Posted in: Absolutely Meaningless Comedy
At HfS we see customers who externalize business or IT processes as falling into three distinct camps:
1) The "Lights On" camp. Let's make no bones about it, we just want to drive out expense without any costly disasters occurring. We don't see any strategic value in these processes, and as long as it's cheaper to have someone else run them and they don't impede our business, then we're happy with that outcome. We only want a small governance team that causes us few headaches and keeps the lights on. We don't want to hear about problems, or additional investment requirements. We'll revisit the engagement when the renewal is up to see if we squeeze a few more bucks out of the supplier. If the whole things messes up, the chances are we'll all be long gone, in any case, and our successors can deal with it. As long as our shareholders are happy with the immediate returns, that's the main thing.
2) The "Efficiency" camp. We don't see a hell of a lot of competitive differentiation in these processes, but we do recognize that there's more than an initial 30% we can lop off the budget if we're smart about this. So let's plan for phased process improvement and additional layers of processes to externalize in the future. We'll build a governance team of Six-Sigma blackbelts to oversee a 5 year cost-efficiency plan. Maybe we'll take 20% savings now and reinvest 10% in inhouse skills and some consulting support to ensure further efficiency gains will be made down the road.
3) The "Transform" camp. We've learned that simply moving work offshore is only a short-term cost reduction measure - these costs will eventually reappear if we only perform an onshore-to-offshore staff exchange. We're simply not going to "kick the can down the road" for someone else to deal with them. We've learned that failing to invest in process improvement, once we've moved processes into either into our own shared service center, or into the hands of a third-party provider, will result in the stagnation of that business function. We've also learned that outsourcing
Picture the scene... the first time I met Ron Walker was back in about 2005 at a Hawaiian Luau in Southern California (I think it was meant to be an EquaTerra "strategy" offsite). From my recollection, the guy was clearly hungover, looked like he'd frequented one-too-many MickeyD drive-thrus as he schlapped around the States doing sales calls, and was sporting a Bermuda shirt and shorts to boot.
Seven years later, I find myself at some conference in Florida, when this suave, well-shaven, slimline gentleman approached me donning a sports jacket with brass-buttons and a consultant's grin on his face. Now there's one transformation the outsourcing business can be proud of: Ron Walker as a Big-4 Consulting Partner.
Yes indeed - Ron Walker, one of the original EquaTerra founding executives has lived the sourcing dream... from start up advisors and providers right through to a global management consultancy. So we thought it high-time we caught up with Ron to talk about his colorful career and how the EquaTerra/KPMG merger was faring over a year on... and how different the sourcing world is looking today compared to those crazy days of the outsourcing boom.
Phil Fersht: Ron - you’ve been around the sourcing industry for quite sometime now. Maybe you could get everybody a little bit of insight into your background and how you got into this industry and a bit about your early career.
Ron Walker: Hey Phil - I actually started my career in the aerospace industry and was fortunate enough to work in the office of the president, where we did some initial shared services and outsourcing work. I then moved over to Arthur Anderson where I worked in the business consulting group and had a successful run working on both the consulting side and the outsourcing piece. I helped build the shared service centre that Arthur Anderson was setting up for General Motors,
With all the quick-thinking and finesse of an Italian analyst in a Hollywood Hills salami shop, here's HfS Research's Tony Filippone imparting the scoop on why SAP just bought Ariba...
With its $4.3 billion cash offer, SAP answered every procurement technologist’s question, “Who is going to buy Ariba?” While this acquisition will rupture the procurement technology universe, HfS believes the real question that supply chain and finance professionals must ask is, “Now that SAP finally has a credible commerce network, can I eliminate and automate processes I’ve been busily outsourcing?”
It Didn’t Happen Overnight
Give credit to Ariba’s leadership. Over the last few years, Ariba’s CEO Bob Calderoni and President Kevin Costello bet the farm on cloud technology and the networked economy. With the introduction of cloud-based 10s1, they took their focus off gritty areas, like category management, usability, and procurement process management, and jumped into technology’s cloudy fray. This was a “check the box” exercise for any technology company. Yet, the real jewel was Ariba’s supplier network. With the help of procurement teams bent on mandating its use among suppliers, Ariba’s supplier network swelled to $319 billion in commerce transactions spanning 730,000 companies. Ariba’s network fees doubled. SAP noticed.
In the meantime, Calderoni sold Ariba’s services arm to Accenture 18 months ago. This clarified Ariba’s technology-focused strategy. It also eliminated the largest objection larger technology firms had about acquiring Ariba – the services. Technology firms want nothing to do with services as they can neither manage nor sell them effectively. In the end, Ariba became a feature-rich, cloud-based platform with one of the world’s largest B2B commerce networks.
What It Means to the Industry
SAP customers gain network capability that automates their O2C and P2P processes. With an installed license base of 190,000 customers, SAP enters the cloud technology world with a real commercial network. This exposes SAP’s industrial, manufacturing, and CPG clients to a modern method of conducting O2C and P2P business. SAP’s customers are likely to rapidly adopt the network. In the wake of SAP customers’ adoption of the Ariba network, business owners should seek to consider bolder, more transformations alternatives to outsourcing their finance and accounting processes. Quit emailing POs, and start electronically flipping them to eliminate manual effort and obtain the true contract value you negotiated.
Other technology players are left picking over the leftovers. SAP eliminated one its competitors, while IBM’s Emptoris acquisition eliminated another. Two heavy weights are gone, and in their wakes lay a large number of low-priced, niche procurement solutions that are left to fight it out. While buyers will always have some interest in pure play solutions, choices for enterprise buyers are more limited. Expect the smaller players to focus on usability and niche process solutions, like supplier relationship management. However, seamlessly automating a company’s global payables team through an established network dwarfs the differentiation of better-looking user interfaces.
Outsourcing service providers face a new landscape. With SAP customers poised to adopt a network, finance and accounting outsourcing service providers will face lower volumes of manually transactions. Service providers that can help buyers transform their processes are positioned best to service clients and win new ones. However, this isn’t a simple technology issue solved by templates. Supplier network adoption and onboarding is a complicated, tactical task and finance and procurement teams will need operational expertise to handle the transition. In addition, SAP’s partner model for its On-Demand services may open new opportunities for service providers that had previously relied on Ariba’s cloud suite.
Procurement and supply chain gets shoved into driver’s seat. With SAP’s sales force pushing Ariba’s network, expect CPO’s to feel the pressure to take more control of their firms’ end-to-end P2P strategy. Whereas few enterprises currently consolidate sourcing, procurement, and payables teams, Ariba’s network will force organizations to reconsider if they want to tap into the true value of seamless source-to-pay processes. More importantly, supply management executives will be given a better network to manage direct goods and services. As a result, CPOs and supply chain leaders will feel the pressure to manage source-to-pay in an end-to-end fashion.
The Bottom-Line: SAP’s Acquisition is a Good One
After the dust settles and SAP integrates Ariba’s sourcing, procurement, and contract management capability into its suite (or vice versa, which could create quite a bit of dust, but represents a fine network-based model for B2B commerce), SAP and Ariba’s customers come out as winners. Customers will get better features, a more broadly adopted cloud-based delivery model, and a rapidly expanding commerce network that reduces the inefficiencies of manual P2P processes. However, despite all the hype SAP has created about its On-Demand solutions, can the German software firm really manage a network and B2B community-based solution?
So for the first time since the '08-09 crash, we're finally starting to see the impact of a commodotizing services market, as HP makes plans to shed 30K jobs this week.
However, I believe HP is a symptom of a commodotizing and standardizing IT/business services industry - it's recent woes have forced it to take corrective action that many of its competitors will surely have to also take in the future.
The bottom line is that several providers of HP's ilk are getting overbloated - and have been for a while - and simply can't continue to remain competitive in today's market under the old rules of yesteryear. It's time to trim the fat. And while other analysts are claiming HP is an anomaly in the services business, I don't agree - we'll see several other service providers make corrections to their workforce sizes in the coming months. The old "butts on seats" services model has to transform or we'll all be on a race to the lowest common denominator.
Meg Whitman is doing what she was hired to do - straighten the ship, re-energize the management talent and getting HP on a roadmap to competitiveness. However, this is the start of a long process to correct the utterly rudderless policies of Léo Apotheker's short-lived, but very damaging, spell as CEO. While a 10% layoff is tough to take, this is likely not going to be the last workforce correction we'll see from Whitman this year.
How has HP found itself as the first Tier One IT Services provider (since the recession) to start shrinking its workforce?
Léo Apotheker had left HP in a sorry state from which it is proving tough to recover. During his ill-fated 10-month leadership spell leading up to his dismissal in September of last years, he'd helped wipe 40% off of its stock valuation and $30bn from its market cap. His corporate leadership decisions were well documented in HfS, and the resulting financial performance has proven tough from which to recover, with little upward movement since Meg Whitman's appointment as CEO.
HP is a victim of its own success as it helped create today's commodity services market. The Tier 1 IT outsourcing providers (Accenture, CSC, HP and IBM) are slowly discovering their success in standardizing the IT outsourcing market is no longer demanding such bulky staff delivery requirements. The movement away from asset heavy deals and heavy staff transitions no longer necessitates the mammoth-like deals of yesteryear.
HP's previous leadership failed to build on its EDS acquisition, which has ceded much of its market position. EDS was one of the original pioneers of ITO, typifying the mega-million dollar IT infrastructure deals of the 80's, 90's and early 2000's. However, as that business suffered from squeezing margins and the focus away from heavy asset-transfer, EDS developed one of the industry's stellar SAP development and maintenance practices. And when HP, also a major proponent of SAP services, acquired EDS in 2008, it was expected the combined outfit would go from strength to strength as a powerhouse enterprise IT/business services provider. Instead, we witnessed the likes of Infosys, TCS and Wipro infiltrate the SAP services market; Accenture and IBM develop genuine offshore competitiveness to fight the Indian low-cost wave; while Deloitte and Capgemini have remained competitive as consultants and integrators. HP, CSC and a few other "old school" ITOs became paralyzed in a state of denial as their market competitiveness was quickly eroded.
With Mark Hurd obsessing about HP's hardware business, and his successor Apotheker seemingly trying to turn HP into a software firm (or at least we'll credit him with trying to achieve something), HP clearly lost focus on its EDS business, while a global recession wasn't exactly helping matters. Additionally, HP's BPO business has remained relatively stagnant since the EDS merger - and is only now showing signs of a resurgence with Whitman placing new management talent to energize its clients and refocus its staff.
The move to the Cloud has further leveled the playing field. Cloud computing deals are further placing the onus away from
We still haven't quite forgiven those of you for not being one of the 1,200 people who signed up to hear six of the most influential IT and business services savants debate on the future of sourcing and services. I mean - what else were you doing? Was it really that important?
However, in our spirit of forgiving even the unforgivable, here's a replay of the event - just click on the image below:
And as usual, we're giving far too much away for free, so...here's your own copy of THE-SERVICES-SAVANTS-SLIDES.
The HfS 50 Blueprint Sessions 2.0 will be a continuation of the hugely successful summit that took place at the Soho Grand in New York in April 2012, where 41 senior recipients of outsourcing services, joined by six of the leading outsourcing services providers on the second day, started the ground work for a Blueprint document that delivers a roadmap for the future direction of the outsourcing industry. And as you can see, it was a blinding experience...
We're awarding an HfS bravery medal to ISG analyst Stanton Jones for pointing a nuclear missile at the credibility of Gartner's recent Magic Quadrant for Managed Hosting. Stanton doesn't mince words as he declares:
"Did you know that of the companies listed on the Managed Hosting Magic Quadrant referenced above, less than half would be capable of supporting a transformational infrastructure sourcing initiative with a multinational company, or that only 10 percent could support the same for a global company?"
Stanton then seizes the opportunity to pitch his firm's own capabilities: "ISG is comfortable (and confident) in making this statement because we’re on the ground every day with both buyers and sellers of IT services. This unique position gives us unprecedented insight into what suppliers are really capable of delivering to clients — clients that trust us to help them vet providers in a fair, transparent way to make sure the vendor will help them solve their ultimate business problem."
While I have no doubt that Stanton's knowledge of providers' IT sourcing capabilities is top-notch (I have always been impressed by the caliber and culture ISG's people), I think we need to look at this accusation in a broader context:
1) ISG lives in a world where it's all about outsourcing - how about the other 72% of enterprises? Our recent studies show that only 28% of large enterprise rely predominantly on an outsourced model for IT infrastructure. While Stanton correctly states that ”less than half of these providers would be capable of transformational infrastructure sourcing initiatives”, he conveniently ignores that fact that most of Gartner’s clients – and the majority of large enterprises, probably don’t care too much about these capabilities. They may just want a quick no-nonsense glance at managed hosting providers. I’m sure Gartner’s clients who do care about "transformative sourcing cababilities" would call them up to find out more.
2) ISG makes the vast majority of its income facilitating and negotiating outsourcing transactions - doesn't this bias its research? I can speak from personal experience that it’s really tough trying to produce “unbiased” research when working for a company that makes most of its money from clients undertaking outsourcing engagements. The bottom-line is your firm is vested in the success of outsourcing, and your research will always be pressured to advocate the benefits of outsourcing. At the end of the day, the consultants want to wave research in front of their clients that supports the case for doing an outsourcing transaction, because that’s how they get paid. However, for those companies who’ve already made the decision to outsource, or are renegotiating existing outsourcing contracts, ISG’s research is likely to be highly pertinent and relevant.
3) All quality consultants conduct good research and thought-leadership, but they're not trying to badge themselves as research companies. In sourcing, some of the best research comes from the likes of PwC, KPMG, AT Kearney, Deloitte etc - in fact, we even showcase some of it at our BPO Resource Center. However, they do research to enhance their eminence and consultative credibility, and they make every effort to make it widely available and accessible to enterprise decision makers. I don't think I have ever read a detailed piece of ISG (or TPI) research in my entire career beyond their quarterly index calls. I am sure it's great, but it's not easily accessible or widely available to the industry at large. If they truly want to become a research firm, then let's have a gander at some and we can all form our own opinions.
The Bottom-line: Outsourcing specialists need to base their business models more broadly than solely on outsourcing if they want to take on the traditional analysts
Love them or loath them, Gartner serves the vast majority of IT buyers, whether or not they outsource. Moreover, Gartner is predominantly a research firm and IT strategy advisor, who I haven't ever seen facilitate an IT outsourcing deal (I've seen them dabble in it in the past, but they never really got anywhere). ISG is a great outsourcing consultant, and has consistently been the industry-leader for facilitating IT outsourcing transactions for the last couple of decades.
While Gartner could clearly do a better job researching the sourcing transformational capabilities of providers, ISG could similarly do a better job producing research for the 72% of enterprises who haven't done a lot of IT outsourcing. If I'm a CIO and need some unbiased validation of my overarching IT strategy, I'll be likely to call Gartner (among others) for an independent viewpoint. If I was doing an outsourcing deal and needed specific advice and data around how to do my transaction and develop my shortlist, ISG will surely be on my list of experts to call.
As we have painfully laid out here time and time again... it's not all about outsourcing!
One of the most influential and popular figures in the development of India's services business over the last couple of decades is Basab Pradhan. I personally got to know Basab when he became part of the esteemed blogging syndicate "Enterprise Irregulars" last year, where I was impressed by his pragmatic and visionary approach to global sourcing, as he was finalizing his new book "Offshore: India’s Services Juggernaut".
Basab made his name in the industry by climbing the ranks at Infosys during its hyper-growth years, where he led the global sales and marketing function until 2005. This year, Infy managed to persuade him to rejoin the firm to be instrumental in helping position the firm for this new phase of the industry.
So we managed to convince Basab to park his Chevy Volt electric car for few minutes, which he passionately drives around the Bay area, and claims to have recently clocked 108 miles per gallon. We were also joined by his colleague, co-scribe and Kindle-fanatic, Gaurav Rastogi, who's spent the last nine years leading global sales effectiveness and learning for Infosys.
Phil Fersht (HfS): How is the Chevy Volt doing? If it blew up tomorrow, would you get another one?
Basab Pradhan: It's doing great! I am up to 108 mpg. The news of it blowing up in tests were highly exaggerated. No such worries here.
Phil: So…tell us about your recently published, co-authored book, Offshore: India’s Services Juggernaut.
Gaurav Rastogi: The premise is very simple. While many books have been written about India and offshoring, very little has been said about how the Indian offshoring industry came to be, what it means for a company to be Indian, what impact this industry has had on the Indian economy, how it works, where it’s at right now, and what makes it successful. And the headlines you read about offshoring are the equivalent of bumper sticker stories. So we set out to characterize, demystify and explain the Indian offshoring industry.
Basab: We talk a lot about how the industry is changing, and the shifts are quite perceptible if you observe the industry. For example, at the early part of the 21st century, it was all about the new offshore or global delivery model (GDM), and the cost savings, flexibility and other advantages it could bring to buyers, But it’s no longer about the GDM. In fact, buyers today, especially in the U.S. and U.K., assume a GDM is built into their solutions, and they don’t select service providers based on those they feel can safely take them across the GDM chasm. Now, they’re buying on the
At the end of the day, it's not all about outsourcing and it's not all about shared services; it's about focusing on how to globalize processes, how to transform finance (and other) functions, and how to govern it all in a global business services context. There is no dominant model, it's more about achieving the right balance across all delivery models to achieve the best business goals.
In conjunction with global accounting body ACCA, We spoke to 682 large organizations currently running finance in either an outsourced or shared service framework (or both) - and the results are emphatic: those organizations relying predominantly on outsourced delivery, or predominantly shared services, are viewing their finance delivery performance much more skeptically:
Why do these results signal the decline of the "predominantly outsourced" model?
1) Expectations are clearly higher with outsourcing... and they're not being met. Only the ability to meet compliance and regulatory goals (42%) is brushing up notably well with the outsourced finance functions. Everything else is mediocre-to-average, in terms of meeting finance performance objectives. This is because many buyers' outsourcing environments are relatively nascent, and their expectations were likely set to a high level when they embarked upon their engagements. In addition, most governance staff can clearly recall what it was like before outsourcing, and find their new environment a struggle to get things ticking over like they were in the old days. Buyers are clearly finding it hard to make productivity improvements to their finance processes when they outsource heavily, with the main reasons being the cost and complexity of dealing with providers' change-order processes and also the fact they the operational people running the engagements on both the buyer and provider side are too junior to make decisions. Instead, they get absorbed into the table-stakes of meeting SLAs and running things on budget. Other reasons we will discuss further in our upcoming Sourcing Blueprint document. Our concern at HfS is that if buyers and providers allow these relationships to stagnate, we could get left facing a dangerous commodozitation of operational process outsourcing.
2) Shared Services delivery models aren't faring much better. Those buyers sticking predominantly to a shared service model for finance are also suffering similarly mediocre performance levels to their outsourcing peers. Only their ability to standardize processes is really coming though as a major plus, with 52% experience really effective results to-date. Clearly, they find it easier to make tweaks to process flows and delivery quality issues. However, when you consider that most of these buyers have been doing shared services for an average time-span of