percent” or “I’m going to standardize my components and move them into an elastic or consumption-based model, and I’m going to develop agile vehicles to integrate the components.” But how you will do that and how it will involve your current environment is unknowable.

All that is knowable is how you develop a proof of concept and how you move from POC to rapid implementation. You can fund each step much like VCs do (Series A, Series B, and Series C funding) and break it down to create funding associated with milestones that get you to the next gate.

This is a broad application of the VC philosophy, and there’s much more to it. But I believe by applying these principles, we can change how we drive transformation. We can dramatically lower the interaction costs of the purchasing process, and we can spend that money and time instead on the actual transformation. And we can deal with our providers or ecosystem partners in a much more transparent and direct way.

It’s best to apply this VC-based methodology where the benefits of design and architecture drive the value, instead of price reduction as the driver. You can still get lower unit prices, but the old procurement process is dead. That process is useful if you’re trying to take a stable environment and reduce its unit price. But it is not useful where you are driving a transformational agenda, which cannot be precisely defined. Using the old methodology for a transformational agenda tends to waste time, frustrate ecosystem partners and create false promises.

Perspective on Wipro’s Cost Reduction | Sherpas in Blue Shirts

Wipro is reportedly looking at headcount and cost-reduction exercise in the realm of $300+ million. Why are they doing this? Is it a good idea? Of a few possible interpretations for wringing out costs, here’s my opinion – starting with my belief that this undertaking was inevitable. The more important question is how will they do it?

Wipro’s action comes on the back of similar news about TCS and IBM and is predicated by the pricing pressures hitting leading service providers. As I blogged recently, pricing pressure has become acute with existing clients looking for significant cost reductions.

In addition, the market is changing and clients are more insistent about requiring onshore resources; this raises operational costs for the Indian firms, which need to invest in a richer set of capabilities on shore. These resources located close to the customer are substantially more expensive for Wipro and other providers than their India-based resources.

It’s a case of when push comes to shove; if Wipro and other providers are to maintain reasonable margins or be competitive, something has to give. That “something” is the necessity to take out costs to allow them to meet the pricing pressures and allow them to hire the onshore resources that clients increasingly insist upon.

How will they achieve the cost reduction? 

I think Wipro and others will move further into the industrialized factory model, which relies on an ever-widening pyramid that pushes work down to lower-cost resources and eliminates middle-management roles.

However, I think the strategy of moving deeper into the pyramid model raises the risk of further commoditizing the space and increasing churn. And clients are more and more intolerant of churn. The likely result is that it will open the door for firms like EPAM and others that differentiate around persistent teams of experienced engineers.

Live Deal Support for Service Providers – Seller Beware! | Sherpas in Blue Shirts

Everest Group recently conducted an interesting engagement with a large service provider organization that displays the opposite of the phrase “caveat emptor”…caveat venditor, or “seller beware.”

The provider was trying to extend its five-year-old deal with its client. The buyer had retained a consulting firm to advise on the competitiveness of the proposed pricing. Based on a quick diagnostic assessment, the consulting firm suggested that the as-is pricing was above the market. The service provider, faced with the threat of pulling down the price to avoid the deal going into a competitive bid process, asked for opinion on the pricing. Based on a detailed analysis of the in-scope services, we found that the pricing – which was prima-facie 9-12 percent above the market – was actually 2-3 percent lower than market after factoring in value-added services and other deal-specific nuances.

We’ve seen multiple such examples recently. Buyers are churning their vendor portfolios much more than in the past, and aren’t afraid to pressure their service providers for reduced pricing with the underlying message that they should be prepared for competitive re-bidding process. Deal pursuit life cycles have also become longer, and the competitive intensity has been on the rise consistently.

In this environment, it becomes paramount that service providers get their solution and pricing correct on the first go. And it can be to their advantage to obtain advisory support during live deal negotiations. However, there is a big caveat here: leveraging off-the-shelf benchmarks is unlikely to add any competitive advantage to providers’ bids. The benchmarks must be very contextualized, bearing in mind the buyer environment, the vertical industry, the volumes in scope, the deal terms, the delivery locations, the provider’s solution, etc. This will not only enable development of winning bids, but also ensure that the provider doesn’t leave money on the table.

Caveat venditor!

Have a question?

Please let us know how we can help you.

Contact us

Email us

How can we engage?

Please let us know how we can help you on your journey.