“Ten years ago, my CEO asked me to drive efficiencies through offshore outsourcing, now he’s asking me to make them through automation”, declared the CFO of a major corporation at the recent NASSCOM event in India.
This pretty much sums up where we are as a global services industry. We’re embarking on the next phase of productivity, and that means we have to incorporate it into our contracts and prepare to invest in the future model, not merely perpetuate the old one.
Service Providers invested in the old FTE model and it worked, now they need to make new investments in As-a-Service delivery
It’s not completely dissimilar to the old “lift and shift” FTE-centric deals of 5+ years ago, where providers would invest in the short term costs of client transitions, and spread the investments out over a 5-7 year contract to make the deal offer immediate attractive cost-saving gains for clients. Yes, they were making their first steps to becoming insurance firms for their clients, which is even more the case today, where the risks are higher and the savings more challenging to generate. However, if today’s service providers fail to develop scalable As-a-Service delivery platforms they can replicate across clients for the future, they will likely get replaced by other service providers in the future, which have made the investments necessary to provide more automated delivery, better data – and consequently more intelligent operating talent.
OK – the legacy FTE deals were less risky, so long as you could deliver up the lower cost people and shift the work to them without any major blow-ups. The modern deals require providers to find additional margin by automating processes effectively, converting freed-up effort into lower operating costs and also redeploying available talent on higher value collaborative activities. In other words, the old model was all about hard savings from direct labor swapping, the As-a-Service model is about a combination of smarter labor provision and genuine process transformation through better technology (i.e. soft savings).
It’s higher risk to avoid making the necessary investments – extinction could beckon for many
As the following graphic clearly illustrates, from our recent As-a-Service study covering 178 major buyers of services, if the major decision makers (SVPs and above) fail to see real As-a-Service progress made by their existing service providers, six-out-of-ten believe replacing their services providers would have a significant impact smoothing their progress towards their desired As-a-Service end-state.
While their more junior subordinates clearly do not view replacing their service providers as having such a drastic impact (25%), the frustration at the senior levels from providers’ failed promises and lack of progress to invest beyond the legacy model is abundantly clear:
This isn’t about like-for-like body-swapping, this is about removing menial transactional work and redeploying people resources into areas of higher value-add to clients. This is what real “transformation” (sorry, I said it) is about – spreading workloads across talent pools effectively, by leveraging smarter automation, SaaS-based process standards and training talent to work more collaboratively and intelligently.
The Bottom-line: Most service providers are not structured for success…. and the problem lies at the top
There are a lot of client RFIs on the market that are increasingly complex, but aren’t as attractive to providers as the juicy scale deals of the past, requiring a determined effort from the provider to cobble together the right resources and expertise to take them on effectively. Sadly, many of today’s service providers are simply not structured in the right way to take on more integrated / As-a-Service-type deals. At HfS, we are seeing some of the legacy service providers turn up their noses at these deals because they simply cannot break down the barriers internally to bid effectively for them. They are geared up for the dwindling legacy deals, not the new ones that are emerging from the next layer of buyers ready to move into outsourced As-a-Service business models.
In most cases, service providers are too vertically set up, for example, most still have an infrastructure service line, an application service line and a BPO service line – and most have product service lines too (not to mention some legacy vertical industry groups that do not even talk to each other). Each service line still tends to use its own unique contracting, pricing and risk tolerances. In short, client expectations are increasingly becoming much more mature around integrated services, taking the form of As-a-Service models, comprising elements of infrastructure, storage, comms, apps functionality and BPO, optimized around that integration as opposed to discrete components.
The legacy service providers (and those service providers who may not realize they are – actually – legacy) simply don’t know how to price, solution, assess the risk and pull it all together – they can’t, because they simply aren’t set up that way. These problems stem from the leaderships in these providers, where they simply have failed to structure their organizations in a way that can truly deliver As-a-Service. They are slaves to their little fiefdoms of siloed P&Ls, which have dictated strategy over the years.
Without a game-plan to take on integrated deals at lower margins to grow the future platform, many service providers can kiss goodbye to growth. The only route is to invest in smaller deals to build a service delivery platform for future client utility – today’s providers need to develop a 2-3 year plan where they will take on strategic deals at low margin/cost in order to build out the As-a-Service model of the future. Those ignoring this strategy better have a few billion in the bank to make acquisitions down the road, as that will be their only route out of this legacy black-hole into which they currently find themselves sinking.