Tag: IT services

Customers Changing Core Objectives for Services Industry and IT Delivery | Sherpas in Blue Shirts

July 22, 2015

There is a secular shift occurring within IT services. Many businesses are shifting from functional orientation – where cost and reliability are the key objectives – to a new focus where business value and cycle time are the new objective functions. This shift has big and very serious implications for organizations that encompass the technologies they use and the third-party services ecosystem they use to meet these needs. Accommodating these needs requires a significant rethink of traditional IT delivery, whether it’s through internal centralized IT services or third-party IT services.

Cost and reliability are still important; but these are now secondary issues and no longer dominant issues. C-level executives now drive IT spend. They increasingly focus on aligning IT and business value with the voice of the end user/customer as well as the speed at which IT can make changes and respond to the business needs.

I’ve blogged many times over the last few years, observing this shift of influence out of centralized IT into the rest of the organization (business units, CFO, CMO, etc.) These powerful stakeholders now believe technology more than ever is central to their moves to change the game. They want better value – technology that meets their needs and also responds far more quickly to their needs.

Functional IT structures has disciplines that frustrate these stakeholders because:

  • Projects or initiatives take too long (often a year to 18 months) for them to get the functionalities/capabilities
  • IT often focuses on how to do those functionalities cost-effectively instead of focusing on the customer or user experience and the value derived from that.

Therefore, their requirements can’t be met through a traditional structure of IT where technology orientation is based on functions (data centers, applications maintenance, application development, etc.).

To accommodate the change in demands – the new core objectives – enterprise IT must realign by service lines and have persistent teams that align from end to end on the service lines that focus on achieving business value instead of aligning on performing excellence in a functional way.

Therefore, organizations are rethinking their IT services and a new Enterprise IT-as-a-Service model is taking off. I’ll discuss this new model in upcoming blog posts. The implications are profound for internal services as well as third-party IT services.

Photo credit: Flickr

Q1 2015 in Services Industry Reveals Heightened Tensions | Sherpas in Blue Shirts

July 7, 2015

In reviewing the DeepDive Equity Research report for Q1, it’s clear that this year’s first quarter was a bit of a disaster for the services industry. Contrary to industry expectations at the beginning of the year, the report evidences that growth is decelerating. What happened to the expectations?

This report heralds what I’ve been blogging about for more than a year – the services industry has been rapidly moving to a mature state and is now at an inflection point. The results: slower growth, pressure on pricing and margins plus accelerated industry consolidation. In the Q1 report, Rod Bourgeois, founder and head of research and consulting at DeepDive Equity Research, presents analysis of the quarter’s results for 15 leading service providers.

The report (“IT Services: Whoa! What Happened in Q1 Results of 15 Services Firms”) is well worth reading. It reveals that nine of the 15 providers posted bad earnings results, two had mixed results and two were incomplete. Only two providers posted good earnings results. Only two – and these results are despite the accelerated GDP and more favorable economies in North America and the UK.

A caveat: as Rod points out, one quarter doesn’t make a trend. But it is troubling. And it certainly fits with my thesis of a rapidly maturing market.

What are the implications?

First, this means that the underlying growth assumptions on which the labor arbitrage market is based are no longer valid. Second, tensions around pricing and margins will heighten.

The challenge for providers is growth. The winning strategy will require moving from an industrialized arbitrage focus to one of differentiation and achieving a leadership position in new growth areas.

But the buying enterprises also have a challenge in a maturing market: don’t get trapped by vendor lock-in.

Photo credit: Flickr

UHG-Aetna and Anthem-Cigna Merger Rumor Mills May Give IT Service Providers Goose Bumps | Sherpas in Blue Shirts

June 18, 2015

Rumor mills are buzzing over the potential acquisition approaches made by suitors United Health and Anthem for Aetna and Cigna, respectively. The Affordable Care Act (ACA) and the growing focus on consolidation to drive health insurance premium/cost rationalization have led to these tactical maneuvers. While the equity analysts and investment banks have already started to split hairs on the potential implications for capital markets and stocks, our focus here is on the implications these mergers may have on the IT/BPO services market.

These four companies – Aetna, Anthem, Cigna, and UnitedHealth – are star accounts for some of the largest IT service providers that focus on the payer industry. Some service providers have so much revenue exposure to these accounts that their healthcare revenues can take a hit of over 200 basis points, simply as a consequence of IT budget realignments or vendor consolidation.

Impact on IT services

These potential mergers may lead to the following key transformational IT implications:

  • Systems and applications integration: Merging organizations reduce redundancy by retiring transactional systems and applications, and opting for integrated systems that can work across the merging entities. The biggest impact will likely be on claims, members, and product rationalization initiatives
  • Database and datawarehouse consolidation: This is one of the biggest imminent implications, as some of these organizations (especially Anthem) have gone through a decade long initiative to create an enterprise view of organizational data. Going through another round of database integration will be an imperative hard to push to a future date
  • Infrastructure rationalization: These are huge capital assets, and mergers often present an opportunity to divest some of these assets in favor of cloud-based (most likely private) services
  • Vendor rationalization: There are likely to be significant vendor redundancies, given that most of these organizations have mature vendor portfolios.

Implications for service providers

  • The most likely beneficiaries of these mergers will be service providers that have systems experience across both the acquiring and target entities, as this will help with any integration initiative
  • The second most likely beneficiaries will be service providers that are strongly entrenched in one of the entities and have indispensable systemic knowledge. However, given the potential hazard of these systems being retired as part of redundancy rationalization initiatives, these entrenchments can also be huge risks for these service providers
  • Competitive presence will also be a key differentiator. Service providers with smaller visibility into these accounts may find their portfolios being overtaken by competitors with wider system coverage and presence in these accounts. Organizations today do not fear putting all their eggs in one basket. In fact, they rely a lot on service partners that will not only share their risk but also be strong partners in their transitional initiatives.

The following image illustrates the current exposure of key service providers in these four entities. As you see, these mergers may be beneficial for most of these large service providers. However, a few, such as Infosys in UHG-Aetna, CGI in Anthem-Cigna, and IBM in both UHG-Aetna and Anthem-Cigna, may have at-risk portfolios given competitive underpinnings and systemic maturity of the acquirers.

We’ll be reporting our views on this story as it unfolds, so keep watching this space.

UHG Aetna Anthem Cigna Account-level Exposure of Key Service Providers

U.S. Domestic Sourcing: Early Insights from Research for RevAmerica Event | Sherpas in Blue Shirts

March 26, 2015

Three stoplights. Well, eventually four by the time I moved away in 1985. Also, a line of people each night around the new McDonalds for several days after it opened in the late 1970s.  This was the situation in my hometown of Maryville, Missouri with a population of just less than 10,000 people at the time.

Small, rural town, right? Yes, it was in many ways. But it was also home to a university, Northwest Missouri State University, which was the first college in the U.S. to put PCs into every dorm room and a student population of about 5,000. The area was packed with PhDs and farmers quietly living the pleasant life in the middle of the country.

As the buzz about rural and domestic outsourcing has increased over the past five years, I have often wondered “Is this type of location a good candidate for a service delivery center?” To the best of my knowledge, it does not have a service delivery center of any notable scale.

To help answer questions like these, Everest Group is the research partner for RevAmerica, to be held in New Orleans on May 5-7, 2015. This is the only event focused on domestic sourcing in the U.S. and Canada.

The research report that we release at the event will analyze the trends in domestic outsourcing, looking at variations by location type across different functions (IT, business process, contact center), type of service provider, and other factors.

Although we are currently deep in the middle of collecting responses to RFIs and conducting interviews, we have been able to glean a few initial insights from the database of approximately 350 cities, which range from small, rural communities to tier 1 cities. Some of these insights include:

  • The number of centers for domestic outsourcing is clearly on a growth trajectory and with a whopping 66% centers expecting headcount growth in next 3 years
  • Some of this is in response to preferring domestic locations over offshore locations, but much is about creating a portfolio of locations to support increasingly diverse sets of work
  • The typical size of a center is in the range of 100-500 employees; some centers are in the 1,000 employee range and are almost exclusively a long-term hub of an organization in a tier 2 location (vs. tier 3 or 4 or rural)
  • For IT services, the key driver is largely around the presence of local educational institutions that offer computer science and technical training, and are willing to collaborate on helping shape that talent for the needs of technical employers. Having said that, IT is a function where more than half of the centers are using a mix of locally hired resources and landed resources (resources traveling from other parts of the world on work permit)
  • Finally, two-thirds of the centers are single function delivery focused (i.e., IT or BP or CC) and couple with the fact that they are small, indicates that they have been primarily set-up to serve a specific need – serve a local client, tap into (small) specific talent pool at the same time gain cost arbitrage

We invite you to join us in New Orleans as we roll out the findings of this important study. We look forward to hearing your experiences.

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