As we at Everest Group study the service industry, we find that a number of service providers have been successful in growing their relationships with some large clients into very substantial annual expenditures often exceeding $100 million a year. These accounts have become the backbone of the leading service providers’ business and have accounted for much of the growth of the leading firms such as Cognizant’s and TCS. As we have studied this phenomenon, we have come to recognize that these mega accounts are important engines of the industry and are vital to the leading firm’s growth and profits. However, the industry is facing increasing headwinds inside many of these big accounts.
These headwinds emanate from different sources. In the financial services market, the headwinds come from regulators. Under Dodd-Frank, regulators are driving a more aggressive regulatory climate. One of the consequences of this is increased scrutiny of the financial services supply chain, specifically around the risks emanating from work done by third-party service providers and, in particular, where there is heavy service provider concentration.
As banks and financial services firms react to these regulatory concerns, they are reexamining the role of third-party providers and paying particularly close attention to the relationships in which they have large concentrations of work with one service provider. As this pressure works through the system, we see these firms starting to take action to lessen this perceived risk by bringing work back in house, acting to stop further growth with existing providers and, in some cases, looking to introduce new competitors to reduce concentration.
I’ve blogged before about the trap for service providers that listen to their salespeople and where that purchasing-oriented perspective takes a provider – to undifferentiated offerings, lower pricing, lower margins, standard offerings and low value. But there is a significant part of the market that is dictated by procurement/purchasing departments and, as a provider, you can’t ignore that part of the market. Providers ask us at Everest Group how to up their win rate in these situations.
I’ll answer this question using an illustration of IT infrastructure services demanding greater levels of automation. The provider expects to charge a premium for the increased automation demands, but the client expects increased automation to lead to lower cost. Clients believe high-quality services come from machines or a software-defined world, so fewer mistakes occur and the work requires fewer FTEs – and both drive costs down.
You also need to understand that in an RFP process, your automation story looks exactly the same as other providers’ presentations. You can easily take any provider’s presentation, remove the logos and background color graphics, substitute other companies’ logos and background color, and they will be indistinguishable. Everyone’s pitch around automation and infrastructure looks and sounds exactly like everybody else’s. And the facts that are offered as proof also sound reasonable. So it is very difficult for a procurement organization or a client organization to differentiate between the presentations or even the demonstrations that they see. So how can a provider create differentiation?
We at Everest Group have studied this phenomenon and conclude that if you’re a provider offering services based on automation, you need to come out of the gate with a low price – and ideally lower than the rest of the market. By doing so, you challenge the market or your competitors to meet your price. Your low price is supported by your story of automation – you can get to this low price because you have a greater degree of automation than the other providers. If you try to get to that price by saying you pay your people less, that raises quality issues in the mind of the customer. But if your thesis is you can get to the low price because you have a greater degree of automation, your price is consistent with your automation promise.
Other providers will spend their time trying to come down to your price. That will result in the client feeling increasingly more comfortable with the company that sets the low price and spends time showing how they meet that price instead of the company that is constantly redoing its bid in an effort to beat the lower price.
So the successful approach where automation is a key component is to be the price challenger, not just the automation expert. Then support how you get to that price with your automation strategy.
As we work with service providers developing new offers, we see a very common issue. A provider develops an innovative offering for one of its customers. Often that customer will have led the provider into it and then they evolve it over time. An executive shows up from the provider company and says, “Wow, that’s really powerful and an incredible story. Let’s package that and sell it to the rest of the market.” Almost like a basketball slam-dunk maneuver, they believe the new offering will be a crowd-pleaser, a “sure thing.” That’s a mistake.
We see providers spending a substantial amount of money, time and effort into building offerings around these one-off experiences. Here’s the problem: Just because an offering delights one client doesn’t mean it will delight the rest of the market. It’s not a slam dunk. Typically these one-off experiences are with large clients with unique requirements. The larger and more sophisticated the client, the less likely the offering can be transported to other clients.
The industry has had poor success in scaling offers built around just one client; they seldom scale quickly or profitably. It’s great to get an idea from a client. But the provider needs to then do industry-wide market research to understand what really resonates. Where Everest Group has conducted this research for our clients, it always surprises both us and the clients how different an offer is when built for the industry compared to one built for a specific client.
To recap: Providers shouldn’t build an offering around just one client’s experience and shouldn’t risk cutting out the step of doing industry-wide research before building an industry-wide offering.
So often, clients tell their providers, “If you help us save money, we will spend that money on your services in other areas.” But what often happens when the service provider saves the money is that no funding for new initiatives is forthcoming. Instead, they are asked to do more initiatives to achieve more savings, and the savings is spent with other service providers’ initiatives in other areas. Occasionally providers are awarded funding for new initiatives from some of the savings, but over time that money is taken back to the business. So service providers face a dilemma: how to fund new initiatives.
Cutting costs to have more money for new initiatives happens in some companies, but it really only works in a world in which a CIO has a zero-sum game. I think this is a Hobson’s choice – one in which really only one option is offered.
I’m not saying providers shouldn’t reduce the run cost as much as possible. But I’m not sure that there is a direct correlation between how much they reduce run costs over the long run and how much capital is available for new initiatives.
New initiatives get funded by the business, not the CIO’s budget. I blogged before about the reality of today’s Golden Rule in business – they who make the gold make the rules. The provider might get a one-year reprieve on that cost savings but won’t get a permanent allocation of that money.
Here’s what drives funding for new interesting, impactful initiatives more than anything else: If the client can see clear, unambiguous value generation for the business from the initiative, it will get funded. The more the value, the more money is available to fund the initiative. Providers need to build a strong business case with an unambiguous and high confidence that the proposed initiative will drive value.
I don’t want to discourage service providers from cutting costs or finding saved money. But if you want to be brought into the conversations around new initiatives, you must make the case and explain that the initiatives that you’re suggesting will drive clear and quick returns. This is what allows you to capture the development budget much more than your ability or your willingness to squeeze out more savings in the existing issue.
The innovation dollars that help clients generate new value clearly and unambiguously are much more likely to yield a higher return for the service provider than initiatives to cut costs. But the provider still may need to cut costs to keep the client. Reducing the run rate might mean keeping the client, but it doesn’t necessarily mean the provider will get new opportunities to serve the client in other ways. Service providers must be able to link new initiatives to business value to assure a consistent buy of new developments.
With apologies to George Orwell and his novel “Animal Farm,” I think Napoleon the Pig’s famous quote (“All animals are created equal, but some animals are more equal than others”) has important applicability and insight for the services industry.
The industry is changing very quickly. Customers are open and eager for transformation and to apply disruptive technologies. Service providers are eager to bring them to the customers. Seems like a match made in heaven.
But here’s the problem: all providers’ presentations look identical. They all include phrases like “extreme automation,” “cloud” and “elastic service.” In fact, if you delete the logo and the background color of the presentations, they are indecipherable from one another. For the customer, it looks like all providers are equal. And the customers are equally cynical about them.
From the customer’s perspective, the problem is how to pierce the veil and determine which providers really can do the work. There are a variety of ways to determine this, but one of the prominent ways is to look at the price. If the provider pitches robotics, repeatable process automation (RPA), or cloud services, it should translate to lower pricing. But this is not the case. Usually we find that the offer price and terms don’t align with the presentation slides.
For example, if the customer is moving to a consumption-based frame or elastic vehicle, it expects a low price and no long-term entanglement. But we consistently see is providers coming in with a five-year contract, a modest reduction in price and COLA (cost of living adjustment). All of these terms fly in the face of the promise of cloud, elastic services and extreme automation. AWS, for example, dropped its price by 60 percent last year.
As an industry observer, providers often ask me how they can change their messaging to be more compelling. My answer is, “You can’t. Any clever graphic or catchy saying will be quickly adopted by your competitors.” Instead of changing the way the presentation looks, providers need to make sure their pricing mechanism and contractual structure aligns with the promise of the offering.
Customers can tell service providers apart by looking for the provider whose entire model is consistent with the promise. Otherwise, the promise is just rhetoric and all providers are equal.
Management consultant and bestselling author Peter Drucker wrote, “The only thing we know about the future is that it is going to be different.” That is, indeed, true for service providers, as new technologies increasingly adopted this year are a catalyst for change in nearly all aspects of the services business. Here are four things that service providers need to think about in light of threats or opportunities in 2016.
The first thing to think about is the role that automation will play in your service delivery model. It’s clear at this point that between RPA, neural computing and cognitive computing, businesses can automate a significant portion of their service delivery network. And customers expect it. So whether your business focuses on IT apps, infrastructure or BPO / BPS, automation stands to be increasingly disruptive in 2016.
2. Talent model
The second thing to think about is how your talent model will change. As automation, cloud and other disruptive technologies continue to play, they will challenge providers’ existing talent models. We see the market moving to cross-functional teams, which will take over a larger share of work and will thus will stress the specialized talent factories that providers have built over the last 15 years.
3. Business model
Another big upcoming change to think about is how the increased emphasis on using persistent teams rather than a leveraged pyramid will lead to change in your business model. Clients are increasingly looking for continuity in a services team over several years, not over several months. As providers seek to accommodate this demand, it will both challenge the offshore labor models that rely on constant input of freshers and create implicit churn of talent as those people move through the pyramid.
The fourth operational aspect to think about in 2016 is location. I’ve blogged frequently about the impact of new technologies on labor arbitrage. Although I’m not predicting the end of labor arbitrage by any means, I expect more pressure on location decisions and clients desiring to move more workloads closer to their business. There will be pressure to not move workloads offshore and to move work currently offshore back on shore.
Shaping the future
None of these four aspects of change will individually remake the current services model. But I believe they will cause the model to evolve and definitely put stress on long-held beliefs and assumptions. It’s something to think about in 2016 when building for success in services.
I’ve blogged extensively on how the industrialized arbitrage market is maturing rapidly. One of the many frustrating aspects of a maturing services market is that a dominant portion of procurements for larger opportunities come through RFPs. These RFPs require sophisticated and elaborate responses with large deal teams and solutioning teams working at the provider’s expense to create a compelling response. This cost is growing, and what’s worse is that it’s not unusual for providers to lose 66 percent of these costly bids.
In the large-deal segment, it’s not uncommon for service providers to spend $1 million – and in some cases as much as $10 million – to respond to the RFPs. These costs are often disseminated through the service provider and not easily recognized; they are borne by the individual delivery teams and therefore can creep up or grow unmonitored by the service provider. When viewed objectively, the costs amount to a substantial amount of money.
At Everest Group, we’ve done a significant amount of work on competitiveness and improving providers’ win rates. For world-class performers, the win rate is around 33 percent of their opportunities – which means that they lose 66 percent. Let’s take the low end of this range as an example. If it costs $2 million to respond to an RFP and solutioning for a winning bid, it costs $6 million for a deal the provider doesn’t win.
These unreimbursed “dead deal” costs are an increasing drag on providers’ profitability and are a significant contributor to service providers’ growing cost of sales.
The implications of this are very significant for service providers seeking to maintain their growth by bidding for larger transactions.
Yes, there are numerous solutions. One is for providers to pursue only the opportunities that they have a realistic chance of winning.
Can the industry shift away from these dead deal costs, instead giving solutioning free to the client in the RFP response?
Effectively, the provider would move to a more consultative structure in which the highest value is not given away in a free solution but is paid by the client in consulting services.
These are intriguing thoughts. This structure would be difficult to accomplish – but well worth the journey if it can be changed.
TCS has a sophisticated suite of apps and delivery tools. They accept small engagements with the intent to grow those accounts by being reliable and over-delivering. And they’re willing to shift away from their comfort zone. But this isn’t why TCS is a leader in the services industry.
Why are they so successful? To answer this question, we used Everest Group’s framework of six characteristics necessary for success.
Our assessment is that TCS’s success is due to aligning all six aspects in the framework. By doing so, they perfected an industrial global services model in which they are able to take a pragmatic and cost-effective approach to large-scale processes. These processes must have at their core the ability to deploy TCS’s local services offshoring model in a highly repetitive or highly predictable consistent-quality manner.
Using this core understanding of who they are, TCS operates in a wide variety of geographies across a wide variety of industries. They apply this core understanding to a bewildering set of disciplines ranging from applications to infrastructure to F&A to customer service. On the surface, these service disciplines look highly unrelated. But when you dig deeper, they all have in common the ability for TCS to apply an industrialized global services model to the benefit of their clients.
This understanding of their essence and their discipline about applying it has allowed TCS to emerge as a true industry services leader.
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Our last blog on social media analytics outlined the challenges organizations can face in developing and launching their social media analytics capabilities. The challenges ranged from organizational issues to technology solutions. Given that many organizations channel their social media interactions through contact centers, it’s not surprising that an increasing number of companies have turned to contact center outsourcing (CCO) providers to help them get their social media house in order. Here’s why.
Among all non-voice contact center channels, spending on social media support, while the smallest at 3.4%, is the fastest growing, at 53% CAGR. This spending occurs both within existing CCO engagements with expanded scope thatinclude channels beyond social media, as well as those engagements developed specifically around social media interaction. At the same time, Everest Group has seen the inclusion of customer analytics as a defined element of CCO engagement double in the past five years, from 19% of deals including analytics to now 40% inclusion. These two developments are clearly linked.
Realizing the stakes in play of a successful social media effort versus one that fails, clients often seek specific benefits from their working relationship with CCO providers. The table below outlines the key challenges in play and how CCO providers can address these.
Key Client Social Media Challenges and CCO Solutions
CCO providers have been on the frontline of social media and analytics adoption – in fact they’re ahead of the curve on this one. Providers have proactively invested in best practices, staff training, and technology capabilities in order to meet clients’ current needs and help them envision the path forward. These engagements will often begin with a consultative phase to determine strategy and run through implementation and service delivery.
One key area of investment by CCO providers has been in enabling technology in support of social media, which can be both proprietary in nature (60%) and through partnership models (40%). Below we capture examples of proprietary technology tools developed by CCO providers specifically to take on their clients’ social media and analytics needs.
Investments in social media and analytics by ownership model
Share of instances
If you take a close look at these solutions, a few identifiable trends appear:
The level of investments made by the service providers clearly outpaces that of most organizations and provides a solid starting point for those that like to go-it-alone. Along the evolving frontier of social media and analytics, for some organizations, their CCO providers are valuable scouts leading their explorers to brighter horizons.
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