Tag: next generation global services

The Reason for Joy This Season | Sherpas in Blue Shirts

I’ve observed an unusual acceleration of new activity here at the end of the year — a season when global services initiatives activity traditionally tapers off dramatically. It looks like this year the industry is getting a big Christmas / New Year’s present of accelerating sales. What’s the reason for this strong uptick in new initiatives, so unusual for the November-December season? It’s a little too early to tell, but I believe two big factors are driving the uptick.

Reason for joy

Both reasons are a result of the end of uncertainties in two big areas of the market. With more certainty, organizations are moving forward.

Reason #1

The first reason is the North American economy is finally starting to give organizations confidence to open their wallets and spend on transformational activities. With the GDP expanding and the U.S. economy on a much sounder footing in the third and fourth quarters, companies are kicking off new initiatives. When the economy was uncertain, organizations didn’t focus on structural changes; but with a rising economic tide, the services boat seems to be floating better.

Reason #2

The second reason for the unusual activity at this time of year is that the cloud experiment is over and organizations now have a clear path for what they want to do with cloud and other new-generation technologies.

For three years organizations have been diligently piloting cloud and new-generation technologies. We’re now at a point where organizations have sufficient confidence in the technologies themselves, whether it’s digital, mobility or cloud. So organizations are willing to adopt these technologies on a greater scale.

From false starts to strong finish

2014 has been a strange year with several false starts for the services industry. But we’re observing a strong finish. Combined, these two new certainties around the economy and new technologies are creating the long-awaited uptick in new global services. So it looks like it will be a very happy Christmas and a wondrous new year.


Photo credit: Matthew Paulson

Next-Generation Options Change Relationships with Service Providers | Sherpas in Blue Shirts

The 16th century political theorist Machiavelli wrote that there is “nothing more dangerous, or more doubtful of success, than to attempt to introduce a new order of things.” I think we should remember his words as we embark on the journey to embrace the next-generation solutions entering the services marketplace. Next-generation options are now changing the nature of the relationship between buyers and service providers. And there is plenty of significant change for both sides.

The traditional structure of solutions focused on cost reductions, RFPs prepared from a proscriptive perspective, and rigid MSAs included in the RFP package along with process descriptions, service level specifications and pricing exhibits. Value was created by onerous contract terms or traps for the provider.

Next-generation solutions give way to a much more fluid partnership approach to create value. The parties distribute the risks and develop a relationship built on flexibility and innovation. Contractual documents evolve with the discussions and negotiations. In a next-gen deal buyers and providers collaborate on how they might execute the buyer’s business objectives. Together they create value through building a framework for a successful relationship rather than through an onerous contract. The contract reflects the principles the parties agree to rather than predetermined contractual terms and conditions.

This highly collaborative process in developing the commercial requirements of the contract covers such issues as who owns the intellectual property. In many of these constructs, buyers ask their providers to develop or bring intellectual property with the buyer using it on a consumption basis. The discussions and negotiations articulate both parties’ risk, understanding of the business impact and the desired solution. They jointly develop the initial governance model and also participate jointly in refining it over time.

In a relationship developing a next-gen solution, the parties need to discuss — not dictate — the commercial requirements. Competitive tension is far less useful than in the traditional RFP structure where price is the dominant issue discussed. Instead, in next-gen deals, the parties discuss capabilities and design as levers for creating value.

Next Gen SP Tweet

There is another significant aspect that differentiates next-gen relationships. The commercial construct must allow for a journey rather than a destination. As the commercial constructs take place, the buyer often faces substantial change in organizational philosophies, policies and processes. This journey of change can be as daunting and significant as the one the provider must go through.

From our experience in working with clients in these kinds of relationships, the first step toward success is for the buyer to build a robust strategic intent that includes both its objectives and its vision of how to get there. Both parties can then use this strategic intent to keep all parties aligned over time and create a North Star to follow as they navigate through a collaborative but complicated process.


Photo credit: Hartwig HKD

Hewlett and Packard – Will a Split Make 1 + 1 = 3? | Sherpas in Blue Shirts

The Wall Street Journal broke the news over the weekend that HP was contemplating splitting the company into two – PCs and Printers in one company and enterprise hardware and services in another. HP confirmed the news this morning. Many on Wall Street are applauding the move, and I suspect from a financial market view, the move may unlock “untapped value” in the stock price. However, will it really make a difference in the market, particularly the global services market, which is where Everest Group’s clients live; in other words, what’s in it for the customers of HP’s enterprise services?

Each of the new companies will be over $50 billion in revenue, so there’s really no concern to be had about either of the resulting entities lacking scale. Certainly the PC/printer sector and the enterprise sector have very different growth profiles and different overall market drivers – increased focus is probably good news and discussions arising from internal competition for capital and resources should be streamlined and more reflective of each market group’s needs. It appears that each of the “new” companies will continue to leverage the strong HP brand.

HP blog tweet

Aside from those elements cited above, it doesn’t feel like a move structured to unlock value on Wall Street will result in fundamental changes in the new HP Enterprise entity’s competitiveness in the market. The struggle to compete successfully on a consistent basis with the more nimble offshore-centric players in the enterprise services marketplace doesn’t really change under a split company:

  • Challenges of delivering on the promise of integrated hardware and services synergies will remain. Major changes in strategy are unlikely, and there will be temptation to pull through equipment and software on services deals.
  • Underlying differences in many processes central to market success – including recognizing that products and services are indeed very different – will continue to plague both bidding competitiveness and an ability to generate attractive margins.
  • Cumbersome decision-making compared to more nimble competitors will be unlikely to improve noticeably to impact customer performance.
  • While the smaller HP Enterprise might be less inclined to be acquisitive on next generation assets (which are quite expensive), one wonders if they will/should enter the CSC acquisition sweepstakes (a mix of select next generation assets discounted by an overhang of less attractive traditional business)

Don’t get me wrong – I support the logic of pushing to create an entity that is more focused on serving the enterprise’s needs, especially when a boost on Wall Street will help support positive momentum and improved morale. The HP Enterprise leadership, however, needs to recognize that the split is a facilitator for determined actions, not a turnaround strategy in and of itself. They need to ensure an environment exists that unleashes both the hardware business and the services business to focus on the distinctive buying behaviors and competition in each (and not get so wrapped up in the potential integrated hardware/services that they lose sight of the forest for the trees).

Current HP Enterprise Services customers should think about how the more focused company can add more value in their services. It is unclear if the split will trigger “change of control” clauses that exist in many enterprise services agreements, but if so, customers should use the opportunity to open a dialogue about a new era for service delivery. We would not suggest using these discussions as an opportunity to squeeze HP Enterprise for price concessions, but as a way to get your account team focused on value and truly listening to your needs. Customers must ensure that plans are in place with HP to ensure distractions are minimized as the details of the split are sorted out and operationalized.

HP Enterprise competitors should recognize that this split may create a more focused, more competitive services company. While short-term opportunities may arise if HP gets distracted on select accounts. If the newly svelte HP Enterprise deals with the challenges noted above successfully, the player that arises from the split should have formidable capabilities and greater focus to take to market. Complacency will not serve any competitors well.

With the core HP Enterprise business under constant pressure from next generation disruption, the status quo is not an attractive path. Kudos to HP leaders for taking action – now the shape and sustainability of the follow-through will prove whether the arithmetic really works for the customer. 


Photo credit: Jeremy Fulton

Robotic Process Automation and Anti-incumbency in Business Process Services (BPS) – Opportunity or Threat? | Sherpas in Blue Shirts

While robotic process automation (RPA) is creating opportunities for the newer breed of service providers, their more established competitors are feeling the pressure of change. RPA would cannibalize the established service providers’ labor arbitrage business which they have invested in for decades. At an initial estimate, we see a phenomenon of 40-40 emerging which means 40% of existing BPS work is likely to get impacted by RPA with a 40% lower cost impact. Free of this legacy, newer service providers can ride the wave of automation to gain market share quickly. Cannibalization is not the only threat to established vendors. The RPA disruption has coincided and in part fuelled the current trend for anti-incumbency. In 2013, for example, Everest Group research shows that over half of Finance and Accounting Outsourcing (FAO) contracts were taken away from the incumbent provider when they came up for renewal. In this market the newer breed of service providers could be seen as agile and unencumbered by legacy investments in labor arbitrage. However, established providers are also upping their game and this means it will likely be a buyers’ market in the mature BPS segments.
40-40 Phenomenon: 40% of existing #BPS work likely to get impacted by #RPA wtih 40% lower cost impact

The Newer Breed of Service Providers

The newer breed of service providers are those which have either focused strategically on RPA as a growth engine (and have limited legacy non-voice BPS business), or which have been newly established as pure-play RPA-based service providers. Let’s look at the one illustrative provider in each of these two categories respectively – Sutherland Global Services and Genfour.

Sutherland Global Services

Sutherland Global Services (SGS), a leading contact center player, is arguably one of the first service providers to strategically focus on RPA as well as actively market it for the non-voice BPS space. It has made automation a key part of its proposition and is leveraging it to differentiate itself from other service providers that either rely heavily on offshore resources or global majors that can implement automation through major transformation and system integration projects. This strategic focus has led it to develop partnerships with RPA technology providers such as Blue Prism. It has also seen the company develop its own RPA software layer which links to and supports third party automation technologies. Another key capability that SGS has developed is a 24×7 control tower, which maintains existing automations to ensure continuous operations.

SGS refers to a recent contract win as a sign that its focus on RPA is paying off. As part of the RPA-led BPO deal with an European travel company, it is taking over two operational centers in Scandinavia and Estonia.  It already has circa 400 people in Sophia delivering transactional and front-office services. The largely U.S. based service provider will leverage the additional delivery centers to grow in Europe. That growth, according to SGS, is going strongly with annual targets reached and exceeded part way through its financial year. Other RPA-led deals are in the pipeline.

We believe, as a relatively newer service provider in the non-voice BPS space, SGS is transitioning to a mostly automation-enabled provider in the back- and middle- office. We estimate that automation currently accounts for 10%-15% of its FAO & middle-office services but is rising fast. 

Genfour

Genfour was founded in 2012 to offer a different way of providing back-office services. Today it offers Robotics as a Service, on a cloud-based infrastructure on-demand. The proposition to lower costs is strong given the benefits of automation combined with a cloud infrastructure. Its challenge is to win over skeptics that do not yet believe that robots can do as good a job as people in delivering business processes.

Genfour also offers consultancy, development and on-going run operations. It has gained six clients since it was established and these include organizations such as NHS Scotland, IFDS, Coral and RAC.

Genfour is building an annuity-based business model where, not only does it generate revenue from the reselling of robotic software but also from managing every robot that it operates on behalf of its clients. It is already achieving a high operating margin for a business process service provider at 22% in H1 2014. This is set to stay at 20% to 21% full year.

Both SGS and Genfour see the use of automation as a good fit to the increasing buy-side appetite for transaction or outcome-based pricing instead of the input/FTE-based model.  Genfour started out with its “as a service” model while SGS is in a transition state. It is offering banded pricing using virtual FTEs and some blended pricing where people and robots are mixed.

Anti-incumbency

Anti-incumbency provides opportunities for the newer breed of service providers which could be seen by potential clients as agile an unencumbered by legacy investments. However, these service providers will have to have the ability to scale services and offer slick switching processes if they target contract renewals.  Competition is intense in the market with established service providers making investments to optimize and streamline the switching process. For example, multiple service providers have developed specialized transition management solutions to streamline switching and subsequent transition.

Established Service Providers

There has been a great deal of buzz about RPA in the market recently. This is making established service providers increasingly highlight their own automation capabilities and make new strategic alliances with third party automation software vendors. Examples include EXL, Infosys and Steria which have been largely using their own automation tools. In addition, some such as Steria and Genpact, have also set up partnerships with third party software vendors (e.g. Blue Prism & Automic). These and others will be looking to narrow the gap in mindshare between themselves and the new generation of service providers which have gained market share through strong messaging and strategic use of RPA.

Buyers are increasingly becoming focused on higher-end value proposition. They are willing to switch to a new provider, in case the incumbent is unable to deliver value beyond just labor arbitrage and basic process efficiency. Established service providers that are building on their RPA capabilities will be looking to make up for cannibalization of revenue by opening up new higher value opportunities such as analytics services. RPA can help them reduce internal costs too. Apart from helping the bottom line, given anti-incumbency, this would enable them to more easily absorb the cost involved in clients switching.

Everest Group will be publishing a report on Service Delivery Automation (SDA) shortly. It will be discussing the findings of the report at its half-day Robotic Process Automation event for buy-side clients in Dallas on October 22nd. Review the agenda and request an invitation

Watch out for forthcoming research reports from Everest Group on anti-incumbency, analytics, and technology / automation in the BPS space for a deeper-dive into these dynamics.

Internet of Things Opens Up Intriguing New Growth Opportunities for Service Providers | Sherpas in Blue Shirts

Code Halos: How the Digital Lives of People, Things, and Organizations are Changing the Rules of Business, by Cognizant’s Malcolm Frank, Paul Roehrig and Ben Pring, discusses the impact of the already huge and ever-increasing amounts of data surrounding individuals and our environment. The authors point out today many pieces of equipment or devices have the potential to generate data about themselves and we can collect, analyze and act on that information and transform the world around us. The implications for service providers are exciting.

The authors of Code Halos explain that equipment, processes and people will have so much information coming off of them that it will create a halo that surrounds them, containing an ongoing flow of information.

An example is a GE jet engine into which GE has put sensors that provide GE and its customers with ongoing diagnostics of an engine’s performance, location and conditions on which it’s operating. This information is collected and synthesized, allowing GE to move from a one-to-many maintenance schedule to an individualized path that treats all of its jet engines the same with customized maintenance. This allows GE to predict when an engine is going to fail so the company can act ahead of failure. Creating customized maintenance also dramatically improves the performance and cost to maintain the engines.

The same potential exists for most, if not all, pieces of equipment. Let’s take the common light bulb. Today we can put a sensor on the light bulb and treat that bulb as an independent entity. We can monitor its working conditions, its useful life, replace it when necessary and adjust the electricity coming to it for greater or lesser amount of light at certain times and conditions. So we can take the most mundane household appliance and create a code halo around it and transform its use, its cost to serve and its usefulness.

As the authors rightfully point out in the book, if we apply this to business processes, it opens up an unending series of opportunities to apply digital technologies and transform the world around us.

One of the meta effects of this phenomenon is that service providers can create completely new lines of service to transform their impact on their customers. Think of GE, which utilizes Genpact to gather and analyze the data to transform its maintenance of its jet engines.

In a services world where we have maturing markets for traditional outsourced application development services, the potential of these code halos is almost limitless. And the need for partnership with companies such as Genpact and Cognizant is significant.

This could create a whole new set of services and market growth opportunities in a maturing market space and become a significant bright spot for the services industry.

Why BPO Providers Are Disappointing Investors | Sherpas in Blue Shirts

Out of 22 outsourcing stocks, a few have outperformed the S&P to date this year: EXL Service, Global Payments, Star Tek and UEPS. But 18 have underperformed by an average of 9 percent so far. Why is this trend happening?

First, investors are always forward looking, and stock disappointments or exuberance are relative to the prior year. We saw great appreciation in stocks across the industry in 2013. But this year we’re well off that pace. With stocks at full value last year, they have less progress to go.

Several other factors are in play. Protectionist sensitivity to moving work offshore affects several providers. Rising labor costs, attrition and currency fluctuations take another hit. Competition and pricing pressure are intense in some segments. And some providers are dealing with a stepped-up pace of regulatory changes as well as integration challenges of acquisitions.

Top driver

But I believe the biggest factor is that the global services space is maturing. The strong, robust growth driven by the secular shift to offshoring or labor arbitrage is starting to flatten.

As a result, the industry is in search of the next set of S curves that can drive growth. There are a number of interesting contenders:

  • Cloud
  • As a service
  • Digital
  • New functional areas that companies are willing to contemplate giving to third parties
  • Vertical industry plays in healthcare or financial services driven by wrestling with regulations and driving further into compliance and dealing with regulations

All these areas are promising for industry growth. However, these new growth opportunities are not sufficient to offset the declining rate of growth in the broader arbitrage segment. So what does this portend for the future?

The future

I think at least until — and unless — these new areas develop enough scale for robust revenue growth, we’ll see the kind of cyclicality that we’ve experienced over the last few years with the industry’s fortunes tied to economic cycles rather than an underlying growth engine.

Capgemini Rides the Wave of Demand for Industrialized, Standardized and Pre-packaged Services | Sherpas in Blue Shirts

At Capgemini global analyst event in London last week, the company provided a holistic view of its business growth strategy and internal initiatives to enhance skills and sales capabilities.

Capgemini management was relatively upbeat about growth opportunities while acknowledging the continuing headwinds in its main market in Europe. Economic uncertainty continues in continental Europe, but the need for cost cutting and efficiency is driving demand for services. Capgemini also expects growth from wider adoption of outsourcing and offshoring in continental Europe with a number of large deals on the horizon. Disruptions from cloud and offshoring continue to negatively impact revenue growth but improve margins. At the same time, cloud and other disruptive technologies such as big data, are increasing demand for services and boosting business.

Against this backdrop, Capgemini provided guidance of 5% – 7% organic revenue growth for the mid-term. Paul Hermelin, Group CEO, also indicated that the company is well on its way to achieving an operating margin of 10%. Assuming a 2-3 year period for mid-term, this is in keeping with outlook at the end of Q1 2014: organic revenue growth of 2% to 4% and an operating margin rate between 8.8% and 9.0% for 2014.

In terms of services, industrialization, standardization, innovation and pre-packaging dominated the company’s strategy. In infrastructure services the strategy has seen service delivery standardized and globalized with increasing focus on RIM, automation, cloud migration, orchestration and brokerage services. Capgemini saw +19% growth in cloud bookings year on year in 2013.

Application management has turned into a success story for Capgemini too. This is something of a turn around with dwindling bookings reversed into an increase of 60% in 2013 and 40% in Q1 2014. This has been achieved through industrialization and taking a factory approach to AM. Capgemini highlighted circa 30% cost savings for clients through this approach. It is also offering a new approach to AM services with a business process focus – where KPI’s include related business process metrics. This is a novel approach to AM that Everest Group will cover in a separate piece.

Another key lever for growth is innovation with Capgemini investing in IP in its strategic offerings (which are based on major technological transformation themes such as customer experience, cloud, mobility, big data, and social media). In keeping with this strategy, Capgemini will continue to target demand in the market for digitization of services and for transforming big data into new business opportunities. Similar opportunities from the Internet of things is also on its radar.

The widening of the strategic offerings portfolio with more IP is to boost profitability with higher margin services. Capgemini has shown that it can do well in these. Its strategic offerings grew by 19% in 2013 and are on the way to grow by 20% in 2014.

The drive for innovation is likely to lead to more acquisitions and partnership co-development. The latter brings with it the risks of investing in ambitious technology that proves too difficult to bring to market in a timely fashion e.g. Skysight, the cloud service orchestration product which Capgemini is developing in partnership with Microsoft, has been delayed.

Verticalization is another growth lever for Capgemini. One example is industry managed services offerings with OnePath Suite. This consists of pre-packaged SAP solutions that have been pre-configured for specific verticals, such as CPG, Energy and Life Sciences, and which will be delivered and set up as part of hosted and managed services with the potential to add business process services on top of bundled infrastructure and software integration.

BPO services are also being extended from the core F&A offerings to a broader set of services aimed at CFOs, including spend analytics, internal audit, SC analytics and MDM, and tax efficient accounting.

Internal organizational measures include:

  • HR: Increasing the size of the offshore workforce and its leadership while flattening the labor pyramid in other regions
  • Sales: A unified ‘One Group’ approach is being rolled out with dedicated major account teams, new rules across P&Ls and priority access to Group assets.

With globalization of services have come the challenges of managing resources better and increasing utilization rates. Capgemini needs a robust global organization to support its evolving delivery model. The HR strategy is addressing this requirement.

Capgemini has had an entrepreneurial culture with many P&L centers. This has led to a sales structure that has adapted to local market conditions. The implementation of a ‘One Group’ approach to major accounts is needed to tap into large multi-national opportunities that can now be supported by Capgemini’s global delivery model.

Overall, Capgemini has made excellent progress in transforming itself to ride the wave of demand in the market for modernized services and to compete with India-based vendors who are targeting Europe, Capgemini’s biggest market. Offshoring and globalization of service delivery has been largely achieved. Other aspects of the strategy are still work in progress but with the economic outlook generally brighter across the globe, the company is set well to achieve its latest guidance.

Automation, the Once and Future King | Sherpas in Blue Shirts

I once read that our society’s major accomplishments over the last 50 years were that we had harnessed lightning and used it to get sand to think. This massive leap forward was about using information and computers to automate processes, and it really took center stage in the service marketplace. But 15 years ago labor arbitrage emerged and arguably supplanted automation as the dominant source of value creation in the services field. With the maturing of the arbitrage market, we are seeing automation reemerge at the center of service offerings, and I feel we are in the early stages of a tectonic shift where automation once again dominates the landscape.

We see this disruptive shift to automation happening in many areas. For instance, what moves the market now in end-user customer service isn’t outstanding service from India or the Philippines. It’s the emergence of “service now,” an automation SaaS play, which creates increased levels of automation for customer service.

And there is the expectation of just-in-time cloud or consumption-based CRM. I blogged before about IBM reacting to this trend by selling its transactional BPO and CRM practice when the space commoditized. Dell and CSC are other market leaders reacting to the move toward automated services.

The analytics movement is part of the shift to automation. Another hot growth area is digital commerce. Both of these areas have become largely a tools play rather than a labor arbitrage play.

The as-a-service platforms are also a manifestation of the shift to automated services. Hot new offerings are coming out as BPaaS platform-based services and disrupting the BPO space. In a previous blog I mentioned how payments companies are outperforming BPO companies because of the automated platforms that allow the payments providers to be highly profitable.

These are all harbingers of things to come as automation re-disrupts the global services world.

2014 Outlook for the Global Services Industry | Sherpas in Blue Shirts

What will be the big stories in 2014 in global services? We believe the main themes of 2013 will continue this year but will take on bigger significance. Whether you’re a buyer or a provider, you need the following issues on your radar screen and need to be prepared for change over the next 12 months.

An expanding upswing

From an economic perspective, it appears that both North America and Europe will continue their slow climb out of the depths of the recession. We expect that to continue to beneficially affect the services sector, specifically in discretionary spend.

Quite frankly, we see the strongest growth coming in the traditional arbitrage labor market. As economies expand, the Indian firms with their talent factories are well positioned to capture a significant portion of discretionary spend as more funding becomes available for IT and projects.

We believe the expanding economy will also influence transformation projects. The large organizations that drive the transformation market are extraordinarily well capitalized at this point, and it makes sense that the improving economy would motivate them to spend some of their cash on transformation. We would always expect cost reduction to drive a portion of the transformation market, but we believe that some of the transformation focus in 2014 may well shift to drive growth and differentiation.

A big push

We continue to see the rise in the influence of business stakeholders, a phenomenon that we commented on fairly regularly last year in our blogs. We believe this trend will continue and the result a push for services more focused on outcomes and functionality and less focus on price per unit. We don’t see the entire market shifting to this, but we believe this shift will be an important part of the market.

The as-a-service models are best positioned to service the shift to outcomes and functionality. Hence, we believe the ongoing rush to cloud and as-a-service will continue and will increasingly reach into the CIO/CTO funding budget to garner more of their share of spend. It’s clear that business stakeholders will continue to drive the cloud surge.

A looming threat

We believe the immigration and H-1B visa reform issue will continue to hang over the industry, swaying ponderously like the mythological Sword of Damocles. Unlike Damocles, who managed to depart the peril and anxiety of the sword above his head in Greek mythology, we think the immigration/visa issue will have an ongoing effect.

Specifically, we believe that there will be no let-up in the difficulty in getting B-1 and H-1B visas, and particularly firms that are viewed with caution will struggle along those lines. We think that the bureaucrats will continue to monitor visa issues and create friction in the visa approval process. This has happened in the United States, and we also see this happening in Canada and across Europe. The increasing friction in the approval process won’t stop the industry’s use of the visas, but it will create irritation.

The unanswered question is whether or not immigration reform will happen. We don’t believe there is strong support for the India-based model or the model of using H-1B or temporary workers on shore.

As we’ve blogged before, we believe that if reform does happen, on balance it will have negative consequences for the industry, particularly for the Indian heritage firms, which aggressively use H-1B and L-1 visas in their onshore mix. It will raise their cost of doing business and bring them closer to the cost base of their MNC and Global In-house Center (GIC) competitors.

A dose of rebalancing

We believe 2014 will bring a move in the banking sector to more aggressively shift work from third parties into GICs or captives. A number of issues are driving this strategy change. The banks want to increase productivity in services and also desire to gain control over key aspects. In addition, there is a regulatory tailwind from the Fed’s recent pronouncements around its concern that the banks have used third parties too aggressively for some delivery functions.

We believe these factors will drive a shift from third parties in the banking sector to GICs. We don’t believe that this will materially drive work from offshore to onshore but more into the type of vehicle from delivering services. The overall proportion probably will not change, but we do see some rebalancing going on with a realization that there are segments of the workload that are better delivered for productivity closer to the customer. However, we believe the ongoing desire to lower costs will somewhat offset the shift.

What will be interesting to watch is whether other industries follow the banking lead. Historically, the banking sector leads market shifts and other industries following after a 9-18-month gap.

Any of this movement in a significant way will have a material effect on the services industry.

A move up

Partly driven by the previous issue of banking leading the shift, our opinion is that the GICs and captives will continue to increase their influence over spend. Those firms with captives or GICs will continue to grow in influence and potentially in size. In addition to their potential to increase the amount of work they do, we also believe they increasingly will be asked to manage some vendor or provider relationships from a low-cost location such as India. We think this, in turn, will drive more focus on price.

The upside

Typically an increased volume of work increases provider’s pricing power. But we think this will be largely offset going forward. In some select areas where there is more and more inclination to view offshored work as less sticky and therefore bid it out on return, we think that mindset will drive down overall prices. But we don’t see that there will be a precipitous drop in pricing in 2014; pricing will be stable to slightly down.

A Win-Win-Win Model Attracts Attention in Global Services Market | Sherpas in Blue Shirts

Whether you are a service provider or a buyer of services, you can benefit significantly from a relatively new delivery model in the services ecosystem — outsourced in-home services.

Why is it attractive? The in-home model leverages the labor arbitrage idea but applies it in a different way for even greater benefits.

Over the last 10 years companies learned that if they moved work to the people rather than moving people to the work, they would get a much lower cost of labor. For instance, moving software programming work from New York City ($150,000/year job) to Bangalore ($25,000/year) produced a big labor arbitrage. The in-home model takes the work to people, but they work from their own homes instead of being concentrated in an office, factory or call center. This model gives providers access to a much larger talent pool at a more affordable rate.

The in-home model works in locations such as India or the Philippines, but providers are deploying this model primarily in the United States or in region. In the U.S. where people are politically sensitive about sending work offshore, this is a particularly attractive model to consider.

Three critically distinct advantages of the in-home model

The first benefit of deploying the in-home model is access to a wider, richer and more diverse talent pool at a cheaper labor rate. At the same time, this pool is willing to work at a substantially discounted rate compared to workers in a central office, factory or call center. They have strong reasons for preferring to work from home, which are a trade-off for the lower price of their labor. Typically these preferences arise from:

  • Family or lifestyle issues
  • Physical handicaps that make it difficult for the person to work at an office or other central location
  • Need for part-time income to supplement a full-time job
  • Desire to supplement retirement income

All of these preferences for working from home are very important choices in today’s world. They lead to two other major advantages of deploying an in-home model:

  • Lower attrition
  • Greater productivity

Because people in this talent pool prefer working from their houses instead of commuting to an office or factory, they tend to be more loyal to the employer that facilitates this need and more focused on ensuring they meet or exceed the employer’s expectations for productivity.

In a nutshell, the strong attraction for providers to the in-home model is access to a completely different talent pool that is cheaper and often more loyal and more productive. So it’s not surprising that the in-home delivery model is showing tremendous growth.

Impact of work-management tools

Management tools to allocate and manage work in a virtual environment are transforming this space. These tools now are inexpensive as many are SaaS apps that enable providers to pay for them on a consumption basis. The SaaS model often makes these tools the same or even a lower-cost investment than tools needed for remote management in locations such as India.

Prominent areas of adoption

The in-home services model is quickly growing in voice services, especially in the call center and customer spaces.

It also has great applicability in rare skills such as programming. One of the very significant dilemmas in today’s digital world is aged-out technology languages that still need to be supported. For instance, it is very difficult these days to find COBOL programmers as programmers see it as a dead-end career.

The in-home services model eliminates the turnover problem and increases motivation and productivity in COBOL work as the greatest number of qualified, highly productive COBOL programmers are retired. They are willing to work but not in a central office or factory and not full time. They can supplement their income while living a retired lifestyle, and the provider gets superior quality, highly productive, very reliable support at a discount.

Another skill area that is ideal for the in-home model is legal services. In fact, we use this model for Everest Group’s outsourced legal services. In today’s world the major law firms have raised their rates to an unconscionable level, making the cost of legal services very high. Many firms are starting to tap into the in-home model, outsourcing work to ex-partners who have opted out of the legal race because of lifestyle issues. Rather than giving the work to a less-experienced associate, they have access to seasoned, credentialed lawyers whose turnaround time is faster and quality of work is better. And the price point is half or a third of the price for utilizing a partner in a major law firm.

It’s a win-win-win

Clearly the in-home model for outsourced services is a win for those who want to keep jobs in America, a win for workers who want to allow for a culture of self-actualization or are handicapped, a win for the service providers and their customers that get better services at lower cost. You can’t beat it — it’s a win for everybody.

This outsourcing model is gathering a lot of consideration around the world. I’ll discuss it in more depth in my upcoming presentation on “A New Paradigm — Truths and Myths” at the CORE conference on November 5 in Toronto.


Photo credit: Matt Crawford

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