Get the HfS Newsletter
Search the Blog
Oil & Gas has gone through a crippling crisis in the last three years. What are service providers doing to help Oil & Gas recover? This question plays a central role in our 2016 Energy Operations Blueprint, HfS’ inaugural report on the services provided to the oil and gas industry. Infosys is an As-a-Service Winner’s Circle provider with strong roots in the oil and gas industry and a clear vision for the services needed to pull the industry out of the slump it has been in since the oil price collapsed in 2014. Since the 2016 Blueprint, the oil price has rebounded and is stabilizing between $50 and $55 per barrel, giving the industry some more breathing room and a momentum for change.
Time to have a conversation with Robin Goswami and John Ruddy. Robin heads Infosys’ Energy practice in the Americas. John in the president of Noah Consulting, Infosys’ 2015 acquisition that bolsters its capabilities in Oil & Gas.
Derk Erbé, Research Vice President, Supply Chain, Procurement, and Energy: Robin and John, thanks for sharing your vision for the Oil & Gas industry with our audience at Horses for Sources and candidly discussing the challenges of operating in a struggling industry. Infosys impressed us in the Energy Operations Blueprint, with its vision for the evolution of services that this industry needs to pull itself out of the downward spiral since 2014. Even though this is a very volatile environment with challenging economic circumstances, Infosys has continued to invest. How do you see the current situation in Oil & Gas?
Robin Goswami, Vice President and Head of Energy Practice Americas, Infosys: We are starting to see some recovery but there is a growing realization that this is not going to be a quick recovery, but more of a gradual one, like what we saw in the '80s downturn.
In 2014, everybody thought this would be a six-month downturn, by early 2015 it looked like a one-year downturn. Only in late 2015, was there a realization that this could last a lot longer and would be much harder to predict. The last ten years now seem more like a spike, with the market having settled to a new normal of $50 a barrel of oil.
Due to the downturn of the last couple of years, companies have stopped most capital projects, whether in IT or the field. They are trying to optimize what they have. At some point, they must start looking at different ways of doing things including radically different ways of leveraging technology. This is where offerings like Infosys Mana – the knowledge based artificial intelligence will play a significant role in driving automation and innovation. So far, this has happened in spurts and pockets. We've seen a couple of companies try to do it, but most of these have been the smaller to medium sized ones in a desperate situation. We have not seen the bigger companies do this just yet, but lately, are starting to see a changed mindset and some positive signs as a result.
We'll see a lot more interest in the things that we've been trying to talk about for the last year, year and a half or so. Automation, how can that help to significantly reduce operational expenditures? Analytics, how can you leverage analytics to get a lot more efficient and predictive analytics around equipment failure.
John Ruddy, President, Noah Consulting: The industry is learning how to be profitable in a $40 per barrel world, and that the days of anything more than $60 are over. They are learning that they need to be profitable at this price point, and that's driving much leaner, much more efficient operations and much more reliance on automation, machine learning, and analytics. We're starting to see modest growth because our clients recognize that this is their direction. They've stabilized following the workforce reduction, which was very significant. I believe they're now starting to become leaner, more agile organization that they need to be to survive in today's market.
Derk: Do you feel they are making the shift in mindset from cutting down costs in existing processes and with workforce reduction towards how to create value in a different way and create new value?
John: Now that the price is somewhat stabilized, we see the emergence of a focus on how they become a lean, responsive organization. We see a big focus on operational technologies around real-time data, and that the digital oil field wave that happened 10 -15 years ago is now re-emerging with IoT being the main catalysts, with even more sensors, and even more data and even more automation are happening.
We see a big push into more Cloud based As-a-Service models out there. In fact, the operators are forcing the software providers to move there more quickly than the software providers had anticipated. There is a very strong desire on the demand side for an As-a-Service ecosystem and the operators at one point were reluctant and are now pushing very hard for that type of a model to be offered by the vendors.
Derk: We're on the verge of a very interesting period in oil and gas. Would innovation go slower or faster if the oil price were slightly higher?
Robin: Innovation would go faster if the oil price were slightly higher. Our clients have been focusing on primary goals, ensuring that they stay just cash flow positive. They don't have the cushion to invest in innovation. If the oil price was slightly higher, I think that the money would be there. I also feel that if the price were to push 80 or 90 a barrel all of this would be forgotten, and we would be back to doing business the way we were before. But if the price consistently stays in the 50s, it will drive some efforts and activity to bring up the level of investment in innovation.
Derk: There is this fine line for innovation, investments and having the ability and willingness to innovate. Where do you think we’ll find the sweet spot?
John: I think $50 to $60 per barrel might be the sweet spot for a lot of innovation, a lot of demand to be addressed, especially with the smaller workforces that are out there and to a certain degree, a refreshment of the workforce regarding the average age coming down. I think you're going to find more millennials driving automation as well. The voice for innovation will be a little bit louder perhaps than it was pre-downturn. I do think that the $50 to $60 sweet spot would have allowed more innovation to be applied to the clients. There are modest pockets of it happening with prices in the $40 range. $50 to $60 will open the floodgates for people to be innovative. Anything more than that ($60) and people don't care about innovation anymore.
Derk: The industry has adapted to this ‘new normal’ of $60 per barrel as the peak price. What does that mean for the focus of your oil and gas practice and your competitors?
Robin: Oil and gas is a cyclical industry, and we're in a down cycle, but we've got to continue to invest. I strongly believe that when it does come back, the folks who have invested will reap the rewards of their investments. We continue to focus on oil and gas and are seeing some positive movement. The tough part is the fact that our work is split between OpEx and CapEx and the CapEx side of the work really came to a halt. We've got clients who are doing work on analytics, data lake projects, or initiatives to get more efficient, but it's small compared to the amount of work pre-downturn. You can count the number of ERP implementations currently happening in the industry on the one hand. That was completely different four years ago. At any given point in time, four or five projects were kicked off. That has not happened recently at all. In terms of competition, we used to have eight or nine competitors bid for the same projects. That has drastically changed, a lot of competition has re-focused or exited this space.
We have seen a lot of companies that in the past never looked at outsourcing who have now started to approach the market and say, "Let us explore working with outsourcing companies that can do IT a lot more efficiently than we can do it ourselves." It has opened some opportunities. But the opportunities are still few and small. We are doing well from a perspective of winning them, but the squeeze in capital expenditure has hurt all the service providers.
We acquired Noah Consulting in late 2015. We continue to invest in oil and gas. We see a modest growth of some CapEx-projects, though not in a big way. The significant change that happened over the last year was people trying to find more efficient ways of doing their expansion. Whether it is the large or the small players, everybody is trying to use this down phase to optimize how their operating expenditure is leveraged.
We are focusing on delivering value by proposing automation (Infosys Mana) and leveraging digital to optimize the operational costs and are starting to see success.
Derk: What is the key to creating more of an innovation-minded culture and boost As-a-Service adoption in this hundred-year industry that doesn’t like to change and frankly lacked the incentive to change most of the time?
John: The key is education. A lot of it is repetition. A lot of it is helping to stimulate some of that demand and get our industry comfortable with new ideas. I'll give an example. There is a lot of innovation happening in Infosys, for instance in our Palo Alto offices. We were out there a couple of months ago. The first thing you notice when you walk into the lobby is a science lab type experiment set up with plants. There are different basil plants. Each plant has sensors measuring the nutrients in the soil and the amount of light and the amount of water that they're getting. Each plant is generating a growth curve, and they're learning from each other. They're looking at each other's growth curves and adopting best practices and dropping bad practices, and are using our AI platform Mana.
That's being used in the other industries, but not yet adopted by oil and gas in a large manner, but it's applied to this little science experiment. That was an inspiration for us. We looked at that and take that same exact concept and took it out to an oilfield and have pumpers learn from each other. Have the pumpers look at the Geoscience strata for that field. They're from the same field, comparing that pad to the one a quarter mile away and the pumpers look at the data and learn from each other and look at economic conditions.
We're test driving those innovative concepts. It's an industry that avoids disruptions. We're working towards it, but it's an educational process. We show them the possibilities and help them get more and more comfortable with innovation. Some clients are first movers, prove the benefits and the rest of the industry will follow. The onus is on us to find that first mover, and that's what we're out there doing.
Derk: If you were given the keys to the oil and gas services kingdom and you can rule the services world for a week, what's the one thing that you would do to change the industry for the better?
Robin: That's a tough one. John, I'll let you go first.
John: Having the keys to the kingdom, one very broad-based public relations thing that I would do is I would promote natural gas as a clean fuel alternative. Why aren't there more compressed natural gas vehicles? Why aren't there more natural gas power plants? I know there is an uptake in those, but not to the degree it could be. There is a huge environmental and climate change concern, and our industry has the answer to that, and that's natural gas. As king, I'd be out there to get the public comfortable that natural gas as a clean fuel alternative that should be embraced and not pushed away.
Robin: I would like the companies to look at the industry and say "Look, we all know, oil and gas will be there in our lifetimes. We will come out of the downturn at some point. Lets leverage this downturn and look to use technology to change our model. This is an opportunity for us to reset our entire cost model, our entire way of operating with technology for the next decade.”
Right from the beginning of the downturn, we've had a view from the outside. We are very much part of the oil and gas industry, but we have the luxury of having the bulk of our business focus on IT services, so any impact from oil and gas is well cushioned by the rest of the Infosys business. That gives us the cushion to make acquisitions, invest and enables us to continue what we are doing. That is not an advantage, unfortunately, that most oil and gas companies have. They are unfortunately dealing with the day to day of trying to keep positive cash flows and are forced to react to weekly, monthly, quarterly pressures and none of them have been able to step back and say, "Let's assume this is a three year or a five-year downturn and let’s try to do things differently". Definitely not when it hit in 2014.
I saw this as an opportunity in late 2014, for companies to completely change their model, move to other service models, look at analytics, automation, Internet of Things, to radically work differently with technology, not only IT, technology overall. Most of them were unable to take that opportunity. The longer the downturn continues, the more you are, in a sense, in a hole where you are trying to just survive. The amount of cash that companies had in 2014 and 2015 was just not there in 2016. Those initiatives could have been taken on in 2014 and 2015. It has become way more difficult, a lot more challenging, now. And this is the one thing I would like us to do differently.
If I had the keys to the kingdom, that is what I would do. Try to move away from the quarterly, the monthly survival and look at leveraging technology to change the model.
Derk: The saying is “never waste a good crisis” and they're wasting a good crisis to change. Would you recommend having a different dialogue with the financial markets, because that's part of the issue for oil and gas companies? They want to do the same for the shareholders as they did when the oil price was $100. Does that need to change or they're addicted to doing the same as ever before?
Robin: I don't think we have a choice, Derk. I think we have reached a stage where $80 barrel of oil is not coming back shortly. The boom won’t be back for a while and we must reset expectations and look to do things differently and leverage technology a lot more.
We have ranked the major service providers in the Procurement As-a-Service market in our 2016 Blueprint grid, see Exhibit 1.
Exhibit 1: HfS Procurement As-a-Service 2016 Blueprint Grid
Looking further into the future, who will dominate the space in 2020? Three providers are set to remain at the helm for the foreseeable future: Accenture, IBM, and GEP.
IBM has a massive supply chain, which it smartly leverages in its procurement offerings. IBM is bullish on cognitive procurement. IBM BPS is morphing into Cognitive Business Solutions. Its own procurement provides a great playground for applying and road testing all the new cognitive procurement solutions, giving it an advantage over providers who don't manage procurement for their own organization or have less 'cognitive savvy' clients.
Towards 2020 IBM will be leading in the cognitive procurement services space. Underpinned by a strong BPaaS platform, most clients will look at IBM first when it comes to new cognitive technology-driven services with vastly improved data analytics capabilities. The biggest challenge for IBM to succeed with cognitive procurement is to bring clients along this journey. The vast majority of procurement organizations perceive itself as far removed from advanced innovative procurement capabilities – they are fixing the basics, getting procurement technology to work and pondering the opportunities RPA could bring the procurement function. The gap between cognitive procurement and the (perceived) level of maturity and change readiness of procurement is the hurdle IBM needs to take to make its cognitive ambitions reality or be at risk of running too far ahead of the game.
Accenture has a significant head start to all other providers, having invested and developed capabilities through acquisitions like Procurian and putting technology into every procurement engagement, leveraging one-to-many advantages for years. Now Accenture is betting on modularity to give them sustained advantage with current clients. And opening markets with medium-sized enterprises, for whom the business case of outsourcing procurement never added up.
Accenture seems to have a more 'wait and see' stance when it comes to cognitive procurement, investing in capabilities and use cases, but not willing to bet the farm just yet. Be confident they’ll pounce when the time is right and gobble up any procurement related cognitive and artificial intelligence capabilities they might lack. We expect via acquisition, maybe not of the magnitude of Procurian, but an inorganic technology growth strategy makes sense.
GEP plays in an increasingly contentious market, with its procurement BPO brethren gobbling up smaller niche firms, investing heavily in technology and partnerships. As the largest pure play procurement service provider and a pioneer in procurement technology, the onus is on GEP to continue its leading position and ‘best in class’ technology. We expect technology and services to converge more and GEP may emerge as an acquirer of cognitive capabilities as cognitive and AI in procurement are on the rise.
Which are the providers emerging to challenge the leaders?
The early 2017 activity is driven by Indian heritage providers WNS and Wipro. They show their ambitions and make steps to move up the strategic value chain and incorporate more procurement technology into their service delivery and offerings.
WNS, with the Denali brand as a strategic procurement services arm, will have moved into the As-a-Service Winner's Circle by 2020. The strong vision and upstream procurement capabilities from Denali put together with the execution prowess of WNS leads to cross-selling opportunities and investments in tech-enabled new services. The downstream procurement side of the business will have moved to procurement platforms of WNS' partners, with WNS managing the platforms.
Wipro announced an investment and strategic partnership with Tradeshift, which is emerging as a top 3 digital procurement platform and arguably the only real “platform” in the space. This will turn out to be a smart move for Wipro, addressing a technology gap in its procurement offerings and developing on top of the proven platform that is Tradeshift, leveraging an existing and expanding network and adding Wipro Holmes capabilities. On top of this, the partnership with Tradeshift has the potential to help Wipro move up the strategic value chain, with more upstream services and shifting technology-based services to new commercial models faster.
Genpact continues to move up the strategic value chain, and between now and 2020 will have sought to bolster the technology layer in its Procurement As-a-Service offerings, something it lacks compared to other As-a-Service Winner's Circle providers in 2016. Genpact’s conundrum is choosing between organic growth to add technology prowess to its BPO capabilities and acquisitions to get there faster. With a poor track record with acquisitions – Headstrong comes to mind - we will follow their ability to make the RAGE Frameworks acquisition work and how the newly obtained Artificial Intelligence capabilities are transferred to procurement solutions.
Infosys builds out the procurement practice on AI, analytics and platform technology. ProcureEdge and Mana will continue to converge and bring innovation in downstream and upstream procurement. The lack of enthusiasm for BPO from Infosys’ top brass is a big concern. To make a concerted move in the Procurement As-a-Service space, Infosys needs a bigger commitment to BPO in general and more focus on bringing all the pieces (Mana, ProcureEdge, category management and strategic sourcing talent and capabilities) together.
Proxima leapfrogged incumbent legacy procurement BPO providers with high value, on-demand As-a-Service services, leveraging technology and expertise. Building out technology led point solutions (beyond current offering in Commercial Management) and marketing pure subscription-based services, a fairly new area for Proxima, will be a major effort to cement a leadership position in Procurement As-a-Service.
All signs point to buyers looking for more modular services – fitting well with Proxima’s focused approach and offerings. However, if the market would shift back to demanding end-to-end procurement services, Proxima would have to quickly acquire more end-to-end capabilities.
Fading into Obscurity?
In an earlier version, I wrote: “Capgemini will have lost most of its appetite for the BPO side of procurement, while IBX remains a technology asset in the increasing tech-focused procurement services market”. Reality caught up, and Capgemini sold IBX to Tradeshift last week - essentially selling its biggest asset in procurement. Combined with the seeming lack of focus for BPO in Capgemini’s C-suite post iGate acquisition, we can conclude it exited the Procurement As-a-Service market in early 2017, well before 2020. IBX needed significant attention and investment from its parent to compete in the procurement platform market, and Capgemini decided it wouldn’t stomach this.
HPE is now the home of Xchanging, once a force to reckon with in procurement outsourcing. Xchanging dropped from the As-a-Service Winner's Circle in the 2016 Procurement As-a-Service Blueprint and are in danger of sliding down further in this space. Neither 'interim-owner' CSC nor HPE are big on procurement outsourcing, a market HP neglected in the last decade, although it had the biggest supply chain in the world to service and leverage.
The Bottom Line – From Cost Obsession to Value Creation
Looking into the glass bowl, we expect the procurement As-a-Service market to continue to build value for providers and service buyers as the value of digital solutions, analytics, procurement tech platforms and cognitive automation takes hold. Albeit with a smaller number of providers, which have a full stack approach ranging from upstream strategic capabilities to platform-based execution of transactional procurement – delivering business outcomes on a subscription model.
In 2020 the market will be bifurcated into the ‘Haves’ and ‘Have-nots’, the ‘Haves’ being those providers with technology, platform based delivery and upstream procurement capabilities, offering flexibility, agility, modularity and superior digital customer experience.
With affordable, modular services making procurement services accessible to midmarket enterprises, a new hunting ground for service providers is gradually emerging. Moreover, emerging digital clients, which may be less than $50m in revenues, but have high volume transaction needs, will need to access procurement services. It’s not going to be all about size and scale, but also profitability and transaction volume.
Providers will be venturing, more and more, into direct spend delivery models, supporting clients to drive value and efficiency with cognitive, AI capabilities. As enterprises like to keep control of sourcing of direct materials and services, this will be a collaborative, partnership approach as opposed to full-blown outsourcing.
We're witnessing the most far-reaching evolution in Procurement’s existence with ambitious procurement professionals desperate to elevate the profession to a much more strategic level aligned with the needs of the business or face irrelevance in the wake of emerging digital procurement solutions and rapid automation of transactional procurement processes. This means procurement leaders need to reposition procurement as a strategic ally that supports the business stakeholders it is designed to serve.
The evolution of Procurement As-a-Service solutions is making day-to-day procurement needs become increasingly easy at access in an affordable on-demand model. Our Procurement As-a-Service Blueprint shows the steps service providers have made in morphing their service offerings to combine people, technology, and processes into these on-demand, flexible services, with pay-as-you-go, As-a-Service pricing, and subscription based models.
Procurement As-a-Service delivery models are already having a significant impact on the market thus far; with the expectations of procurement services buyers rapidly changing. The average size and length of outsourcing engagements have plummeted from large ($50-100 million) and long (8-10 years) to small ($3-6 million) and short (1-3 years). This greatly impacts ambitious service providers’ revenue models once they have realized the ability to scale modular, agile services delivered via a utility model and increase their overall profitability. This is in addition to delivering high-value upstream procurement activities in strategic sourcing and category management to build out their end-to-end procurement capabilities.
Customer Demands and Technology Drivers will relentlessly continue to Disrupt Procurement
Let’s explores how the landscape will evolve and who we expect to rule the Procurement As-a-Service space.
The big survival challenge for procurement is threefold;
- Redefining Talent: The old-school procurement professional has become legacy and needs to be completely reoriented or retired. Focusing on (transactional) procurement with the sole purpose of saving as many costs as possible is a dead end - it's counter-productive in the new business world, especially when it’s increasingly easy to leverage digital procurement solutions to source purchases at the lowest prices and conduct most transactions digitally without the need for human interaction. The name of the survival game for procurement is relationship management; becoming the spider in the web that consists of internal business stakeholders, suppliers, service providers, partners. Next to relationship skills like empathy and business acumen, the new skills that need developing are critical thinking, creativity, and complex problem-solving. And being able to use technology to improve processes and ultimately experiences.
- Embracing Technology is Critical: Standardized procurement platforms combined with cognitive automation is the only way forward. Procurement tech platforms like Ariba, SMART by GEP, Coupa, Tradeshift have demanded a lot of attention the past few years and have emerged at the core of procurement. Processes are clustered, integrated and delivered by platforms. Processes that are not suitable to be on these platforms are the focus of robotic process automation. The next wave of technology affecting procurement and sourcing is cognitive and artificial intelligence.
- Delivering the customer experience must be embedded into all procurement activities. The pièce de resistance is creating better experiences for customers, being end-customers, buyers within the internal organization, suppliers, partners and your customers' customers. It's about creating buying experiences that meet the needs of more mature internal buyers, underpinned by seamless, straight through transactional processes. Effective procurement is all about enabling much more collaboration and innovation to take place with suppliers, providers, partners and customers and amongst them.
There is a staggering gap between C-level executives and middle managers when it comes to dealing with the change digital-enabled business models and new services paradigms force upon us. The journey to the As-a-Service Economy is met with enthusiasm by the C-Suite (see Exhibit 1). But their middle management has a different take: shying away from big transformational initiatives and focusing on more tactical interventions. Are you all living in the same world?
We should not blame middle management for the inertia we witness in many industries, including the business and IT services industry.
Anxiety and resistance are logical reactions to change. People don’t like change, as it threatens the status quo, what they know and worked hard for. This is the playground of the sunk cost fallacy. “We worked so hard to get to where we are: we can’t throw that away. We need to keep going to maintain what we have”. C-Suite respondents in our large surveys show they’re not willing to throw good money at keeping the status quo. That is the big point: change is inevitable. The way a company deals with change will increasingly be a deciding factor for survival and competitive advantage.
The Ball is in the C-Suite’s Court
Having a vision is one thing, enabling implementation and executing the vision is significantly different. Middle management's lukewarm reaction to change is understandable and frankly not surprising. There is a lot of uncertainty about new technologies such as autonomics, robotic process automation, artificial intelligence, and cognitive computing. There are wild predictions about robots destroying people’s jobs. People are wondering how they will be impacted; what do the changes mean, what will my job look like in this As-a-Service economy, do I have the skills to be successful?
Uncertainty is the enemy of the ability to embrace change.
The answer? Educate, show results and impact. Also, are people incentivized in the right way to lead sweeping change? Or are they incentivized to drive incremental improvement? Aligning incentives to the ultimate goal is paramount.
"Beam me up, Scotty"
Wouldn't we all want to just be there, at the destination? Counting the times, you would love to say, “Beam me up, Scotty” … But alas, if you need to go somewhere, you must endure the journey.
It is a journey to change, and all road warriors know making a journey is not always fun, it is pretty exhausting, and you often have to deal with unpleasant adversity.
Investing in disruptive technologies is one thing. Successfully implementing them and going through the change process as a business is another. C-Suite respondents are likely to bring in external help in the form of transformational leadership or change agents to redesign the operations. However, to be successful, they need to inspire, motivate, and properly measure and provide associated incentives and rewards for the team.
Often when a sports team is dysfunctional, the leadership tries to shake things up by firing the coach and bringing in new blood. On the one hand, a new perspective can change the dynamics of the team for the better. On the contrary, there is an entirely pragmatic reason to fire coaches; it is much easier and cheaper to fire one coach than to fire all players. This logic holds true for enterprises as well. An external stimulus is good, but getting rid of the middle management is impossible and threatens the going concern (aka the revenue generating machine). See here the dilemma for the large incumbent with legacy operations trying to fight off the nimble new entrants, who simply don’t have to drag all the baggage with them.
A Plan is as Good as its Implementation
Leadership is critical; don’t let there be any doubt about the destination, the Northern Star. But, involve the rest of the company to map out the journey. Let them be a part of the solution. Our research shows the gap between C-Suite and middle management is significantly smaller when asked about using creative problem solving (Design Thinking) to reach the As-a-Service end-state. 54% of C-Suite and 43% of middle management think Design Thinking will have a significant impact on the journey.
Unleash the Knowledge and Creativity of the Company
Years of operational excellence, Lean and Six Sigma have beaten all creativity out of operations and middle management. You get what you pay for. So if you pay for hundreds of green KPI’s, you get hundreds of micro-managed green KPI’s.
C-level leadership has to set creativity free, unleash the innovative power of the workforce. Granted, corporate Japan is not the prime example of free-spirited creativity, but they have a thorough understanding of the power of expert knowledge. Toyota's concept of the Creative Idea Suggestion System brought them a lot of good (and paradoxically they copied it from the American firms they tried to beat). For service providers, a big challenge will be to integrate the innovation labs and all the beauty created there into the legacy beast. Innovation labs can quickly become ivory towers. And no-one likes the people shouting from ivory towers.
Revamp Imagination by Creating a Culture Capable of Dealing with Constant Change
Our take on change? Use the old concepts of Total Participation and Employee Engagement and focus it on creative, lateral problem solving and Design Thinking (instead of operational excellence and Lean Six Sigma) in an era of increasing volatility, uncertainty and technology driven change. Bring in academics, analysts, practitioners, other ‘thinkers’, but most of all the company’s own brain trust.
We are not arguing everyone will be a good fit in the new era, or that the goal is to keep everybody on board and happy. But an inclusive strategy to alter the culture is ultimately the most promising trajectory for change.
Our subscribers can download our upcoming Blueprint Report on Design Thinking in a few days here in our ever-growing research library.
A smart business operation uses the right combination of talent and technology to drive desired business outcomes. Third party suppliers are crucial for that combination, and our new research shows an increasing focus on the relationships with suppliers to standardize contract management and governance, centralize management of strategic suppliers, recruit and engage talent that has relationship building and critical thinking skills, and better leverage self-service platforms and automation in procurement and supplier management.
The big emerging trends in SRM:
Based on our new research, including discussions at the HfS Summit, our annual Shared Services and Outsourcing survey with KPMG, and interviews with executives from financial services, healthcare, logistics, high tech and other industries, we’ve put together this picture of the “state of supplier and partner management” in the IT and business process services industry:
- Ambitious procurement / sourcing leaders are positioning themselves as advisors to plug capability gaps – partnering with the business units to define strategy; coordinating across business units, IT, and legal; defining standards for governance (reinforced through templates and automation); using training to ensure the more distributed relationship management is active and following a framework.
- Organizations are increasingly standardizing and centralizing business operations functions - often incorporating outsourcing in hybrid / global business services models. IT has been the first mover here, with business functions following – F&A, Procurement, and HR as well as industry specific support. We expect centralization and shared services to continue, with selective and targeted use of outsourcing (on and offshore) and RPA in a model many are calling “no-shore.”
- There is a similar move to centralize supplier/partner governance and contract management, often separate from the relationship management. Relationship management is more difficult to centralize, and typically happens when the suppliers are providing IT or BPO through a shared services unit. Once centralized, governance and contract management is increasingly automated; and relationship management gets more focus.
Exhibit 1: Top 3 Desired – and Hardest to Find – Capabilties for Business Operations
Source: HfS Research in Conjunction with KPMG, State of Business Operations 2017 N=454 Enterprise Buyers
- Supplier management talent is increasingly oriented toward relationship building, decision-making, and analytical skills. Subject matter knowledge of the function is a basic capability that’s needed; negotiation and contract management “can be taught.” Executives are also increasingly interested in candidates with technical skills (or interest) in determining the right mix of talent and technology for managing optimal business results.
- Procurement is setting the pace for evaluating and implementing robotic process automation and cloud-enabled platforms for more self-service. In our state of industry study, 57% of enterprises are in the process of evaluating/implementing RPA for procurement processes.
- Across the board, we have found a move to consolidate and prioritize/tier suppliers for better negotiation capability, more effective and compliant oversight, and a more collaborative and engaged approach to partnering versus managing “off the side of the desk.”
- It doesn’t matter what your operating model is if you don’t have the right talent. The right talent will make the relationship with the supplier effective for the business.
The bottom line: There are three critical components to effective supplier management that stand out in our research
- Alignment and tiering of suppliers with business objectives
- Standardized and coordinated supplier relationship management and contract management and governance
- The “right” talent to broker and manage relationships and results
In general, companies are on a journey to have a more strategic approach to supplier management and believe it will take a matter of years to get there because of the cultural shifts required. We explore these themes further in our recently published POV, “The Rise of Supplier Relationship Management,” available for download (free with site registration).
This is era of the emerging BPO provider, as IT services stagnate and clients demand greater personalization and attention from business services firms that have the scale, resources, hunger and technology enablement skills to take on increasing complexity and make sense out of the dataswamps plaguing so many of today's businesses.
One such stalwart of BPO, quietly going about its business over the years with steady growth and increasing reputation for solid delivery, is WNS (yes, the one that was spawned out of the British Airways captive back in the day). WNS has performed well over the years, growing business streams in knowledge process domains, finance and accounting, insurance, travel, mid-size banks, contact center and some other areas. It has oft-threatened to make a grander procurement BPO play, but mostly opted to partner with the likes of Denali when the need arised.
In my view, having solid procurement delivery capabilities goes hand in hand with F&A, so it's refreshing to see WNS snap up one of the best pureplay strategic sourcing providers left in the market, which should make the merged entity a Winner's Circle contender later this year when we rerun the Procurement-as-a-Service blueprint:
So let's hear from our Procurement and Supply Chain analyst, Derk Erbé, who's recently emerged from a major analysis of the procurement services market:
WNS + Denali - The Details
To start the New Year with a bang, WNS announced the $40 million acquisition of Denali Sourcing Services. We have covered both WNS and Denali in our December 2016 Procurement As-a-Service Blueprint. WNS is ranked as an Execution Powerhouse, while Denali is a High Performer in the Procurement As-a-Service market.
The acquisition of Denali Sourcing Services is a good move from WNS, and effectively bolsters
As we dived deep into procurement for the Procurement As-a-Service 2016 Blueprint, we had a lot of almost philosophical conversations about the future of procurement.
About the fun stuff, not the procurement grunt work like invoice processing, PO matching, accounts payable. No, about cognitive procurement, predictive analytics, procurement being completely automated and invisible.
Amara’s Law concluded about the future and our estimations thereof: We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.
Bill Gates famously paraphrased: "We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.”
So, here are our overestimations and underestimations for procurement in two and ten years’ time:
Overestimations … within two years:
* Service providers successfully scale the knowledge of their scarce category experts with brilliant cognitive solutions.
* P2P platforms completely automate away manual transactional procurement.
* Suppliers are completely digitized on what we used to call Supplier Networks or Business Networks and now know as collaboration platforms.
* Service providers have adopted on-demand As-a-Service to the extreme – they don’t talk about multi-year contracts or total contract value anymore - just about number of subscribers, active users, churn, annual and monthly recurring revenue (ARR / MRR) growth.
* Amazon takes over the B2B Marketplace (if in Asia - Alibaba). Amazon Business is the de facto marketplace in B2B.
* If you’re looking for the Procurement department, follow the signs: Brokers of Capability.
* Competition from outside outsourcing or procurement disrupts outsourcing of specific categories - like DHL in logistics.
* With Blockchain cemented into the core processes, we also pay in Bitcoin.
Underestimations, or what we’ll see (!) in 10 years:
* Algorithms will decide the preferred supplier du jour.
* Algorithms will determine what, how, where and when to buy, show you options and recommendations.
* No one touches an invoice or a purchase order. Blockchain and smart contracts take care of transactions.
* Some categories disappear (probably office supplies - as we go paperless, you can bring your own pen or pencil (BYOP).
* Connected assets (IoT) in value chains will tell algorithms what to buy and when.
* No need for approvals, the algorithm got it.
* Predictive analytics decide what you need – the system knows our needs better than we do.
* When I want to buy something algorithms, and analytics didn’t figure out already, I just tell Alexa to get it for me.
* Stuff will unexpectedly appear on your desk or doorstep.
* Fedex and UPS will help return stuff you, after all, didn’t need….by a drone or an Uber.
Bottom Line: The future is already here – it's just not evenly distributed yet
To end with the famous quote from William Gibson. All the forces impacting procurement and driving our overestimations and underestimations are here today. Some very nascent and aspirational – cognitive procurement, IoT, Blockchain, true predictive analytics. Others have been embraced by the market and broadly implemented into procurement and Procurement As-a-Service offerings – procurement platforms, supplier networks, intelligent automation. Ask yourself; will you be on the overestimated or the underestimated side of this transformation? Figure out what the future looks like for your procurement function and start preparing now or risk becoming obsolete.
We can obsess about losing our jobs to robots, our traditional industries being wiped out by digital transformation, our politicians losing the plot... but it'll all count for nothing if we abuse our valuable natural resources and pollute the air we breathe. So without further ado, let's hear the real deal about on what's going on in the energy sector these days - and how it impacts our world of operations and technology. And who better to talk to than HfS analyst Derk Erbé, who likes to take a long hard look at things...
So Derk...what do we need to know about the energy sector these days, with climate change, crazy oil prices etc? What are the key issues we need to care about?
First off, it really is a perfect storm at the moment. We’ve seen the world coming together to curb global warming in Paris, only a year ago. Rising social and political pressure in conjunction with technology advances and economic shifts are combining to create a positive atmosphere to address one of the biggest challenges of the coming decades.
We’ve also seen the sharp fall of oil prices from above $100 per barrel to $27 per barrel in February 2016, currently stabilizing around $45. The reaction from Oil & Gas companies to the crazy oil prices has been focused on survival for much of the last 18 months. Cost cutting was the primary reaction, resulting in the loss of 250,000 oil workers’ jobs. Two out of three oil rigs has been decommissioned and many capital projects postponed and canceled. This was not enough to save many oil and gas companies from bankruptcy. The initial hope of short-term
Procurement BPO has seen a more rapid move to “As-a-Service” — agile and on-demand — than other horizontal offerings. At the center of this movement is the maturity of procurement platforms and networks such as Ariba, Coupa, and GEP, the high degree of automation due to the transactional nature of large parts of the outsourced work, and increasingly strategic use of talent with subject matter expertise. These elements have led to more productive and “intelligent” operations. And at the same time…procurement outsourcing has become cheaper.
The increasingly common use of technology platforms, as well as maturity and confidence in service delivery, has driven down the contract value of procurement BPO deals. In the early days of procurement outsourcing labor-based deals often exceeded $100 million, this number dropped steadily to $50-60 million (five years ago) and currently sits between $25-30 million over five years. Growth dropped in five years to single digits from 12-15%.
Service providers have needed to develop and invest in a strong vision for procurement to drive change on themselves, or risk getting stuck in labor arbitrage. Bringing together an understanding of clients and technology plays a role of paramount importance in continuing to deliver on rising expectations.
A recent HfS Study on Intelligent Operations found the most important driver outsourcing is to drive up productivity. One in six respondents at the SVP level or higher, sees replacing their current (legacy) provider with one that is driven by As-a-Service (they’re more flexible, employ better use of technology and talent) as the way to get to this Intelligent Operations end-state. In this service engagement users in the enterprise get a better user experience—potentially resulting in more compliance, better stakeholder relationships, and stronger business alignment. We are currently exploring these stories and examples in our current research to be published later this month in the HfS Research Blueprint on Procurement Operations.
Procurement BPO has changed substantially over the last decade. Growing maturity of procurement technology and commodification of significant parts of the procurement value change altered the value proposition of procurement BPO: From very large lift and shift outsourcing deals, heavily dependent on labor arbitrage, to smaller (about a fifth the size of ‘legacy’ deals) engagements leveraging procurement platforms, advanced analytics and intelligent automation. This exemplary of the shift in services we call the “As-a-Service Economy”. As we interview service buyers and service providers for the 2016 Procurement As-a-Service Blueprint, we home in on five facets representing Procurement As-a-Service:
Continued use of automation and robotics in services. Transactional procurement has changed tremendously. Not only by better platforms (see #5) leading to fewer and fewer exceptions in processes, and processes and exceptions that can’t be handled on a platform can be done with Robotic Process Automation. As an illustration: in spend analytics automation is used to automatically aggregate, cleanse, validate, classify and report spend data. Further areas with lots of intelligent automation potential are invoice processing, purchase order management, contract management, auto-routing of exceptions to stakeholders, invoice matching procedures, payment status and tracking.
Traditionally, the 'higher value' activities in contract management, category management and strategic sourcing have been consultancy driven. Skills are scarce and hard to repeat and scale.
It's about knowledge and expertise and labor intensive processes. The market sees an accelerating talent issue, as category and sourcing experience is scarce and you can't buy experience. Really good sourcing or category experience is built over a minimum of 10 years and many experts are retiring at a higher rate than new talent can be brought on. So there is a need for knowledge management and an opportunity with cognitive and AI becoming more mature to solve a part of this puzzle.
With cognitive platforms maturing, we will see a change in the more strategic parts of procurement.
Strategic sourcing and category management expertise and capabilities. Sourcing and category management drive a lot of value for clients, for instance in tail spend. There are many small categories, small sourcing events and potentially poorly sourced products in enterprises, which don’t warrant building in house category expertise. Procurement As-a-Service providers are expanding internal category management and sourcing capabilities by attracting and retaining more sourcing talent, arming sourcing and category talent with more and better analytics, insights and market intelligence and nurturing an ecosystem of partners, growing in the role of brokers of capability.
End-to-end capabilities. Service providers increasingly bring in traditional sourcing consulting skills into Procurement As-a-Service delivery, opening new doors to buyers looking for consulting skills at lower (BPO) costs, enhancing capabilities across the value chain. Procurement As-a-Service covers the entire Source to pay (S2P) Value Chain. The growing role of technology is enabling closed loop processes, with advanced analytics creating continuous feedback loops. New value creation in transactional procurement hinges on one to many solutions and services, deriving data and bundling insights across multiple client engagements. The game in procurement business services is scale, being able to deploy limited skilled resources across multiple clients, not on the project basis but on concurrent, day to day, shared basis.
Providers’ ability to bring sustainable change to the client organization is key to Procurement As-a-Service. Traditional challenges are compliance with procurement policy, contributing to transforming the procurement function and stakeholder management as part of continuous change management, beyond the transition period.
Commercial models. HfS’ research shows that while As-a-Service delivery is gaining ground in many horizontal and vertical offerings, the adoption of As-a-Service commercial models is lagging behind. Gain-share was popular in the early days of procurement outsourcing, but its popularity seems to have faded since in many cases the wrong behavior was incentivized. Determining actual savings and which part of the savings should be contributed to whom proved a nightmare. We are having a good look at how service providers supporting the As-a-Service vision introduce new commercial constructs and if they are bringing those into existing client engagements.
Platforms. Procurement technology is now much more integrated in platforms, where much of the technology of the past was separate, heavily customized and bespoke (point) solutions. SaaS enabled technology platforms such as Ariba, Coupa, SMART by GEP, Tradeshift, Accenture’s Radix and Capgemini’s IBX have taken a significant role at the core of procurement. In a nutshell, platforms consolidate a set of suppliers, automate most processes and put (commoditized) processes at the fingertips of buyers.
Platforms are eating into the traditional procurement outsourcing model. The mega deals of the past slimmed down due to the degree of technology being sourced, reducing human labor dependency in procurement. Key ingredients of Procurement As-a-Service are usage of platforms, services with embedded platforms, services around platforms and integration of platforms in service delivery.
What To Watch
Winners in Procurement As-a-Service are those providers going beyond merely providing a replacement or extension of existing procurement, by providing a vision and strategy for the future of procurement.
This vision includes:
- Leveraging multi client insights, experience and buying power
- Models for Customer management
- Providing smart solutions for indirect (tail) spend
- Expanding expertise in strategic sourcing and category mgmt
- Putting Intelligent Automation at the core of (digital) procurement operating models
- Leveraging procurement platforms (proprietary and 3rd party) in engagements and the ability to provide technology management across clients in a one to many model
- Building closed loop processes
- Data and information foundations
- Using advanced analytics for (near) real time information and insights
- Skills in consulting, technology and relationship management
- End to end supply management
- Creating communities for clients
The 2016 HfS Procurement As-a-Service Blueprint will investigate the progression service providers have made on the As-a-Service Journey, their vision for the future of procurement and their ability to bring this vision into the real world of procurement.