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Have we finally become an industry? Have we become the Digital Operations Industry?

October 05, 2017 | Phil Fersht

The worlds of software, business operations and services have always been chasms apart – different mindsets, vernaculars, conversations, ideas of what constitutes value – and vastly different cultures.  Software people never understood the operations folks and vice versa – each thought they were top of the corporate food chain.

However, the past couple of years have seen the coming together of these diverse groups of people to rethink completely how we run global operations in this robotically digital era (or whatever we want to call this curious period of time in which we exist). 

One thing is abundantly clear: the outsourcing phenomenon which has gripped the Global 2000 over the past decade is making way for a genuine industry in which we all play a part – an industry where we have no choice but to develop learning programs, sustainable business strategies and make real, actual investments in order to survive.  And what’s most fascinating are the new conversations that have rapidly emerged to bridge this divide between the technologists and the business operators. 

Suddenly, we’re talking about business logic, about datasets, about redesigning processes with genuine business outcomes in mind.  We’re talking about deep learning AI systems that store what has been learned in the past, take notes of how variables and results have changed under different scenarios and then make decisions based on that.

The narrative has radically changed and the focus is now firmly on bringing together all the components that can escort us to this promised land of Digital Operations. So let’s take a look at what has transpired to get us to this point, where we can actually claim to be part of this emerging industry….

“Outsourcing” never materialized as an “industry”

Having spent the best part of the last two decades trying to make some sort of sense out of "outsourcing" I have come to the simple conclusion:  "outsourcing" was never an industry - it was simply the practice of moving work around the world to save money.  It consisted of people selling outsourcing deals and the poor suckers who'd been lumbered with trying to manage them - and the deal brokers and lawyers who took money from both sides making it all happen.  It was never an industry, it was  greedy corporates slashing their wage bills, and those lovely folks who were just so keen to comply with their wishes to turn a profit. Outsourcing has always been an activity searching for a higher purpose than cost take-out. While service providers and advisors undoubtedly feel part of an outsourcing industry, the buyers do not - they are operations people doing their job deploying whatever techniques are at their disposal to improve efficiencies and operating costs. They would not class themselves as "outsourcing professionals". It's like selling gym equipment to gyms. The seller is in the "gym equipment business", the gym itself is in the "gym business", and the customer at the gym is looking after their fitness. The "industry" is ultimately the higher purpose of which all the entities are all constituents  - in this instance, it is the fitness industry - which could also encompass sportswear manufacturers, specialist outlets stores and so on.

How traditional outsourcing has left us in a right pickle

Outsourcing was like a one-time thing C-suite execs arranged on the golf-course to take 30-40% off the operations budget for a set of low-level processes – and enjoy the bulk of those savings upfront for a nice impact.  Many folks became heroes overnight for making these deals happen, and they were lauded and courted at conferences as those radical executives who possessed some secret talent ingredient to make this all possible. Yes, a mystique around outsourcing was created, advisors did an amazing job making a science out of the “art of the deal”, and the façade of a new profession and (possibly) a whole new industry was borne.

Sadly, there was never (really) a long-term plan to sustain those productivity impacts, beyond moving as much work offshore, without overly impacting business performance and finding even lower cost cities to take on the low-hanging fruit to eek out a little bit more cost off the bottom line. Eventually, that well runs dry if you don’t make fundamental improvements to the quality of your processes and the convergence of the data sets they support.

Yes, we had a lot of fun creating useless qualifications and meaningless SLAs, but the end results were always the same: clients figured out how they only got what they had paid for, and the fancy innovations they were fed on those lovely pitch decks were always subject to change orders (or never really existed).  The only real leverage came at rebid time, when the incumbent would usually make some new promises to get their house in order, if they felt there was actually a chance they could lose the business.  Otherwise, it was business as usual. 

The Global 2000 is littered with stale outsourcing deals that need radical transformation

However which way you paper over the cracks of short-termism, costs are like hedges – if you don’t look after them properly, eventually they grow back. As a result of all these fun and games, we are left with thousands of ropy outsourcing engagements littering the corporate world, where the clients are still paying for the same number of FTEs to deliver the same tired old obsolete processes, while their providers has no incentive to cannibalise their revenue streams, and the actual concept of moving these deals to other service providers is pretty desperate - all the smart ones have no interest buying up a legacy mess, while some desperate lower tiers ones may take on the work if they can shunt it to even cheaper, lower quality delivery resources.

But there is a way forward, and outsourcing has served a purpose

Believe it or not, there is a method to all this madness - companies managed to externalize work they didn't want to run themselves, they got a lot of cost off their books, and they opened up the opportunity to pull more levers in the future to find new thresholds of productivity.  Rarely will you ever find an enterprise which regretted outsourcing - they'll never want that work back. The big issue, now, is ensuring that work is in a state to be optimized further by improving the quality and logic of process flows, digitizing them and applying smart automation techniques, where it makes sense.  However, that can prove quite a challenge when the work has been distributed across third and fourth tier cities, and it actually requires some investment to transform those processes to consider meaningful automation and other delights that digitized processes can enjoy, such as Machine Learning and AI. 

In fact, in too many cases, outsourcing resulted in enterprises sweeping their real process issues under the carpet and choosing to ignore the real need for genuine transformation until that day of reckoning occurred.  And that day is now upon us, as CFOs are smoking the automation crackpipe and demanding that next 50% of cost to be ripped from the bottom-line in a 3 year timescale.  Outsourcing provided them with a band-aid to enjoy cost savings through labor arbitrage, but robots can only provide further band-aids if the outsourced work has high-intensity, high-throughput processes that can easily be programmed into the software.  If that work is distributed across too many locations, with service providers unwilling to make renewed investments to co-invest with those clients, we have an emerging issue facing many enterprises: their day of reckoning has been reached and they actually need to make some investments in their processes and underlying systems.

Welcome to an actual industry in which we can co-exist: Digital Operations. This is why we are now emerging as an industry – we are facing the reality that most enterprises need to make long-term investments in their digital underbelly, their process flows and their people to run them, in order to find sustainable value over the next decade.

For the first time, we are witnessing deep conversations happening across the operations spectrum: RPA, Machine Learning and AI software vendors and now talking with service providers about how to embed their offering into long-term service contracts to support sustainable productivity and incremental data value over time (our data already shows close to a third of the Global 2000 are already integrating automation into their service delivery):

Ambitious enterprise customers of outsourcing, shared services heads and other operations leaders are all feverishly learning how to understand the value of software tools and how to prepare their process flows for the benefits of digitization and automation.  Consultants worth their salt are rapidly training their people to develop automation roadmaps for their clients and prepare them for a longer term strategy of creating a truly effective digital underbelly.   Yes, we are still are suffering from a few cowboy consultants claiming their clients can slash 50% overnight through RPA, the our observations are quickly showing that people are learning fast and know they need to address many of their underlying processes and talent issues, if they are truly going to take the next step forward.

Bottom-line: The Industry is Digital Operations, and there are six levers to pull to find sustainable value

The conversation among operations executives has changed dramatically just over the past year.  As the excruciating hype around robots taking our jobs and these outlandish predictions from drama-loving analysts and academics, a sense of reality is finally setting in – roles are not changing overnight, we just need to get out of our comfort zones and learn new stuff.  We need to understand the pivotal role data plays in our professional lives and become smarter about how we manage it.  We need to understand where RPA adds value, where to start with Machine Learning and AI, how we can truly leverage globally distributed talent to support out operations affordably and smartly, we need to be observant about the creeping impact of blockchain and how we can truly take advantage of digital technologies to nurture new revenue streams and enhance customer, partner and employee engagement up and down our supply chains. It’s taken a full decade just to take advantage of the cloud, and we need another one before that really fulfils its potential.  It’s going to be even more complex to ingest the benefits of automation, AI and blockchain into our business operations – but now we have six genuine value levers to pull to tend the hedgerows of digital operations.

Posted in: Business Process Outsourcing (BPO)Design ThinkingDigital Transformation

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1 Comments

7 Comments

  1. Suvradeep Ghosh
    Posted Oct 07, 2017 09:37 PM | Permalink Reply

    Phil - third party providers always talked about making operations more efficient and productive . Since the inception of BPO, there was Lean and Six Sigma then in mid 2000's it was Analytics and now RPA is the buzz word. My point here is 3rd party providers always wanted to sell the idea of "efficient ops" and now it's called "digital ops"

    Suvradeep

  2. Phil Fersht
    Posted Oct 08, 2017 01:22 AM | Permalink Reply

    Hi Suvradeep - this is a fair comment. This real point I am trying to make here is we are seeing a much more diverse set of services, products and skills now blending together, which is much broader and more transformative than simple an outsourcing contracts. Whereas, in the past, we were really just talking about how to improve an outsourcing relationship, now the conversation has shifted to broader operational effectiveness to meet desired business outcomes, where outsourcing is just one of several levers to pull.

    This is also the "real" coming together of software and services cultures and minsets - something we haven't seen before. They are very different and diverse worlds that have been a bit like oil and water for a very, very long time....

    PF

  3. Hemanshu Ruparel
    Posted Oct 08, 2017 04:09 AM | Permalink Reply

    Phil,

    I like the articulation of the idea of Digital Operations and what comprises that. Having said that if outsourcing does not fit the idea of an industry then neither does Digital Operations. All the more considering “Digital Operations” is way too new and still evolving and everybody is trying to figure it out. Actually if one was to really try to fit both into a certain definition, then “Operating Model” is a more appropriate one.

    Thanks H

  4. Phil Fersht
    Posted Oct 08, 2017 09:10 AM | Permalink Reply

    @Hemanshu - I like the term "Operating Model" but to me this feels a bit more like the merging together of all the value levers to create that OneOffice dynamic. I use the term "Digital Operations" in this context, because this is the common thread across all the six value levers: Each lever is ultimately about creating the optimum digital scenario for the organization:

    RPA: moving manual work into a digital process loop, AI: having unsupervised digital processes running autonomously Blockchain: the ultimate way to digitize ledgers and majorly enhance business logic Analytics: it's all about converged datasets to enhance digital capability and rapid decision-making Global sourcing: creating seamless process flows across globally distributed centers to support digital capabilities and outcomes Digital Business Models: all about creating new revenue streams and driving real-time customer engagement via digital technologies and platforms

    Am I married to the digital operations term? Not really, but I think it is the best unifier today across these value levers. I would prefer to call in the OneOffice industry, but many companies are so far off that concept it doesn't make sense - at least for a couple more years,

    PF

  5. James
    Posted Oct 09, 2017 12:26 AM | Permalink Reply

    Phil - you totally nailed it right here: "Outsourcing has always been an activity searching for a hugher purpose than cost take out." Digital operations is a great way of describing that higher purpose.

    Great thinking and great article!

    James

  6. Shrikant Bhogaraju
    Posted Oct 14, 2017 06:03 PM | Permalink Reply

    Great Article Phil,

    I like your framework of Digital operations, simple but quiet powerful. There is key element though that I have personally seen providers and buyers struggling with and that is the integration of digital assets with legacy systems. Implementation of Digital assets without integration with ERP's pose a huge challenge and it is quite a nightmarish exercise to manage exceptions around it. I would say Integration with ERP's could be another aspect of Digital operations although it could fall under Digital business models as well.

    The other aspect is companies trying to rush to implement Digital on broken processes for the sake or digital revenue and this has been constantly leading to failures and additional pressure on operations on both sides.

    I guess we will continue to see developments in this space and hope we will all learn fast enough.

    regards

    Shrikant

  7. Manishi Mehta
    Posted Oct 15, 2017 01:14 PM | Permalink Reply

    Digital Transformation = The creation of automated digital data chains connecting the supply and demand sides of organizationwide processes (using cloud-saas-iot, mobile, legacy) and then the layering in of intelligence where appropriate (through the application of ML and data analytics techniques), thereby creating a "digital business operation".

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