Tag: service providers

Live Deal Support for Service Providers – Seller Beware! | Sherpas in Blue Shirts

Everest Group recently conducted an interesting engagement with a large service provider organization that displays the opposite of the phrase “caveat emptor”…caveat venditor, or “seller beware.”

The provider was trying to extend its five-year-old deal with its client. The buyer had retained a consulting firm to advise on the competitiveness of the proposed pricing. Based on a quick diagnostic assessment, the consulting firm suggested that the as-is pricing was above the market. The service provider, faced with the threat of pulling down the price to avoid the deal going into a competitive bid process, asked for opinion on the pricing. Based on a detailed analysis of the in-scope services, we found that the pricing – which was prima-facie 9-12 percent above the market – was actually 2-3 percent lower than market after factoring in value-added services and other deal-specific nuances.

We’ve seen multiple such examples recently. Buyers are churning their vendor portfolios much more than in the past, and aren’t afraid to pressure their service providers for reduced pricing with the underlying message that they should be prepared for competitive re-bidding process. Deal pursuit life cycles have also become longer, and the competitive intensity has been on the rise consistently.

In this environment, it becomes paramount that service providers get their solution and pricing correct on the first go. And it can be to their advantage to obtain advisory support during live deal negotiations. However, there is a big caveat here: leveraging off-the-shelf benchmarks is unlikely to add any competitive advantage to providers’ bids. The benchmarks must be very contextualized, bearing in mind the buyer environment, the vertical industry, the volumes in scope, the deal terms, the delivery locations, the provider’s solution, etc. This will not only enable development of winning bids, but also ensure that the provider doesn’t leave money on the table.

Caveat venditor!

Silver Bullets Don’t Drive Growth in Services | Sherpas in Blue Shirts

Every service provider is looking for the one, simple thing they need to do to change their growth trajectory. They think they may need to change their messaging or perhaps they should incorporate automation into their finance and accounting offering. Or they think moving from FTE-based pricing to transaction-based pricing will grow their business. If a silver-bullet answer existed for the question of how to grow a service business, it would be a wonderful thing. But here’s the sad truth: none of these actions will change the game.

Insanity is doing the same thing again and again and expecting a different result. Are service providers going insane? It appears so, since they keep looking for simple, one-dimensional answers over and over again. I think by now they should be willing to step back and realize that their growth problems are much bigger than getting their messaging right or delivering the right combination of offshore and onshore resources or even adding a host of new service offerings in cloud, as-a-service, digital and automation platforms.

We talk with providers that are very enthusiastic about their new offerings and say they’ve signed dozens of new deals. But when we ask how much revenue comes from the new deals, the answer paints a very different picture. Often these are small sales, pilot situations and small revenue with the hope that they will grow into something larger. That may be where the market is heading, though not always.

Does a provider’s future success depend on moving to new technologies, new offerings? Providers need to recognize they can drive bigger sales by focusing on well-established areas that customers are already buying. For example, businesses will spend small amounts of money experimenting with cloud and social media, but they will spend huge amounts of money extending their CRM system so it supports the provider’s new offering. Evolving established technologies drives much larger revenue than experimenting with new technologies or new business models. That said, this still won’t change the game.

I believe providers need to stop their insane search for silver bullets and look, instead, at the fundamental tenets of how their customers perceive them and then change the nature of those relationships.

Providers that want to change the trajectory or the nature of their customer relationships and move into a deeper relationship on a larger scale likely need to change how they treat customers. Today’s customers want deeper, more intimate relationships.

But when we at Everest Group talk to providers about this reality, we find very few service providers are willing to step back and do that. Providers tell us they can’t afford to allocate more resources to customer relationship development and customer care functions because their cost of sales will rise too fast. So they just keep treating customers the same way but expecting a different outcome.

The dilemma for service providers is that they have a shareholder mandate to drive growth today. Sure, they get rewarded for growth in the current quarter, but their future ability to drive growth depends on their ability to position themselves should new technologies catch hold. When that happens, having already established deep, intimate relationships with customers will drive growth.

Selling New Services Concepts | Sherpas in Blue Shirts

Why are many service providers struggling to sell new technology in volume through traditional channels? If the provider’s sales team challenges the buyer with a new concept such as the Internet of Things and the buyer understands how it will change their business, why don’t they take action and buy it?

The answer is they can’t.

For new concepts and technologies, the only source of funding is at the C-suite level. Everyone else in the organization runs from a budget. The C-suite are the only parties that are able to generate a budget.

It’s not that you can’t sell to the other stakeholders, but you have to sell what they’re buying — what they’re asking for and what they have a budget for. That’s fine if you’re selling application maintenance or finance and accounting services — a function they already know they need and you’re selling it in the way they need to purchase it. But they’re not empowered to take action on new concepts.

Often in new areas such as the Internet of Things, the actions require cutting across traditional organization structures, and the business stakeholder you try to sell to doesn’t have the ability to do that. Therefore, if you sell it, you’ll be faced with only experiments and incremental activity; although they move in the direction of the new technology or new capability, the result is small and frustrating in that it rarely lives up to the potential of the new technology.

We see this in analytics where the potential for the digital revolution and analytics to transform supply chains and business models is huge. But each party in an organization only acts within its own domain and within its own budget.  So buyers are forced to look for opportunities to create the funding through savings, which limits the enterprise’s progress toward these exciting possibilities.

Challenger’s Advantage | Sherpas in Blue Shirts

Every morning in Africa a gazelle wakes up knowing that it must outrun the fastest lion. Every lion wakes up knowing it must outrun the slowest gazelle. So when the sun comes up in Africa, you’d better be running. We see this happening in the services world — as cloud and as-a-service models move into mainstream adoption and trump labor arbitrage, everybody is running and the hunters become the hunted.

It’s clear that the services world is changing due to the new technologies and models. Historically the dominant players in one era failed to make the transition and become dominant players in the next era. Established dominant hunters do not know how to behave or succeed as game; the emergence of a super predator disrupts the natural order.

The dominant providers really struggle with making the change. They talk about it. Their senior executives recognize the need. They have structured their business to perfection to facilitate the incumbent model. It’s very difficult and very unusual for them to successfully transition to a new model. We see this time and time again.

Here’s a real-world example. I was on an airplane and headed home after a meeting with senior executives of a major IT provider. At the meeting they laid out their commitment and strategy to cloud and as-a-service models and the massive investments they made and are facilitating to make to facilitate this transition.

On the airplane I sat next to another executive from the same company. He was returning from a trip to South America where he advised clients about future technology. He spent most of the trip spouting scorn and ridiculing that the new cloud technologies are not appropriate to run enterprise-class applications and stating confidently that they would never replace or threaten the existing order.

Think of the confusion and conflict customers face when they hear dueling and contradictory positions coming from the same company. They are much more likely to adopt a provider that is completely aligned with the new models. This is why, historically, challengers succeed.

A similar situation occurred when I returned from a provider conference where top execs laid out their grand vision. But less than a week later Everest Group observed the provider working in a client account and the account team espoused exactly the opposite of what the senior leaders said.

We see similar behavior within Indian firms. They make the most money when they deliver work from a low-cost location (ideally a tier-3 city) with the most junior people (the freshers). That’s the heart of the pyramid, the heart of their factory model and it achieves the highest margin a service provider can make. Incumbent providers with factory models have high turnover as they constantly push to the next generation of junior people coming in.

They do this even though they know their customers want less turnover and more work delivered onsite at the client or at least in country as they want more customer intimacy. So their needs and commercial interests are unaligned.

We see providers’ executives making big announcements about more people delivering services in country and on site. But what their salespeople say and what the management and operations people do is the opposite.

In the above examples, providers’ employees did not buy in to the new models. And this is but one of a thousand different points of alignment that needed to happen. The incentive structure, organization structure and underlying technology enablement must change. And the hearts and minds of employees need to change.

Customers aren’t stupid. And they do change providers. We’ve seen a big jump in challenger models across the board in outsourcing. Increasingly the challenger has an advantage over the incumbent. They’d better be running.


Photo credit: Flickr

The Truth in IBM and TCS Layoffs and What it Means to Services Industry Customers and Providers | Sherpas in Blue Shirts

Over the last few weeks, we saw “bad news” about massive layoffs at IBM (100,000) and TCS (25,000), two of the industry’s largest services companies and market leaders. Those numbers proved to be overstated, but clarification on the real numbers isn’t what’s important. The numbers distract from the real issue. Attention-grabbing news headlines and social media’s frequently salacious, overhyped comments created a “fog” around the true picture of layoffs at both companies. So let’s cut through this fog and look at the truth of what is happening and the real issue for services providers and customers.

The truth

Social media and irresponsible reporting allowed initial numbers that later turned out to be significantly over-stated. The official number for TCS was less than 5,000 and IBM called the 100K number “baseless” and “ridiculous.” But even the subsequent clarifications on numbers distract us from the real issue – the fact that the services industry is witnessing a fundamental discontinuity and is in need of massive reskilling to meet customer demands.

Layoffs at IBM and TCS are not signs of companies in distress, and neither company is leaving the services space. Rather, these are two market leaders proactively dealing with the major disruptive transition now happening in the services space. IBM and TCS have been market leaders, IBM the undisputed leader in infrastructure services and TCS the largest provider in the arbitrage and offshore space.

Both companies recognize that they don’t have enough of the new skills needed for the new digital services markets and both have too much talent in the skills that made them leaders in infrastructure and labor arbitrage – services segments that are now diminishing as customers switch to digital services and new consumption-based models.

From our discussions with both companies and with some of their customers, it’s clear that their customers are demanding they take steps to acquire the necessary new skills so they can serve customers’ new demands. For example, providers’ reskilling efforts may need to include such talent as creative UX experts and data scientists.

As leaders, both companies understand that the services market is changing fundamentally. Services and technology leverage are shifting from being an efficiency/cost play to one generating revenue and growth for customers. Both are simply taking necessary steps to ensure they stay relevant and retain their leadership positions as the market evolves and customers demand new skills to address their needs.

IBM’s recent moves appear to be radical and more significant, but that’s because its acquisitions are larger (such as acquiring SoftLayer so it can compete on AWS’s level for cloud services) and it’s also divesting the kinds of business (such as voice services and chips) that could hold Big Blue back from continuing to be a leader in meeting customer expectations.

Issue for services customers

All organizations using third-party resources these days should ask their existing and/or future service providers what steps they are taking to ensure relevance and necessary talent to deliver services in new business models and new technologies.

Issue for service providers

We at Everest Group believe the reskilling actions of IBM and TCS are a harbinger of things to come for all service providers – ongoing rolling waves of disruption affecting talent needed for the fundamental changes happening in the services space. I’ve been blogging about these changes (growing maturation of services, pricing pressures, lower demand for labor arbitrage and shifts in customer demand) for more than two years. With the proactive steps of IBM and TCS, the industry now has tangible proof that the landscape is indeed changing.

The Innovation Dance Floor is Getting Crowded | Sherpas in Blue Shirts

The innovation dance floor is getting awfully crowded with a lot of eager participants. CIOs want to re-establish their traditional role of custodian of technology driving innovation. CMOs wants to be at the forefront of using innovation to change the customer experience and outreach. Data scientists are using the new analytics tools and want to participate in innovation strategy. And as I blogged recently, an IBM study found even chief purchasing officers are making a bid to join the innovation party. Unfortunately, they’re all joining the product managers, who are historically in a slow dance; so not only is the dance floor getting more crowded, but there are also a lot of different beats that they’re dancing to.

Each of these positions has its own point of view, its own agenda, and sees innovation differently. On the plus side, this provides for a rich mix of opportunity. But on the downside, few innovative ideas have come out of committees.

The IBM study indicates that CPOs are attempting to become more strategic and influential and they believe they are more critical to the enterprise. So by necessity, they have to better align with the corporate strategy and therefore want to participate in developing strategy.

I think it opens up even bigger questions:

  • In what areas will they seek to set strategy?
  • Do CPOs have the right background and perspective to do this?

Particularly in the area of services, which are an important ingredient to a change strategy and require deep understanding of the business and how to shape or manipulate the components to create a differentiated position as an advantage, CPOs may struggle as the champions of change.

Enterprises need to protect the innovation strategy

My view is that CPOs are not the right people to influence innovation. Their idea of innovation is do it at half the price rather than doing something different. A data scientist, for example, can get at a certain kind of innovation because they bring a fresh, different capability to the table. I don’t see purchasing bringing something fresh and different.

So this poses some very significant questions to the enterprise:

  • How do you allow for innovation?
  • Who do you want driving it?
  • How do you protect innovation from amateurs who may not be helpful?

Problems for service providers

With purchasing and other departments trying to crowd onto the innovation dance floor, service providers wanting to bring new innovative ideas or capabilities will have to navigate a gauntlet of powerful stakeholder groups. It certainly makes for an intriguing tango.


Photo credit: Piotr Pazola

The Vexing Aspect of Service Delivery Automation | Sherpas in Blue Shirts

The advantages of service delivery automation add up to significant value realization. Unfortunately, it’s not a one-time step change. Automating is a continuous shift, and it’s never over. You first assess where it should happen. Then you get comfortable with the tools, get data on the process, get comfortable with the organizational implications of automation, then you learn from automating the functions. And then you do it again. And then you get comfortable with an even higher degree of automation. And then you do it again. And again.

Moving into an increasingly automated world is an ongoing journey – which poses a number of challenges for service providers.

Perhaps the most significant challenge is customers’ interests often are not aligned with their service provider. This quickly becomes obvious when the services are priced in FTEs. Automation reduces the quantity of FTEs, which means revenue loss for the provider. But if services are in a transaction-based model, automation dramatically reduces the cost of processing the transaction, and the customer wants a share of that cost reduction.

I think this is a startling challenge to the BPO industry. At a time when revenue growth is already slowing, if revenue drops proportionately with the level of automation (and it makes sense that it would), service providers not only won’t be able to grow revenues but will have to run very fast to stay even with their revenues.

Certainly automation won’t remove all people from a process; but more and more will be removed over time as the tools expand and become more mature and as companies become more comfortable in using the tools and as their learnings and the data from the tools allow them to continue to drive deeper levels of automation. So we can expect the effect of service delivery automation to increase over time.

Thus I believe we’re looking at substantial change and disruption coming to the services industry. And it’s not a one-time impact. It will be an ongoing impact.

Global Services Trends and Tipping Points for 2015 | Sherpas in Blue Shirts

It’s the season when analyst/advisory firms flood the media their predictions and top-10 lists. One problem with those lists is the services world rarely has 10 things that are different from the year before. Another problem is we tend to hype new technologies and business models and make predictions about their impact in the next year, when in reality they take multiple years to validate and start to build traction. So rather than falling into this trap that I and others fall into every year, here are my thoughts on a few big secular services trends and their tipping-point positions.

Cloud

We’re over the tipping point here. As I blogged previously, the cloud experiment is over. The last three years have been a grand experiment in examining cloud and the cloud products family. 2015 will see enterprises increasingly planning and implementing new functionalities in the cloud environment.

Labor arbitrage

We’re now atop an inflection point for change in the labor arbitrage market. It’s alive and well and still powerful, but in 2014 we saw value propositions that are dominantly arbitrage based diminish in effectiveness. We also saw the growth areas increasingly shifting to an “arbitrage-plus” model in new areas. The implications are that arbitrage-based offerings will be less effective and their growth rates will continue to drop.

2015 will be a year in which provider growth is driven by differentiation around industry knowledge, firm knowledge and functional knowledge, rather than cheap resources from India. Firms that pivot and provide more and better resources in country, more focus around industry and function, more specialization for those that will succeed.

Service providers talked the talk of differentiation in 2013-2014, but they didn’t walk the walk. In 2015 providers that are successful in growing share will execute really great, meaningful differentiation rather than just giving lip service to differentiation.

Automation

The tipping point for automation is still in the future. The industry has had a couple of years of experimentation with automation, but we don’t think the experimentation phase is finished. We have yet to see the automation play done at scale either on infrastructure or BPO; it is yet to move into the mainstream and is yet to be acknowledged for the full power and capability that it possesses. So the stories of automation destroying the arbitrage game are premature.

We think that, much like cloud in the last three years, in 2015 the automation journey will continue its experimentation and advance toward a time where it is implemented at scale and is able to change the value proposition in a meaningful way.

In 2015, we do not expect automation to take meaningful share from the BPO or infrastructure players. But we expect many more proof points to develop and more hype or industry attention to focus on automation.

As a service

We’re not near a tipping point in moving to a consistent as-a-service model, but we’re definitely seeing a growing uptick in experimentation with this model. In 2014, we saw a number of important companies experimenting with implementing as a-service solutions, but they weren’t multi-tenant. What they’re doing is taking their entire supply chain and turning it into a consumable, as-a-service supply chain and achieving similar benefits that are derived from a multi-tenant SaaS offering but without having the multi-tenant characteristic.

The implications of early experimentation are very significant for legacy environments. We expect 2015 to have a number of announcements of leading firms implementing this approach. We believe this is an important development but will not become an industry standard for several years to come.

Service provider landscape

As to the service providers, in 2015 we expect some changes in dominance and success. Cognizant and TCS always do well and will do so again in 2015. What’s interesting is to look at those that are going to change their fortunes. Specifically we’re watching two companies: IBM and Wipro. In 2013-2014 both made structural changes that position them well for entering 2015.

IBM decided to address the cloud issue head on. Big Blue’s purchase of SoftLayer, the moving of IBM’s middleware suite to an as-a-service delivery vehicle and willingness to deal directly and forthrightly with customers on cannibalization issues positions IBM for a potentially strong turnaround in 2015. We already see signs of that in the three megadeals IBM announced in the last quarter of 2014. We believe IBM is in for a strong year in 2015 if it stays the course.

Likewise, I’ve blogged before about Wipro laying the groundwork for a resurgence. Specifically I call out the firm’s early adoption of automation and increased focus on the large megadeal space. We believe Wipro’s adoption of automation allows the provider to be a cost challenger without giving up margins in the multi-tower megadeal space. I expect Wipro will continue its momentum into 2015, building on early successes.

This is not to say that other service providers won’t do well. I highlight these two because they took big steps to turn around their business and position themselves for the future and for velocity coming into 2015.


Photo credit: harmish khambhaita

Change Is Coming to Global Services | Sherpas in Blue Shirts

In observing the global services industry players in recent weeks, I was amazed at how much frenetic activity India’s providers undertook in joint ventures and acquisitions in Q4 2014. What does all this noise signify? Change is coming.

There are signs that let us know seasonal changes are coming. Before winter arrives, we see its signs in leaves changing colors, birds migrating south and days getting shorter. One of the signs of change coming in the services industry is when incumbent providers go on an acquisition and alliance spree.

Let me highlight just some of the spree of activity in the past few months.

  • Cognizant
    • Acquired TriZetto, a healthcare software vendor
    • Acquired Odecee, providing digital solutions to enterprises in Australia and New Zealand
  • Genpact
    • Created an alliance with Top Image Systems to increase its automation capabilities in F&A
  • Infosys
    • Undertaking a significant shift in its M&A strategy. After completing only five acquisitions since its inception, Infosys recently aggressively bid on Trizetto, but lost to Cognizant. And it’s considering several strategic acquisitions with annual revenue of $600-$700 million.
    • Partnering with DreamWorks animation
    • Partnering with Tableau Software for big data, visualization and business intelligence solutions
  • Tech Mahindra
    • Acquired Lightbridge Communications, a telecom network engineering service provider
  • Wipro
    • Extended partnership with Red Hat for open hybrid cloud solutions

And it isn’t just the Indian providers who are on a spree. Examples:

  • Acquire BPO acquired Shore Solutions in the Philippines
  • Capgemini is partnering with NetSuite to provide a scalable cloud-based back-office solution and is also partnering with Adaptra to provide insurance industry solutions in Australia
  • Citigroup is setting up its own IT arm in India
  • IBM agreed to acquire Lufthansa’s IT infrastructure unit

Individually, none of these events is particularly important, just as one duck flying south isn’t important. But when the sky is full of ducks, you can be pretty sure the season is changing.

Collectively, this spree of activity, especially by the Indian service providers, is an indication that the services industry is at an inflection point. Change is brewing and the providers are attempting to position themselves for the change.


Photo credit: U.S. Fish and Wildlife Service Headquarters

Oh What a Tangled Web We Weave When First We Practice to Deceive | Sherpas in Blue Shirts

As I recently looked at service providers’ PowerPoint decks pitching their as-a-service offering, the well-known tangled-web-we-weave quote from Sir Walter Scott’s 1808 poem “Marmion” came to mind. It’s very clear that the industry is interested in moving to platform services. And it’s a fabulous idea — great content reduced cost, agility and focus on the customer’s business. The problem is no providers have actually done what they tout in their decks.

Service providers discussing their offerings with analysts or potential customers use decks that make it seem that they have a great deal of experience in as-a-service offerings and they do this work all the time. However the truth is that they have done only pieces of these offerings and they have done many elements in isolation. But pulling it all together — not so much. When you push them on details, they fall back on a blizzard of integrated charts.

Oh what a tangled web we weave when first we practice to deceive. But when we practice quite a while, it improves our style. (from “Marmion”)

Over the past seven months I’ve seen glossy charts getting better by the moment and pitch decks becoming much more impressive. But still they deceive; no one has actual experience in the complete journey. Everest Group is working with providers that are on the way to doing it, but it takes three years.

Here’s my advice to providers that don’t want to suffer the embarrassment of customers realizing their deception: the truth will set you free. Acknowledge that you can prove it now only in part and the rest will come about over the next two years.

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