TPI + Compass: a new direction for outsourcing advisors, or more of the same?

TPI and Compass: a bold new direction?

How can enterprises find unbiased coaching, advice and data to help them make the right sourcing decisions, but then also have the expertise they need to transition into a sourcing environment?

The role of consultants claiming to provide these services has been under constant scrutiny in recent years, as the outsourcing of IT and business processes become a mainstream component of organizational strategy.

Boutique outsourcing advisors have roamed industries for over two decades, providing structured roadmaps for taking enterprises into an outsourcing transaction.  Enterprises usually bring them in, once the “O” decision is made, to perform the operational tasks necessary to develop a scoping document, find an appropriate provider, negotiate an agreeable price for themselves, and take it to a transaction. Most of these boutiques tend to be small and specialized, existing in a little world of their own where they hobnob with providers, frequent the same events, speak the same language and regurgitate the same slideware year after year, as not a lot really changes in the world of number-crunching outsourcing deals.

However, in the last couple of years, the major consulting firms have finally realized they need to cater for the demands of an increasing majority of their clients, which have chosen to go down the outsourcing route.  The results has been too many competitors chasing advisory engagements that enterprises are increasingly finding too costly.  Hence, the outsourcing advisory market is embarking on a wave of consolidation that is likely to result in a different landscape of competitors by the end of the year.

The outsourcing advisor consolidation kicks off with TPI and Compass being paired up

To kick off 2011, the first acquisition involves outsourcing benchmarking consultancy Compass by TPI’s sole investor, Information Services Group (ISG), essentially creating an outsourcing consultancy of several hundred consultants with global breadth, armed with benchmarking capability.

With the increased focus on outsourcing advisory services from management consultants such as Deloitte, KPMG and PwC, the souped-up TPI/Compass creates a super-boutique that can compete effectively in the market for the complex enterprise engagements that require a lot of hourly-billable heavy-lifting.  There’s little doubt this merger helps bolster TPI’s credentials as a serious player, now the big boys fancy their piece of the action.

However, when we look at the current enterprise needs for outsourcing support, we see a dire need for enterprises to receive a mixture of consulting advice and data, served up in a less expensive, easier-to-digest format, than the $500-per-hour model. With deals across ITO and BPO getting smaller in scope, and enterprise buyers getting increasingly familiar and knowledgeable about outsourcing, we question whether this latest merger is really addressing the changing market, or whether its merely a continuation of consolidation in the intermediary space.

HfS Research has been alerting its readers and clients for months about the limitations of benchmarking data and the need for a practitioner’s interpretation.  From that perspective, the acquisition of Compass by the largest sourcing advisory consultancy makes sense, especially given TPI’s lack of a credible source of industry data. The combined capabilities of the two companies bring them closer to delivering real market intelligence to their customers. However, the economics will be tricky: each is a premium-priced participant in their space. There is a potential for conflicting philosophies too: Compass never succeeded at deal advice, so it could afford to advise clients not to do a deal, whereas TPI, like any advisor, effectively kills the most profitable part of its pipeline if it advises against a deal.  You may recall this datapoint from Compass in 2007, which the firm was only too happy to release to the market:

“65 percent of outsourcing contracts terminated before the actual date of termination over the past two years…Two thirds of outsourcing contracts worth more than £20m are ‘unravelling’ before the end of their contract terms.”  Compass, 2007 .

What this transaction will mean to industry constituencies

If you are an IT outsourcing buyer, one of your potential advisors just got more formidable, in the sense that they now own data they didn’t before. However, this combination of capabilities is not new: Alsbridge acquired ProBenchmark over two years ago and Everest went the in-house route building the Everest Research Institute, though its mission is more “research” than “data”. Buyers should also beware of the cost of benchmarking. Keeping the databases current and relevant costs money—it may be tempting for buyers to think that they are getting “free” benchmarking with an outsourcing advisory engagement, but sometime, somehow, somebody is going to have to pay for the benchmarks or the business isn’t viable.

If you are a BPO buyer, there’s nothing new for you here, unfortunately. The dearth of reliable industry data is not made any better by the mere combination of two companies. Perhaps this is something the enhanced TPI will seek to address. But there is only so much any company can do given the wide range of BPO solutions on the market today.

If you are an outsourcing provider, your nemesis at the negotiating table has a new weapon. Because Compass’ IT data is relevant and current, it may be used as additional leverage. The benchmarking clause, already a bane of your existence, becomes even more crucial in a TPI deal, because they can actively seek to re-engage every year through Compass’ benchmarking offering, so expect even tougher negotiations. The counter-arguments haven’t really changed, though, and a strategic judo-like move might be to push for greater transparency in the benchmarking  methodology, which remains quite obscure across all benchmarking firms today.

If you are a competitor to either one of these companies, you probably should not expect much change. Certainly TPI will bring a more complete and compelling offering to the table, but its competitors by and large have had similar capabilities. HfS does not expect this acquisition to swing more deals one way or the other, and there were probably very few deals in which the two companies went head to head. As TPI and other advisors add benchmarking and research capabilities, it does increase the pressure on the big-firm advisory units (KPMG, PwC, Deloitte, Pillsbury) to add these offerings in order to compete for new business. If you play in the benchmarking space, you can expect to see a push for Compass to benchmark TPI-advised deals, perhaps raising your barriers to entry at some accounts.

Overall HfS Research thinks this deal plugs part of the data gap for TPI and most of the consulting gap for Compass, and in that way is synergistic. However, we do not see major market movement or new offerings as a result. In many ways, this is two of the bigger players, in their respective slices of the industry, coming together to do what many of their smaller competitors have already done.

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6 Comments

  1. Posted January 8, 2011 at 10:34 pm | Permalink

    Will I can’t argue with the many points that you are making the real issue, that slants the advisory service sector is the lack of a tangible evaluation model that can be applied toward the buying decision. Data & information is one thing, sometime captive at a point in time. But aren’t we living in a real-time discipline that requires substantive dynamic data? Does a buyer really need a legion of advisors or are we assuming that size is the criteria for excellence and that credible impartial (definitive) guidance is the order of the day.

    A troubling concern is that in order to properly advise on solution providers the yardstick is not one crafted domestically but one that has been conditioned by the local realities produced in the local supply chain.

    In short, while some value (gap filling) has occurred, the real question is whether it’s provided more value or simply a bit more feel good impressions gain from the big complex.

  2. James Wheeler
    Posted January 9, 2011 at 8:11 am | Permalink

    I would have thought Compass would have been acquired by an analyst firm, such as Ovum or Gartner – they have a real gap where outsourcing benchmarks are concerned. Hackett has already shown it’s tough to sell “benchmarking” for outsourcing engagements on the bill/hour model.

    Seems like a good fit from a consulting perspective, but it doesn’t address how they can change the model to make it more “off the shelf” for clients – and more affordable. Seems like a scramble for a dwindling number of enterprise projects, as opposed an any real game-changer here.

    James Wheeler

  3. Alain Schaeffer
    Posted January 9, 2011 at 9:56 am | Permalink

    Kudos to TPI for expanding their capabilities with Compass. I am surprised the large management consultancies haven’t been acquiring firms such as this as they look to broaden their expertise here.

    As you correctly point out, “the major consulting firms have finally realized they need to cater for the demands of an increasing majority of their clients, which have chosen to go down the outsourcing route”, so you’d expect them to be on the look-out for specialist firms such as Compass,

    Alain Schaeffer

  4. Jack Black
    Posted January 10, 2011 at 2:23 pm | Permalink

    Conflict of interest warning…I bought shares in TPI (well, their parent group actually) 3 months ago! Read this comment in that light.

    For some reason nothing seems to do anything to TPI’s market valuation. Neither economic good news or bad news, rumours of KPMG buying Equaterra, nor acquisition of bolt-ons like Compass seem to have any impact at all on what investors see.

    In an increasingly competitive market, with low barriers of entry, one can see why the market is “cautious”. As an outsider a Market Cap of $68m seems low (valuing each fee earner, including the IP and brand, at approx $170k each), and would typically make them a takeover target. However, the parent company floated the company at $7.50 (well before the boom) and with the current share bouncing around $2.10 I can’t see them taking that kind of loss on the chin.

    This, in itself, is a self-weakening prophecy: what incentive is there for a senior manager or Exec to stay at TPI when their Long Term incentive package shows zero sign of paying out?!?

    I’m optimistic that the brand will pull through (thus I’m keeping my shares) but I can’t see them getting anywhere near $7.50. Maybe the age old TPI/Equaterra merger rumour would help…

  5. Anonymous
    Posted January 11, 2011 at 11:07 am | Permalink

    It has been the strategy of ISG (TPI’s “parent”) to get into the data-driven space all along. The ISG leadership are largely ex-ACNielsen and they place great value in the data side of the decision-making process. Further, while they’ve been looking for the right data-oriented acquisition (for 3+ years), they’ve restructured the consulting business of TPI for the changing market.

    I use “consulting” a bit liberally as most outsourcing advisors are better described as “process managers” rather than business consultants. That dichotomy – between trusted advisor on business strategy versus procurement/contracting process wonk – has been the challenge of every sourcing advisor. From TPI, to Equaterra, to Everest, to Alsbridge … they all aspire to “do more than deals” but the market really only values them for their deal-doing templates and skills.

    So, not unlike the current trends in the IT Services market (where the provider community is placing bets on either commodity services at scale or vertically-integrated stacks of industry-specific BPOs), I think we’re seeing the same in the advisory ranks.

    Everest, long ago, declared that they were a research firm. Sourcing advice is a step child to their data business.

    Gartner abandoned the deal advisory business, in order to focus on data and research.

    Alsbridge is a TPI-wannabe. So are W-group, Transition Partners, and a slew of newcomers.

    Equaterra, by all accounts, is giving up the ghost and handing the reins to KPMG. Not a bad move for KPMG as they clearly have the “business consulting” pedigree and scale.

    Deloitte appear left at the alter … the rumored deal for TPI having petered out. Might they go for Alsbridge now?

    But … is there a “data play” in the sourcing advisory space? A few years back, I would have argued “not really.” Gartner provides the essential cost benchmarking.

    But, along comes the Cloud, and the aforementioned move by many IT Services providers to commodity-like offerings. Data-oriented services are most relevant when the comparisons are generally accepted, and that is enabled by the like-for-like nature of today’s emerging computing/storage/networking ubiquity.

    That said, data is only as good as its source and we’ve seen that the virtuous cycle of deal-advising contributing to data collection is specious, at best. What will fuel the Compass data machine? Do they have a better mousetrap than Gartner? Certainly TPI can’t provide that flow.

    So … the Compass+TPI combination meant to drive growth of one or the other? Hard to tell.

    I think there’s a new void in the market around “pricing references for the Cloud” … capacity, platforms, and as-a-service functionality, but I don’t see this combination addressing it.

    Anon.

  6. Sourcing Adviseur
    Posted January 14, 2011 at 12:08 pm | Permalink

    Does it mean that Deloitte’s DD was inconclusive on the TPI acquisition? And TPI has to keep going on their own?

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