The Definition of FAO Is Evolving | Market Insights™
February 22, 2014
The definition of FAO is evolving to include an end-to-end approach, industry-specificity, and integration of contiguous processes/functions
The definition of FAO is evolving to include an end-to-end approach, industry-specificity, and integration of contiguous processes/functions
Over the last five years the story of growth in the global services industry has been one of the rich getting richer. In fact, the larger tier-one firms, especially Cognizant and TCS, are growing faster than the marketplace. But I think it’s more notable, at this time when markets are maturing and growth is difficult to achieve, that some of the tier-two providers, such as EPAM, Syntel and Virtusa also outperform the market.
A few years ago the global services industry basically wrote off most of the tier-two providers, relegating them to a fate of consolidation. But like the still-alive man being carted away mistakenly in the British comedy film, “Monty Python and the Holy Grail,” they’re not dead yet. Just the opposite — these three tier-twos are enjoying increased profit and earnings. This is not the case for all smaller providers, so what’s their formula for success?
Market challengers
They follow a simple but long-proven formula. EPAM, Syntel and Virtusa offer a differentiated alternative to their competitors and thus become market challengers that stand out to buyers.
In some cases they provide a challenge on price. In others they bring a differentiated source of deep industry and functional expertise. In the case of EPAM, the alternative challenge is a delivery model with a source of highly technical talent from Eastern Europe.
Perhaps the most piercing challenge they have ushered into the marketplace is attention. In some of the more mature spaces in the services market the providers have become complacent. Clients are frustrated because they don’t get the level of attention they used to enjoy. The challengers are delivering intense attention to existing and potential clients’ needs.
The tier-two providers bear watching. History demonstrates that shake-ups result on any battlefield where challengers successfully deliver levers that break down barriers.
When I think about the ITO and BPO industries today, I can’t help thinking about Walter Cronkite, the American journalist who anchored the CBS Evening News from 1962-1981. He was known as the most trusted man in America. Back in those days there were no 24-hour cable TV news stations and no Internet — just three TV networks with nightly news broadcasts. A lot of perspectives were hatched in those newsrooms, and broadcast journalists were very influential. They were the ones to watch when we wanted to know what was happening, the meaning behind events and the implications going forward.
The same things could be said of the ITO and BPO industry analysts a few years ago. They were the purveyors of wisdom about such information as business marketplace trends, whether or not to outsource or how to achieve greater ROI from IT and business process management and improvement strategies.
But both the TV news and the ITO / BPO industries evolved to the point where the pundits’ influence is limited. They still have an audience, but the market has segmented into more defined topical areas.
Industry analysts and experts talking about IT strategies and BPO today talk to a pretty small crowd comprised of mostly junior people, many of whom are in the provider/vendor community rather than decision makers in the buyer community. Pundits talking about shared services may have a broader crowd, but it’s also mostly junior folks. Often it’s mostly the industry talking to itself, not talking to its customers, which is similar to the news pundits all tracking what each other say on TV and Internet news these days.
America experienced this phenomenon in dramatic action in its last presidential election. The Obama campaign was able to segment the market much more precisely than the Romney campaign because they understood the need to directly address various market segments about their specific problems. We can assume that Walter Cronkite reporting the results of that election would have ended that story the same way he ended each of his news broadcasts: “And that’s the way it was.”
The folks who control the purse strings in ITO and BPO decisions no longer look to analysts and pundits who don’t talk about specific business problems. Industry perspectives broadcast to a wide targeted market no longer yield access to real business opportunities for service providers and vendors. The opportunities lie in providers and vendors having many mini conversations with much more tightly defined subgroups of the market.
And that’s the way it is.
It’s earnings season for the outsourcing industry. So far, we’re seeing mixed results: modest growth in most companies (including Accenture, IBM, Infosys and Wipro ) and strong growth in a few. Notably, Cognizant and TCS are pulling away from the pack. Or as my old running coach would say, they are showing the competition a clean pair of heels.
But it’s not just the results of the recent quarter; this is the pattern for several quarters, and we’ve come to expect strong performance from both Cognizant and TCS. This is evident in organic growth in their existing accounts as well as in new client logos. On the surface, they look the same as everyone else in the industry in that they have very similar offer sets. But there are four notably different aspects about these two providers.
1. Early industry orientation
Cognizant and TCS are out-executing other service providers, because they have a much more mature industry orientation than their competitors. They were early to build an industry focus, and this had a significant impact. Where others such as Infosys and Wipro are still refining their industry orientations today, Cognizant and TCS are harvesting the benefits of in-depth relationships and relevance from having had an industry focus for several years.
While other providers are still building out their industry capabilities, Cognizant and TCS have fully formed industry units that are already perceived as more relevant and having the capabilities to be more impactful. With this differentiation, they have a big head start that is a wide gap not easy for for others to fill quickly.
2. Industry selection
Cognizant and TCS made wise decisions to focus on the largest industry verticals: financial services and healthcare. Both of these verticals are large and have been high-growth areas, experiencing a lot of substantial disruption, which results in a wealth of opportunities for market shifts.
In addition, these two industries tend to reward providers that specialize in them and punish those that don’t. They like to think of themselves as industries apart and prefer to buy from people who are dedicated to them more so than to other industries.
3. They invest more in their clients
Although Cognizant and TCS take different approaches to client investment, both of these high-growth firms have more people on site at their clients than their peer competitors, and these resources are often in addition to the contractually guaranteed numbers. In other words, they have more people building client relationships, uncovering new opportunities and building a deeper understanding of how their clients’ businesses work. In a virtuous cycle, greater investments in client-side resources lead to greater intimacy, which in turn leads to more work, which in turn leads to greater client understanding and greater intimacy.
4. They listen effectively
Like the rest of the industry, Cognizant and TCS are still adjusting to the new market reality where business stakeholders play an increasingly stronger role than CIOs in driving new spend on technology. But both of these providers are taking a more humble sales approach for this market; instead of pushing offerings, they are listening to and engaging with business stakeholders about their emerging needs. They are performing better than their competitors in this regard. As a result, they can identify opportunities their competitors miss and, where they are in competition, appear far more credible and relevant.
The net result of the above four aspects is a very positive differentiation in the minds of their customers, so these providers often are the first choice of a customer when thinking of new work.
Like the clean heels of a fleet-of-foot racer, Cognizant and TCS’ adaptation to the new empowered business stakeholders’ approach to buying, together with their longstanding in-depth investment in industry capabilities, enables them to run straighter and encounter fewer obstructions in their market races.
Summary report now available | Download
As you may recall, in December Everest Group announced that we were partnering with Shared Services & Outsourcing Network (SSON) to launch the industry’s first-ever survey to investigate Vertical Industry-specific Strategies for Shared Services and Outsourcing (or “VISSSO” for those who like acronyms that hiss like a snake).
The survey covered not only traditional horizontal functions like F&A, HR, and IT, but also industry-specific functions like order management in hi-tech, merchandising analytics in retail, and loan and mortgage servicing in banking. In total, it addressed 164 vertical functions and 8 horizontal functions. Scope, sourcing model, technology strategy, organization model, improvement initiatives…all that stuff for each function across 28 industries.
Quite simply, it was a huge effort, and we are just now climbing out from underneath the avalanche of data.
Starting tomorrow at the North America Shared Services & Outsourcing Week in Orlando, we will begin unveiling the findings. We will follow with similar sessions in other SSOW events around the world, plus release the summary report later in March.
Enough about what is to come, let’s jump into some of the insights we have uncovered.
Looking across the 164 vertical functions, the responses reveal that services industries like financial services, transportation, and healthcare (in comparison to product-oriented industries like manufacturing and energy) include over twice as many vertical functions in their shared services and outsourcing strategies. Why? To over-simplify, the mid-office of services industries is simply larger and more important than that of product-oriented industries.
This means the mid-office is more closely tied to the financial processes typically at the heart of both shared services and outsourcing efforts. Or as we have hypothesized in our earlier research, “operational finance” processes of services industries are a critical component of value delivery and due to their linkage with other finance process, they are most commonly aggregated into the more general finance activities.
We also broke apart the data based upon the organizational maturity for delivering services (see the graph below). Interestingly, mature organizations are twice as likely to use end-to-end models for delivering F&A services. Further, mature groups are somewhat less focused on consolidation (and re-engineering – not shown), but more focused on increasing collaboration with their user groups. Further, they believe they are more than four times as successful in implementing change.
What does this tell us? Our belief is that shared services and outsourcing professionals are segmenting into two groups. One has been successful in creating change for their organizations, plus implementing and optimizing a new delivery model. The second has not only implemented a new model, but is actively trying to create ongoing change by engaging their users and seeing change as a day-to-day competency instead of a painful and one-time transition.
Consolidation and process re-engineering will not quickly go out of style, but they are far from the end of the story. And, by the way, the more mature group reports greater focus on cost savings, greater ability to meet financial targets, and more increased inclusion of non-cost value drivers in their business cases.
There are many other findings that will be featured in our summary report; some additional interesting factoids in the interim include:
All for now…looking forward to sharing more as we work through additional analysis. Please don’t hesitate to contact me if you have questions or wish to debate the findings.
Most enterprise cloud offering conversations to date have focused on the horizontal benefits…flexibility, scalability, auto scaling, cost savings, reliability, security, self provisioning, etc.
Advantageous as these are, CIOs are increasingly interested in learning more about cloud benefits that are specific to the industry in which their organizations operate. For example, latency requirements, failover mechanism and data encryption are important to a CIO in the financial industry. A healthcare industry IT executive will be interested in hearing more about mobility and data archiving. How the cloud can improve supply chain or logistics is important for a CIO in manufacturing industry. And a media industry IT executive, quite aware of the various platforms being used to access content, will want to hear more about Content Delivery Networks (CDN) supported by the cloud.
A growing number of enterprise cloud providers are beginning to understand this interest in vertical cloud benefits. While their focus has been on “SaaS-i-fying” their offerings to meet unique, industry-specific application requirements, the trend will continue towards “PaaS-i-fying” and even “IaaS-i-fying” their offerings.
Let’s take a quick look at some of today’s verticalized enterprise cloud offerings.
IBM’s Federal Community Cloud is dynamic and scalable to meet government organizations’ consolidation policies as mandated by the Obama administration’s CIO. It is in the process of obtaining FedRAMP certification to meet Federal Information Security Management Act (FISMA) compliance standards, a requirement for government IT contractors, and will be operated and maintained in accordance with federal security guidelines.
Savvis provides customized IaaS solutions that cater to the financial industry. Growth in this vertical has been led by providing infrastructure services – such as proximity hosting and low latency networks – which support electronic trading. Savvis has added six new trading venues and an international market data provider. Its customers can now cross-connect, or have network access, to over 59 exchanges, Electronic Communication Networks (ECNs), and market data providers. For example, it hosts Barclays Capital’s dark liquidity crossing network, LX, which aggregates its global client bases’ market structure investments.
Infosys took advantage of Microsoft Azure PaaS platform and its SQL Data Services (SDS) to provide automotive dealers with cloud-based solutions to go from a point-to-point dealer connection for inventory management to a hub-based approach. In this solution, an inventory database for all dealers is hosted at a dedicated instance of SDSin the cloud. It provides middle tier code and business logic to integrate data between participating parties and a web-based interface for dealer employees wanting to check inventory at other dealerships.
Amazon Web Services (AWS) has cloud solutions that cater to the media industry’s needs for transcoding, analytics, rendering, and digital asset management. It developed a CDN, based on CloudFront™, which provides the streaming from edge nodes strategically located throughout the United States for a robust streaming experience.
AWS’ Gov Cloud™ provides a cloud computing platform that meets the federal security compliances FISMA, PCI, DCC and ISO 27001. The Department of State and its prime contractor, MetroStar Systems, built an online video contest platform to encourage discussion and participation around cultural topics, and to promote membership in its ExchangesConnect network. The contest drew participants from more than 160 countries and took advantage of AWS for scalability. AWS hosts websites for many federal agencies such as the Recovery Accountability and Transparency Board (recovery.gov) and the U.S. Department of Treasury (treasury.gov). AWS provides multiple failover locations within the United States, a provision which meets the security requirement that only people physically located within the United States have access the data.
Game hosting companies are running their games in the cloud for faster delivery and scalability. And AWS’ S3 platform provides the storage capacities for gaming companies such as Zynga and Playfish.
GNAX’s healthcare cloud specifically caters to the healthcare industry and understands the nuances of HIPPA. It provides a private cloud solution to healthcare companies that scales up and down depending on patient volume.
Of course, there are both pros and cons to adopting vertical-specific cloud offerings.
Pros:
Cons:
These issues can be mitigated through a careful sourcing methodology, now being provided through cloud agents who negotiate the contracts with multiple vendors as per the needs of the client organization.
As illustrated above, there are significant benefits to be gained from industry-specific cloud solutions, and I predict we’ll see an increasing number of them emerging in the near-term.
With the maturation of legacy service delivery models, everyone is looking for the next lever to pull.
And the first-ever survey into how shared services and outsourcing models are maturing by industry – being jointly conducted by Everest Group and the Shared Services and Outsourcing Network (SSON) – will finally yield definitive insights from buyers, providers and consultants alike on the abundantly clear next lever…industry-specific strategies. Take the survey now.
For the first time, we will be able to look at how shared services and outsourcing models are maturing for functions specific to more than 25 industries, such as claims management in insurance, order management in telecommunications, and loyalty program management in hospitality and tourism.
The responses from the Vertical Industries Strategies for Shared Services and Outsourcing survey will enable us to document the current role of shared services and outsourcing, degree of centralization, expected optimization initiatives, technology strategies, and other factors relating to more than 150 functions across all the covered industries. We’ll then be able to arm you with both the broad themes and the detailed nuances that are relevant to you and your business.
Why is a view of vertical industry strategies important?
First, we are receiving an abundance of these questions. We are increasingly asked to help organizations calibrate their approaches based upon factors unique to their businesses. For example, although sometimes collectively referred to as “Energy and Resources”, oil & gas, utilities, and mining are very different industries, and the location of businesses requiring support, the role and degree of centralization, and the tolerance for operating shared services in “non-traditional” geographies vary tremendously. And SSON is hearing the same thing from its members –industry-specific content and networking are increasing in prominence.
Second, solutions specific to vertical industry strategies drive more complex economics, especially as they relate to technology. As the functions being supported more closely touch the business, the potential impact on revenue and cost increases…as does the potential for greater value. However, the unique nature of each function complicates the technology options. Make-buy decisions become more complicated and fewer options exist. Further, service providers must carefully assess whether they have the stomach to invest in and maintain more narrow solutions with fewer potential clients across which to spread their investments. As illustrated below, service providers must think carefully about where to draw the line in making technology investments to serve unique industry needs. Further, their clients must make a corresponding commitment to a technology model.
Third, organization models are under attack and will be shaped by the answer. Traditional shared services models were initially defined around the scope being impacted by ERP implementations. The scope for offshore outsourcing and captives was largely shaped around roles that could be delivered remotely with lower cost labor. Neither was fundamentally designed around what best enabled the business. As shared services and outsourcing initiatives mature and expand, they are challenging existing organizing philosophies, and the degree and type of industry-specific services will fundamentally set the stage for the next generation in global services.
Oh yes, this is an important topic.
The survey, which will launch in early January 2012, will include relevant questions for enterprises, service providers, and consultant/analysts. If you have any questions or comments before you participate in it, please contact me at [email protected].
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