What’s happening to sourcing advice?

Looking into the sourcing advisorsI have never (I repeat never) witnessed such an intense level of interest in global sourcing than the current environment.   I simply am struggling to find the time to do anything but take calls from companies in deperate need of working out their sourcing options.  In fact, if anyone wants to send me compeling guest posts, be my guest, as this thing is creeping into my weekends far too much these days ;)   However, I have been alarmed with the recent retrenchments that several of the leading sourcing advisors are being forced to make.  Their problem is simply the cost model – if large engagements close out with nothing immediate to re-staff the advisors, they simply cannot afford to keep them on the bench.  What worries me is how buyers are getting their advice and direction. 

Bottom-line, buyers are being forced to avoid spending on consultants unless deemed absolutely essential, and investing a few hundred grand on getting the support, methodology, data, ideas, knowledge and experience they need, seems to be beyond many firms at the moment.  So what are they doing?  The answer is scratching around for snippets of wisdom, being courted by service providers offering "free" evaluations, turning up at industry events hoping for free info and joining LinkedIn groups hoping for a silver bullet solution for helping them through the sourcing maze.

So what's the answer?  

Advisors need to be onsite with their clients at least two days a week.  The "do it yourself" sourcing model doesn't work, unless the buyer is extremely exprienced with the outsourcing process, or has hired a former advisor to manage an internal program.  As an analyst (and former advisor), I can tell buyers what they need to do, but I don't have the time to hold their hand and execute their sourcing agenda for them.  They need consultants who can come in and do it for them.  Moreover, it works much better to have an external party run a sourcing evaluation, than an inhouse staff member, due to the sensitivity of the situation.  So the cost model needs to change, and it probably will, with more unemployed advisors looking for work (and there are some really good ones coming onto the job market at the moment). 

I can see most of the sourcing advisors moving to "billable-only" compensation models for their consultants (some already are), and away from having them on full-time salaries, which they simply cannot afford when they are not being utilized.  In addition, the rates need to change to a retainer model, and away from a billable-hour model, which simply gets too expensive for clients.  Yes, the FORTUNE 500 can still shell-out for Big 4 consultants, but outside of that I see the need for a more cost-friendly advisor model that leverages the advisor talent in the market and doesn't cost the earth for buyers with severe spending restraints.

I know many advisors frequent here regularly, so please chime in with your views…

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19 Comments

  1. Posted February 15, 2009 at 10:58 am | Permalink

    Phil,

    I understand that the present model has proved its utility in terms of kick-starting an initial hand-holding of the clients in their outsourcing/offshoring endeavors. But on account of all the factors mentioned by you and further interest in offshoring of high end services like product R&D and engineering services, this model might not prove helpful on various accounts. Also, since this industry is already approaching maturity, so perhaps the clients do not see good value in paying through their nose for these consultants.

    Hence, this burden (or in more positive terms “onus”) is going to come onto the service providers where they need to have an inhouse team of specialists who are non-billable to the client and they spend time at the client location, gather important data, do the necessary analysis and create an outsourcing roadmap for the client, advise the client management, and get their buying in.

    We have already done one similar exercise for one of our new clients who had no previous experience of offshoring. This proved to be a win-win situation for both sides. For the client, he was not forced to spend big money on offshoring consultants and since we wanted to win this business and grow it, our recommendations are directed towards creating best value proposition for the client. However, this model is going to be partial towards the established service providers.

    Vibhav Jindal

  2. Posted February 15, 2009 at 11:07 am | Permalink

    Hi Vibhav,

    Thanks for your views, and I agree 100% that the service providers need to work hard with their clients to help they transition into a global sourcing model. Plus, the more they can demonstrate their expertise, transition methodology, culture and working style with the client pre-contract is invaluable.

    However, there needs to be an unbiased intermediary who can help advise the client on what is the optimum sourcing model, how the client should go about governing a service provider (or multitude of service providers), and which service providers have the operational excellence, cultural style and financial stability to be the right partner for them.

    I do agree that post-contract, the service provider can make a HUGE difference by devoting more time to helping their client’s governance model, but pre-contract the third-party presence is critical in most cases.

    PF

  3. Posted February 15, 2009 at 1:19 pm | Permalink

    Phil,

    We have worked on a fixed-fee outcome-based model where most of activities are done from offshore.

    Onsite involvement is more applicable during the readiness, data gathering, scope formulation phase and final negotiation phases. Key stakeholders are involved throughout the process with remote-meeting tools and shared knowledge repositories.

    This models works great with both mature outsourcing organizations and ones that are outsourcing for the first time. We can ensure that enough training & coaching is provided on overall outsourcing process to the steering committee and there is frequent executive level involvement from both sides. Also onsite workshops at critical phases act as stop gates for the process.

    It may even happen, in the future, that the advisor is paid by the % of savings delivered by the new contract from their existing contract value. Hence, the advisors would not seem to be adding to the outsourcing cost.

    Ratish Pandya

  4. Posted February 15, 2009 at 2:47 pm | Permalink

    Phil, my experience is in the HR Outsourcing market, with client side advisory (both big 4 and niche) & HRO solutions, transition and delivery on the provider side.

    I agree with your comments about leading sourcing advisors not able to provide the value sourcing advice that buyers need right now because of their own internal cost model. This model often puts the advisors in a conflicting position – they need to provide the best outcome for clients but also need to sell on their consultants. The challenge for buyers (and advisors) is to be creative about ‘who does what’ to deliver most value. For example, you don’t want to turn the RfP (request for proposal) production into an industry it doesn’t need to be (just ask the providers about this). When it comes to the preparation of RfP appendices, the buyer can do much of this themselves with good templates and some guidance (in Due Diligence & Transition providers often convert these to their own internal templates anyway).
    The real value in independent sourcing advisory is confirmation of buyers strategy and plans and is needed in complex transactions. It also ensures the process is set-up correctly and helps to short-list providers. As you noted there is high demand at the moment and potential buyers need to position themselves credibly with the providers. An independent advisor is recommended and looking outside the big advisory groups definitely has its advantages.

    For those interested in HR Outsourcing, you might find this article interesting :- http://www.glassbeadconsulting.com/top-5-benefits-of-hr-outsourcing/

    Andrew Spence
    Glass Bead Consulting

  5. Posted February 16, 2009 at 7:27 am | Permalink

    Phil,

    These are unusual and turbulent times and what “one should do” is no longer good enough. Buyers are looking for more and more creative ideas to save costs and stretch the outsourcing/offshoring models to increase productivity. Even though it may be ideal to call in the “Experts” to advise on developing the right sourcing model for a buyer, it is being considered as wasteful expenditure – at least for now. They may decide to defer such engagements or use existing internal resources to develop such models.

    In such market the only way for the providers (advice as well as services) is to earn the trust of the buyer and be able to justify the hundreds of thousands of dollars they charge the buyer on developing an outsourcing or offshoring strategy/model. In most cases the buyer would go with an existing trusted-partner – who may or may not be “the expert” in a given area. The philosophy behind such behavior being – “I don’t care if you know something. What I want to know is that you care”.

  6. Charles
    Posted February 16, 2009 at 8:21 am | Permalink

    Great article, and brings up some interesting discussion points regarding where this market is going. I believe brand is becoming much more important in this recessionary environment.

    Most companies have never heard of many of these boutique consultancies. They want brands they have heard of and trust – and these turbulent times are increasing the sensitivity levels of clients making some very tough decisions. I predict the traditional consultants will become more influential in the sourcing advisory market this year for the following reasons:

    1) They have the existing trusted client relationhships;
    2) Their clients are now demanding help in sourcing;
    3) They have developed sourcing advisory capabilities (albeit in small groups in most the firms, but they have been hiring sourcing experts from the boutiques over the last year). Sourcing is now becoming a mainstream part of corporate strategy and they are paying more attention to supporting their clients’ supporting needs;
    4) The current recession is driving firms to make life-or-death decisions and they want to use consultants with heritage brands they feel they can rely on, as opposed to unknowns which are low-cost and largely transactional in nature.

    Charles

  7. Posted February 16, 2009 at 10:10 am | Permalink

    Phil

    You are right about these being challenging times for everybody. Like normally happens in these cases, there is some ‘blurring’ of roles & responsibilities and consolidation across players. Some patterns that I see emerging are
    1. Advisors are finding ways to reduce the bid cycle time as well as costs by
    a. Collecting more and more provider data – beefing up their databases and then offering ‘fixed-cost’ models to customers by leveraging this data.
    b. ‘Empanelling’ a smaller set of vendors or even sole-sourcing.
    c. Reducing the pre-RFx data they collected to benchmark customer’s current operations.
    d. Willing to move beyond their questionnaire templates to find an amicable win-win solution

    2. Advisors are expanding their offerings to beyond the RFx cycle and increasingly participating in ongoing governance.

    3. Advisors are keen to find alternate sources of revenue including providing research / analyst services and targeting the ‘sell’ side.

    4. Customers are exploring the possibility of expanding relations with their existing providers. Inviting them to ‘due diligences’ just like you suggest. In some cases customers are also willing to let the providers do some ‘pilot’ outsourcing.

    5. Customer’s Captives where they exist are increasingly willing to act as their strategic procurement organization – sometimes eliminating the need for advisors.

    6. Providers are forming consortiums – a management or technology consultant partnering with a IT/ITES service provider to deliver ‘business’ results to the customer and in the process edging out the advisors.

    7. Providers are trying to build up on skills in the way they respond to the advisors so as to get more face time with the customers.

    From a customer perspective, its indeed important to rope in an expert – especially if they have not outsourced before. However, in the current market condition it might just be possible to hire an individual rather than consult a firm.

    From an advisor perspective, its equally important that they build a long term partnership with the customer rather than treat each outsourcing engagement as a one-off assignment.

    As to the providers – I think this is a great time for them to build their relations with the advisors.

  8. Posted February 16, 2009 at 12:21 pm | Permalink

    Phil, Great insight. Here’s some added validation that buyers of outsourcing are seeking less expensive options to data research and short cuts to consultant/advisor engagements where possible:

    The average volume of buyers/prospective buyers with valid email contacts that are accessing the free “Black Book of Outsourcing” client experience rankings of competitive Vendors is up 200% since last November…now nearly 800 VISITORS PER DAY.

    85% of Black Book site visitors surveyed state they are NOT using advisors/consultants currently to evaluate vendors in their respective stages of selection. 71% are Fortune 2000 or Inc 500. 92% access 3 or more vendor category rankings in various domains/ functions/ verticals. 83% state they are in the mode to purchase outsourced services within 120 days.

    Also, Black Book’s advisors’ rankings are accessed an average sixty-four times a day this quarter with request for comparative references on firms, by new site visitors, which is double the pace compared to Q3 2008. (FYI, we do not maintain an advisory practice so all requests are directed to the current client experience survey results without prejudice).

    Where Black Book once served to supplement advice and/or function as a starting point, the economy, in large part, is changing its resource value.

    Read into it what you will.

  9. Posted February 16, 2009 at 12:49 pm | Permalink

    Shyam -

    Excellent input – you have certainly nailed what is happening with advisors streamlining their models to deliver what clients need in a leaner, smarter, and less-expensive fashion. I suspect they will need to go even “leaner” in this environment to help clients through to a contractual negotiation i.e. $100K evaluations as opposed to $300K. Stiff competition, less client funds and increasingly desperate times call for more radical price reductions.

    I anticipate some consolidation this year – it’s all about having the data and expertise ready, and the only way to get that is to bring together the IP and talent across advisor shops.

    I recall the early days of ERP negtiations where consultants charged a fortune for delivering a business case and negotiating a deal; now you can get a consultant to run this for much lower price-points. The more data that becomes available, the more mature suppliers become with their delivery models, the easier it is to find the benchmarks and industry insight needed to get to a contract. However, the whole post-contractual governance area is a different issue entirely (and where advisors should be looking for more ongoing, high-value work down the line with their clients).

    I’ll be repeating my advisor study this year, so will be intetresting to monitor the pace at which this market is commodotizing and whether buyers are using advisors post-transaction.

    PF

  10. Posted February 17, 2009 at 5:22 am | Permalink

    Phil
    For clients to further reduce consultancy costs, do you think that clients will move away from multi-vendor outsourcing and towards a one stop shop….or do you think a client putting their eggs in one basket could pose a counterparty risk (Satyam)?

  11. Posted February 17, 2009 at 11:12 am | Permalink

    Hi Steve,

    Good question – I don’t see a correlation between clients reducing their spend on sourcing advisors and multi-sourcing, but I do see a move towards less multi-sourcing in the mid-market and a more mature multi-sourcing approach developing among the larger enterprises.

    Mid-market: going with a single vendor for ITO is clearly helping with the cost and quality of provider. Creates challenges with infrastructure management, but maturing RIM solutions from the offshore vendors is helping. On the BPO side, it’s tough to multi-source in general and only really view a single-provider model for mid tier (a lot of payroll/transactional accounting/KPO work).

    Enterprise-market: sill a lot of multi-sourcing in ITO, but a clear trend towards a separate vendor for app testing, one for development/maintenance and one for infrastructire, with one occasionally bolted on for specialist app development work. For BPO, see a lot of FAO/PO going with one provider, and less so with HRO/FAO. Ben admin outsourcing is clearly breaking off into a separate service.

    Hope this helps,

    Phil

  12. Posted February 17, 2009 at 5:15 pm | Permalink

    After many years in leadership positions for Big 4 and smaller consultancies, I decided to strike out on my own about a year ago. My area of expertise is Supply Chain, with emphasis on China sourcing and subassembly manufacturing. The market for my services is flourishing. I am busy with multiple projects.

    In particular, mid-market companies that cannot afford Big 4 prices are looking to boutique firms like mine, for assistance. What they get from us is more senior-level experience at a better price. I am teaching and coaching my clients…not just delivering “credenza-ware” from an overpriced consulting engagement.

    Many of my clients (mostly in Silicon Valley) view these economic times as an opportunity to change the way they do business. Mid-market companies have been talking about China sourcing or outsourcing for some time…and now the opportunity has presented itself. There is a whole new wave of interest.

  13. Amit Kapoor
    Posted February 18, 2009 at 10:19 am | Permalink

    Hi Phil,

    While the sourcing advisory field is something that attracts me personally, I also sense that there are some systemic problems in the business model. One of the prime reasons I think sourcing advisory exists is the asymmetry of information between buyers & sellers. It is but natural that with time, this asymmetry of information will recede, eroding the value proposition of sourcing advisory. There are other problems as well. When a company decides to outsource, it has to re-skill or retrench some of the existing IT staff. Its a no-brainer that some these people will be given outsourcing management roles (something that overlaps with the sourcing advisory forte). Secondly, once a buyer has entrusted services with a particular supplier and enjoys a good relationship, it could get a lot of insights into outsourcing even from them. Such information is more likely to be biased with a sales spin around it, but intelligent questioning should allow the buyer to uncover honest answers.

    I think the current business model of quite a few sourcing advisors revolves around managing the supplier selection & transitioning process. Since all the documents and knowledge of the process is understood by the buyer the first time around, there will be low tendency to engage with outsourcing advisors on an ongoing basis. There needs to be more proprietary processes and tools that only the advisors can employ. A few companies including Alsbridge have done that and have specific tools and databases. Secondly, an increased emphasis needs to be given to determination of what can be outsourced and what not. Outsourcing advisors must have business modelling capabilities (operational research) to scientifically quantify the benefits of outsourcing a particular process and present the outcomes of different scenarios. They must spend more time analysing and understanding business processes than evaluating suppliers. Outsourcing suppliers by and large lack this business process re-engineering capability.

    Regards,
    Amit

  14. Posted February 18, 2009 at 11:52 am | Permalink

    While I agree with many of the comments expressed on this thread, I can’t shake the feeling we are overthinking this (as befits a group of consultants, I suppose).

    It’s fairly simple: The value proposition for advisory services must exist. We ask clients to part with a lot of dollars so their return on that investment should be clearly visible, tangible, transparent, neasurable, etc….

    If we see ourselves as brokers, we are doomed to the fate of every other intermediary out there: to be “technologized” out of existence. We MUST bring to our clients table experience and tools that allow them to singificantly increase their busines performance (notice I did not say sourcing performance) through global sourcing.

    I think all good sourcing advisors already think this way, but some tend to forget in the heat of the deal.

  15. Posted February 20, 2009 at 7:37 am | Permalink

    Phil

    This is turning out be an advertising board now!

    I think it is difficult for many organisations to take a medium or long-term view on benefits of advisory services, when the immediate pressures are so huge. When many financial institutions and retailers and others are having to categorise ‘discretionary’ and ‘mandatory’, advisory services end up in the first category and are aversely impacted.

    While some comments refer to such roles being done by someone within the organisation – but a look at redundancies in many organisations indicates that internal sourcing functions have been one of the worst hit. So the question being asked is ‘Is it essential to have a dedicated person/team either internal or external doing ‘sourcing advisory’? The answer is provided by redundancies, both in internal sourcing teams as well as sourcing advisors.

  16. Posted February 21, 2009 at 12:32 pm | Permalink

    Hi Siddhartha -

    Just doing my bit to stimulate the economy :)

    We will see some consultants working for very low rates, as they become more desperate for work. Some will work full time with a client for $50/hour than go hungry if that goes straight into their pocket. It could get that tough out there. Am already seeing worrying signs – what choice do some folks have, who have the experience, but no income?

    The way these services are delivered has to change, or we’ll see several boutiques disappear in the coming months (or just become groups of unemployed consultants operating under a banner).

    PF

  17. Posted March 8, 2009 at 7:03 pm | Permalink

    It seems to me that there are several opportunities but what it boils down to is investing funds where it makes the most sense. Why spend money in an area where you have mastered the discipline? On the other hand, if you are walking through a mine field without a clue where to step those few dollar that you spend can easily be funded by the monies you save. One reason why we migrated from buyer to supply side was to help improve (lower risk) the supply chain at the source. Otherwise, no matter how much energy you expend to resolve your buying practices will be at a loss.

    JD (www.Int-IOM.org)

  18. Dave
    Posted May 16, 2009 at 4:43 pm | Permalink

    Guilty as charged…

  19. Michael Steer
    Posted May 19, 2009 at 8:07 am | Permalink

    The business world is tough.
    If you cannot make it pay then just dont play.
    My perspective is that for too long too many so called sourcing advisor boutiques have played on the fears of the clients, have elevated their own self-importance, have used individuals with little real life experience of doing what they are advising on and have operated as no more than deal brokers adding little real value to the process whilst being far too intimate with the providers.
    They were first to see and exploit an opportunity and good for them.
    The world is changing and those that survive will be those that adapt.
    If I was a client I would want a source of unbiaised advice from an individual who has intimate knowledge of the providers based on a series of regular interactions supported by personal experience of selling, transitioning and running operations but who retains complete independence and does not operate in a cosy world of you scratch my back and I will scratch yours.
    If anything the advice should be getting more expensive as the market skills up.

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