Tag: service providers

The Illusion of Services Growth in the Midmarket | Sherpas in Blue Shirts

As the services industry struggles more and more with growth, providers naturally think: “We’ve saturated the large clients, so let’s go to the midmarket clients. After all, there are so many more midmarket companies than large ones. So if we can sell to midmarket companies, happy days are here again. We can reignite our growth curve and continue to grow at the pace we want to return to.” Unfortunately this violates the Dillinger principle.

When John Dillinger — an infamous gangster and bank robber during America’s Great Depression — was asked why he robbed banks, he replied, “That’s where the money is.” By analogy, that is why the services industry rarely are able to take services designed for large enterprises and build successful growth strategies in midsize companies — they don’t have the money.

As any number of providers have found out, it costs a similar amount to sell to midsized companies as large ones; however, the resulting contracts are much smaller. Furthermore, the provider has very little ability to scale that relationship to a large footprint as it could do with large companies.

My observation is that the providers that attempt to shift from large enterprises to the midmarket in an attempt to reignite growth almost always fail to achieve their goals. It’s complicated, expensive and time-consuming to sign up midsize clients. And there is lower profitability because the cost of the sale and the cost of client interaction overwhelm the potential profit.

Unfortunately, the idea of heading into the midmarket and finding a big services market is consistently disappointing.

Infosys is Different | Sherpas in Blue Shirts

What a difference a few months with a new CEO makes. Things are different at Infosys today. When we talk with them, it’s clear that it’s a different organization than it was a few months ago because of Vishal Sikka, the new CEO. On one level, very little has changed; but on another level, there are significant changes.

Their strategy remains the same. They are leaning into the future by focusing on platforms, intellectual property and software. This is the same strategy they have used for engaging with clients for several years.

It’s the same organization, other than the new CEO. He has yet to bring a large cohort of new executives in. And the firm has the same clients and employees.

So what’s different?

Inside of Infosys, morale is clearly better. There is a renewed sense of optimism in their strategy. We observe renewed vigor and enthusiasm in talking with their clients and in the marketplace. The result is improved execution across the board, from engaging with clients to delivery. Across the board we see improved execution.

We also see a change in customers’ attitudes. They are interested in the new CEO. They are giving Infosys a second chance, and Infosys is finding doors easier to open and audiences more receptive than they were a few months ago.

The moral

Here’s the moral of the Infosys story: in the services industry where client relationships and delivery execution means everything, vision and morale matter. Those factors alone can account for improved performance.

It’s not everything, but it’s a powerful ingredient in improving performance. We look forward to seeing what Vishal Sikka will do in reshaping Infosys’ strategy, organization and people. So far we’re seeing an effective start.

The Golden Rule in the Services World | Sherpas in Blue Shirts

One of life’s realities is that he who has the gold makes the rules. I mention this because it’s now affecting the global services world and providers need to be aware of how the rule impacts their business.

Over the last three years we’ve seen companies task their CIOs and shared services organizations with cost-cutting and demand that they deliver more services at a lower price. At the same time, we’ve seen companies give other stakeholders responsible for growth and customer satisfaction access to large discretionary budgets. Thus they’re placing the gold — or budgeting power — in the hands of the business unit leaders, chief marketing officers, and other stakeholder groups.

With their increased access to capital, these business leaders and stakeholder groups now exercise the golden rule. Since they have the capital, they influence how to spend the money.

This influence is rising at the expense of the traditional stakeholder groups that are the custodians of purchasing, IT and shared services. As I’ve blogged before, provider sales and marketing teams need to understand how to avoid being bitten by this paradigm shift in IT spend decisions.


Photo credit: Boullion Vault

Consequences of Pressuring Service Providers to Reduce Price | Sherpas in Blue Shirts

As we work with service providers across the industry, a theme we hear increasingly is the buyers’ unrelenting pressure on providers to reduce price. The pressure is exacerbated by the growth slowdown in the industry. I believe this pricing pressure will soon show up in providers’ financial performance with decreased earnings per share.

The unrelenting pressure — which also seems to be growing — is linked to the power of purchasing departments and their inability and unwillingness to consider factors outside of price per unit in decisions.

The pressure frustrates service providers across two dimensions. First of all, it’s always unpleasant to have a services client ask a provider to reduce its price when its costs are rising. I think this is one of the reasons why we see a rise in anti-incumbency that I’ve blogged about before. If not the number-one reason, it’s at least a significant concern of service providers. Customers increasingly ask their providers to make investments in the customer’s business, but their pricing pressure deprives the providers of the margins with which to do that.

The second frustrating aspect is that the pricing pressure creates a set of unintended consequences. Most notably, there is less and less time for clients to take into consideration quality, total cost or total efficiencies the providers deliver. Instead they place more focus on reducing the cost per FTE or cost per unit.

It was easier for providers to resist, or at least manage, pricing pressures when the industry enjoyed a fast-growing marketplace thus affording providers the benefit of scale. In addition, most service providers also have been fortunate over the last few years to have forex tailwinds with the dollar to rupee or the pound or Euro to rupee. But the rupee depreciation can’t go on forever and may well be reversed as India puts its house in order.

Certainly there are growth areas in the market today: automation, cloud and as a service. And providers have the possibility of changing pricing algorithms from FTE-based deals to transactional outcome-based deals. However, those techniques are uncertain, difficult and, taken collectively, may not be sufficient to offset the downward pricing pressure on a provider’s core business.

That’s My Girl, but It Ain’t My Truck | Sherpas in Blue Shirts

The cowboy song by Rhett Akins, “That Ain’t My Truck,” where he discovers his girl has left him for another guy, reminds me of the anti-incumbency bias occurring in today’s global services marketplace. What’s causing clients’ infidelity to their incumbent providers?

I believe many incumbent service providers find themselves displaced today because of three factors.

  1. Services that clients once viewed as value are now just a commodity. Almost all services commoditize over time. And at that point a service that was once a differentiation of the provider no longer is different from other providers’ offerings.
  1. Client and provider interests become unaligned. When interests aren’t aligned, the client comes to believe the provider delivers services in a manner that benefits itself rather than working for the client’s benefit.
  1. The service provider takes the relationship for granted and the customer sees it increasingly as day-to-day business. Figuratively speaking, the provider forgets to bring roses. I’ve blogged before about this relationship phenomenon where clients tell Everest Group they get no innovation (continual added value) from their providers.

Incumbent providers should keep in mind that Taco Bell is not fine dining and a trip to Galveston is not the same as a trip the south of France. Just as with relationships between men and women, commercial relationships also need forward momentum. Without making an effort to build a deeper relationship, it will go stale or even go backward. Management changes and employee turnover in the provider organization aggravate this situation.

Service Provider Taco Bell

Clients now have a variety of options when it comes to service providers. Incumbent providers that don’t want to find their clients with another provider’s “truck” are wise to focus on the above three factors.

Also see our complimentary viewpoint, Rising Anti-Incumbency in Outsourcing: Breaking Up Is Not Hard to Do.


Photo credit: Don O’Brien

UK Outsourcing Giants Take Diverging Paths | Sherpas in Blue Shirts

Last week both Serco and Capita announced their interim results. Not only did the two companies show a widening gap in terms of financial performance, but they also highlighted diverging business strategies.

Firstly, their financial performance in H2 2014 to date was very different:

Operating margin:

  • Capita has managed to stay on track to achieving at least 8% organic growth, net of attrition, for the full year 2014 (2013: 8%). It also stated that it expects to maintain its operating margin in the range of 12.5% to 13.5% for the foreseeable future
  • In contrast, Serco announced that the 2% organic growth in H1 2014 has turned into a mid-single digit decline in H2. This has been primarily due to reductions in volume of work in the Australian immigration contract but also due to contract losses and reduced volumes elsewhere. Serco expects to shrink significantly by 2016, with revenue reaching a nadir of £3 billion to £3.5 billion from a forecasted adjusted revenue of £4.8 billion in 2014. It expects to return to growth in 2017
  • Serco also announced a proposed equity rights issue of up to £550 million in the first quarter of 2015 to strengthen its capital structure
  • Capita announced that it has secured £1.63 billion of major new deals to date in 2014 (nine months). This is down by £1.27 billion year-on-year (largely accounted for by the signing of the £1.2 billion O2 mega deal in 2013). At £4.1 billion the bid pipeline is also lower on a sequential basis compared with £5.7 billion announced in July 2014. However Capita reports a strong win rate of one in two
  • Serco reported £900 million of contract awards since the half year to date. It also said that its current pipeline and win rate are considerably weaker than before

Secondly, the strategic directions of the two companies are diverging:

  • With its strategic review still ongoing, Serco announced that it is going to focus entirely on business to government (B2G) in the areas of justice and immigration, defense, transport, citizen services, and healthcare
  • In contrast, Capita aims to grow its private sector business and in particular in the customer management services (CMS) arena. Like Serco, it made a number of CMS acquisitions in the past few years including Ventura and parts of Vertex. Another growth target is its burgeoning legal business with the acquisition of Eclipse Legal Systems. It is also expanding its presence beyond its UK stronghold to countries such as Ireland and Germany
  • Serco will be divesting a number of businesses that are now non-core to its strategy. These include the Environmental and Leisure businesses in the UK, Great Southern Rail business in Australia, and the majority of its private sector BPO business which are mostly CMS businesses delivered by two companies that it acquired in recent years: Intelenet and The Listening Company
  • Capita has made 13 acquisitions to date in 2014 for £285 million, with more likely as it continues to expand or enhance its capabilities

Interestingly, both companies have also announced changes to their boards:

  • Alastair Lyons, Serco’s chairman has resigned
  • Capita’s CFO Gordon Hurst is stepping down following a 27-year stint at the company

Serco’s tale of woe began in 2013 when the British government discovered that it had been overcharged by Serco for offender tagging services to the Ministry of Justice (MoJ). The company is still recovering from the fallout more than a year after the issue first came to light, and having repaid more than £68 million of fees and gone through several reviews and management changes. It is ironic that Serco’s new board has chosen to focus on B2G services only, given that the troubles began in a government contract. That said, front line government services is and has always been at the core of the company’s business.

Serco has suffered from failures of governance and risk management. As it rebuilds itself, it will seek to enhance these significantly. In terms of business strategy, it will target growing opportunities in the government sector, as the pressures from aging populations and rising demand for services pushes governments to outsource more. Serco will seek to differentiate itself with its international approach, as part of which it will give its businesses a portfolio of services to go to market within specific regions of the world, to share experience and expertise.

Capita boasts of robust financial and governance structures and highly selective approach to opportunities that it pursues. Robust governance is highly needed given Capita’s aggressive acquisition strategy that has seen it take over more than a dozen companies a year for many years. Even with robust governance problems can still occur. For example, in its eagerness to win more government clients, in 2012 Capita acquired Applied Language Solutions (ALS), which had been awarded responsibility for courts interpreter services in England and Wales. For a while service delivery was less than smooth leading to the MoJ withholding fees in some instances and bad publicity in the press. Overall though Capita has benefited from many niche and strategic acquisitions that it has fully internalized, and which have largely created value and revenue.

Serco and Capita

There are lessons to be learnt from the performance of the giants of UK outsourcing. Today, one thing that is common to both is the belief that bid and governance structures have to be robust and maintained at all times.

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

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