“Have we reached the end of globalization?” Fareed Zakaria, the host of CNN’s weekly international affairs show, asked last week. He points to two factors — 3D printing and the rise in protectionist policies — as forces that combine to challenge the globalization movement of the last 30 years.
From a services perspective, we at Everest Group have similar worries.
But instead of 3D printing and protectionism, cloud and automation transform the global services world. These forces give rise to compelling possibilities that pose a threat to low-wage service models. The results could be transformative: more cost-effective and higher-quality services without having to reach across borders.
Of course, cloud and automation aren’t a complete substitution for everything companies have sent offshore during the past 30 years. There is, however, ongoing adoption for these more cost-effective models. And I’d wager we’re further along the adoption curve than in 3D printing.
Protectionism, Policy and Posturing
We also see the prospect of protectionism rearing its ugly head in the services world. It’s something we blogged about last year, focusing on immigration and H-1B visa reform. We need look no further than Senator Durbin to see one of the proponents of protectionism.
These sorts of political statements and trends create a worrying backdrop that allows other protectionist statements to create more relevance.
Too Early to Worry? No.
It may be too early to call globalization to an end, but these factors certainly present challenges. We’ll continue watching both these trends carefully. Although they are in early stages, combined they can prove a substantial threat to the globalization that has driven the services model since the mid-1990s.
Before you read the blog, watch Mac Davis on The Muppet Show singing “It’s Hard to Be Humble”!
We’ve noted several instances in our research and consulting practices where providers’ behavior reminds me of an old Mac Davis song. The lyrics proclaim that he no longer has a girlfriend but he never gets lonesome because he treasures his own company and that it’s hard for him to be humble because he’s perfect in every way. It is remarkable how self-confident service providers become when they have the dominant market share in their space. They become so enamored of their position that they don’t notice their clients start to resent them.
Sure, there is much to admire about these providers. They have had great growth, enjoy great profitability and clients invite them to do important things in transformational ways that they could only have dreamed about a few years ago. Thus, borrowing from the song, they think they’re perfect in every way. This leads to unintentionally expressing a level of arrogance.
The arrogance is displayed as the account team talking about their company instead of the client’s business. And account teams start trying to shape the solution or services and dictate to the client. They tell the client, “We’ve got a great idea; you should do this.” Clients resent this provider behavior.
Clients prefer account teams with this kind of approach: “Oh, you have a problem over here. We’ll help you with that.”
These service providers have also invested a lot of money in innovation. But we recently conducted a study on innovation investments across a wide variety of providers and found that very little of this money was rewarded in terms of the provider’s growth or profitability. So what went wrong?
Clients don’t want factory-centric service delivery
In analyzing these situations of arrogance and low return on innovation investments, we note that they share a common foundation: the provider bases its solutioning and delivery approach on centralized “factory” control. Historically providers demonstrated they had a good service factory, and clients put into their provider’s factory the work appropriate for the factory.
The factories include centralized innovation centers where providers pick up ideas from clients, refine them and then take them out to other clients. The problem with this approach is that the provider develops the ideas in a vacuum and then believes that they fit the entire industry. The provider believes it is cleverer than clients. But the ideas don’t fit other clients well enough. So it’s very high risk, and our study shows it’s proving to be spectacularly unsuccessful.
Today’s customers look to do things differently and want to invert the factory model to shift the power of running the factory to the client account. But this is very difficult for providers to do; it takes a long time, imposes a different listening culture and the providers don’t give up control easily. In addition, there must be clear accountability in place to hold the client responsible for the resources provided and accountable for the provider’s profitability.
Another way for providers to deal with this situation is to eliminate the central innovation center and start innovating out in the clients’ locations. In this model, the provider is positioned much closer to reality, listening to and responding to client needs and extending that into innovation efforts rather than making big bets from a centralized position.
This model requires having more of the provider’s people at the client’s site. And they must be empowered to make decisions about where to invest, make pricing decisions and make quality decisions, rather than going back to the factory head and solutioning decisions. So it’s much easier for the client to do business with the provider, and the provider can react quickly and flexibly to client needs.
Our observation is that providers that adopt this approach and place empowered account teams at the client’s location not only eliminate the resentment of clients but also have the added benefit of rapid growth. Where services are structured so that the account team must go back to the central factory for solutioning decisions and permissions, the provider will struggle to grow.
In the worlds of sports and business, there are many examples of teams coming from behind and winning big. Oracle Team USA’s exciting win over Team New Zealand in the 2013 America’s Cup yacht races last week is certainly a big one.
There’s also a race happening among the global services providers in the tier-one transformation services space. I’ve blogged before about the big three currently in the lead in this space: Accenture, Deloitte and IBM. But other service providers are trying to crash the party for the big three because increasingly transformation is the lucrative differentiated space in a commoditizing marketplace.
Transformation is the axis upon which higher-value services are delivered today. It drives profitability and growth in the services marketplace and is the most desirable of capabilities in a maturing market where high growth at profitable margins is increasingly difficult to come by.
Providers coming around the curve in the tier-one transformation space are not new kids on the block and not trying to reinvent themselves. They’re just strengthening their existing capabilities and strategies so they can cross the border and be invited to opportunities to compete against Accenture, Deloitte and IBM.
So who are the potential party crashers? Here are the ones we’re watching.
Cognizant and TCS. Clearly these two strong players are making big strides in the transformation area, particularly where they are already embedded in an account. Both have above-industry growth rates and very strong profitability, and increasingly they are in the mix in large transformation plays. Both are leveraging their large existing client portfolios and capitalizing on the permission and reputation that they have built with those clients to be considered for more expensive and larger-scale transformation opportunities. Often this comes on the back of significant investments in industry capability.
Most Indian firms aspire to achieve a spot at the table; but with the exception of Cognizant and TCS, most of them are somewhat off pace in their ability to regularly get in the mix for consideration for large transformation opportunities.
E&Y, KPMG and PwC. Deloitte’s sister audit firms and consulting companies also are working hard to build capabilities to join the leaders in the tier-one transformation services space. Each is capitalizing on the strengths they already possess.
E&Y’s formula is to search for transformational opportunities in its top 50 accounts and invest in a depth of understanding of the relationship and capabilities needed by these clients. It is rare to see them venture away from these top 50.
The strategy for both PwC and KPMG is to add capabilities and grow inorganically, and both have been on the acquisition trail. They continue to build out their systems integration and consulting activities to become more transformational partners.
Who’s buying transformation?
It’s important to note that the growing influence of business stakeholders in provider selection is fundamental to all attempts to participate in the transformation marketplace. Their increasing influence (at the expense of the CIO and shared services groups) is evident by the fact that the CFO, business unit heads or CMO often now drive the funding as well as the project management in new deals.
Which of the above providers are most likely to join Accenture, Deloitte and IBM at the tier-one transformation space party? We believe it will be the companies that are most adept at addressing the new business stakeholder groups’ issues.
There are bountiful opportunities today to use Big Data analytics and business intelligence technologies to change the game. But before you quicken your pace to the nearest tech store, you need to stop and recognize what “change the game” really means.
Certainly it means that the analytics software can yield insights that could help you improve interactions with your customers. The insights you gain could lead your organization to do something in a more compelling way.
But it’s important to recognize that the technology just gives you the chance to solve a business problem; it doesn’t actually solve it. You can spend money on technologies to create insights about how you can do things differently to great effect. But you can’t create just insights. You have to create organizational change and marshal the people in your organization so they WILL change and do things differently.
Creating organizational change is complicated. You will have to work your way through the dreaded snarls of change management. The rewards can be great; there’s no doubt about that. But the change can have far-ranging organizational implications and can be quite painful and disruptive to implement. Altering internal incentive structures. Entering new markets. Restructuring resource allocations. Reshaping your business model.
And if your organization fails to adapt to the new realities, it will thwart the impact and opportunity of the insight.
Our advice is to recognize up front that you will waste your investment in analytics technology if you are unprepared or unwilling to do down the path of a great transformational journey. Leaders must be prepared to deal with the consequences of the insights the analytics technology brings to light.
Accenture has beautifully moved into the number-one spot among transformational service providers. They snatched it from IBM, their biggest competitor for that spot.
How did they do it? Accenture created a significant gap between itself and IBM in two game-changing aspects: customer access and talent.
Accenture gained a leg up on IBM in customer access because it was better able to access the emerging business stakeholder groups outside of the IT organization. They were better able to communicate with the CFOs or business heads and leads, which helped increase Accenture’s credibility around transformation services. Discussions with the business stakeholders also gave Accenture visibility into large transformational opportunities.
In the second aspect, Accenture built a larger and deeper bench for consulting and systems integration (SI) talent than IBM.
Accenture has taken transformation services to a level that’s hard to beat.
But IBM has taken the challenge seriously and has been busily recruiting consulting talent. They started in the ERP arena and are now extending it to other areas. We’re seeing a lot of ex-strategy consultants showing up at IBM from Booz Allen and other firms.
So IBM is closing the gap created by Accenture in consulting. As they do that, they are starting to win back market share.
But then along came the dark horse, Deloitte.
Deloitte is contesting both Accenture and IBM for large transformation deals. But it’s able to be more disruptive to Accenture — in fact, the disruption is right along the same lines as Accenture followed to beat IBM.
Access to boards of directors and senior management suites has been a defining differentiator of Accenture and IBM compared to other providers in the transformational services landscape. But Deloitte is able to match them in this customer access aspect. And the dark horse provider has even better access than Accenture to the business stakeholder groups, particularly the office of the CFO, which is becoming increasingly important on large transformational agendas.
Deloitte also brings similar consulting and SI talent as Accenture, plus it has deep industry knowledge and industry practices; thus Deloitte is highly relevant on industry and domain topics, not just on technology.
But far more interesting is the central difference in the way Deloitte and Accenture approach transformational problems. Accenture tends to carve out the attractive outsourcing pieces and leave the asset-heavy risk-shifting pieces for others. Deloitte takes a much lighter touch and agile approach. The dark horse tends to reconfigure transformation agendas to be more of a consulting and SI effort and less of an outsourcing effort. This doesn’t work well with every client, as some prefer an outsourcing approach; but this lighter, more agile approach makes Deloitte’s offering more complete and distinct.
IBM is starting to narrow the gap that Accenture created. But Accenture is still the reigning king among transformational service providers. Both need to watch out for the dark horse as Deloitte has emerged as a tier-one transformational provider in the same category and same quadrant as Accenture and IBM.
There are other providers trying to get into the tier-one group. But that’s another story. Stay tuned for a future blog post on who they are and how they’re trying to compete.
CEOs can say the darndest things. I’ve met with many of them over the years, and on more than one occasion their response to one of my fact-based statements has been, “Why didn’t you tell me about this earlier?” Of course! Why didn’t I think of that? The truth is, it’s far easier said than done.
A few years ago I had this same type of exchange with the CEO of a Fortune 100 company. After presenting my analysis of a specific situation with which his organization and the entire industry was grappling, I stated that I had been delivering the same message at various levels of his organization for months, to anyone who would listen – and in doing so tied it directly to the strategy and vision he presented at an analyst conference at the beginning of the year – all to no avail.
Then he said something that still amuses me: “Why didn’t you come directly to me with this? I’ve been in a knife fight and you’re selling guns.”
I respectfully explained to him that I had been trying to arrange a one-on-one meeting with him since shortly after his analyst conference presentation, and:
His screener/executive assistant/handler responded, stating that my request had been forwarded to “the person in the organization who deals with this issue.”
Since I had previously spoken with “the person in the organization who deals with this issue,” the next meeting I had with him was, let’s say, less fun than a funeral. In fact, it was a funeral for my relationship with this particular executive as I had “gone over his head.”
The CEO then acknowledged that this could be a problem, but he wasn’t sure how to fix it. I suggested that one solution would be to hire/appoint an ombudsman to vet ideas and to tell him directly of those that warranted top-level attention. I also recommended that the person be someone external to his organization to guard against political ambitions or personal agendas.
I spoke again several weeks ago with this CEO and asked whether he had tried the ombudsman suggestion. He said yes, that he had hired the individual personally, and that his executive assistant was the only person in the organization that knew of this person’s existence. He explained that the in-place guidelines are, if a salesperson/consultant had the wherewithal to attempt to go directly to the CEO, his assistant forwards the information to the ombudsman. That person evaluates the idea and, if it is of value, recommends that the CEO accept an in-person meeting. And then he swore me to secrecy.
Could this approach help your organization? Well, I guess that depends if you’re trying to fight a gun battle with a knife.
Today’s large, global companies face an ever-growing need for talented resources to manage their increasingly complex global services delivery organizations. The requirements extend far beyond traditional models that often found firms simply assigning the “folks who have performed the service for the past 20 years” into various leadership roles. While that was never a best practice, in today’s world, it can be catastrophic.
Global services delivery leaders of today must navigate a complicated mix of internal and external delivery engines while forecasting supply versus demand and keeping clients happy across diverse regions and cultures. To meet these demands, leading global services organizations are increasingly adopting highly integrated cross-business leadership teams sponsored at the most senior levels of the corporation.
The graphic below illustrates this concept in a hypothetical global organization.
Organizations seeking to build a robust team to deliver their services globally into the next generation should consider the following best practices as observed by Everest Group in working with many of the world’s leading organizations:
Global governance structures should be aligned with corporate strategy and chaired by a senior leader at the appropriate level in the organization
The governance structure should include an Executive Steering Committee and have formal dedicated roles for key global functions
The structure should have responsibility for global strategy, planning, design authority, reporting, delivery, talent development, and innovation
The structure should have global process leaders who are responsible for the design, implementation, and compliance of standardized processes across the enterprise, with appropriate representation and input from all lines of business
Increasingly, business services are maturing from a legacy functional approach (Finance, Procurement, Tax, Human Resources, etc.) to an end-to-end approach (e.g., Purchase-to-Pay, Record-to-Report-to-File, Order-to-Cash, Hire-to-Retire, etc.). Appropriate transition and transformation teams must be deployed to manage this migration
The structure should also ensure the effective management and integration of all delivery centers
Above all, Everest Group’s experience suggests that companies must treat global services management as a vital business unit with appropriate priority given to recruiting and retaining the talent necessary to execute with excellence and deliver the next generation of value from global services.
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