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The traditional outsourcing model is officially out of value, but the future is bright for co-innovation partnerships

March 19, 2017 | Phil Fersht

Remember all those juicy reasons why companies jumped into outsourcing? Like driving out cost, standardizing processes, perhaps even finding a few nuggets of innovation along the way with better access to talent and technology? Well our new 2017 State of Operations and Outsourcing Study of 454 major enterprise buyers gives a pretty gloomy picture of the current value impact of today’s outsourcing engagements:

 

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What made us happy in the past no longer passes muster

If there was ever one home-banker benefit from outsourcing, it was always the ability to take 30%+ off the bottom line cost of running a process or set of processes.

The VPs and below are those who are managing the engagements – and not even a third of them view their engagements as being very effective at driving out significant cost or making their operations more flexible and scalable. Their bosses are slightly less cynical, but still the vast majority is underwhelmed.

"But how can they be unhappy, we saved them so much money?" I hear frustrated providers cry… 

Well, the answer is quite simply that those costs have been removed from the balance sheet – they no longer exist. Managing operations in a global environment is now the new normal – money that was saved was a onetime experience in the past. It’s like trading in your Hummer for a Prius… you don’t think to yourself, everytime you fill up with gas, “Wow, I’m saving $50 per tank”, but you might even think, “Hmmm… maybe I’ll get a fully electric car next and save even more on my running costs”.

We can go on to bemoan the disappointing lack of effectiveness from analytics, automation and cognitive from over four-fifths of outsourcing engagements, but we know clients are unlikely to have invested actual funds in these areas as part of most of these engagements today – they are getting what they have paid for in the past.

All is not lost as many operations leaders want their service providers to change with them

However, the next wave of engagements have to be set up in a very different way to bring back delights to these jaded customers, which is where the brighter news appears:

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What's encouraging here is that buyers, by and large, do not view their service providers as mere efficient cost take-out vehicles, which was how well over half viewed them a couple of years ago. While 43% of SVPs and above see service providers as competent partners who can deliver the goods, another 35% actually view them as real innovation partners who can work with them to achieve co-defined business outcomes.  This is a breakthrough for the services industry.

The Bottom-line: The door is wide open for ambitious providers willing to invest in developing their talent, but closing firmly shut for those perpetuating what worked in the past

There has never been a time in the history of services where we've arrived at such a pivotal turning point - what used to work for clients is now commodity, and those service providers wanting to avoid this drain-circling spiral into transactional insignificance must make serious investments in their internal capabilities to partner with their clients.  This means more people who can work in close proximity to their clients with real capabilities rolling out automation roadmaps, designing digital business models, working with clients to develop predictive data models and smart cognitive strategies.  Sadly, there isn't much of an available pool of eager college graduates ready to leap into these roles at low wage rates, so providers need to reinvent themselves radically as true learning establishments and universities for their emerging talent... ambitious people will want to invest their careers with firms who are prepared to invest in their talent.  The future isn't about buying packaged consulting, it's about partnering with services firms whose stakeholders want to co-invest in themselves and their clients with a long-term vision and definitive plan.  The model has changed forever... and we can only watch, learn and work with it as it unravels piece by piece.  

Posted in: Business Process Outsourcing (BPO)IT Outsourcing / IT Services2017 State of Industry Study

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1 Comments

4 Comments

  1. Alan Jones
    Posted Mar 20, 2017 01:19 AM | Permalink Reply

    Phil - very well articulated. I couldn't agree more that we're in a world of focusing on the "what next", as opposed to achievements made in the past. As you rightly point out, saving costs through a global labour model is really a one time experience, finding continual future value requires other areas of focus, such as better automation and better predictive data,

    Alan

  2. Phil Fersht
    Posted Mar 20, 2017 07:01 AM | Permalink Reply

    @Alan - driving out costs is always top of the agenda tree - it's the mechanism for doing so which changes. 20 years ago it was by centralzing people and processes under one roof that allowed for low cost management controls and more efficient process flows. Then it was about moving those processes to be run in much lower cost locations. Now it's about removing manual elements from the processes to have them better support a digital organization with real time data flows to drive business decisions and supply chain behaviours. Location is now a side conversation as we look at the digitization of processes, supply chains, customer engagement and business models. Our biggest issue how is how to measure the ROI of automation and AI initiatives and how to staff up in the right way to achieve this ROI. Setting broader-based outcomes are probably the better way to go than very specific ROI, but then the real issue becomes one of which metrics can business leaders deploy in the future to hold as targets over the heads of operations leaders...

    Oh these are interesting times =)

    PF

  3. Tiger tyagarajan
    Posted Mar 20, 2017 08:59 PM | Permalink Reply

    Phil , very well articulated , our own experience at Genpact shows that the most value is being created by us in these co-innovation journeys with key clients . This is the world of AI and RPA , it's the world of joint discovery and experimentation and it's the world where we use "design thinking " to understand the problem before jumping to a solution . The goals one aspires for are audacious .... 10 x improvement in outcomes !! You always catch the curve at the beginning and it's here !!

  4. Phil Fersht
    Posted Mar 21, 2017 03:24 AM | Permalink Reply

    @Tiger - being able to demonstrate major improvements in outcomes is a major step forward. The critical challenge in all of this is the change in metrics to demonstrate success - but if you can work with clients to envision and defining success first, then you have a chance of working towards that. Design Thinking (or elements of it) provides an integral way for people to work together to share a problem and a solution.

    In the context of outsourcing services, it starts with understanding the situation and the people involved, the business outcomes you want to impact, and then quickly generating ideas, prioritizing them, testing them, figuring out how to measure the impact, and iterate to determine a solution.

    I guess my question to you is how you get clients to open up more and engage with you in this way... it seems that about a third are open to it (which is pretty consistent with our research over the past couple of years, but increasing). RPA and AI are challenges and opportunities which seem to be opening doors to have more of these Design Thinking relatinships.

    PF

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