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What I Found Out at NASSCOM India Leadership Forum 2014 | Sherpas in Blue Shirts

March 6, 2014

Conversations at the recent NASSCOM India Leadership Forum 2014 in Mumbai were injected with a dose of confidence and optimism — but were also guarded in their outlook for India’s growth in the global services market this year.

Central to the message is that the industry is on an upswing. I noted that the services players showed more confidence this year than in 2013. NASSCOM projects a range of 13-15 percent overall growth for the services work coming into India this year. (The number includes work sent to Global In-House Centers/captives, BPO and ITO.) That number is slightly up from last year’s guidance of 12-13 percent, so they’re guiding up for the industry in 2014.

What’s Changing?

From an IT perspective, I think the providers’ hope is that discretionary spend will return to the marketplace, driven mostly out of the United States, Canada and the UK. They also believe that there is a strong secular shift in the Nordics and Germany not dependent on discretionary spend, as those economies reach for arbitrage partners to manage their structural talent challenges.

Shaping their Future

I also noted a lot of focus on cloud functions. At last year’s forum, there was a lot of exuberant talk about the cloud. This year cloud talk was backed up by more use cases and growing confidence that the cloud/automation trends can be turned to the Indian players’ advantage.

Specifically they belief that this will result in significant additional systems integration and project work and that the low-cost Indian players are well positioned to capture a disproportionate share of that work.

Most memorable to me is that, for all the enthusiasm evident at this year’s forum because of the Indian players’ capabilities, the topic that captured a significant amount of attention was differentiated growth strategies. There is much interest in how to grow faster. My sense is that the driver for this focus is a trend I’ve blogged about before — the increasing cost of growth efforts in a maturing marketplace.

That said, NASSCOM leaders and India’s services players projected guarded optimism about growth opportunities in 2014.

Photo credit: NASSCOM

Infosys Makes a Turnaround, but Has Miles to Go Before It Sleeps | Sherpas in Blue Shirts

February 11, 2014

INFY’s December 2013 quarterly report demonstrates that Murthy’s back-to-basics strategy is starting to show fruit with Infosys upping its guidance for both revenue and earnings. Its year-over-year revenue growth of 9.8 percent is encouraging; however, when we compare it to the performance of industry leaders TCS and Cognizant, it is clear that there is still much to do. Put another way, the faster growth of the industry leaders shows that INFY is still losing market share and is far from out of the woods.

Thorny issues

At 9.8 percent, INFY’s growth pace is slower than the market leaders and dramatically far from the growth of Cognizant (21.9 percent) and TCS (17 percent). Why the large gap? INFY’s earnings are a bright spot; but once again, when we look more closely, it’s apparent that rupee appreciation — rather than improved efficiencies — is the biggest factor.

Although it’s good to see Murthy’s turnaround strategies showing early returns, we believe they may be short lived and even shift to a disadvantage over time. Here’s why. Murthy’s strategy focuses on investing more in offshore relationships, especially in the commoditized application outsourcing space. It’s likely to bring short-term financial gains, but we believe this move could result in Infosys losing client intimacy. It’s not likely a winning strategy in the face of competition — especially from the leading duo, Cognizant and TCS, which are investing in enriching their onshore client relationships and their consulting expertise.

Losing market share and profits propped up by currency changes … short-term gains but long-term challenges — with apologies to Robert Frost, Infosys has miles to go before it sleeps.

Photo credit: ATiwolf

Convergys to Acquire Stream – Can Leading CCO Providers Get the Mix Right Between Scale and Value? | Sherpas in Blue Shirts

January 13, 2014

Last week Convergys announced it plans to acquire Stream International. This combination of two large U.S.-based providers creates the world’s second largest Contact Center Outsourcing (CCO) provider, with a combined revenue topping the US$3 billion mark. Convergys stands to gain an expanded set of service delivery capabilities, client segments and regional presence.

As competition in the CCO market heats up, service providers are actively looking around for attractive opportunities for acquiring their way to growth and expanded offerings. Over the past two to three years several CCO M&A deals have been announced. These deals target a number of specific objectives, which Everest Group categorizes into three types – capabilities augmentation, scale enhancement and footprint expansion. Capabilities enhancement was the primary driver for nine of the more recent deals, making it the most prevalent investment area.

Key M&As in CCO space in 2011-2013

Two key objectives drive Convergys’ acquisition of Stream, scale enhancement and client base expansion. On the other hand, the other CCO mergers in the past year and a half had different sets of objectives. Concentrix’s acquisition of IBM’s CCO (October 2013) business and Sykes’ acquisition of Alpine Access (July 2012) were driven by capability enhancements. In contrast, Webhelp Group’s acquisition of HEROtsc (February 2013) and Capita’s acquisition of Full Circle (June 2012) were driven by delivery footprint expansion.

While the deal ensures top line growth, we wonder how Convergys plans to tackle bottom-line growth. In our opinion, CCO leaders will need to balance scale-driven growth with more profitable organic growth among the existing client portfolio. The trick to achieving this growth involves effectively addressing ever-increasing client expectations around customer experience management and end-to-end multi-channel customer interaction. Everest Group research shows that over the past few years CCO clients have expanded the number and nature of the processes included in their engagements, with value-added services growing the fastest among all process areas.

For the gears to keep powering growth long after acquisitions have been digested, CCO service providers will have to focus on value-added services that expand existing client engagements and create differentiation in the market.

For more analysis, download our complimentary viewpoint on this topic.

Murthy Prepares Infosys for Growth | Sherpas in Blue Shirts

December 5, 2013

When Infosys’ founder and former chairman N.R. Narayana Murthy returned in June, it was a clear sign that Infosys wanted him to guide the company in reinvigorating growth. But to do that, he would need to change the existing growth strategy.

The new strategy that Murthy has adopted is now clear. He has decided to refocus on Infosys’ great strength in the traditional labor arbitrage talent space and is de-emphasizing the push into platforms. In Infosys 3.0, the growth strategy was to get one-third of their revenue from contracts in the platforms and consulting space. It is not exiting or selling the platforms/consulting business; rather, it plans to give it less attention and will invest less in this space going forward.

The central tenet in Murthy’s strategy aims for a larger share of the labor arbitrage market and aims to capture larger transactions in that market. Accordingly, the company is aligning sales incentives with large application and infrastructure transactions instead of linear growth opportunities in platforms.

In our opinion this is a wise move. As we discussed in a previous blog, the labor arbitrage model is really the only game in town for providers that built their business on this model — and it’s still a huge market. Murthy’s plan also capitalizes on Infosys’ robust and strong reputation —and a proven success strategy of client access — to drive increased focus in this space.

In this focus, Infosys is willing to meet clients where they are rather than create a need for change. Therefore, Murthy’s growth plan emphasizes large transactions more than transformation. That’s not to say that Infosys no longer has an interest in transformation opportunities; it’s just that its focus now is large transactions rather than transformation.

Intended and unintended consequences

There are other consequences of Murthy’s strategy, in addition to realigning incentives. He is reorganizing the leadership team, reassigning senior leaders to focus on the larger application and infrastructure transactions.

He also brought decision making back into a central organization out of India. So they’ve changed the focus they had on moving down a path of more and more decentralized decision making and have recentralized it.

We can see the results of these tactics already in terms of leadership turnover. Some leaders who have been refocused have choosen to exit. The latest — and sixth exit in the five months since Murthy’s return — is Stephen Pratt, who was head of the consulting practice but was reassigned to utilities. This is understandable as leaders brought in specifically to drive a certain agenda would choose to go elsewhere if reassigned to a different agenda.

But we’re also starting to see the consequences in terms of accelerated growth. The last Infosys growth report showed a modest and welcome step up. So we can see that Murthy’s strategy is starting to have a positive effect in terms of growth. We’re also seeing market shifts happening as the sales teams become more focused on arbitrage opportunities.

Infosys’ premium pricing dilemma

Another change Murthy has dealt with is the historic problem that Infosys had in terms of its premium pricing. They were on the horns of a dilemma — Infosys was proud of having robust industry-leading margins, but that translated to a premium price per hour for resources. They are finding that the market is more competitive now and that premium is no longer consistently available to the Infosys brand. This is certainly not to say that the market has a poor view of Infosys; it’s just that the giant can no longer command premium pricing in a highly competitive marketplace.

This has consequently caused Infosys to change its strategic direction. Although Murthy still maintains going after high margins, the company is achieving that objective by taking costs out of the delivery vehicle rather than trying to achieve a market premium in the space. In this respect, Murthy appears to be taking a page from the TCS playbook in driving lower-cost delivery capabilities. He’s doing that through increased utilization, a broader pyramid and more focus on delivery in offshore locations.

Early returns on Murthy’s new strategy are both interesting and modestly good. We’re seeing consequences in both the firm’s internal leadership and go-to-market strategy. Already we see evidence of a pick-up in competitive intensity of Infosys in the marketplace, and we’re seeing that result in its growth. We look forward with interest to see how Murthy’s strategy will play out in an increasingly competitive marketplace.

Cognizant Finds the Secret to Growing a Services Business Faster | Sherpas in Blue Shirts

November 7, 2013

Service providers often ask Everest Group for advice on how to grow their business faster. We usually find that their starting-point perspective has a pitfall. They fall for the seduction of new logos.

The problem with this growth strategy is that it’s very difficult to win a brand new customer without “privilege.” Privilege is not a well-understood concept, but basically it requires that your company has an existing relationship with a customer. Where this is not the case your company will have to prove that it is credible, different from competitors and special. Specialness is the depth of understanding that you have in the uniqueness of the customer, an industry or a function. Obviously it’s easier to build this within an existing client base.

In most service industries, companies can grow three to four times faster in their existing client base than they can by adding new clients. Why? Because they already have a relationship, and the customers understand that the provider is “special.”

The master of this strategy is Cognizant. They are great at enlarging the “mine.” To do this, they sell more to their existing stakeholder groups, creating new mines in that client base. They are very adept at befriending and really understanding CIOs, CTOs and department managers’ needs where they already serve a client.

The first thing they do is look for a new mine in an existing customer. They first service HR, accounting or another stakeholder group and learn how best to service them. Based on the depth of understanding of industry or function they get from serving that stakeholder group, they are more credible in the open marketplace than their competitors. By growing fast and broadly in their existing client base, they build a richness of how to service clients and what each client’s real issues are. And they build real stories that make them much more credible. It’s that experience and credibility that make them special.

Cognizant also organizes its business around this methodology. For example, they put more people into their customer accounts than many other providers. Why? It’s their growth strategy:

They have more people at the customer location to help outsell their competition.
When they go to start a new mine, they can move in people who already know the customer rather than bringing in people from the outside.
When they go to get a new logo outside their customer base, they are able to bring in people with direct experience. And they don’t violate the existing customer’s need for consistency because they have a surplus of people in the account. So the customer doesn’t lose key people; they lose one of three key people, not the one key person.

Our advice is that your company’s growth strategy should follow the Cognizant model. Deemphasize new logos and instead focus on growing business with existing accounts. As you build depth, experience and credibility from these experiences the new logos will be much easier. Besides being a proven strategy, the good news is that your cost of sales will be lower if you adopt this strategy.

Is There Anything Providers Can Do to Change the Growth Trajectory of the Labor Arbitrage Industry? | Sherpas in Blue Shirts

November 5, 2013

There is an inconvenient truth in the global services industry: The growth rates in labor-arbitrage-based businesses are diminishing.

Tied to that fact is an even more inconvenient truth: Service providers have overreached in moving to outcome-based platform models to compensate for the drop in arbitrage growth rates.

Labor arbitrage is not going away. But it’s so well established that much of the work that would go into a labor arbitrage model has already moved, so the growth rates are dropping in this business. This has caused the provider community to run helter-skelter for new growth ventures. Many have developed IP and deliver multi-tenant or multi-use software in “outcome-based” or “non-linear platforms” — only to discover two more inconvenient truths:

Although these models sound great and there are signs that the market seeks to adopt them, the unpleasant fact is that the size of the market for these types of offerings is small compared to the labor arbitrage market.
Providers have invested in these platforms and cloud offerings for future growth, but the hoped-for growth kick is slow in coming.

The net result is we now see them focusing back on the labor arbitrage talent-based space. The good news is that, although the growth rates here are slowing, the market is huge. Furthermore, providers in this market have a differentiated or compelling position.

Why isn’t the hoped-for growth kicking in?

The providers’ strategy is troubled in several dimensions. A prime reason why their strategy based on the new models has not been successful is that they don’t understand the new models. They try to scale them, assuming a move from experimentation to hyper-growth, before they thoroughly think through how to work with the different sales model and adoption trends. They also tend to use their existing pricing structures for new models. As a result, they struggle with wide-scale customer adoption.

These are small markets, and the offerings in these new models tend to be focused by industry or by function. Therefore, for each offering the market is much smaller than the arbitrage-based market. So even when providers succeed in gaining new business, they only succeed in small numbers.

So that’s the problem.

What’s the solution to this dilemma?

Is there anything we can do to change the growth trajectory of the arbitrage industry? The simple fact is no, there isn’t anything we can do. The truth is the arbitrage-based market will continue to slow. The new models and markets are nascent and immature and not large enough to offset the declining growth in traditional, bigger arbitrage businesses.

When the industry has slowing growth rates in a market, it becomes more and more difficult for providers to grow fast in that space. In the short run, I think the answer is the providers must stay focused on their arbitrage base, as this market is large and they have secure, robust positions. I think it is a mistake to run too fast after the new models while patiently nurturing the new offerings in hopes that someday they will mature into the high-growth business they so desperately want. Our observation is that overly strong focus on the new offerings results in distracting the organizations from their core businesses.

Today the arbitrage-based market is really the only game in town for the providers that built their business on this model, and for at least the foreseeable future, they must reconcile themselves to the slowing growth rates. Even so, there is good news: It’s a huge market that still presents growth possibilities for the providers that focus on capturing it.

Just Like CSC and Dell, Sell Your Truck While It’s Still Running | Sherpas in Blue Shirts

October 23, 2013

When Bobby Pinson recorded his country & western song “Don’t Ask Me How I Know” dispensing bits of wisdom, I’m sure he didn’t realize he was providing advice to service providers. But my favorite line in the song is also great advice for today’s BPO providers — “Sell your truck while it’s still running.”

That’s what CSC and Dell did. In December 2012 CSC sold its credit services division “truck” to Equifax. A month earlier, Dell sold to Conifer Health Solutions its revenue cycle solutions line of business for healthcare providers. Wisely, they sold these business lines while they were still profitable. But they were not growing and were not consistent with the firms’ long-term strategies.

The business lines were sold to providers where the assets fit well with those companies’ core business and growth strategies, and which will invest in growing those lines of business. Both CSC and Dell then used the cash from those asset sales to invest in developing cloud services, which have a greater growth potential for their business.

The BPO space is full of big ideas and big investments in industry solutions or functional solutions that grew quickly and then stopped growing. In some cases the service providers are finding that they hit on a need in a micro industry and that the total market is only four or five companies that have that need. So the service line did not expand from the initial few clients.

In other cases, the provider built an offering that is now an unattractive area, so the business faces declining margins. Or perhaps the offering is based on technologies that are under attack by new disruptive technologies.

As we look across the landscape of service providers and their offerings, it’s clear that most companies have several of these kinds of businesses. Some are starting to look like a scientist’s attic stuffed full of experiments that didn’t work out.

These business pockets arose over the last few years because of the providers’ desire to drive growth by entering new markets. Many offerings were put together and sold at a price point that would allow them to scale and then become profitable after scaling. A few of these experiments in service offerings succeeded, but many stopped growing. When they don’t scale, the provider can damage its reputation by trying to drive profit improvement exercises on them afterwards in the form of price rises or a cut back in services. Existing clients become unhappy, and it affects other work they would otherwise do with the provider.

Fundamental question for BPO providers

There are many reasons to divest these BPO experiments that didn’t grow. The CSC and Dell asset sales pose a fundamental question for all BPO providers: Should you, too, sell your truck while it’s still running? Should you harvest these BPO pockets or should you run them out and let them decline?

If you leave them in place, the best that can happen is they become an anchor against growth because their future growth prospects are limited. It will make it more difficult to grow your company going forward. These BPO pockets contribute to mass but not to growth.

We wonder if others will follow CSC and Dell down the path of divestitures. What do you think? Other than these providers and IBM, we we have not seen many firms with the discipline to prune their business. Will we see a movement of others learning from these examples and start pruning back some of their portfolio?

For the right buyer, it might be a great model to aggregate these BPO business pockets and build a business around them. Pull them out of the fast-growing areas and build a separate company that has an appetite for this kind of investment. There’s an interesting proposition.

Selling the truck while it still runs is poignant advice that we should reflect on. Who knew that CSC and Dell were getting their strategic thinking from country/western songs?

Photo credit: Don O’Brien

In Services Marketing, Fruitcake Won’t Bring You New Business | Sherpas in Blue Shirts

October 4, 2013

One of my favorite quotes of American humorist Mark Twain is: “I didn’t have time to write you a short letter, so I wrote a long one instead.” He knew the secret of creating effective content: less is more. This is absolutely the case when creating content for marketing your service offerings and capabilities. But it’s not the dominant view, which is why so many service providers’ odds of getting new business sink when they launch new content — sort of like fruitcake.

Fruitcake is dense and heavy. Although it’s sweet and looks like a dessert, many people just pass it around without sampling it. Don’t let your marketing content be like fruitcake. It needs to be like a buntini — light, snack size, easily picked up and memorable. Your marketing intellectual property needs to be short, easy to digest, and easy to refer to other people.

I’ve blogged before about problems with ineffective thought leadership and marketing content. Often the issue is people and companies want to be stars. To be effective and memorable, you need to check that mindset at the door and focus on creating content that is compelling, interesting and based on real experience.

It’s even better if you serve up your content as a story or illustration rather than presenting it in a theoretical context. People gobble up stories. But theories, like fruitcake, are difficult to digest. If you go the theoretical route, you need to increase the level of synthesis and brevity.

Yes, it takes more time and effort to be concise. But your content will be more effective if you whip up a compelling topic, synthesize it down to its essence, present the essence in a short story and then stop. This way you’ll leave your potential customers hungry for more instead of wondering how they can squeeze in a nap to digest what they’ve eaten.

Photo credit: Richard Elzey

Doing a Double Take on IBM’s Spinoff in the Customer Care Services Market | Sherpas in Blue Shirts

October 3, 2013

IBM is consistently more profitable than its peers in the global services market. Why are they succeeding and staying out in front of competitors? If you take a deep look at IBM’s impressive record of profit and growth, the reason behind its success becomes apparent: IBM has a clear strategic intent and makes hard decisions well before others. It’s a critical distinction. And it puts it in the right markets at the right time and with the right offerings.

IBM clearly understands how to assess markets and are committed to investing for its future in the right markets even though those may be hard decisions.

For example, years ago it foresaw that the emerging markets were going to be a source of growth. Well ahead of other providers, it understood the importance of investing in those markets. At that time China was an emerging market, but IBM’s assessment was that it would be huge and dominate the Asian market. So they moved its Asia administrative teams out of Japan and Australia to Shanghai — a location that at that time was far from comfortable for their executives but would become the heart of the Chinese economy.

As another example, IBM recognized early that PCs were commoditizing, and it wanted to provide high-value hardware. It sold its PC division to Lenovo; at the time Dell and HP were still actively trying to grow in that space. IBM exited the space early and history has shown how that commoditization turned other providers’ businesses upside down.

The latest example of IBM’s record of making tough, smart decisions based on its strategic intent is its recent spinoff to Synnex of its customer care unit for call center services. Although it’s an attractive space in the outsourcing world, call centers and voice work are not growing and IBM believes they are likely to experience further commoditization.

In order to uplift the profitability of its overall portfolio, IBM needed to divest this slow-growing, less- profitable segment and invest in new areas for growth (such as customer care analytics). It’s another hard decision that took a lot of commitment and bravery.

Interestingly, as with PCs, in this recent spinoff IBM will be able to have its cake and eat it too. The sale to Synnex (and its subsidiary Concentrix, which runs outsourced call centers) gets the asset and business unit off IBM’s balance sheet. But IBM still retains the client relationships and the capacity to integrate call center services in with its other offerings by having a strategic relationship with the buyer. Synnex/Concentrix will become an IBM business partner and the companies are planning to jointly pursue business opportunities.

IBM clearly understands that not all revenue fits in its portfolio and that there is a life cycle for IBM’s commitment to stay at the leading edge of services. Therefore, as service lines age and fade, it divests them.

We think there are lessons here for other service providers. Others tend to put more emphasis on revenue and less on profitability and ongoing growth. In doing so, they will find themselves in several years wishing they had followed IBM’s example sooner.

See our related viewpoint on this topic: SYNNEX Acquires IBM’s Contact Center Business – Canary in the Coal Mine for the CCO Market?

Photo credit: Chris Dag

Competitors Beware: Genpact Becoming More Dominant | Sherpas in Blue Shirts

September 17, 2013

Have you the noticed the growing ripples of marketing messages from Genpact? The firm is already a leader in the global services market, but Bain Capital is aggressively pushing Genpact to grow faster and become more dominant in the market.

Bain — which is known for taking well-run, aggressive firms and super-charging them — provides capital to Genpact, has a seat on the provider’s board, and is becoming far more active in its management meetings. Acquisitions, organic growth, and looking outside the Indian heritage for Western talent are all on the strategic agenda along with refreshing marketing activities.

They moved from purely F&A services and solutions and now have compelling offerings in enterprise application services and IT infrastructure services. In today’s environment, there is plenty of room to grow their share of the pie. Genpact already had one of the higher win rates in the global services industry and now, with increased focus on marketing, should capture more wins.

If you’re a global services buyer, these observations portend to Genpact coming to visit you soon.

If you’re a service provider, you likely have reasons to be frightened by the moves Genpact is making to step up to a higher level in the market.

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Tag: growth strategy