Outsourcing will shine or fail as we combat this global assault on our stability

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The assault on everything we once knew as stable is now in full throttle, choking the very life out of businesses whose leaders are struggling to find immediate answers to many emerging problems.  There has never been a time when third-party help has been so needed to help businesses drowning in spiraling inflation, wages and energy costs, crippled by attrition, tormented by cyber criminals and new compliance regulations, and under massive pressure to drive down operating costs.  Net-net, enterprises are desperately in need of access to skills and capabilities just to keep their business operations viable as they fight this global assault on their survival.

Outsourcing is going through its most significant pivot-point to help enterprises with this plethora of crises

The whole focus on pricing and scoping outsourcing engagements is being completely rethought, as are the strategies of the leading service providers to support them. The IT and BPO services industry is reaching its most defining moment since Jack Welch doubled down on India in the 1990s.

The challenge facing outsourcers is two-fold:

  1. The Great Resignation is over… keeping hold of key client-facing and delivery staff is now under extreme client scrutiny.  Every organization has suffered from attrition since the post-Covid economic boom, with employees jumping jobs for large pay hikes or pursuing their “dreams” in start-ups, where most got hired from the comfort of their living rooms.  Most providers got a free “attrition pass” for a little while, but the Great Resignation is now behind us (we will reveal data on this very soon).  If you can’t keep hold of your talent now, you’re in real trouble as a services firm.  Enterprise customers are walking away from providers whose delivery quality is falling apart from staff turnover.
  2. Smaller deals and price competition are forcing innovative engagement models.  Enterprise clients are demanding engagements at similar pricing levels from pre-inflation days.  The sheer number of competitive service providers is piling pressure on them to stay price competitive to win engagements while maintaining their profit margins.  In addition, most enterprise customers are demanding smaller-sized engagements to deal with focused areas in immediate need of support, such as cyber, app modernization, cloud migration, customer and sales support, data management, etc.  While smaller deals make it even harder for providers to benefit from scaling people on the engagement, it also opens the door for performance-level pricing that involves more automation, SaaS delivery, and better data integration.  Hence, providers that have a strong capability to deliver services with less need for people-effort are in a position to offer creative pricing that rewards performance, not merely effort (you must read our earlier piece on this).  The key is to convince enterprise customers to de-link pricing from simply provision of effort and align it with the delivery of services, provision of data, and (where appropriate) provision of innovation that creates new value for the client over and above the existing baseline of services.

So what must outsourcers do to thrive (not fade away) in today’s market?

Invest in technology but sell services.  Many services firms have been talking about Business Process as a Service (BPaaS) for years, while others have made software investments and attempted to resell licenses to customers and bundle their services on top.  The stark reality is that enterprise customers do not want to buy technology products from services firms – and services firms are not good at selling technology products either (requires a completely different channel and capability set).

The answer actually lies in services firms building technology-enabled service delivery themselves but only exposing and charging their customer for the services they consume or data/outcomes they need.  For example, if a services firm wants to provide customer support services to smaller-scale enterprises, it could build its own CX platform that utilizes digital assistants, automates workflows, runs smart analytics etc., which all contribute to the enterprise client receiving efficient, low-cost services and the data they need to make decisions.  If the provider has to partner with an expensive CRM platform, it is stuck with only making revenues from providing the people-effort, and has little incentive to automate to drive down costs and improve workflows.  Hence the service provider can differentiate themselves by selling cost-effective services and providing the data its clients need.  Why should their clients care about the people-effort being provided if they get exactly what they want at a price they are happy to pay?  This is why we have been defining the emerging market for Business Data Services as the new generation of BPM, where enterprises pay for outcomes and data.

Control attrition, which is critical to stay in the game.  If service providers can’t keep their workers and have them deliver more value to their clients, they will end up in a zero-sum race to the bottom, and many are already losing business because their clients are not tolerating the attrition and the impact on delivery quality. Net-net, we are in a war to retain people to keep our businesses functioning, and this is likely to be the case for several years to come as people reject employers who fail to develop them, pay them well, and offer them career expansion.  This is especially the case for staff working in operational roles, whether it’s part of a shared services organization or a professional services firm.  Smart service providers are getting ahead of this with increased investments in their talent development efforts, wage increases across the board, and announcements of plans to open new service delivery centers in locations with pools of concentrated talent that can be fast-tracked into their model.  We are also seeing several service providers target talent from community colleges and high schools, where they can offer them their own development experience that is highly relevant to their clients’ needs.  Most importantly, service providers must invest in training their managers to develop their staff effectively in today’s hybrid work environment.  The old style of “check the box” management that may have worked in the old factory model is failing.

“Taking the people” with the deal is becoming more attractive.  We can go back to my very first blog (here) on BPO value in 2007, and we were droning on about moving to standard processes and new technologies back then to make outsourcing add value beyond labor savings.  Fast-forward 15 years, throw in a two-year pandemic, spiraling inflation, chronic attrition, a military conflict in Europe, and a desperate need from enterprises to hurry into functioning virtual models and supply chains, and enterprises need more help than ever from third-party outsourcers and their armies of millions of staff to keep their businesses moving forward. Outsourcing deals that involve talent moving to the service provider, many of whom may actually welcome their new employer, are looking a lot more appealing to many service providers in today’s environment.  While most engagements are fairly small ($5m-$20m TCV), there are a few major consolidation deals under discussion where a lot of people transition is in play.  Expect these to increase as recessionary pressures bite in the coming months, especially in Europe.

The Bottom-line:  We’ve reached a make-or-break time in outsourcing history… those that invest in the right relationships, the right tech, and inspire their talent will win

Enterprise customers are quickly evaluating what talent is core to their differentiation and then determining whether they have the ability to attract, retain and develop it themselves or whether they are better placed (and the risk lower) to partner with a service provider.  The latter option is becoming increasingly attractive in this recessionary economy and shortage of available talent.

Conversely, service providers are more hungry than ever to take on people they can integrate into their model to mitigate their own attrition risks and cement deeper and far more strategic relationships with their key clients.  The main question now is whether the right firms are engaging with the right service providers to achieve mutual medium and long-term success.  Those that get these new relationship decisions right to stay in the game will emerge as the leaders in their business ecosystems.

Posted in : Analytics and Big Data, Automation, Business Data Services, Business Process Outsourcing (BPO), IT Outsourcing / IT Services, Talent and Workforce

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  1. A very sharp call to action and sobering thoughts, Phil.. Few reflections: Committing to outcomes is going to be the game changer and that, as you call out will involve bundling in the right tech and analytical capabilities.. Service providers have to convince in some cases that they can be trusted to bring the right tech but equally clients still don’t believe that integration with rest of the org stack is an easy one and nor is driving change with client orgs.. Hence they pivot to many relationships with providers as tactical especially in the mid sized deals range. Clients lead and expect providers to support a.k.a staff aug, especially in financial services. I wonder when that equation will likely tilt. Personally I believe services providers can deliver lot more with accountability if the right governance and deal principles are set in motion at the top of the house.. Interesting times and one thing is for certain that the pandemic has simply compressed the need to digitise, modernise and the attrition, desire for hybrid work all means a radical need to strip out FTE dependencies to a considerable extent.. There is no looking back on this one..