Tag: service providers

Becoming Credible as a Digital Service Provider | Sherpas in Blue Shirts

Digital technologies adoption is riding the crest of a powerful wave. I think one of the most interesting aspects is an emerging trend of service providers successfully using digital capabilities as a springboard for positioning themselves beyond the services industry.

A case in point: Leading successful service providers including Accenture, Deloitte, KPMG, IBM, McKinsey and PwC are acquiring advertising agencies. Think about that for a minute. This is not a trend of advertising agencies acquiring other marketing-related agencies to bolster their growth. Traditional consulting and IT service providers are spreading out and starting to disrupt the advertising industry.

The relation to digital transformation trends

This trend evidences a key factor in the way digital transformation is “crossing the chasm.” The same phenomenon is evident in findings in Everest Group’s January 2017 Enterprise Pulse Study on digital and IT services, “Customer (Dis)Satisfaction: Why are Enterprises Unhappy with their Service Providers?

In the study, we interviewed 130 “reference clients” of leading service providers. We uncovered a significant differentiation. When ranking services firms according to providing the best overall client experience, three rise to the top: TCS, Cognizant and HCL. But when we look at how the clients ranked digitalization, the providers that shoot to the top are IBM, Accenture and Deloitte (three of the six I mentioned earlier as service providers acquiring advertising agencies).

The impact on traditional vs digital service providers

Simply put, clients look to a different set of providers for their digital needs. Why? Because the traditional, arbitrage-first service providers aren’t well positioned or credible as digital providers. The magnitude of the problem for traditional service providers trying to convince clients of their digital credibility is a bit like trying to spread thick, dry peanut butter on a soft slice of bread – it gets bogged down and doesn’t go far.

But consider this: IBM, Accenture and Deloitte faced the same problem that the traditional and Indian providers faced. Two years ago, when the rotation into digital became apparent, they were no more credible than the other players. How did they manage to become more credible in digital services?

They gained credibility largely by acquiring digital companies instead of attempting to build digital skill sets themselves. This strategy has been far more effective in shifting market perceptions of their ability to drive digital transformation.

Digital platforms are driving a sea change in ecosystem support. Advertising is just one example, but it’s starting to happen in all industries. The winning players will be those that quickly gain credibility in digitalization and deep expertise in industries.

The Widening Gap between Customer Satisfaction Perception and Reality | Sherpas in Blue Shirts

Not surprisingly, every service provider claims to have exceptionally high customer satisfaction ratings from their enterprise clients. Yet, we see anti-incumbency rising and deal size dwindling.

To assess enterprises’ satisfaction levels in IT services engagements, we conducted a deep dive study of 30 service providers and 130+ of their clients. We largely focused our analysis lens on six vital parameters of service delivery – technical expertise, domain expertise, talent management, commercial models, client management, and strategic partnership.

Enterprise customers are dissatisfied with service providers

The results, presented in our recently published report entitled, “Customer (Dis)Satisfaction: Why Are Enterprises Unhappy with Their Service Providers?” were quite disturbing. They indicated that nearly 50 percent of IT service buyers are not satisfied with their providers, feeling that they fall short in many areas of service delivery.

enterprises not satisfied with service provders 1

We investigated the reasons behind the huge gap between buyer expectations and current service delivery and arrived at the following insights:

  1. Early-stage differentiating factors have become table stakes: The value propositions of labor arbitrage and low-cost delivery are no longer compelling. Instead, enterprises want service providers that can create a positive impact on their core business functions.
  2. Inability to meet the unspoken demands of customers: Enterprises expect their service providers to have evolved from “order takers” to “collaborators” capable of effectively partnering with them in strategic decision making. They want their providers to go beyond the project ask and demonstrate transformative skills, even though such expectations are largely unspoken.
  3. Limited understanding of clients’ businesses narrows down business opportunities: Visibility into enterprises’ business dynamics and priorities are critical for service providers to align their offerings and strategy to client needs. Yet their margin obsession and hesitation to make new technology investments have precluded them from taking a futuristic approach to IT engagements.enterprises not satisfied with service providers 2

How service providers can turn the tide

So how can service providers turn the tide to have a more positive impact on existing and future engagements? Here are Everest Group’s top three recommendations.

  1. Shift from an operational to a strategic mindset: Service providers need to go the extra mile to proactively identify enterprises’ business drivers and must develop capabilities to offer innovative solutions. Just delivering on the agreed upon SLAs does not elevate service providers to the level of service partners.
  2. Innovative engagement: With rising competition, it is imperative that service providers walk the talk. While they cannot avoid investing in new technologies, they can share the adoption risk with their enterprise clients. Newer engagement models like outcome-based, risk-reward sharing, and output-based give enterprises the necessary confidence to take the leap and engage service providers for a next generation technology adoption initiative.
  3. Invest. Automate. Improve: Two-thirds of the enterprises are gearing up for large scale process digitalization, and they expect their service providers to be able to technologically support their objectives. Service providers must strategically invest in automation to improve efficiency, reduce costs, enable faster time-to-market, and deliver process improvements in order to offer a compelling solution.enterprises not satisfied with service providers 3

With anti-incumbency risks, anti-offshoring rhetoric, and clients’ propensity to adopt a digital arbitrage model looming large, service providers cannot afford to lose customer confidence. They must, today, start looking through a clearer lens to evaluate where their relationships with their enterprise clients stand.

For details on the areas in which service providers must smooth their rough edges, polish their existing skills, and develop new skill sets, please read our report, “Customer (Dis)Satisfaction: Why Are Enterprises Unhappy with Their Service Providers?

How to Evaluate Your Service Providers in 2017 | Sherpas in Blue Shirts

In a video discussion, General Electric’s CEO Jeff Immelt discussed digital transformation and stated that companies must “either embrace the future or you’ll find yourself not able to satisfy your customers.” Third-party IT and business service providers also face a changing market and are taking steps to align themselves with the new business realities and new market opportunities — which is what brings me to the discussion in this blog post. You need to understand the current debate in the service industry and how the providers’ decisions can affect your company.  Read more at Peter’s CIO online blog.

IT Service Providers Increase Investment in Onshore Locations | In the News

The global sourcing industry has seen a surge in setup activity in onshore location in recent years, according to outsourcing consultancy and research firm Everest Group.

After seeing significant declines in onshore location expansion in 2013 and 2014 due to a global slowdown, the percentage of new onshore versus offshore delivery locations among the top 20 service providers rose from 45 percent in 2014 to 52 percent during 2015 and the first half of 2016, according to Everest Group. That brings the proportion of onshore locations to an unprecedented high in the industry.

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European Service Providers Bet Big on Automation | Sherpas in Blue Shirts

European service providers are betting big on automation. They are systematically including automation in their offerings, taking advantage of both Robotic Process Automation (RPA) and smarter varieties of automation technologies. Here’s a rundown on the key players’ approaches:

Capita: One of the earliest adopters of automation and the one that is the quietest about its initiatives is Capita, the UK behemoth. Examples of its deployment of RPA include Blue Prism in its front-office contracts and open source tools for software testing.

Atos: At its analyst event in Boston in April 2016, Atos announced a strong shift towards automation in its infrastructure services. Partnerships include IPsoft for Amelia, Arago, and Thoughtonomy. Examples of embedding automation in its services include combining it with analytics & cognitive services to transform end user support and reduce call volumes by more than 50%. It is also leveraging automation in its datacenter and cloud-services. Atos is also increasing its focus on Business Process Services (BPS), going beyond the government sector in the UK and possibly growing in other geographies as well. We expect Atos to take advantage of automation to boost competitiveness and opportunities in BPS, too.

Capgemini: The French major has partnered with automation technology providers such as Blue Prism, NICE, and UiPath for RPA and IBM for smart automation. It has been investing in its own automation management capabilities, too.

Sopra Steria: It has developed a new Lean Process Automation (LPA) offering based on a partnership with Blue Prism. Through LPA, Sopra Steria plans to provide clients with a virtual workforce controlled by business users.

Swiss Post Solutions (SPS): At its analyst event in Vietnam on November 16, SPS demonstrated the use of its own smart tools for identifying and processing key information on documents. It is also taking advantage of RPA from UiPath and smart automation from Celaton to automate many different types of processes including the handling of incoming email and claims processing for insurers. SPS is reaping the benefits of automation, reporting that it has more than doubled its productivity. This has enabled it to build capacity and expand its offerings into more business process services such as transactional F&A. Given these achievements, it is unsurprising that SPS has decided to expand its partnership with Celaton. It is going to be one of the first partners to host Celaton’s inSTREAM outside the UK, in Switzerland, and offer it as well as level 1 support for the software to its clients.

European service providers’ automation initiatives will have an impact on services pricing as well as delivery locations. We will continue to cover these and many other aspects of the Service Delivery Automation (SDA) market in our Service Optimization Technologies (SOT) research program.

Cognizant’s Cash Choice is a Lesson for All Service Providers | Sherpas in Blue Shirts

Cognizant is now in a position where it must make important choices, and by extension, most service providers are likely to face the same situation soon. Elliott Management, an activist investor, took a position in Cognizant. When Elliott compared Cognizant’s performance to other benchmark companies in the services industry, it determined that Cognizant is undervalued and could be managed differently to create a higher stock price. Elliott then sent an open letter to Cognizant’s board and management to lay out its thesis and outline a Value-Enhancement Plan.

The activist investor pointed out that Cognizant has a strong balance sheet and a strong cash position and the firm could return some of that cash to its shareholders by buying stock. The letter also stated that Cognizant has room to increase its margins. The basis for this belief is that Infosys, TCS and some other benchmark firms have higher margins than Cognizant and Cognizant could match those margins.

My opinion? Yes, Cognizant has plenty of capacity to generate cash and a strong balance sheet. And it certainly could return more cash to shareholders without diminishing its ability to continue to consolidate the industry through acquisitions and fund its drive into becoming a digital business. However, I think it is very risky for it to follow the rest of Elliott’s thesis of attempting to match its competitor’s margins.

Cognizant already operates just as efficiently as Infosys and TCS, and its gross margins are very similar to its leading competitor. However, its net margins are lower. What does it do with the difference? Cognizant uses it to invest in customer investments and relationships, thus driving growth in its legacy business; and it uses the money to fund its transformation into a digital company.

Basically, there is a tradeoff between margin and growth. Changing that ratio would cause two impacts:

  • It would interfere in Cognizant’s ability to continue to have distinctive, above-market growth in its legacy business.
  • It would hinder investing in digital transformation.

The future of the services market will be about digital companies. Cognizant understands this and is investing against that to change into a digital company. So, it needs that money instead of returning it to shareholders in terms of extra earnings. In my opinion, asking Cognizant to increase its margins would screw up that digital growth strategy. Funding the transformation into a digital company doesn’t come cheap, so Cognizant needs that money even more today than in the past.

It makes sense that this activist investor would go after the industry. The industry has been accumulating cash, and it is highly profitable. But it’s now an industry in change. It also makes sense that the services industry, and specifically Cognizant, can return those handsome earnings to their shareholders. But as most people often find out through life, what makes sense is not always the best choice.

The changing market conditions will make it difficult for all providers to maintain high margins. Basically, it’s unrealistic to expect them to expand margins when there is downward pressure on all margins, and they need their operating margins.

I think this puts the service providers’ choice in stark relief. Basically, the legacy services industry is now mature and the providers face three options of what to do with their cash:

  1. Use their profitability to acquire and become bigger
  2. Return cash to shareholders
  3. Fund the path to transform into digital companies so that they can compete in the future

Providers are facing a hyper-competitive pricing environment in which it will become harder and hard to maintain their existing margins in their legacy business. However, they may be able to get the same or better margins as digital companies.

I think it would be a mistake to ask Cognizant to increase its net margins and not drive growth and not drive the digital transformation. It would be very short sighted to back away from Cognizant’s current growth strategy.

How to Work with Your Service Provider in a Consumption-Based Pricing Model | Sherpas in Blue Shirts

I’ve blogged several times in the past three years about the benefits of switching to a consumption-based pricing model for services, especially the benefit it delivers in shaving off operational costs. In this model, companies pay only for what they use instead of paying for over-capacity. We see customers’ desire for consumption-based pricing coming across all service lines. But, as one of the world’s largest electronics companies found in switching to consumption-based services, it creates some new challenges.

The situation that motivated the electronics company to consider switching to consumption-based services is that the company was splitting into two different operating units to strengthen its market in both areas. So agility was the main driver. The leaders knew they needed a lot more flexibility in adding or subtracting apps and services and quickly scaling the volume of work up or down. They wanted to make it easier to adopt providers’ services, and they wanted to ensure the company would not overpay for services.

But as I mentioned earlier, the company encountered some challenges. Challenges tend to increase costs. Here are three aspects to keep in mind when you work with your service provider in a consumption-based model.

  1. Pay attention to the architecture mindset. Service providers that were “born in the cloud” have a cloud mentality and expertise when it comes to architecture. But it can be challenging to work with established providers having to change their mindset around solution design and traditional architectures. The electronics company found some providers wanting to wrap cloud capabilities in traditional delivery models. A characteristic of this type of provider is the demand to establish change control procedures. The electronics company found that changing mindsets works both ways. A big lesson learned was that the company couldn’t manage IT as it did before in that it couldn’t treat infrastructure as if the company owned it. Working from an ownership mentality will drive up costs. Another lesson learned was to turn off services and components the company no longer needed.
  2. Accurately define compliance requirements up front. As the electronics company found, it’s crucial to map out all the different regulatory compliance and legal requirements and what each means for IT as well as business continuity. They encountered service providers that lacked understanding of patterns among multiple compliance and legal requirements. For example, some providers didn’t know whether a requirement also applied to other regulations, or providers didn’t know how compliance with Russian regulations for storing personal data differed from European compliance.
  3. Operational changes will be required. In a consumption-based services model, your organization will need fewer people to monitor the services. Monitoring the infrastructure will no longer be necessary, but you will need to make sure the service provider monitors it. The electronics company used multiple providers for different cloud components and found it necessary to aggregate their performance, coordinate among them if something was not working and, in such case, escalate upwards to decide what to do. Aggregating, coordinating and escalating require different skills and capabilities than performance monitoring.

When the operating model changes to a consumption basis, you may also need to configure your database differently. And you may need to retrain employees or augment current staff with new skills. The electronics company, for instance, found it lacked IT people with the skills necessary to lead a solution design discussion with the business.

The outcome for the electronics company was worth the challenges. The company achieved significant cost benefits from the consumption-based strategy, including:

  • Fees elimination. The company implemented a cloud model for IT infrastructure, which ensured it would pay only for what it used, plus it eliminated start-up and termination fees to service providers.
  • Cost reduction—in fact, 70 percent unit-cost reduction in most of the Infrastructure-as-a-Service components. First came a 40 percent reduction by recompeting legacy outsourcing agreements. The next tactic was moving core cloud infrastructure services and workloads (including storage, compute, security, analytics, devices and network) to the company’s infrastructure and operating platform based on a consumption model. This resulted in an additional 30 percent cost reduction.
  • Portability. Using SaaS apps made it easier to switch applications such as email and analytics.
  • Standardization. Market standards in areas as analytics, storage and the Internet of Things are still evolving. To avoid additional costs while market standards evolve, the company standardized on the service provider’s architecture instead of on a market standard.

Most of all, switching to a consumption-based model eliminated the friction that exists in many services relationships. It eliminated the problem of misaligned provider/customer interests that occurs in traditional take-or-pay situations that often result in customers deciding to switch to a different service provider.

Technology Investments, Onshoring On the Rise in Contact Center Outsourcing | Press Release

CCO investments in technology and staffing are centered on the growing customer need for an integrated digital experience.

Technology is the leading investment theme in the contact center outsourcing (CCO) industry, followed by scale. Enabler technologies accounted for about three-fourths of the reported investments in 2014-2015, with analytics, automation, and multi-channel tools being the major areas of investments, according to new research from Everest Group, a consulting and research firm focused on strategic IT, business services, and sourcing.

“Contact centers across the world are moving into the digital era with a focus on enhanced customer experience in a multi-channel environment,” said Katrina Menzigian, vice president at Everest Group. “Service providers are responding by shifting their value proposition from the traditional, FTE-based focus on cost containment and implementation to an emphasis on providing insights and innovation to enhance the customer experience.”

Another aspect of the CCO market marking a notable increase in 2015 was onshoring activity, as buyers increased their focus on improving service quality and demonstrated a preference for agents located close to customers. In 2015, the percentage of CCO contracts with significant onshore delivery rose to 53 percent, as compared to 35 percent in 2010 and 49 percent in 2013. This trend also has led to the growth in adoption of a work-at-home agents model, which incurs lower operational costs than onshore full-time-equivalents (FTEs).

Otherwise, movements in the market were modest in scale. Experiencing a period of transition, the global CCO market grew at a rate of 4 percent in 2015 to reach US$75-78 billion. The global contact center spend stands at US$300-320 billion, of which third-party outsourcing accounts for approximately 25 percent.

These findings and more are discussed in “Contact Center Outsourcing Annual Report 2016: The Rise of Digital Contact Centers – Clear Evidence that Real Change is Underway.”

*** Download Complimentary, Publication-Quality Graphics Here ***

High-resolution graphics illustrating key takeaways from this research can be included in news coverage, with attribution to Everest Group.  Graphics include:

  • The benefits of automation in CCO
  • Digital initiatives changing CCO fundamentals
  • Why the CCO market continues to grow, but at a slower pace
  • CCO and the rise of onshore delivery

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