Outsourcing Archives - Page 9 Of 14

The 40-40 Rule of Disruption in Global Services | Sherpas in Blue Shirts

October 27, 2014

Everest Group research has analyzed the impact that automation will have on the services industry. Our opinion, which we refer to as the 40-40 Rule, is that 40 percent of all outsourcing contracts are ready to be impacted by automation and the average impact in the amount of labor to do the work will be a drop of 40 percent. We believe the 40-40 Rule affects BPO, applications outsourcing, and infrastructure.

If we’re right, this is a very substantial disruption to the services industry.

Impact in the next 18 months

What makes a contract “ready” for automation (e.g., scripts and robotics)? The contract must be close to termination and/or the customer is open to or interested in driving an automation agenda. In saying that 40 percent of all outsourcing contracts are ready to be impacted by automation Everest Group believes that 40 percent of all contracts have the potential to be affected over the next 18 months. But it won’t stop there; this party will keep going.

Headcount reduction

The average impact on the reduction of headcount for after automating the work per contract will be about 40 percent reduction of FTEs to perform the same functions or oversee the same amount of transaction processing. The headcount reduction will range from 20 percent at the low end to 80 percent at the high end. Individual experiences will vary; but as an impact on the entire industry, we think that it could be as high as 40 percent.

The good news hidden in the bad

This is a huge impact, but it’s not all bad news for service providers. In the early situations where we’re seeing service providers take the initiative, they are able to capture — particularly in their existing accounts — higher margins by participating in some of the benefit of the reduced headcount. They can participate in two ways:

Charge a premium for projects
Often an automated structure allows moving to a more consumption-based model and providers can capture some of the benefit in premium pricing in that model

This is exhilarating in that it has the opportunity for potentially higher margins to offset the ongoing drumbeat of the demand for lower cost.

Margin uplift is all very well. But if the provider has a labor-based business and takes a 40 percent hit to its revenue, that’s a very difficult gap to overcome. And it’s even more difficult in today’s world where growth is slowing across the industry and it’s becoming harder to find new work that hasn’t been outsourced.

Everest Group sees the services industry into a brownfield in which service providers must take work from other providers rather than take work from the customer’s in-house functions.

Investment implications

Any kind of automation strategy enabling a provider to capture part of the benefits of the automation requires that the provider make up-front investments. Of course if the client is pays for the automation, it is not reasonable to expect that the provider participate in the uplift in margins. But if the provider funds or partially funds the investment, it’s more reasonable to assume that the provider will capture some of those benefits for itself, at least in the short run. So we believe there will be a significant uptick in investment intensity.

However, such investment carry a negative implication: it will cause an uptake in risk held by the provider because it will have a stranded asset that needs to be paid for even if customers’ needs or desires change over time. If the customer moves away from that automated platform, the provider may find itself straddled with an unamortized investment.

Bottom line

If we are right about the 40-40 Rule and that automation will be this powerful, we’re looking at a very substantial impact on the service industry. And I think the acceleration will be quite fast. We’ve found in the past that any disruption that changes the cost equation by over 20 percent for a specific client achieves rapid adoption. Therefore, we think customers will very aggressively seek the 40 percent reduction of labor, in which case the industry is in for a significant change and challenge.

The Sharing Economy and the Airbnb of Outsourcing | Sherpas in Blue Shirts

October 24, 2014

The ideas are not new – for many years people have been sharing spare capacity or capabilities with each other, for example carpooling, holiday home swaps. etc. New channels, such as Airbnb, which enable sharing on a larger scale, have drawn the attention of governments, which in turn are looking for new ways to boost their economies. For example the UK’s Department for Business, Innovation & Skills (BIS) is currently running an independent review of the sharing economy led by Debbie Wosskow, CEO of Love Home Swap. I expect some aspects of the model to be deployed by BIS to help startups.

The question is can the sharing economy get a foot hold in the business-to-business (B2B) world? Other concepts such as e-commerce marketplaces have crossed the business-to-consumer (B2C) and the B2B divide. We have had sharing of resources and capabilities in the enterprise world for decades too, from shared service centers to shared office facilities. Cloud computing and the various “-as-a-service” models are also about sharing. What is different about the sharing economy is the many-to-many relationships. For example, through Airbnb many home owners offer rooms to many guests. While there will be some many-to-many examples of sharing in the enterprise too, the prevailing model in outsourcing is one-to-many, one service provider pooling its resources and capabilities to deliver services to many clients.

The sharing economy concept could lead to enterprises doing more sharing among themselves, offering their spare capacity and resources to each other. This could potentially reduce demand for outsourcing to service providers, in certain scenarios, for example sharing of resources for common business functions with partners. The trouble is that setting up such arrangements could be complicated and there would need to be solid governance procedures in place to ensure performance. It would be different if there were channels through which formal sharing arrangements could be made easily. This represents an opportunity for outsourcing service providers to augment their own services by providing such a channel.

There is already one operating in the UK: The Liberata owned Capacity Grid connects 140 local authorities in the UK to provide spare revenue and benefits processing capacity to each other. Liberata provides the network and the connectivity and charges a fee on the transactions performed. It also offers its own processing services to local authorities on or off the grid. It is looking to expand its Capacity Grid portfolio.

Looking at the company’s financials, it has got over a pension-liability black hole which dragged it down for a few years before it was acquired by Endless in 2011. Today it reports steady revenues of circa £90m per annum and an operating profit margin of 7% based on its 2012 and 2013 results. Capacity Grid has helped it maintain its revenues and Liberata is looking for complementary acquisitions that add to it. In September 2014 it acquired Trustmarque, a UK-based IT services provider. The additional IT capabilities are likely to boost Capacity Grid’s infrastructure. The acquisition also boosts Liberata’s public sector clients, including UK government and the National Health Service (NHS). There are many common services across swathes of the public sector, e.g. primary care administration in the NHS, where the enterprise sharing economy is likely to get more traction than in other sectors.

The Capacity Grid shows that a sharing channel can work in the government-to-government (G2G) setting where the parties are not in competition with each other. There are also many complementary businesses in the private sector, such as partnerships, where the model could work in a B2B setting. This could see large enterprises, or their global in-house centers, or new entrants create a marketplace for overflow business capacity. Many service providers already have the network connectivity and the platforms to enable this kind of capacity or resource sharing. The model could also open the market for services to small and medium companies that make up more than 90% of businesses.

The traditional outsourcing market is already under pressure from other disruptions such as the business process as a service model (BPaaS) and automation. Pricing and delivery models are already changing and the enterprise sharing economy could add an alternative to the mix.

With digital transformation helping an increasing number of portions of the economy better match demand with capacity through sharing mechanisms, it would appear to be only a matter of time before enterprises are applying this to some of their business needs.

Photo credit: Carlos Maya

Global Services and Politics | Sherpas in Blue Shirts

October 22, 2014

It’s a sign of the times. Understandable and predictable. But unfortunate. The Massachusetts Democratic gubernatorial candidate and the media are hammering Republican opponent Charlie Baker for an outsourcing award presented in 2008 to Harvard Pilgrim Health Care and service provider Perot Systems. Baker was Harvard Pilgrim’s CEO at the time, and the turnaround from bankruptcy involved moving some jobs to India.

It’s a sign of the times that the highly populist agenda in North America and Europe increasingly dominates politics to the point that an award given to a company six years ago is now used to denigrate a politician.

In and of itself, this will not move public opinion or change policy. But the populist desire to at least soft play the moving of work to low-cost locations in other countries doesn’t bode well for the global services industry or immigration reform. The services industry needs to be aware that it is clearly operating in a much more sensitive and emotional environment.

Election times are always difficult. And outsourcing and global services is an easy dog to kick. I think service providers need to be aware of this and work to lower their profile in these difficult times and focus on investments that can help offset this growing populism.

Photo credit: Coralie Mercier

Why Germany’s Global Services Market Is Not Like the Nordics | Sherpas in Blue Shirts

September 23, 2014

In a recent blog I shared Everest Group’s prediction about the short-term nature of the global services market in the Nordics. Germany is also a bright star in the global services arena. However, in contrast to the Nordics, we believe Germany’s market will not mature quickly.

Germany is relatively early on in its adoption of global services. As is the case in the Nordics, global service providers serving the German market are dealing with some structural inefficiencies in Germany’s labor market. Companies are increasingly using third parties to overcome some of their constraints around labor market rules. And German firms are hungry to apply technology into their businesses.

But the market differs from the Nordics because it’s significantly larger and broader. The German market is not concentrated in a relatively few large companies. It has large and medium-sized companies in a huge market that looks to be systematically utilizing global services to address labor market challenges.

Therefore, we believe that the growth of the German market will be long, projected and unlike the Nordics, which we think will mature quickly and be short lived.

How Big is the Bright Spot in Nordics Global Services? | Sherpas in Blue Shirts

September 11, 2014

For the past two years, we’ve observed rapid adoption and market growth of outsourcing of global services in the Nordics. This is well-documented and a real bright spot for a number of global services companies. The question is: how long will this growth continue?

At Everest Group, we believe the Nordics will behave much like the Australian marketplace. The Nordics are a larger market than Australia but have similar characteristics.

Australia is a market of 20 million people and has a well-educated, sophisticated population. Aussie businesses were quick to adopt a new global services paradigm, quick on the traditional outsourcing infrastructure model and quick on labor arbitrage. However, the Australian services segments grow quickly for three to four years and then mature equally quickly.

We believe the Nordics are following a similar path. This market is limited in size and scale. Just like Australia, its business is concentrated in some large companies that have a tendency to share or to think similarly. Therefore, we believe the growth in the Nordics likely will slow down and the market will move into a mature stage within 18 months to two years.

We make this prediction based on our observation of the Australian market performance which shares many characteristics with the Nordics in terms of size, business concentration, sophistication and collegiality.

How to Make Your Website Invisible | Sherpas in Blue Shirts

July 7, 2014

There’s a big move underway, especially among the Indian firms, to rebrand away from outsourcing and BPO. The industry now prefers to use a variety of other terms such as BPM, BPS and managed service. But the immediate impact of changing the terminology on a provider’s website is that the website disappears from the search engines, effectively turning the company into stealth mode and sabotaging marketing efforts when potential customers turn to search engines to look for those services.

In the U.S. market, the term outsourcing is saddled with the negative connotation of job loss and exporting jobs. And in the Indian market, negative connotations have attached themselves to the BPO brand due to BPO workers enjoying themselves in their first job out of college and often getting into interesting escapades that appear to be an aggressive, risky lifestyle. BPO is increasingly seen in a poor light, particularly among the parents of the Indian workforce the providers seek to attract.

India’s service providers have nothing to be embarrassed about; they offer employees high-paying jobs with good career potential. But in an attempt to deal with the negative connotations, they are changing the terms “outsourcing” and “BPO” to sidestep the problematic issues. It’s quite understandable.

There’s no doubt that the industry has accumulated these difficult brand connotations, and we would all prefer not to work in an industry with negative brand connotations. However, businesses tunnel to Google for marketing and, by calling themselves by other terms, they disappear from the search engines.

Nevertheless, customers continue to believe that they’re buying outsourcing and BPO services and are confused and somewhat annoyed about these new terms they must learn. It violates the first rule of marketing, which I’ve blogged about before: it’s all about the customer.

At a time when services growth is becoming more difficult, going into stealth mode in search engines may not be the wisest course of action.

Photo credit: Daniel

Location Strategies and the Inevitability of Change | Sherpas in Blue Shirts

May 21, 2014

Everest Group’s Eric Simonson, Managing Partner, Research, recently led a panel titled “Location Strategies: Optimising Your Operations in Growth Markets” at the 12 – 15 May SSON Shared Services & Outsourcing Week in Dublin, Ireland. Sarah Burnett, VP, Everest Group, was in the audience and shares the insights she gleaned from the discussion.

Last week I attended Shared Services Outsourcing Week (SSOW) in Dublin, where Eric Simonson, Everest Group Managing Partner – Research, ran a panel session to discuss location strategies. Taking part in the panel were:

Jamie Davies, Finance SSC Manager, Computacenter
Petter Frisell, Finance Operations Manager, Dixons Retail
Gerry Meegan, Head of Operational Excellence, GBS, Europe and Asia, The Coca Cola Company

Emerging from the debate was that change is inevitable — so location strategies cannot stay the same for long periods of time. Accordingly, Shared Services Center (SSC) organizations must be highly skilled in managing location as well as transformational change while delivering services, keeping staff motivated, and achieving ever increasing year-on-year efficiency and improvement targets.

Factors that contribute to change include:

Internal dynamics such as shifting corporate priorities and business strategy leading to changes in location requirements
External reasons such as problems with retaining skilled staff in off-shore locations.

For example, one company had moved some of its IT services offshore to India but had problems with talent retention. The quick turn over of staff made the services unsustainable and led to the company bringing its capabilities back onshore. This is the type of problem that could be exacerbated by the lack of brand awareness among the local workers who might prefer to work for an IT company rather than the IT unit of a different type of business.

Taking services back onshore can bring its own issues, such as lack of onshore skills particularly in IT where skills are expensive. Of course, changing locations does not necessarily mean bringing services onshore but likely to other locations and nearshore, particularly where the company might already have offices. Panel members had experienced moving SSCs to existing nearshore offices. Having had staff already in place in these new locations had made the moves much easier. The benefits of having an existing presence in a location had to be balanced against availability of the desired skills in that locality, for example required language skills or availability of specific technology platform expertise, such as, Oracle.

Having change management experience is essential for SSCs, not only to move locations but to modernize and transform services too. Some of the transformation challenges that panel members had dealt with included cultural resistance to change within their organizations. Their advice was to ensure good communication to engage well with stakeholders and all staff who will be affected by the change. One panel member gave the example of having to win hearts and minds to support even the simplest form of change; from paper to electronic payslips.

SSC managers also have to excel at marketing and sales in order to sell their services to the rest of the business. This activity requires performance data, monitoring and reporting, to demonstrate the value of the SSC in order to win new clients. This ties in to benchmarking and monitoring to measure year-on-year improvements.

Continuously improving performance can be very challenging, with expectations seemingly on an ever upward trajectory. This goes for year-on-year process and performance improvements as well as cost cutting targets. Consequently, panel members emphasized the need for SSC management to take a broad view of their services and how these can be improved. Some organizations have set up service optimization functions that work in parallel with the operational function of the SSC, but which are focused on achieving year-on-year improvements.

On the subject of continuous improvements, panel members believed that times of change, e.g. moving locations or bringing services back in house after outsourcing an SSC, provide good opportunities to review and improve processes, to fix them if they are broken, or to simplify them if they have become over-complicated.

Another important skill for SSC managers is good people management. The issue of staff retention has already been mentioned. Add to that the problem of staff in onshore or nearshore centers knowing that the service is very likely to be offshored at some point in the future. The SSC manager has to deal with the resulting job insecurity issues that this raises and the potential impact on staff engagement, motivation and retention. Some companies have specific HR policies to address this issue, for example, they will not take on raw graduates in the main part of the business but have career paths for their SSC staff to transfer to the main part of the business instead.

Finally, if the service is outsourced, the panel recommended that some capabilities should be kept in house, such as the operational oversight and the optimization functions mentioned earlier. This would keep some important skills inhouse should the outsourcing not work out.

Photo credit: SSON

Cloud Places Service Providers on the Horns of a Dilemma | Sherpas in Blue Shirts

May 20, 2014

The Promised Land of SaaS and cloud models in the services world is clearly visible, but it’s frustratingly difficult for service providers to get there. The new models are the land for service providers’ growth and profits, but providers are finding it painful and frustrating as they try to move to the new models.

Software companies are shifting from the traditional on-premises licensing/deployment model to SaaS and cloud subscription models, and it’s not a trivial matter to make the switch. They have to change operational practices and investments and stop doing some activities to be able to do the new models’ activities. The transformation pulls them in two different directions.

Outsourcing service providers have the same problem as the software vendors. As SaaS takes hold, it changes customers’ expectations, and they want to buy services on a consumption or subscription basis instead of buying a set of components. They want to pay only for what they use rather than a take-or-pay model where they have to buy commitments.

In attempting to accommodate these increasingly vocal clients, providers are forced to move in two opposite directions at the same time. First they have to accommodate their original client demands with their existing service contracts structured in a business model where the provider charges customers on the basis of service components (e.g., buying 30 applications people, 15 servers, 50 licenses). But new demands require that these components are bundled, delivered and priced on a functionality on demand, or consumption basis. Their SaaS or Saas-like expectations require different approaches and even different customer support.

These two different business models are driven by different customer adoption patterns and also often driven by a different set of stakeholders making the decision. The new business stakeholder buyer is less concerned about cost per unit and more concerned about meeting the business needs. And they are increasingly influential in driving new opportunities.

Hence the dilemma for incumbent providers. The traditional business model won’t support a SaaS model, and the SaaS model won’t support a traditional model. The result? The provider is like a carriage drawn by two horses pulling in different directions. It’s not good for the carriage and quite frustrating for both horses.

Providers, thinking the dilemma is just a pricing issue, try to make their existing teams and business operate in both worlds and price services on a consumption basis the way new customers want to buy it. But they quickly find that’s not the case. To succeed, they need to backwards-engineer their entire delivery platform so it can work that way.

The alternative is to have two “carriages.” But then they have double the costs. There’s the frustration in getting to the Promised Land: they’re faced with having one carriage and two horses pulling it in opposite directions or having two carriages and twice the cost. The trip to the Promised Land of growth in the cloud world isn’t as simple as it appears.

Business Process Outsourcing or Operations or Management or Services? What’s with the Name? | Sherpas in Blue Shirts

May 13, 2014

Nomenclature for third-party provision of business process related services (typically called BPO or Business Process Outsourcing) has stirred up quite a debate in the industry. Is it just a marketing exercise or a step in the maturation of the industry? Clients have to feel the difference before they are willing to adopt a new name; otherwise it is purely marketing.

Most of the conversation is about replacing the letter “O” in BPO. Accenture retained the “O” but are calling it “Operations.” Nasscom along with several other service providers started calling it BPM (Business Process Management). Several industry stakeholders have asked for Everest Group’s opinion, so here’s my list of different acronyms (in ascending order of my personal preference):

BPM (M=Management)	My least favorite. The name should at least convey what it means. BPM tends to confuse the BP? industry with workflows and process management tools and technologies that enable BP? delivery but are not truly representative of it. With BPM, I tend to think more Appian and Newgen rather than Genpact, TCS, and Accenture.
BPO (O=Outsourcing)	It accurately describes the market, but I can understand why people do not want to associate the industry with just outsourcing which often connotes commoditized offerings providing cost reduction through arbitrage. It also has a certain social and political stigma associated with it. A word of caution though – outsourcing is not the same as offshoring but is a superset that may include offshore, nearshore, and/or onshore delivery.
BPO (O=Operations)	Nice play of words but again seems to imply “operational” value creation and not the “transformational” capability of BP? in terms of value creation.
BPS (S=Services)	My current favorite as essentially BP? is an industry where a third-party provides enterprises with services across horizontal business processes (order-to-cash, procure-to-pay, hire-to-retire) and industry-specific business processes (mortgage processing, claims management, meter-to-cash). Service delivery requires people expertise, process excellence, and technology capabilities, and service performance can be measured across efficiency, effectiveness, and business outcomes.

The industry is desperately seeking ways to go beyond the cost reduction mindset and evolve into a cost+ value proposition. Changing the name of the industry will not be of much use unless the underlying behavior (both buying and selling), solutions, contracts, and performance of the industry change.

However, I fear the industry is just trying to change the name versus actually working on the value, which will leave it open to criticisms. It’s just like putting a new coat of paint on an old car that needs an engine replacement!

So let’s try and go beyond this “name game” and focus on things that really matter.

Photo credit: Quinn Dombrowski

Recession-Era Pricing is Here to Stay in Sourcing Deals | Sherpas in Blue Shirts

May 9, 2014

Originally posted on Spend Matters

The slowly fading recession has left a profound impact on pricing in sourcing contracts. That impact is seen in a trilogy of forces with long-term ramifications that will keep pricing at recession-era levels for the foreseeable future, even as contract volume rebounds with pent-up demand. This “new normal” imparts lasting implications on future sourcing agreements.

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Tag: outsourcing