Enterprise perspectives on the 2019 global services market: five things to know – automation, business models, talent challenges, budget centers, and sourcing models / provider mix
Enterprise perspectives on the 2019 global services market: five things to know – automation, business models, talent challenges, budget centers, and sourcing models / provider mix
Is there a right time to benchmark? While benchmarking clauses may be built into a contract, it is best to align benchmarking with concrete objectives throughout the sourcing journey.
With the digitization wave disrupting and redefining today’s businesses, the role of enterprise IT, and consequently that of the IT Strategic Outsourcing and Vendor Management (SO&VM) function has become more critical than ever before.
As enterprises ramp up their digital transformation initiatives, the IT SO&VM function faces the onerous task of establishing and orchestrating an IT services vendor portfolio that can help the enterprise navigate the proverbial IT maze and fulfill strategic business objectives.
However, this is clearly easier said than done from an strategic outsourcing & vendor management function standpoint. Current enterprise satisfaction with their incumbent IT service providers stands at an all time low – 54% of all enterprise discussions conducted by Everest Group over 2017 (with companies nominated as reference clients by service providers across multiple PEAK Matrix™ evaluations of Everest Group) expressed dissatisfaction with IT service providers.
A careful examination reveals that a large part of the enterprise dissatisfaction with providers is associated with a perceived lack of innovation and business value within the IT services engagements. While enterprises point out that service providers are largely at fault for this phenomenon, Everest Group’s research suggests that the fundamental challenge lies in the sourcing model and associated practices itself.
The current IT services sourcing model is designed with scale and cost effectiveness as the primary objective function and vendor selection/categorization premise. However, new age IT services delivery requires service providers to be properly incentivized, and equipped with sufficient enterprise context in order to drive business value from IT.
Evidently, IT SO&VM functions need to fundamentally reimagine the way the sourcing model is designed, and redefine how vendor rationalization, selection, and management processes are conducted, including:
In today’s digital world, the value of enterprise IT is being defined by its ability to accelerate time to market, foster business innovation, and help drive competitive advantage.
In parallel, the quest for ongoing services cost reduction and resilience is pivoting to
a “technology-first, automation-led” modernization approach, given the maturation of arbitrage-led models. It is imperative that enterprises strike an optimal balance between their business transformation and IT modernization initiatives to maximize business value from IT.
The role of enterprise IT is undergoing a sea change, with businesses across the board being disrupted and redefined by the rapid digitization wave. IT has now evolved from being a mere cost center to a critical business enabler – in fact, about 60% of enterprises have prioritized IT services agility and flexibility through digital transformation as the PRIMARY focus of their IT services strategy, with cost reduction seen as a logical/implicit derivative.
The digital paradigm has given rise to two distinct sets of enterprise initiatives – IT modernization and business transformation. IT modernization at its core, is focused on making IT leaner, more cost effective, and align better within business requirements. On the other hand, business transformation initiatives are designed with the desired business impact as the starting point, with a view around how “fast” business outcomes/results can be achieved (with cost not necessarily being a key consideration).
IT service providers stand to play a key role in helping enterprises navigate the myriad of complexities arising from next generation technology adoption. However, current enterprise satisfaction levels with IT service providers are at an all-time low. Many enterprises believe that IT service providers simply lack the strategic focus and innovation mindset to drive business value within engagements.
However, enterprises are equally at fault – current enterprise IT service sourcing strategies and constructs being followed by SS&VM functions are still anchored to traditional, cost-centric frameworks, leaving limited room and incentives for service providers to think out-of-the-box and drive innovation on a consistent basis.
While both IT modernization and business transformation are geared towards driving business value, the initiatives fundamentally warrant different approaches and evaluation metrics. While cost reduction and resilience are critical considerations within IT modernization initiatives, digital transformation is designed with the premise that business results and speed-to-market are of paramount importance.
In IT modernization, activities include formulating a legacy automation and cloud strategy and moving into a hybrid environment. Examples of focus areas include how to engineer that IT to be more cost-effective, which workloads should be moved out of legacy into the cloud, and which workloads should be developed in the cloud versus the legacy environment, and what workloads should be automated.
On the other hand, activities in a business transformation initiative focus on rethinking all service model components. These include, for instance, technology and architecture, development process and methodology as well as the talent model of using a persistent team collocated with the business.
As the IT environment gets more complex against the backdrop of a rapidly-proliferating technology landscape, enterprises continue to turn to service providers to navigate the proverbial IT maze. In fact, a healthy 42% of enterprises plan to increase their proportion of spend with IT service providers from existing levels over the next 12 to 24 months.1
That said, these planned spend commitments with IT service providers do not necessarily imply enterprise satisfaction within existing sourcing arrangements. In fact, anti-incumbency sentiments are at an all-time high within IT services engagements.
In 2017, 54% of all enterprise discussions expressed dissatisfaction with IT service providers compared to 48% in 2016
The expectation mismatch between enterprises and their IT service providers is evident from the fact that every one in two enterprises is currently dissatisfied with in its ongoing IT services sourcing engagement. This dissatisfaction is even more profound when a “digital” lens is applied to the sourcing scope and construct.
Contrary to enterprise perception, a meaningful proportion of dissatisfaction arising within IT services engagements is attributable to existing gaps in the sourcing model design itself, as opposed to solely being a function of service provider capabilities and performance.
The current model of vendor selection and sourcing for IT services largely follows a traditional three-tier model comprising strategic, Tier-2, and staffing/1099 vendors. The key challenge with this vendor sourcing model is that it has been designed for driving a scale-driven, arbitrage-led IT services strategy, rather than being anchored to a well-formulated strategic intent that is geared towards creating business value on a continual basis.
One of the underlying drivers for the decreasing relevance of the traditional sourcing model is the impact of enterprise digitalization on the IT+Ops organization and consumption. IT modernization initiatives require service providers to possess sufficient context around how the end-to-end IT stack is architected in order to build a transformation roadmap that not only drives cost savings, but offers the desired level of performance and resilience.
The shortcomings of the traditional IT services sourcing model become even more glaring when applied to a digital transformation context, wherein service providers are expected to leverage and orchestrate emerging technologies, offering on-demand, elastic, and
plug-and play access to ecosystems. This requires a corresponding change in sourcing models to help drive shorter, quicker, and business-focused outcomes at scale, while ensuring that providers have adequate investment and skin in the game.
The “Specialist, Legacy Aggregator, Orchestrator, Transformation Partner, Staffing” (SLOTS) framework represents the reimagined IT service sourcing model for the digital age. The framework establishes five distinct IT service provider roles to help enterprises balance multi-fold objectives of provider competition, risk management, and capabilities across change, manage, and run initiatives. Each type of service provider in the revamped IT operating model will be expected to provide unique value-addition against the backdrop
of the increasingly contingent labor ecosystem and the proliferating technology landscape.
The SLOTS framework is aimed at pivoting the IT services sourcing portfolio design and selection to a “value-driven” provider model, from the classical “scale-driven” vendor categorization followed within traditional sourcing practices.
The underlying principle of the SLOTS framework is that deriving business value from IT requires enterprises to have access to best-of-breed capabilities across a broad set of themes such as legacy IT estate optimization, next generation technology implementation, domain-centric business transformation, multi-vendor orchestration, and niche/specialized functions (e.g., design, data).
Each provider category within the SLOTS framework is expected to bring in a unique set of value addition elements that help enterprises deal with the complexities arising from contingent labor ecosystems and rapid technology proliferation.
Barring multiple domain-centric / functional specialists, an ideal and balanced enterprise IT services sourcing model will include an optimal number (one to two) of providers identified to play each of the roles in the SLOTS framework (thereby avoiding provider sprawl, mitigating governance complexities, and driving high accountability).
Furthermore, as enterprises progressively traverse the journey towards IT modernization, the role of legacy orchestrators is gradually expected to metamorphize into that of orchestrators providing ongoing governance and driving continuous improvement.
While the exact sourcing strategy is expected to vary based on enterprise starting points (scale, maturity, existing provider portfolio, etc.), there are some guidelines and best practices for enterprises to consider while shifting to the SLOTS framework:
The IT services outsourcing market is an inflection point – while the “traditional” IT services industry (accounting for about three-fourths of the market) is shrinking, demand for “digital” services (accounting for remaining one-fourth of the market) is ramping. In a hyper-competitive market, only those service providers who can rapidly rotate and align their portfolios with the digital-first world will survive.
The evolving IT services landscape throws out some key implications/considerations for enterprise IT strategic outsourcing & vendor management function:
In the next five years, over half of all talent acquisition tasks can be automated using a variety of technologies including RPA, cognitive & AI, and analytics, among others, either on their own or in combination with one another
If you are a sourcing professional, you have our deepest respect, because now, more than ever, your job is a tough one. The sourcing industry is changing fast, disrupted by emerging technologies, shifting talent requirements and evolving service provider capabilities. Moreover, fluctuating geopolitical and legislative issues are causing enterprises to rethink substantial, long-held sourcing strategies and provider relationships. Sourcing professionals face formidable challenges in the global economy as the new year approaches and they look for better strategies in an industry experiencing unparalleled turbulence.
It used to be that a sourcing professional’s No. 1 responsibility was finding a way to get the work done as cheaply as possible. Not any more. Technology has changed the game. In nearly every industry, digital technologies are driving the development of innovative products and services and improved customer experiences. To keep pace in this digital world, enterprises are now pursuing a digital-first rather than arbitrage-first strategy. In fact, the global services market has seen a threefold increase in digital-focused deals.
Automation, once merely a service delivery tool, is now “front end,” with enterprises demanding strategy, vision and strong Proof-of-Concepts (POCs) for advanced automation in 33 percent of all application services contracts in 2016. Similarly, artificial intelligence, cognitive computing and robotics will soon begin to pervade the enterprise portfolio and will eventually become mainstream in sourcing landscape.
The increasing adoption of digital strategies is changing the workforce skills that enterprises seek, and, in turn, forcing sourcing professionals to revamp their location portfolios in the midst of a dynamic landscape. Location options for traditional global sourcing continue to expand, and new locations are emerging for unique talent demands, such as digital capabilities.
Sourcing professionals also must anticipate and react to numerous geopolitical disruptions that keep the sourcing landscape shifting like windblown sand. In the past year, for example, we have seen a significant decrease in demand from the United Kingdom given the uncertainty with Brexit; uncertainty about healthcare legislation in the US has dampened the healthcare sourcing market; and the uncertainty due to visa reforms has led to increased local hiring and onshoring in the U.S.
Sourcing professionals also are challenged to stay abreast of changes in the provider landscape. Mergers and acquisitions are on the rise, and leading providers are making fundamental changes to their talent and service delivery models. Between April of 2016 and March of this year, Everest Group witnessed 40 acquisitions to expand digital capabilities, 140 alliances between providers and technology providers or startups, and the setup of 35 new centers and digital pods to help clients rethink their digital strategies.
In the midst of this complexity, buyers of global services are tasked with making critical decisions. Recompeting an outsourcing contract, selecting a location for a global in-house center, or contracting for new tech services—these are the types of decisions that can significantly impact an organization’s performance and an executive’s career.
That’s why Everest Group has announced that it is doubling down on its commitment to provide fact-based comparative assessments. We’re consolidating our comparative analysis offerings – previously offered under a variety of product names – under our flagship PEAK Matrix brand, which will now evaluate services, solutions, products and locations. Additionally, we’ll be expanding the market segments addressed to include new functions, processes and industry verticals. Read more about it here.
In the midst of all the complexity and change that sourcing professionals face, one thing remains the same: Everest Group is your source for the fact-based analyses you need to make informed decisions that deliver high-impact results.
Capital markets BPO (Business Process Outsourcing) is one of the fastest growing industry-specific verticals within the BFSI segment, with a market size of over $2 billion in 2016. Investment banking is the largest line of business within the capital markets BPO. Asset management, custody and fund administration, and brokerage are the other key lines of business in this space.
Enterprises typically look to partner with third-party pureplay service providers such as Cognizant, EXL, Genpact, Infosys, and TCS to remain competitive in the marketplace, and simultaneously manage their regulatory, risk, and cost concerns. But the BPO majors are facing stiff competition from specialist capital markets BPO providers such as Avaloq, eClerx, and Xchanging, which are more focused and have deeper domain expertise.
Against this backdrop, what pricing considerations should enterprises take into account when selecting a specialist or a pureplay Business Process Outsourcing provider?
Net-net, specialist providers, which at least as of today handle more high-value services, come at a higher price than their pureplay BPO peers. And, at least as of today, buyers appear ready and willing to pay this premium.
Enterprises in this space typically tend to value and favor specialists when it comes to finding a partner for their capital markets BPO operations. And they tend to be particularly selective, as most service providers – both pureplay and specialist— do not play in all the segments, but instead focus on building deep capabilities around one or two of the four key business lines.
Are you working with a pureplay or specialist provider in the capital markets BPO space? To what extent did pricing play into your provider selection? Do you think specialists have an edge over pureplay BPO providers in terms of capabilities?
The engineering services industry is one of the most interesting segments in the global services landscape today.
Compared to IT and business process services, the global engineering services market is much smaller, at approximately US$ 90 billion. It is also growing much faster, at approximately 15 percent per year.
The bulk of the growth is going to be driven by a need to reimagine global sourcing of engineering services, in line with the progression of enterprise digitalization strategies.
Everest Group believes there are four distinct objectives behind digital engineering strategies:
Everest Group recommends enterprises follow a “3E” approach to shaping their engineering services global sourcing strategy:
Visit our engineering services page for more insights on engineering services global sourcing strategies.
“The Times They Are a-Changin” is an appropriate idiom to borrow from the great (and now Nobel Laureate) musician Bob Dylan to describe a conversation I had just a few days ago with a senior executive who leads sourcing for one of the largest pharmaceutical firms in the U.S.
Context: As you see in my most recent blog, I have been very cynical of the innovation strategies adopted by both service providers and enterprises. I have accused service providers of digital and cognitive “washing” that just pays lip service to innovation, and enterprises of resting in comfort zones where commodity and arbitrage still rule the roost.
I had no reason to tweak my view, until the discussion with this senior executive.
He was picking my brain on how to infuse innovation into his company’s existing application services engagements. He has been struggling to do so with some of the best-known names in the service provider world. When he asked, “Is there something I can do to make the service providers change?,” I responded:
The challenge is, there are more of the former than the latter, and the incentives for falling for arbitrage-driven models are still high for both procurement and service providers, irrespective of which of the above categories they belong to.
Hence, unless sourcing executives do the following, innovation will be difficult to come by.
At this point, the senior pharma executive had an epiphany, and stated, “Aha. I don’t want to put it this way, but if I have to make my vendors change, I must institute an “Innovation Tax.”
There, my friends, is the sign of things to come. Enterprise sourcing executives are increasingly feeling compelled to show business value. If service providers refuse to bring value to the table, they will have to be ready for an “Innovation Tax.”
By the way, these recommendations are not a bunch of my opinions. The above was validated through a survey of 100 senior enterprise executives Everest Group conducted in late 2016.
See our reports, “How to innovate – A Comprehensive Guide to Innovation in Application Services,” and “Cracking the IT Innovation Code” for more details on how to infuse innovation into your existing and future sourcing contracts.
The global pharma industry, hit hard by the rise of generics and the patent cliff on branded drugs, has been in cost-cutting mode, especially since the beginning of this decade.
With the rising costs of R&D and new drug development, pharma corporations began looking at streamlining manufacturing operations through Contract Manufacturing Organizations (CMO) and de-risking their R&D efforts via Contract Research Organizations (CRO).
CROs, which were initially sought out by pharma companies to cope with ad hoc/transient requirements such as additional capacity, have now emerged to cater to a whole host of services in the pharma outsourcing construct. These include clinical trial management, clinical data management, medical/clinical writing, bio- statistical programming, pharmacovigilance, and regulatory report writing.
Offshoring has also gained considerable traction in the last few years. Indeed, many global pharma giants have increasingly looked to low-cost locations such as India, as evidenced by the establishment of various home-grown CROs and Indian arms of global CROs, and some Tier 1 Indian BPO providers’ scaling up their capabilities in this space.
Given their nature and complexity, pharma industry processes typically command a substantial FTE cost premium over judgment-based sub processes in functional areas. For example, the following chart compares Clinical Trial Management FTE costs within those in Financial Planning and Analysis and Procurement Outsourcing.
What’s behind these premium prices?
First, pharma companies are gaining increased confidence from strengthening clinical and medical infrastructure and the stabilizing regulatory and business environment in India. This is resulting in outsourcing more core activities such as the entire spectrum of services pertaining to drug discovery and development. And second, Indian CROs and BPO providers are augmenting their capabilities to move beyond pharmacovigilance, bioequivalence, and bioavailability services, and challenging global CROs in areas such as end-to-end drug discovery and product development.
What’s your take on the premium pricing in the pharma BPO industry? Is it justified?