I spent much of last week at InsofysBPO's customer summit in Baltimore. Infy always does a good job with their events – they bring their customers together and encourage open, unstructured debate, where the good, bad and plain ugly about BPO and ITO are openly discussed. They know the best way to win business is through baring their DNA to customers and encouraging them to trust and want to work with them.
They also invited some industry personalities to wax on about their vision for the future – and some predicted rampant "consolidation among suppliers". I say they are wrong – they are clinging to their knowledge of the past and are not re-adjusting their perspective to the present. I'd be surprised if we ever see
another merger like EDS/HP for a very long time. I don't even think we'll see a lot of smaller-scale service provider mergers. And you can call me on this one if I am wrong. I've seen a couple of providers hawking themselves on the market for a while, and they're struggling find a buyer. I don't believe this is about a price/stock-swap negotiation; I believe it's because they aren't bringing the right stuff to the table anymore for the new breed of service providers.
The way to win clients today is to show them what you're all about, what you stand for, what you believe in, and what your customers really think of you. I see this style being reflected by a handful of service providers today - and it's not a staged selling strategy: it's actually real. These providers generally want the platform to present their passion, energy, dedication, and willingness to improve to their prospective customers. And more and more these days, customers can detect real passion from service providers during a pursuit process, as opposed to the salemanship of "going through the motions". Today's branding in services is far more about the culture of the delivery staff customers will be working with, and less about tag-lines, sexy marketing and past reputations.
What I am also learning myself, is the future direction of our industry unraveling. It's no longer simply about scale. I still hear the daily rumors about whom is buying who, but I barely believe these anymore. ITO and BPO is about culture and industry specialization – tell me where you can buy that these days? You don't buy it, you build it – and you build it buy partnering with new clients and assimilating their knowledge and talent into your own culture.
Today's battle-ground is largely focused on transactional deals, but the new differentiators are centered on industry knowledge and expertise. Most of the leading service providers today can put on a good show for basic application development, or transactional finance / procurement / analytics work. But which of them can boast genuine industry expertise where they can align specific business knowledge with process transformation, underpinned by technology integration expertise?
The only way these service providers can develop this expertise is through smart client acquisitions, where they can re-badge personnel with intimate industry knowledge and share this intellect across other delivery staff. You can only acquire this knowledge when you invest in new clients, as opposed to buying up new scale with transactional contracts, accumulated from yesteryear's' engagements.
It's time for new thinking, not the same old mentality of biggest is always best from the old-school…
Posted in : Business Process Outsourcing (BPO), IT Outsourcing / IT Services, Outsourcing Events
I think you are right. I used to caution my clients about impending mergers and the havoc they might bring to their relationships but by and large they have failed to materialize.
Further, as I go through yet another week of our highly interactive provider evaluations, your point about passion is completely transparent–you can see who is going through the motions and who is a true believer. In about 5 minutes.
That said, I am not sure culture and vertical expertise are enough. Providers ultimately need to combine capabilities (theirs, clients’, third parties) to create offerings that are revolutionary, not evolutionary. I still think we are a fair distance from something truly new in the industry, but I also have no doubt we are on that path.
I remember what is said to me when I started a career in bpo / call centers. It is easy to learn the CRM software application; it is easy to learn the CRM process; but it is difficult to learn the CRM culture. Everyone who involves in the outsourcing process has got a culture which needs to be aligned to the goal of the customer. This can be better done by forming small groups dedicated to the job. Required DNA can be built this way.
On the other side, Mergers and Acquisitions are financial neccessities.
Service providers to the publishing industry have, due to their fairly narrow niche and specialization, been high-value collaborative partners to their clients for some time. They develop IP and products together; they are at the vanguard of developing next-gen ebooks with images and sound embedded; they provide solutions that venture deep into the workflow of the publisher’s client.. it’s only genuine industry know-how that has enabled it.
When you pick up that newspsper with moving images on page 3 in a few years, it’ll driven by the provider that recognized how the technology would benefit the client.
I would have to say your are spot on. During the mid-2008 timeframe I strongly suggested merger/acquisitions (or at minimum constructive collaborations) as a survival tactic for weathering the economic downturn. For those who failed to follow this advise it now is a question of when their existance will cease. The reason behind this is that Tier 3 supply exceeds demand AND most are not equipped to operate in a global context. Further the general business viability health has been critically damaged as a result of undercapitalization, lack of organization reinvestment, and running the business from a cash flow/engagement basis.
This DNA thing is so true. It’s the first thing that I learned when I crossed the floor from 15 years as a provider to working on the buy-side of outsourcing transactions – no matter what a provider does and how good their sales approach is, their DNA and their personality comes across in every interaction. It’s in everything that they do: the way that they conduct themselves socially, how they prepare for and manage a meeting, how they use slides, how they ask and answer questions.
I often think about why this wasn’t more obvious to us as a provider. We knew that we had a certain way about us, but didn’t understand that it ‘infected’ our message to the degree that it does.
Now having spent the best part of 5 years as an advisor, I can see those personalities shining through from the first contact. My advice to providers is not to try to hide, but to make the most of the situation. Lack of authenticity is as obvious as a lack of commitment. You can tell who is being genuine.
And I agree with Phil that this means that there is going to be room for smaller providers who have genuine passion for their business. Authenticity, commitment, passion and credibility will go a long way to beating scale – unless the scale players can also show the same, which is hard to do consistently.
You’re right in highlighting the relevance of cultural factors in BPO deals. Apply Dunbar number concept to BPO & you get an upper-cap for outsourcing engagements – the figure is approximately 150. Wikipedia explains Dunbar number, thus – Dunbar’s number is a theoretical cognitive limit to the number of people with whom one can maintain stable social relationships. These are relationships in which an individual knows who each person is, and how each person relates to every other person. Proponents assert that numbers larger than this generally require more restricted rules, laws, and enforced norms to maintain a stable, cohesive group.
My own experience over the past 18 years in setting up 9 “new” teams for processes as varied as transaction banking, sales order processing, AP/AR processing, insurance claims , market research & even IT testing & support/helpdesk work , corroborates this approx. 150 figure. Those of you with more than 150 Linked-in/FB etc connections, will relate to this. Upto 40 active connections, one can somehow engage-in directly but to be actively engaged with 150 too, requires some management & effort in terms of archiving/ relationship classification etc. Beyond this, chaos is unavoidable.
Am by no means suggesting a 150 headcount uppercap for BPO Service Providers. Service Providers should have an uppercap for each delivery site, which they invest in ( I recall explaining the criteria for a location model, on this blog, last year). This site cap is primarily dependent on city economics ( Jane Jacobs & Richard Florida should become mandatory reads for Service Provider management teams !!). I should also clarify that 150 headcount ( in my opinion) , holds for a “New” team engagement, in one service-provider location. Depending on 4 variables – process standarization, efficiency of IT tools, team attrition rates & multi-lingual/ country communication – one can add to an existing engagement of 150 ( but not in-excess of 150 again), at the end of at least 18 months. So , the definition of ”New” here is at least 18 months from live operations.
Like in social-networks, the numerical headcount caps get defined in BPO & some parts of ITO ( definitely, excludes application development), if you focus on communication need of the engagement & not the cultural aspects. German language is more structured than english so do germans make better engineers ? Japanese lingo requires a precision, not found in English so are the Japanese better in research ? There is a lot of interesting cogntive research coming out on the subject of whether language shapes cultures or the other way around. ( See – http://www.scientificamerican.com/article.cfm?id=does-language-shape-what ) . But while this research is inconclusive, it does point to the importance of communication too.
Discussing BPO scale, brings back the ghost of FTE-based contracts in BPO. From a service provider perspective, this is the pillar on which the entire BPO industry stands currently. Transaction based pricing, is an eye-wash. Activity Based Costing (ABC) is a complex computation for the services industry. The scale achieved by the large BPO/ITO service providers in the past decade, is in no small measure , thanks to the simplicity of its business model. A direct corelation between FTE based revenue contracts & FTE based engagement spend, defacto brought in ABC best-practices to BPO/ITO solution providers. Today, organizations like Accenture/Infosys/Wipro etc are perceived to have more efficient cost management systems, despite adding on 100,000+ employees in past 9 years than, organizations like Citibank/ Bank Am etc. with a 100 year legacy & fairly stable employee count over the past 9 years.
Apart from the sales effort in a new & more competitive market, there are two key internal challenges for the large BPO/ITO solution providers, in the current scenario :
a) Legacy Contract Retention/ Management – Want to know who’s bitten off more than they could chew ? Divide the BPO Headcount of the Solution Provider (SP) with its total live Customer Engagements in each site & the Avg. Duration of Live Engagements. Big deviations from Dunbar number & its multiples, are a problem – & you will see them in most of the large SPs. These problems are not hidden. Mass x-border corrections aren’t realistic in a recessionary environment & most SPs are genuinely trying to address the issue by adding-on expensive new hires, by reducing their deal margins.
b) New Contract Structuring & related Cost Management – Smaller-sized deals with outcome based pricing, are a new challenge. Traditional cost management practices of service companies signing up multi-year & multi-currency x-border deals involved huge investment in forecasting tools. See the back-office of banks & you’ll know what I mean. ITO/BPO providers signing up large FTE-based deals are just waking up to this new reality.
On the M&A front, just as we saw recently in the banking/automotive sectors & the satyam episode, regulators see some of the large BPO/ITO providers, as too large to fail. We should expect some more of this regulator encouraged consolidation, apart from the occasional captive sell-outs.
These views are of-course biased by my 13 yrs of banking ITO/BPO work at Citibank & 5 yrs of setting up Infosys’s Europe BPO business. Over the past year, am doing consulting (based in the home of DNA/Genetics founder, Gregor Mendel’s Czech town called Brno ) – Would be great to hear other views /experiences on the application of dunbar-number to BPO engagement scale.
Phil –
I am tardy with this comment, but … YES! Your observations about passion for a business relationship and build-vs-buy are spot-on in my experience.
The more likely “M&A” variations will take the form of provider-client partnerships to transform industry segments.
Peter