As their enterprise clients move to digital business models, which are clearly superior in productivity, business alignment and speed, legacy service providers seek to shift their offerings to the new digital world too. Seems like a great match, right? So, what’s the problem? The problem is the service providers are accustomed to a very profitable offshore factory delivery model. Inconveniently, the new digital business models don’t align well with this old tried-and-true mainstay. Even more disturbing for the service providers is that the new delivery models look to be less profitable than the mature offshore talent factories. I foresee increasing pressures on margins and some potentially unrecognized consequences that will impact clients.
Two reasons for the margin paradox
As the services industry rotates from the old labor arbitrage model to digital business models, service providers expect to achieve higher margins than their typical 40 percent gross margins. Why? Because the digital models deliver a higher level of value. They are better aligned against clients’ business results and are delivered at a faster rate. So, why are providers shifting to digital not getting even close to maintaining the margins they enjoyed in the labor arbitrage space?
One reason is the price of digital talent. The skillsets for the disruptive technologies are rare and command a higher price. Plus, there is a scarcity of talent with skills and experience in implementing the new models.
A second factor is the difference in teams doing the work. The digital world requires persistent teams that remain over time and are located onshore; the arbitrage world depends on low-cost labor in offshore teams that churn over time.
Digital is driving dramatic changes to the contact center outsourcing (CCO) industry. Indeed, our recently completed buyer study – conducted over three years via surveys with more than 140 organizations and a large number of executive interviews – made it abundantly clear that outsourcing drivers are shifting away from the traditional (such as cost savings) to a digital orientation for capabilities such as analytics, access to better technology, and multi-channel solutions. Buyers now expect a lot more from their CCO engagements to delight their digitally-savvy customers.
While the importance of digital drivers has risen, service provider performance has remained below par on the new-age KPIs such as innovation, better insights, and proactiveness. As enterprises are now looking to associate with providers that are customer-centric, innovative, flexible, and able to serve as long-term strategic partners in their growth, providers must differentiate themselves by focusing their attention on improving their performance in these areas.
So, what do providers need to do to cater to these changes in buyer expectations and, in turn, survive in the fast-evolving contact center outsourcing industry? Here are our three key action steps:
Invest in new-age digital offerings – First, they should invest in new-age technologies and the required processes, roadmaps, and consulting capabilities to support buyers along their adoption paths of these tools. These investments will go a long way in ensuring that they are well placed to meet the expectations of prospective clients.
Be proactive in solutioning – Buyers have highlighted proactiveness as an area of improvement for providers, irrespective of their size. Strong focuses on prescribing and implementing innovative solutions that help buyers achieve their overall business goals can create differentiation and improve buyer satisfaction levels.
Adopt a consultative approach – With innovation and better insights among the top capabilities buyers are seeking from their providers, a consultative engagement approach is critical. As discussed in our previous CCO blog, adopting this type of partnership will assist in providing a seamless customer experience across multiple touchpoints.
In addition to Everest Group’s work with enterprises on design thinking, I have recently participated in more than a dozen design thinking-focused discussions and analyst events with digital service providers, including as design companies, system integrators, and consultancies.
All the providers talk about the great work they have been doing with clients leveraging design thinking. But it is very clear that they are missing the larger context of design thinking. This, in turn, is impacting the value they can generate for their clients. And unless they embrace a different approach, they will not be able to help their clients become world-class digital adopters.
Three issues with the way design thinking principles are leveraged in client work
Obsessed with persona: Most digital service providers focus on solving the problems of one specific persona in an enterprise – e.g., doctors, sales agents, pilots, or shop floor managers – and largely ignore the ecosystem around that persona. Realizing the solution they designed for that persona, creates complexities for others in the ecosystem, they design solutions for each of those personas. This becomes a never-ending loop that not only frustrates the client but also fails to create the intended value. In the worse cases, the digital solution designed is impractical, and cannot be deployed by the enterprise. This defeats the entire design thinking initiative, and wastes considerable time and money investments.
Over-focused on the “known”: Most design thinking workshops focus on users’ evident, current problems, but fail to address unarticulated needs. There are three reasons for this. First, because the workshops typically carry a crunched timeline. Second, because the digital service providers believe it can be difficult to explain and get funding for unarticulated needs. Third, because the users themselves are more focused on their tangible challenges than issues they cannot visualize. But this sole focus on the known limits the impact a truly successful design thinking initiative can create for an enterprise.
Driven in closed rooms: Only 20% of design thinking workshops are carried out in users’ real working environments. As the rest are conducted in closed conference rooms, user input based on memory and perception, rather than real time observation of their day-to-day activities. Thus, the resulting solution cannot help but fall short of expectations and address only part of the problem, when it is implemented in the real world.
Aspiring world-class digital enterprises must make design thinking the epicenter of their transformation initiatives. To gain all the benefits and value of design thinking, I strongly recommend enterprises:
Have a broad perspective of the problems they are trying to address, rather than obsessing on specific user requirements
Require their service providers observe their users in in their real working environment, and draw a map to the other stakeholders with which they frequently engage
Tie the digital service providers’ financial incentives to the outcomes of their digital initiative
Have you run or attended a design thinking workshop? Experienced a highly successful, or miserably failed, design thinking initiative? Please share with me at [email protected].
There’s no denying that the contingent workforce market is being disrupted by multiple forces – the emergence of statements of work (SoW) and independent contractors (IC) as significant new spend categories, the rapid evolution of analytics and supporting technologies, and rising buyer demand for total talent acquisition, to name just a few. Navigating through the maze of disruptions to rise to the top of the market is no easy feat for service providers in the space, but several have done so in 2017.
Following are the differentiating qualities and capabilities that earned a handful of providers their rightful spot as Leaders in Everest Group’s Managed Service Provider (MSP) PEAK Matrix™ in 2017.
Fast, proactive responses to market trends: With SoW and IC emerging as new spend categories, the Leaders have differentiated themselves by taking early action in acquiring the capabilities needed to manage them. After starting out with the low hanging fruits such as payments, compliance, etc., these Leaders are now moving on to strategic areas of the value chain such as sourcing, category expertise, and negotiation. The Leaders are also making considerable headway in the emerging area of Total Talent Acquisition (TTA) by developing the requisite capabilities and leveraging their existing expertise in RPO and/or as an Managed Service Provider.
Technology ecosystem versus discrete technologies: The Leaders understand the need for and benefits of a talent ecosystem, which means offering an integrated set of tools that can help provide visibility and control over the entire talent acquisition function. These service providers have either developed or are in the final stages of developing a holistic technology architecture to serve the entire talent acquisition landscape. A prime example of this is the addition of SoW and IC management capabilities to the existing Vendor Management System (VMS) itself.
Next-gen analytics capabilities: While reporting and descriptive analytics have been around for a while, the true business potential of analytics technology can only be unleashed through predictive and prescriptive analytics. When you couple these with natural language programming (NLP) and artificial intelligence (AI)/machine learning (ML), you create an easy-to-use, intuitive system that can greatly reduce the costs and spend associated with contingent labor. While the technology is still in nascent stages, the Leaders have started taking a few tentative steps down the road to acquiring these capabilities.
Capability to serve the entire market: the Managed Service Provider market is no longer restricted to certain geographies or large enterprises. Buyers from developing markets and mid-sized firms are starting to embrace and realize the benefits of an outsourced contingent workforce management program. The Leaders have introduced specialized offerings, such as evaluating the need for a contingent workforce management program and advising in the technology implementation stage, that make it practical for these first generation buyers to outsource their contingent workforce management.
Value-added services and customized solutions for experienced buyers: With a significant portion of their portfolio now consisting of second-and third-generation buyers, the Leaders have begun offering value-added services such as contingent talent branding and talent community management, which helps improve the candidate experience and results in better fill rates and acceptance ratios. They are also offering innovative payment models such as gainsharing or risk sharing programs, such as indemnification of contingent workforce management services.
While the Leaders in our 2017 Managed Service Provider PEAK Matrix™ have taken considerable steps to gain the title, the market is still wide open for innovative and proactive providers. Investing in new technologies and capabilities, and quickly addressing market trends will help other providers emerge victorious.
Shortly after the U.S. Food & Drug Administration (FDA) approved Novartis’ CAR T-cell drug, Kymriah – which is used for pediatric B-cell Acute Lymphoblastic Leukemia – last month, Novartis announced its price…a whopping $475,000 per patient. This is certainly not the first market instance of highly expensive drugs (see below.)
But it might just be the tipping point for stakeholders – including regulatory bodies, payers, physicians, advocacy groups, and patients – to start having constructive discussions with drug manufacturers on how to make drugs that treat extremely rare diseases more accessible to the very small share of the population that needs them.
It is certainly time for pharma companies to overhaul their operations in order to mitigate price anger and get such drugs into the hands of those whose lives depend on them.
One way they can do so is by employing pay-for-performance, or outcome-based, contracts, wherein the manufacturer charges for the drug once it proves effective, say one or two months into treatment. Note that this pricing model hasn’t yet really taken off, especially in the United States, where the fragmented multi-payer environment acts as an added roadblock. Indication-based pricing, wherein there are different prices for different conditions, is another model that biopharma companies can use, but the U.S. market does not have mechanisms in place for it, at least as of now.
Other ways of ensuring patients are able to benefit from such critical drugs are through mixes of personalized offline and online marketing campaigns directed specifically to the relevant patient and physician pool, and improved and comprehensive patient support programs to help in solving “last mile connectivity” issues.
But at the end of the day, stakeholder backlash might – and should – force pharma companies to drive down their own costs to make these expensive, personalized medicines more affordable. And this is where outsourcing service providers can help.
The third-party service providers that are already servicing the pharma industry need to prepare or bolster solutions and capabilities around areas including patient and market access, data analytics, omnichannel marketing, IoT, automation, portals, applications, customer support, pricing analytics, infrastructure modernization, and cloud orchestration. Service providers that are struggling to enter the life sciences space should view this as a window of opportunity to get a foot in the door of these companies. Doing so will mean additional business for both these types of vendors; it could also mean reduced pricing pressure for the patients who need such vital treatments. The future of personalized medicine depends a lot on success of such drugs, and biopharma companies can no longer afford to sit back and operate like they always have. For a detailed discussion and analysis around these solutions, and to learn about other trends in the life sciences market, look out for our soon-to-be-published State of the Market Report.
A couple of weeks ago, several of us from Everest Group hosted a roundtable for sourcing executives in the U.K. The event was held in London’s Moorgate area – Moorgate is the name of the northernmost gate in the old city wall, and everything to the south and west was destroyed by the 17th century Great Fire of London – so I decided to orient my discussion on benchmarking by drawing parallels between the fire and digital disruption in the global services industry.
For context, the Great Fire started shortly after midnight on 2 September 1666 in a bakery on Pudding Lane. Over the next three days, the fire gutted the medieval City of London inside the old Roman city wall, and consumed 13,200 houses, 87 parish churches, St. Paul’s cathedral, and most of the buildings of the City authorities.
As we’re just several weeks shy of the 351st anniversary of the Great Fire, let’s all have some fun by casting today’s enterprises and two different types of outsourcing service providers as the entities trying to find a solution to stop the fire from spreading.
First, as there was no city-run fire brigade, the householders – read, the enterprises – attempted to put out the fire themselves, as it engulfed their own buildings. But their two capabilities, dousing buildings with water despite the inadequacies of the pipe network and pulling burning material from structures with bill hooks, were reactive and futile. Theirs was a sub-optimal process.
With the fire quickly spreading, the city authorities realized that a more coordinated approach was required. The city militia – read, service providers that deliver “traditional” services – was called in, and concentrated its efforts on pulling down houses that stood in the fire’s path. While this was an optimized process, it only minimally delayed the spread of the fire, and certainly was not popular with the householders/enterprises.
Finally, the garrison at the Tower of London – read, a provider that offers transformative, digitally-based solutions – offered a solution that was conceptually challenging: the creation of effective firebreaks by using gunpowder to demolish entire streets. This genuinely transformed process rescued the city by leveraging a highly disruptive technology (gunpowder).
The immediate outcome was prevention of further fire spread. Problem solved! But the solution also resulted in two unforeseen, and highly beneficial outcomes: the end of the bubonic plague outbreak that had ravaged London since 1665, and, because of the huge anticipated cost of rebuilding the city, a financial imperative to end the Anglo-Dutch war. The eradication of disease meant that London was immediately a safer place to live, so both economic and intellectual capital returned to the city. Peace with Holland created conditions for trade to thrive, insurance against risk took off (Lloyds appeared as an insurer just 22 years later in 1688,) and London’s emergence as a global city began…extraordinary value-add.
How does this connect with service providers today?
The moral to this entertaining (and historical fact-filled) exercise? Today’s enterprises are facing multiple, unprecedented forces. In order the stop the spread of the fire – or gain and maintain a competitive foothold – they likely need to partner with service providers that embrace innovative, disruptive, digital solutions.
Enterprises can always insist that service providers find better ways to prevent the spread of fire, and to optimize processes by taking a rounded, contextualized approach to reviewing the detail of an existing arrangement. In our experience, this can account for value improvements of between 18 and 24 percent of the total cost. But by insisting that service providers themselves start thinking innovatively and imaginatively, that improvement can often be doubled. While some of the consequences will be unintended, many of them will deliver benefit far beyond their intention.
ADP rises to No. 1, Conduent takes No. 2 and Accenture retains No. 3 ranking among world’s largest third-party BPS providers
Everest Group, a consulting and research firm focused on strategic IT, business services, and sourcing, today released the third annual edition of “The Everest Group BPS Top 50™,” a revenue-based ranking of the world’s largest third-party providers of business process services (BPS). The list was launched in 2015 as the first of its kind for the global industry, which today is valued at more than US$160 billion.
The Everest Group BPS Top 50 ranks the largest BPS service providers by revenue and reports their growth and coverage cutting across geography, domain and buyer size. Further, it analyzes key changes over time along growth, geography and functional coverage dimensions.
Everest Group estimates there are more than 200 service providers with more than US$50 million in revenues offering BPS services around the globe. What started as a cost optimization concept focusing on “non-core” and “back-office” business processes today permeates the entire business process value chain, addressing a wide variety of business objectives.
“As the global services industry in general and BPS in particular goes through a fundamental shift from an arbitrage-first to a digital-first model, service providers’ ability to transform themselves to the new paradigm will be critical to their future success,” said Rajesh Ranjan, partner at Everest Group. “This ranking, the only one of its kind for the overall industry, provides an early indication of who is navigating the shift more successfully than others. We expect the volatility in the ranking of providers to increase in coming years.”
Topping the 2016 list of BPS providers are these 10 leaders:
The cumulative revenue of the providers in BPS Top 50 list grew by 5 percent year-on-year.
The highest growth rate for the past two years was logged by Alorica at 95-105 percent and was achieved largely through acquisitions in 2015 and 2016. Cognizant logged the second fastest growth rate at 22-25 percent and achieved this largely through organic growth.
North America-based service providers continue to dominate the list; however, the region’s overall share declined versus 2014, while APAC’s share has grown.
Top 3 North American Providers:
Top 3 EMEA Providers:
Top 3 APAC Providers:
For the second straight year, the number of broad-based service providers increased their share of market as compared to specialists. Broad-based providers now represent 56 percent of the market whereas specialists represent 44 percent. The top 5 broad-based providers are:
Among the specialist providers, the following ranked highest in their respective specialty area:
Recently, an official from the Trump administration accused Indian IT providers of abusing the H-1B visa process by “flooding” the lottery system with applications, giving them an unfair lottery draw advantage. The statement again spotlighted the issue of importing foreign IT services workers to the U.S., thereby limiting job opportunities for domestic candidates. It also underscored the huge extent of outsourcing being done by U.S. corporations, especially to offshore-heritage providers. What it didn’t discuss was other types of companies’ usage of the H-1B program to import skilled talent into the country.
Everest Group conducted a quick analysis on the Labor Condition Applications (LCAs) employers filed to obtain H-1B visas in the last few years. We classified the employers into several categories:
Offshore-heritage service providers, such as Cognizant, Infosys, and TCS
Multinational service providers, such as Accenture, Capgemini, and IBM
Professional services firms, such as Deloitte, EY, and PwC
Product companies, such as Apple, Cisco, and Oracle
All other companies
While the total number of certified positions increased at a CAGR of 11 percent between FY 2011 and FY 2016, offshore-heritage providers’ share has dropped significantly, from 74 percent in FY 2011 to 40 percent in FY 2016
The biggest share grabbers are professional services firms, which are increasingly competing with traditional IT services players across deals. Their share in H1-B visas has increased from 7 percent in FY 2011 to 37 percent in FY 2016. On an absolute basis, that’s an almost ten-fold increase
The top 25 employers contribute ~50 percent to the total positions certified, which implies that offshore-heritage providers have only a 20 percent share of the total positions certified for H-1B visas by the Department of Labor between FY 2011 and FY 2016.
(For the uninitiated, a certified LCA (ETA Form 9035), is a prerequisite to H-1B approval. The LCA must be certified by the Department of Labor (DOL) before the H-1B petition (Form I-129) is submitted to USCIS. The LCA contains basic wage and location information about the proposed H1B employment. Please note that a certified LCA does not guarantee H-1B visa approval, however, certified position trends are good indicators of H-1B visa usage. Also, note that the data below includes positions certified for new H-1B visa applications as well as renewal and transfer of H-1B visa.)
One of the Trump administration’s suggested reforms is to increase the minimum wage for H-1B visas from US$60,000 to US$130,000. But as this minimum wage recommendation is applicable to companies that are “H-1B dependent” – and most offshore-heritage providers fall into this category – the required increase in minimum wage, whatever it ultimately is, will likely affect offshore-heritage providers more than any other type of organization.
At the same time professional services firms have quietly increased their leverage of the visa-led model, offshore-heritage providers have been the unfortunate recipients of far greater scrutiny and negative limelight. In order to successfully compete, offshore-heritage providers have no choice other than to prepare now for the impact of visa policy changes. As the old saying goes, “better safe than sorry.”
In the immediate aftermath of last week’s Wannacry ransomware attacks around the world, many organizations will consider how quickly and effectively to update older Microsoft operating systems and apply the necessary patches. The longer-term effects, however, will be more far reaching as governments and other organizations review their security policies to protect their systems against future attacks. This spells tougher requirements on IT services as well as service providers’ connections to client systems.
Tougher government policies on suppliers
The Wannacry attack in the UK crippled the National Health Service (NHS), putting people’s lives at risk. It is going to cost billions to put right, not only in terms of upgrading systems but also rescheduling operations and treating people whose condition will have worsened after the delay caused by the attack. The UK government must act and be seen to act to better protect vital services in the future. It is likely to unveil new stringent policies for cyber security.
While this spells new business opportunities for IT service providers to enhance the public sector’s cyber security, other service providers will feel the pain of even more longwinded procedures to connect to client’s VPNs when working on system integration or business process services. Many already have to apply to clients’ IT departments on a daily-basis to be allowed to connect to VPNs. More stringent requirements are likely to come into force.
Microsoft must face the music
Let us not forget that it was a Microsoft Windows vulnerability that enabled this attack. Microsoft must face pressure to continue to support its older operating systems for longer. There are often legacy systems that work only with older operating systems. A Windows upgrade can therefore be very costly. A cash-strapped organization, the NHS prioritises patients care over keeping up with Microsoft’s timetable for Windows upgrades and discontinuing support for older operating systems. This is something that the UK government must address. It has enough buying power to demand action from Microsoft.
Upgrade pressure on government agencies
Government bodies such as the NHS will be put under renewed pressure to upgrade their systems and keep them up-to-date. The organizations will no doubt demand extra cash to deal with the situation. Spending on cyber security is set to increase whether agencies find new money or redirect funds from other activities. This ransomware attack will therefore boost the IT market for end-point security if not the wider security sector.
Pressure on users
Users too will feel the pain of ransom“war”e. Tougher usage policies are likely to get enshrined in IT department guidelines. Users are likely to experience reduced flexibility as more organizations adopt desktop lock downs with workspaces become more centrally controlled and monitored to reduce risks.
With numbers and varieties of attacks increasing, all aspects of IT security will be tightened up. Even the most laggard of organizations will look to build better security controls across their broad IT services or risk loss of business, revenue, reputation and in some cases, the wellbeing of their customers.