The insurance BPO market will hit $5 billion this year, growing at a 5% clip and has proven to be one of the select verticals truly embracing technology enabled BPO capability to support operations. The insurance market has become incredibly competitive in recent years, with the differentiation across insurers moving to customer service and brand perception, once price points are relatively similar across the reputable firms.
In short, these insurance firms need to invest every cent they can in their advertising intensity and customer facing capability to keep ahead in this market. And with advertising costs becoming so immense for the firms operating on wafer thin margins for many insurance products, they have no choice but to find cost efficiencies from elsewhere in the organization to pay for it all, if they are really going to save you 15% or more in a 15 minute phone call…
For the large insurers, many could go out of business if it wasn’t for the savings and efficiencies generated by maturing BPO delivery models. So let’s take a look at the industry’s first meaningful analysis of the innovation and execution capabilities of all the leading service providers:
Click to Enlarge
HfS has evaluated the innovation and execution capabilities of service providers catering to life and annuities (L&A) and property and casualty (P&C) insurers, brokers, reinsurers and others (excluding healthcare). We asked Research Director leading the blueprint initiative, Reetika Joshi, to elaborate further on the results of the exhaustive study.
Reetika, what are the key challenges facing insurers today?
The key challenges global insurers in our study face are regulatory compliance, member retention, reducing total cost to service, integration efforts for aggressive acquisitions, multi-line agency management, profitable growth in new markets (esp. for L&A), pricing pressure (esp. for P&C) and most importantly, risk management. Our conversations with these insurers and their service providers, along with exhaustive secondary research reveal the changing mindset of buyers in this industry. Insurance clients’ outsourcing motivations are slowly starting to change, going from task outsourcing and optimization to impacting total cost to serve, cost of compliance, organization level efficiency and insight generation – in line with core organizational challenges.
How are service providers adding value beyond basic low cost staff augmentation?
Clients are increasingly looking to their service providers to help them with these business outcomes (part of what HfS calls “progressive outsourcing”) which goes beyond traditional, transactional “lights-on outsourcing”. Insurers are continuing to expand the scope of their processes with service providers to include more high-value, complex and core functions such as actuarial and underwriting support, agency network optimization and analytics across areas such as new product, risk and claims. However, service provider capabilities in these service areas are not consistent. Clients are more willing to entrust execution of complex processes to market leading service providers. Further, the delay in decision making around closed block administration outsourcing is starting to give way to a host of new contracts in the last two years. North American insurers are the source for the vast majority of these deals since 2011.
Our research sizes the global insurance BPO market at $4.72 billion in 2013, growing at a CAGR of 4.6% to reach $6.19 billion in 2018. For the scope of this study, we have excluded the traditional third party administrator (TPA)/loss adjustment segments as we believe the competitive dynamics of the outsourcing provider group is unique.
So how did they winners shake out?
The Winner’s Circle Features a Mix of Provider Groups and Strategies. The leaders in our analysis represent a diverse mix of strategies and strengths:
The leaders in our analysis represent a diverse mix of strategies and strengths:
Accenture with dominance in Europe and strengths in catering to both P&C and L&A segments
IBM which exclusively plays in the North American and Asian L&A market
EXL and Genpact which have a mix of P&C and L&A coverage, tending towards North American clients
TCS which has a stronghold in the UK L&A market through its subsidiary Diligenta
These service providers have robust global delivery capabilities, demonstrated expertise across the core insurance BPO services value chain, have exceptional account management and client engagement efforts. Accenture, EXL, Genpact, IBM and TCS have all made significant investments in insurance technology to offer integrated technology and business process solutions to clients. Further, they are committed to future investments in the insurance vertical and delivering value beyond cost by consistently engaging with their customers on vertical-specific innovations. Their forward-thinking vision for the future scope of insurance BPO has helped clients realize benefits from the use of emerging technologies, continuous improvements efforts and regulatory compliance vigilance. We recognize Accenture, Genpact and IBM for leading overall Execution, while Accenture, EXL and Genpact lead Innovation in global insurance BPO.
High Performers Represent Strong Competition. High Performing service providers including Capita, Cognizant, CSC, Infosys, Wipro, WNS and Xchanging have strong execution skills and existing market share. Our study suggests that of this group, Capita, Cognizant, Infosys and WNS will prove to be strong competitors to the Winner’s Circle in the medium term. This is due to their significant commitments to the insurance vertical and investments in innovation capabilities that require time to mature.
And finally, Reetika, what are the key takeaways?
» Most buyers are unimpressed with technology enablers in use today – time to invest in real “value add”. Our primary research with a diverse group of insurers across geographies reveals that most buyers are ambivalent about the performance of technology enablers embedded in their BPO operations today (including reporting dashboards and other tool kits). Bar a couple outperformers, service providers need to address client expectations and improve the standard technology enablers provided to their insurance BPO clients.
» Buyers most swayed by talent management – at the operations level as well as account management. Insurers are highly vocal about how critical the talent brought in by service providers is to client satisfaction. Account managers are one such layer where buyers appreciate prior insurance industry experience apart from account management skills. Further, the industry knowledge and local domain expertise of BPO teams is highly valued by clients, and cited as one of the most important reasons for client satisfaction.
» Service providers of all categories have upped their game on industry knowledge – differentiation will now come from niches. We found numerous examples of efforts by service providers to impact outcomes through industry-specific solutions. Clients have consistently attested to their service providers’ level of knowledge on domain-specific processes including complex service areas, regulatory compliance and reporting knowledge and nuances of different market segments and niches. What this implies is that insurance industry knowledge is now becoming the norm, and will no longer be a source of differentiation in and of itself. Service providers will need to dig deeper into their niches within different market segments and geographic markets to push the envelope on further differentiation.
Reetika Joshi is HfS Research Director, Industry BPO and Analytics Strategies (click for bio)
» Platform play is emerging as one of the strongest engagement models and differentiating strategy. Service providers have seen the most prominent uptake in business platform adoption from the insurance industry. 54% of the deals analyzed for this study featured modern business platforms proprietary to providers. Insurers are accessing new sources of cost reduction, process consolidation and standardization and technology modernization through platform based BPO engagements. Service providers are in turn owning larger parts of clients’ processes, and creating larger and longer lasting relationships (e.g. while average contract length is 7 years, platform based BPO engagements average at 8.2 years)
» Buyers are yet to see a proactive and consistent approach to innovation from their service providers. Our research finds that buyers and service providers have not yet tapped collaboration opportunities for disruptive innovation. Most innovation effected so far has had incremental operational and financial benefits for insurers.
» Regulatory support and compliance is top of mind for both buyers and service providers. Both clients and service providers are very aware of the possibilities of working together to improve regulatory compliance and support. Even if it doesn’t translate into actual business right now for all insurers, this is definitely an area where we see an increased scope for work in the near future.
Thanks, Reetika, for an excellent synopsis of the new blueprint.
HfS subscribers can click here to download their copy of the 2014 Insurance BPO Blueprint Report
And after all these years of horsing with sourcing, it’s finally OUR YEAR! Yes – this is the year of the horse, where HfS is going to achieve all of its wildest ambitions 🙂
Just when you thought it was safe to turn on your PC… then HfS’ webcast roller-coaster returns for another hour of undiluted words and data…
Renewed economic growth, the onset of the digital enterprise, a rebounding outsourcing market and the rise of process robots. That’s what we’re having to contend with in 2014, so we’ve dredged up a plethora of experts to help us understand how this will impact business and IT services dynamics, operations frameworks and investment behavior across the world – and what this all means to the impact on talent and the extended enterprise.
Have you ever tried to dissect the assortment of (sometimes absurd) characters in your professional life with whom you have to invest so much of your time? Well now you don’t have to, because here they all are in their naked glory…
The haters. There are people out there who will always despise and resent you, no matter how hard you try. Just ignore them… if you can. They’re jealous.
The skin-crawlers. There are people you will just despise, no matter how hard you try to like them. Keep trying… never give up, one day you might find something you like about them… unlikely, but you never know. However, once your skin crawls, it usually stays crawling.
The irritants. There are people who will just irritate you. There is no remedy, just suck it up. Try to think about how you deal with the in-laws…
The zombies. There are people who somehow always seem to be employed, despite being completely and utterly unemployable. Just remember, they will keep finding some idiot to give them a job. It’s just reality… deal with it. God invented zombie companies to hire zombie staff…
The upwardly immobiles. There are some people who always seem to get overlooked for promotion, despite the fact they are the only person in that company who does any work and has half a brain. Just keep dealing with them and ccing their management to give them recognition.
The rejections. There are some people whom you really admire and respect, but just don’t seem to feel the same about you. They probably think you’re an idiot, so just move on – they just don’t see your greatness through their mental fog. Remember high-school and the cool kids who just didn’t want to hang out with you…
The hate-hates. There are some people whom you despise, who also (probably) despise you. Might as well pretend to be friends and have painful conversations where you pretend to like each other… keep your enemies closer, and all that.
The drama queens. There are some people who are just a nightmare to deal with – always blowing up with every little activity always becoming a major issue. Just keep practicing that egg-shell walking… this one ain’t going to change anytime soon.
The walking dead. There are some people whom you have no idea what it is they actually do all day. They just exist. They will always exist. Be nice and never probe too deeply on the specifics…
The whiners. There are some people who just go on and on about how busy and over-worked they are all the time – even though you’re not exactly sure doing what. But they somehow manage to spend an awfully large amount of time complaining about their inhumane workload . Just sympathize with how hard they have it and let them know you’re always here to help them… but you have to run, as you “don’t want to take up any more of their precious time…”
The job-hoppers. How about those peeps who are always looking for their next gig as their current job just sucks big-time (like their previous six). Like, what do they expect to be different each time they jump ship? Haven’t they realized that they’re going to be somebody’s b***h wherever they go? Sadly, their new companies are becoming increasingly obscure and the hopping time-spans are decreasing. Just avoid being a reference… you’ll become someone’s enemy pretty quickly!
The “refuse to find a new line of work” people. The are more blogs on HR than any other business topic, because people in the HR industry don’t have anything else to do (or the work is so boring, they just avoid doing it). Why spend all your time writing how fxxxxxd-up your function is than actually doing something about it? No remedy for this, unfortunately. We’ll no doubt get deluged with thousands more blogs about how messed up HR is in 2014… or, heaven forbid, some of these people will actually find jobs in other functions where they can actually do some work.
The social media zombies. A more recent creation of colleague, but one with a high-irritant factor – those people who seem to be endlessly on Facebook, LinkedIn, Twitter, Quora, SlideShare and lord-knows-what-else every minute of every day. What the xxxx do these these people do all day, or are they still living on the memory of the work they used to do pre-2007? Just don’t “like” or re-tweet any of their mindless updates, if you want to avoid them electronically stalking you for the next 20 years…
True corporate love. And finally. there still exists a small number of people in your work environment whom you admire, who feels the same about you. Go see them, have dinner, take in a movie, it’s a rare, but pleasurable experience!
Big data, outcome-pricing, “transformation”, process transmogrification, value thresholding… all big words indicating big ambitions, but they’ll mean squat if your only real strategy is to keep cramming more and more bodies into the same space to drive down costs.
Non-linear growth and outcome-based services in full swing
It may work for United Airlines, but with BPO, all you’ll end up with is the bottom of the barrel choice of talent and more “chop shop” comments from Chuckie Schumer. And, once you’ve run out of floor space and your company is too cheap to rent more, your only choice will be to hire robots, which aren’t programmed to complain about working conditions or undertake industrial action. Unless, of course, they become self-aware and send a re-conditioned Arnold Schwarzenegger on a mission to Nasscom.
So, without further ado, we asked HfS’ own cube-farm specialist Charles Sutherland, to take a look at what the delivery floor of the future may just look like…
Getting Beyond The “Lights On” Standard for Delivery Center Floors
There can be few places more soul-sapping over time than the standard, traditional shared services or BPO delivery floor made up of endless rows of nearly identical cubicles with a few dated operational metric posters tacked to the walls. Whether that’s your daily work environment or you are there on a floor walk as a client or advisor, you probably hoped as the hours passed that the colleagues on the floor were engaging and providing a spark of innovation and excitement otherwise the days (and nights) just seemed to go on forever in these bland and joyless workspaces.
We got to this dire state as a result of a fixation on controllable cost management above all else. In particular by focusing in on the expense components of seat charges to help create “value”. And as an industry we were effective, we shrunk the size of cubicles, minimized the “add-ons” and worried about seat utilizations so that the delivery floor became a predictable and controllable cost in an era lf “lights-on-outsourcing”.
Then as an industry we wondered why employee attrition stayed high, why innovation seemed to trickle rather than flow from operations and why our service provider teams weren’t as connected to the business outcomes of our clients as the occasional logo poster above them suggested they should be.
HfS believes that the BPO marketplace is in the midst of a significant change, as the majority of clients have ambitions to move from a model of “lights-on outsourcing” to “progressive outsourcing”. However, many of the elements of “progressive outsourcing” are so fundamentally different from where this marketplace has been languishing for the last twenty years, there is, in essence, a chasm to cross, in terms of the level of change management needed to discard the legacy enterprise practices and/or the ageing capability models that are in place throughout much of this industry.
A recent discussion with Accenture sparked the thinking at HfS with regards to how the introduction of new ideas and investments to the delivery center floor plays another important role in this transformation journey towards “progressive outsourcing”. We noticed that how delivery floors are structured, how the offices and desks are laid out, and the ergonomics of the environment can have a monumental impact on the overall effectiveness of the team and the results that it can achieve.
For all service providers, reforming the model of the BPO delivery floor has the potential to create additional client value and help cross the chasm to “progressive outsourcing” in four ways:
Heighted Collaboration – New collaborative models inside BPO teams and together with clients is a central to the value to be created by “progressive outsourcing”. By creating new formal and informal ways to collaborate facilitated by technology and ergonomics, these new delivery floors encourage BPO teams to go beyond base delivery of the transactions and work together to solve problems.
Rapid Testing of “What Ifs” – client value is further created by BPO delivery, when the very nature of the process and delivery is continually challenged and improved. Providing a delivery environment where teams have access to client and industry data with the spaces to meet and conduct “what if sessions” helps to foster a delivery culture of not just process excellence but process improvement and innovation as well.
Industry Acumen – delivery floors can create additional industry acumen on the teams by providing easier access to industry benchmarks in real-time using innovation rooms and easy to access visual displays across the floor to increase awareness of industry norms and trends.
Reduced Attrition – one of the primary drivers of excessive unmanaged attrition in BPO delivery is just simply that the work environment BPO employees may be asked to be part of just aren’t very nice. By brightening up floors, making management more integrated into the floor with command center stations (without them having to stand behind everyone all the time) and just generally making a more pleasant work environment, there is every reason to believe that valued BPO employees will be more motivated and committed to their clients than before.
Charles Sutherland is EVP Research and Guinness, HfS (click for bio)
Leading service providers are opening up to the possibilities that the delivery floor can be a driver of change in how processes are delivered and the value that is created, and, in doing so, the new delivery floor becomes yet another tool to help move the marketplace towards “progressive outsourcing”. At HfS we look forward to future floor walks in these delivery centers and discovering all the new benefits they have brought to clients, service providers and employees.
Mike Beals is Vice President, Governance Research and Strategy, HfS Research (click for bio)
The implications of evolving to a GBS model are significant for all affected enterprises, but possibly none more so than those responsible for service delivery governance, as described in our Six Maturity Leaps.
This governance group has the challenge of managing an increasingly complex environment, with aspirations much loftier than in the past to achieve the right maturity levels to run GBS effectively. So, if you have aspirations to make some of these leaps and want to find out how to develop the skills needed, without hiring in a crack team of black belts, you could do worse than read our latest report (click here to download your complimentary copy), authored my HfS’ VP for Governance Research, Mike Beals, aptly entitled “Heroes Don’t Scale”.
In the meantime, we caught up with Mike to discuss the context of the new report and how governance is evolving with the onset of the GBS framework for the back office that promotes control, efficiency, quality and visibility of end-to-end-processes…
Mike, what are the key trends you are seeing in outsourcing governance as we move into 2014?
We’ve seen quite a lot of advancement in the capability and maturity of governance organizations over the past 10 years and I think we’ve hit a tipping point relative to understanding the need for good governance. I believe that as organizations move toward a hybrid model, or a global business services environment, that they will increase their investment and awareness of governance even further. The companies that have not done so, will advance past the point that they are managing each individual outsourcing and shared services environment individually and will aggregate this capability into a center of expertise or a GBS group. I also believe that organizations that have multiple outsourcing or shared services environments will recognize the need to adopt a common framework across the enterprise and implement a training program to ensure their resources have the appropriate level of demonstrated proficiency. There is just too much risk not to.
One aspect we noticed at the recent HfS Blueprint 3.0 session was the difference in skillsets between vendor managers and governance professionals. Is this a common trend developing, where some executives view themselves purely as a “vendor manager” and others as a “governance professional”?
I don’t think it’s as much of a trend as an observation of the career paths that have led them to their current role. There is a group who started out in procurement and have landed in vendor management roles, and then there is a group who started in a business function and are now in a governance role. There are pluses and minuses of each career path, but I think the trend is that the two skill sets will merge together. I think it is somewhat similar to the way CIOs used to be selected in the past. Many of them were very technical and were promoted out of the ranks of IT, but over time, more CIOs came from the business. The point is that CIO’s that came from the IT department sometimes struggled in relating to the business and driving business value. The same type of challenge exists for traditional procurement professionals that stay in their comfort zone and manage vendors but do not effectively understand broad business requirements and how to drive business value.
What, in your view, makes a successful governance executive? What are the key attributes they need to develop?
First, it’s important to point out that the business environment is changing. We are moving from a cost-containment environment to a growth environment where transformation and innovation are increasingly important. So in this new environment, governance executives will have to take on a leadership role in driving change, to include better understanding business drivers, and communicating value to internal business constituents to a much higher degree than they have in the past.
To be successful, these leaders will not only have manage provider relationships well, but they will have to have strong communication skills to clearly articulate the value proposition of adopting new services and communicating value in terms understood by each key stakeholder. Just like CIOs, I think the trend will be for these top governance executives to come in higher numbers from the business rather than from procurement.
Do you see shared services and outsourcing governance genuinely coming together into a single centralized management function across the majority of enterprises? Aren’t the skillsets required very different, between managing providers and managing processes and operations? What are the challenges and opportunities of centralizing governance in the fashion?
These are great questions that many organizations are struggling with and probably deserve a much lengthier response, but here are a few thoughts. I think we first have to breakout the composition of a single central management function, whether we call it a Global Business Services group (GBS) or something else. The way I think about it, is that in both outsourcing and shared services, there is a group that sets the strategy and policies for a business function, there is a group that determines and manages how that strategy will be implemented, and an operations group that delivers.
This requires three very different skill sets. Simplistically, the strategy and policy makers need to be well-versed in their business function, understand its value to the business, and determine what services to provide. The governance, or management, layer needs to understand how to optimize, manage, and report on service delivery. The operations group needs to have very specific expertise in the processes they deliver.
The middle tier, whether outsourcing governance or shared service management requires a very similar skill set. Other than a few commercial processes, like invoice verification and contract change control, the rest of the governance processes should be very similar, if not the same, independent of who delivers the service. There is no valid reason I can think of for activities like how service levels are managed and reported, how new projects are requested, how issues are tracked and reported, or how business value is communicated, to be that different in outsourcing versus shared services. Sure, there are always varying procedures, but the core processes should be consistent.
So, yes. I believe shared services and outsourcing governance can and will come together into a single management function using a common governance framework. The challenge to pulling this off is similar to any merger of groups, and includes politics, change management, and leadership. Specifically, who will be place in charge, what is their reporting structure and mandate, and who decides which version of a governance framework gets adopted.
As far as the benefits go, there is obviously an economy of scale gained by combining independent groups. Additionally, by adopting a common governance framework, you lay the groundwork for driving consistency and improved quality. We haven’t talked about it in this interview, but a consistent governance framework and set of processes makes it much easier to tool enable with automation, workflow, reporting and analytics. This just isn’t possible if everyone is doing their own thing.
Is GBS going to have a major impact on the future of outsourcing governance? What is your advice to outsourcing governance professionals on how to approach GBS?
I believe that GBS is the logical next step in the progression of many organizations that have multiple outsourcing relationships combined with shared services groups that are inconsistently managed across business service functions. So the impact that GBS will have is to become a catalyst for taking outsourcing governance and shared services management to the next level of maturity in managing a portfolio of internal and external delivery assets.
If you think your company is ready to take the next step and move to GBS, I would suggest three things. First is to do your homework with your peers or with an outside consultancy to fully understand what’s involved. Make sure that expectations are appropriately set and that key stakeholders understand that this will be a multi-year initiative. Second, pick a strong leader to head up the charge. He or she will need a lot of credibility and the right philosophy on managing internal and external assets. And third, adopt a consistent governance framework and go through a rational design process before staffing the group. Just because “A” or “B” quality players are available doesn’t mean they have the right experience, skills, or attributes for the job.
When you look out into the future of governance in two-three years’ time, what activities do you see them taking on? Do you see most executives moving beyond tactical and operational management areas into data governance and innovation activities?
As competitive pressures continue to increase and as enterprises shift from cost-containment to growth mode, companies will not be satisfied with achieving only tactical objectives. Many companies still need to rationalize what business services they provide and how those services are delivered. I think governance organizations in the future will play a key role in developing new service offerings in collaboration with their providers and internal customers; they will play a role in ensuring the adoption of new services by selling and marketing those services; and they will be more effective at communicating the value provided by those services. Value will be defined not just in cost reduction, cost avoidance, and risk reduction, but increasingly in employee productivity improvements, capital/asset management, end-customer satisfaction, and in some cases, top-line revenue growth.
As the delivery environment gets more and more complex, tools will have to be implemented to deal with the amount of data generated. Not only will governance groups have the ability to automate almost all standard reports, they will be able to quickly respond to ad hoc reporting requests, and will be able to provide sophisticated analysis on just about any “what if” scenario you can come up with.
And finally, what is your advice for ambitious governance executives today looking to advance their careers?
Getting back to what we talked about before, if you have come up through the procurement ranks, to augment your understanding of sourcing, make sure that you have a good grounding in your company’s business and the business service function or functions you would like to represent. What are your company’s key drivers and initiatives? What are the industry trends in the marketplace? What are the provider capabilities and what new services are on their roadmaps? Take on projects that will provide broader recognition and increase your credibility with the business units.
If you have grown up in a business service function and now find yourself running a governance group, then go to school on strategic supplier management. Really understand how commercial relationships are structured and figure out the levers in the agreement that you can pull to modify provider behavior. You should also nurture relationships in each business unit and strive to better understand where your company is heading.
In either case, improve your skills in presentation, facilitation, and joint planning. All of these will be critical to your success.
Thanks for your time Mike, it’s great having you share your thinking about where governance is heading
Big mega-mergers in IT services are fast-becoming a thing of the past. Noone wants to blow billions on services firms when you’re bound to have a horrible clash of cultures, management teams, legacy unwanted business lines that can’t be killed off, not to mention the impact on the clients and the risk of losing half your decent executives. So why not revisit that age-old practice of partnering? Why not play the field and experiment with your future possibilities as opposed to tying the knot too quickly and regretting it later? (Thank god my wife doesn’t read this…)
It’s about having the right mix of offshore scale and onshore domain knowledge… all nicely packaged in a suite of privately cloudy data centers that can be priced competitively for clients. So enter two candidates from separate continents which are experimenting with each other in a unique partnership to help clients modernize their applications and take advantage of both companies’ core strengths: the cost-competitive offshore scale and expertise of HCL and the onshore domain expertise, legacy integration skills and data center resources of CSC.
CSC and HCL could be paving the way for a new wave of strategic partnerships that combine the skills and capabilities to address the increasingly complex app modernization and integration needs of enterprises
With the economy now in an upward swing and the relentless move to the cloud driving companies to overhaul their IT infrastructures faster than ever, HfS believes now is the time for ambitious providers to act aggressively in the market. Never before have so many organizations been plagued by so many integration nightmares created by multiple instances of ERP, legacy applications still surviving on spaghetti code workarounds, and islands of cloud apps being hurled into the throng, bringing a whole new set of integration challenges that most organizations are simply not equipped to tackle by themselves. Simply put, the rapid emergence of the cloud as is now creating an unprecedented demand for integration services – and the race is on among the leading IT services providers to take a lead in this evolving market.
We view HCL and CSC’s partnership as being a bold and unique approach to developing a compelling offering to clients that takes advantage of each other’s respective market strengths. Both parties clearly feel they can close the gap on the market leaders more effectively by partnering than going it alone. For example, in banking, HfS estimates each company has roughly $200m in ADM revenues, which puts them well behind leaders such as IBM, Accenture and TCS. Both CSC and HCL need to do something to address this gap. The deal will entail co-creating a dedicated delivery network with the first centers located out of existing centers in Bangalore and Chennai. Though CSC brings extensive clients across the US government, the initiative will have an initial focus in banking and financial services, where both firms need to inject more firepower into their market presence and global capability.
The two companies will each appoint a senior executive to run the joint operation encompassing a team of experienced employees sourced evenly from each firm, and the new entity will share revenues and costs based on predetermined rules around what is contributed by whom to each deal. The stated rationale behind the move is to allow them to move more quickly in their pursuit of the growing opportunity around modernizing legacy enterprise apps and solving the integration headaches being posed by multiple cloud and legacy applications. By combining respective strengths – such as CSC’s established client base in banking, where its Hogan platform creates a prime target and HCL’s skilled and lower cost offshore delivery teams, the two entities believe their collective opportunity will greatly exceed what each could obtain on their own.
In the simplest terms, CSC gains access to HCL’s robust global delivery skillset and several new clients for its core technology platforms, especially outside of CSC’s public sector business. HCL will white-label CSC’s BizCloud as it standardizes and rationalized its private cloud offerings to two or three core infrastructure partners down from the 20 or so it has today. For its part, HCL will gain access to CSC clients to boost its enterprise application services business – a segment that was flat during 2013. These reasons alone are compelling and with each entity having mature leadership able to recognize the battles they cannot win on their own, the rationale is sound. Moreover, for several years now, CSC has needed to develop more robust offshore delivery capabilities to compete more effectively with larger competitors like Accenture and IBM, which have massive offshore scale today.
With this deal, HCL and CSC are betting that much of the spoils of all that new transformation activity will largely fall to those that conduct the initial work of modernization. With HfS estimates of around 80% of today’s enterprise application services spending directed at maintaining legacy systems, there is significant upside for the two firms if they can free up this spending for transformation.
Bottom-line: With services deals becoming more complex and niche, we could be in line for a spate of specialist services partnerships
The enterprise application services market now faces a challenging new reality where yesterday’s mega multi-year deals have been replaced by more tightly defined projects. In response, IT services firms need to develop more targeted and nimbler ways to compete. This means tailoring industry specific offerings in order to win new deals. Which brings us to the heart of why it just might serve as the new go-to-market approach for many providers. By forging this alliance, CSC and HCL can collectively go after these narrower markets without making many additional investments that would destroy their ability to remain competitive. HfS’ expects to see this new partnership model utilized by many of the IT service providers seeking to compete across verticals where individually they need to plug scale and capability gaps. We are also highly likely to see more focused collaborations in specific business process areas where pure-play BPO providers could do more hook-ups with technology services firms which lack the process expertise and knowledge.
Net-net, HfS believes that this partnership could serve as a highly-effective model for providers seeking to address the new emerging marketplace defined by deep industry knowledge coupled with vertically-focused technology platform solutions. Mega-acquisitions in IT services have become far, far too costly and unrealistic in today’s environment, and partnerships like this could signal the way forward for many ambitious service providers. Providers want to be more agile and focused, not so big and clunky they lose sight of their goals and control over the operational costs, which is why many of the mega-mergers in IT services have not yielded very successful outcomes in recent years.
If I had a dollar for every person who enlightened me with the news that Global Business Services (GBS) is BS, I could purchase about three hours of offshore help desk support.
However, while several folks make valid arguments why GBS may be a pipe-dream for their own organizations (or some of their clients’ organizations), I believe they are missing the big picture.
GBS is about laying the foundations to achieve much more value than the modest benefits of labor arbitrage and process standardization
The crux of the matter is that when it comes to achieving business outcomes, enterprises need to focus on the “what”, but can’t do that until they have some capability with the “how”. Many of the GBS cynics are stuck in a world where they will forever be trying to master the “how” and settling for achieving the modest benefits of some labor arbitrage savings and process standardization.
In my view, GBS is only BS if you can’t make the Six Maturity Leaps we discussed during Part I, where ambitious enterprises must lay the groundwork to shift from siloed, immature shared services and outsourcing to effective, commercially-oriented Global Business Services:
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Simply put, today’s ambitious enterprises can’t really focus on achieving their desired outcomes (the “what”) until they have the operations framework in place that gives them the control and culture to make genuine advances with their operations performance (the “how”).
In short, there are limitations to the value you can achieve by finding a few more bodies that can be displaced to lower-cost locations and standardizing processes with some better workflows and technology. Most ambitious governance executives already know that only focusing on transactional processing and lower costs will fail to reap the long-term, continuous incremental results their leadership demands (or will start to demand when they see the results of peer enterprises). In short, there is a ceiling to achieving outcomes if you can’t make the Six Leaps.
Business outcomes don’t change with GBS, it’s the desire and capability to achieve them that does
Let’s examine further by comparing the desired business outcomes of enterprises with their level of operational maturity, where we divided up the maturity levels of 343 major enterprises into four percentiles, based on the Six Leaps described above:
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As the data clearly illustrates, the desired business outcomes of enterprises’ shared services and outsourcing initiatives are pretty much the same as their operations become more mature. However, there is a clear jump in focus as enterprises approach the top quartile for maturity – which represents those enterprises which most closely fit the GBS framework.
Suddenly, the desire to drive out cost, improve their quality of data is critical to more than 60% of enterprises, as opposed to much lower proportions of less mature enterprises. Similarly, in terms of developing talent, increasing control over end-to-end processes, improving collaboration with service provider staff and achieving innovations to to processes, the impetuses are double that of the less mature enterprises across each category.
Desire to achieve outcomes is directly linked to maturity of operations and performance
So it’s one thing to aspire the achievement of certain outcomes, but is this desire linked to actual performance? Let’s investigate further:
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As the data plainly points out, strong performance against outcomes increases markedly with maturity levels of operations. However, what is also apparent is there is a real “leap” forward when enterprises enter the highest quartile for maturity. It’s as if they took a running jump and now they are on the other side of the chasm, they have hit the ground running.
Why do I dismiss the GBS naysayers? Because even in the relatively “tactical” areas of cost reduction, capability and standardization, the top quartile massively outperforms. However, the gaps in performance are even more pronounced between the top quartile and the rest of the pack when it comes to more strategic measures, such as staff accountability, greater provider collaboration, improved data quality, talent alignment with corporate objectives and innovation.
The Bottom-line: GBS is about making breakthrough changes to operational maturity, and those on the train are already reaping significant benefits
One of the problems with GBS is that too many people simply don’t understand it, and many who do are threatened by it. It’s about closing the book on the legacy practices of managing providers with punitive and contractual measures, on persisting with dysfunctional, poor quality shared services, on tolerating siloed uncollaborative business units. Asking a monolithic vendor manager to jump on the GBS bandwagon is akin to asking a demolition expert to start building houses. Suddenly they need to think about producing an end product from their work that has long-term meaning and value to their clients, as opposed to meeting simple targets devoid of a long term game-plan.
It’s about the governance function becoming the consultative, value-add capability that does the basics really well, such as running transactional processes efficiently at low cost, but also contributing the higher-value services the organization needs, namely providing better quality operational data, continuous improvements to processes and operations, getting the best out of the third party outsourcers, and so on.
If you’re stuck in those lower two quartiles for maturity, how long will it be before your leadership decides to eliminate much of your inhouse operations altogether? I would agree that GBS is BS to many organizations which couldn’t even conceive of achieving anything near the performance levels of the high achievers with their current operational leadership and infrastructure. In some cases, they may be better off outsourcing as much as they can now, and then rebuilding their internal competencies with a new governance team that can apply analytical thinking and real value to their organization. Or they may simply not care and will limp along hauling around a hulking great inefficient back office, if they can somehow get away with it and still survive.
However which way we look at this, moving to the top quartile is a long, arduous journey for many enterprises, and one that will require a five, or even ten, year roadmap – even in today’s fast-moving environment. But, what is clear, is that successful enterprises have to divorce themselves from the inertia and monolithic habits of managing failing outsourcing relationships and immature operations, and look to develop a governance function that can call itself part of the business, not a cost center. Let’s hope 2014 will be the year that many enterprises can genuinely make this distinction…
Readers can also access our complimentary new report, “The Global Business Services Industry Study“, produced in conjunction with KPMG LLP, where we interviewed 416 enterprises across a cross section of regions and industries about their GBS activities, priorities, drivers, constraints, and plans.
As we embark on our fifth year in operation at HfS, I’ve been reflecting on where the research analyst industry is going.
I’ve always passionately believed research thrives on innovation and disruption of the enterprise status quo, which means you need two factors to be an effective analyst organization:
Data. Trends from the buyers of services and solutions that tell us where they are with their current strategies, how they aspire to evolve, what they need to help them evolve – and what catalysts will drive the evolution.
People. Individual analysts who can read into the data points, who surround themselves by the buyers, sellers and expert advisors, to share an informed judgement on where things are heading and what the industry stakeholders needs to do to survive and thrive.
When it comes to research, big just isn’t so beautiful anymore
What we’ve proven (so far), at HfS, is that you don’t need hundreds of millions in revenue and hundreds of employees to provide that. When you have a platform to present your research to your market, people will flock there, and many others will quickly find you. However, what we’ve also learned is that enterprise executives want data and insight from analysts whom they respect and with whom they can interact, not necessary a faceless machine which churns out facts and figures that simply have to be accurate… as you paid tens of thousands to access it. Simply put, clients want to pay for the experience, as opposed to merely a productized service.
I spend a lot of time with many academics, think-tanks, investors, consultants, pundits, enterprise practitioners, service provider and tech vendor execs to share ideas, data and viewpoints. They all tend to work within small groups of smart individuals to figure out where their world is heading. One factor is common among these beings – most have a real passion for their respective areas of coverage – their careers and livelihoods depend on it, and they care about where all this is heading.
However, when I talk to many analysts working for the big machines, many of them just seem so jaded, and almost disconnected with the world, they’re just going through the motions. Many of these analysts just seem so beaten down by the pressure from paying vendor clients and internal territory wars with other analysts from within their own firms, that they struggle to have anything innovative or profound to say. As one analyst once told me “we just call the trends, that’s all we need to do to get paid”. I would argue that some of these legacy analyst firms aren’t really analysts anymore, they’ve become “J.D. Powers” that validate buying decisions of products and services. Clients aren’t getting an experience from them, they are getting a product.
‘Analyst 2.0’ is about insight, data and community. It’s about experiences, not products.
The core challenge for the emerging analysts is achieving a revenue model that allows them first to first survive, then to establish the right degree of scale and degree of influence to build enough reputation and credibility to attract clients which want a long term, ongoing relationship. Smart clients tend to want three things from analysts:
1) Credible Data. Everyone wants data – on suppliers, on market directions, on business models, on pricing trends; With real validity and statistical significance.
2) On-tap expertise. Clients want instant knowledge-gratification; When they need help with something, they want it via a quick email, phone call. No-one likes 1-800 numbers which take two weeks’ to set up to talk with some individual you don’t know, who’s probably going to tell you they don’t have what you need, in any case.
3) Networking and influence. Research buyers often want to feel they are talking to an analyst connected with the world, who is part of a community that involves them. I have a secret joke with friends, but the best analysts would make great headhunters if they chose to change careers!
Entire industry models are being disrupted, and some obliterated, at a speed yet not seen – and research is not immune
The exciting – and daunting – aspect of today’s business environment, is the speed with which entire industries can be turned on their heads. Did the likes of Sony, Nokia, or Blackberry see Samsung, LG and Apple in their rear view mirrors? Didn’t Yahoo, AOL and Microsoft think they had the internet game sewn up before Google obliterated their dominance? Did Monster have any inkling that LinkedIn would eat its lunch in barely a couple of years (before it was too late to respond)? Does Walmart have any concept how to deal with Amazon developing the ultimate digital retail sales channel, which is revolutionizing the whole retail ecosystem? Did Blockbuster stand a chance responding to Netflix once the industry model had shifted – or, in fact, did it ever stand a chance even if it had realized what was happening in time?
As with many industries, most of the leading enterprises only respond to business model changes when they genuinely feel the impact on their revenue streams (an unfortunate bi-product of the Wall St quarterly view of the world). However, as with the examples above, once the inflection point has been reached, it’s almost impossible to respond, and the only obvious measure is to acquire the disruptor. However, the culture and business model of the acquiring firm often crushes the innovation of the disruptive firm they are buying, even if a takeover is financially viable.
In today’s business environment, the power of digital collaboration, ease of information dissemination, and ubiquitous global access of the cloud is ripping into the 1980 and 1990 business models at a pace that is now frightening. Services are becoming commodities in time-spans we have never seen before – just look at the IT services and BPO industries where the “value” from buying low-cost labor is being completely commodotized by cloud-based business platforms and automation, where clients simply do not need to pay for as many bodies to take support calls, develop lines of code, process payments, claims, paychecks or invoices. The handful of service providers with ambitions to survive are desperate to develop value-add capabilities that will stop their clients dragging them into a price-war for the lowest common dollar denominator.
The research industry is not immune to disruption – the 800lb gorillas can’t simply keep buying up smaller competitors which dare to threaten the status quo, if the way in which the customers desire to use their services is changing. Today, thought-leadership and good ideas are free – and clients expect them to be free. In fact, most of the research clients need to help their decision-making is likely to be freely available if they search hard enough. So that means they will eventually not need to pay for the “basics” that research houses persist in providing today – they will only pay for more personalized expertise, actual data to support specific scenarios and a networking relationship that can really help them be successful in their jobs. They will pay for an experience, not a product.
The Bottom-line: The new analysts are coming, but they just might not be what you expect
This means the “analysts” of the future aren’t necessarily going to be the analysts of today – the smart consultants are desperately looking at more “one-to-many” models to service their clients who want more of an ongoing relationship, than simply splurging on expensive projects every time they need some help. What’s stopping the likes of a Deloitte taking on Gartner, with its global presence and vast resources of experts and networks of clients? And where next for the likes of Reed Elsevier or Thomson Reuters, which are streamlining their executive offerings in a similar model to the analyst houses? And what about smart BPO providers themselves, with their analytics capabilities, global presence, domain knowledge and client communities, where they can pool vast quantities of knowledge, which already have the capability to deliver people services at low cost on long term annuity contracts?
The future of analysts is about providing clients the experiences they need to be smarter and more effective at what they do, not selling them something pre-packaged that everyone else already has…
One of the great discussion topics coming out of the recent Blueprint 3.0 sessions in New York was centered on how enterprise operations can progress beyond the “ordinary” and avoid fading into the netherworld of corporate insignificance. Or, as one member profoundly stated, “We really need to stop being really good at irrelevant stuff”. So let’s take a look at how they can start to do just that…
It’s all about shifting the whole foci of operations from yesterday’s fragmented immaturity to tomorrow’s mature model
Let’s examine the six maturity leaps we identified during our recent GBS study of major enterprises with KPMG:
Location leap: from high-cost to low-cost locales; Do we really need to process those insurance claims in New Jersey?
Standardization leap: from independent standards tied to BUs and geos to enterprise-wide standard solutions; Why do we have 14 instances of ERP, when we can rollout multi-tenant cloud solutions and kill the dysfunction and poor data integration?
Process Orientation leap: from siloed processes within BUs to business-wide process alignment across geographies and broad functions; Why do we need 153 different ways to pay suppliers and process invoices?
Commercial Orientation leap: from operating like a cost center to being measured as a business service center; Why wouldn’t we want to have centralized operations servicing our enterprise with the skill, scale and efficiency of a professional services firm, than some back office cube-farm which constantly gets beaten up for cost and quality, which the BUs barely use in any case?
Pace of Change leap: from low-impact change to a genuine willingness to impact people and invest in long-term strategies; Rolling out a “Big Data” roadmap takes enterprises 5-10 years – how can you be serious about a strategic roadmap when every action is reactive and short-term in nature?
Service Portfolio leap: from being merely transactional to delivering both transactional skills and analytical services at scale. Transactional process are ultimately automated, or outsourced (or both) – especially if these are delivered inefficiently, which means operations teams need to deliver business value and analysis if they want to thrive in today’s business environment.
As the GBS study detailed, most enterprises still have a long way to go when it comes to achieving “maturity” across these six leaps, especially when it comes to adopting a more commercial orientation:
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The Bottom-line: In 2014, ambitious operations leaders must begin achieve a certain degree of maturity across their operations before they can really address achieving their desired outcomes
Our research has clearly shown that enterprises can’t achieve anything near their desired levels of cost-reduction, analytics quality or innovation, if their operations and processes are fragmented and poorly aligned with the corporate goals of the business. Outsourcing and shared services can provide levers to access expertise (often at lower cost) and standard ways of managing process flows. However, it is the job of the governance organization to take oversight control of end-to-end processes and work with their BU leaders to map out a long-term roadmap to get better access to data and achieve consistent, ongoing cost efficiencies.
Global Business Services isn’t just about managing a few provider contracts and beating up on poorly performing shared service centers – it’s about re-aligning the enter operations function (the old “COO’s office”) to support the business with a commercial orientation. A GBS operation needs to operate like a consultative service provider that can deliver ongoing expertise, processing capability and analytical services in a scalable fashion. GBS executives needs to pull together both the internal and external resources to make this happen. Smart service providers will (and some already are) positioning themselves as partners to support their clients’ GBS strategies, while smart sourcing advisors know they need to address the broader GBS transformation needs of their clients, or face being relegated to supporting contract procurement.
Stay tuned for Part II of our 2014 outlook, we will analyze the performance of enterprises against their desired business outcomes, based on their maturity levels.
Readers can also access our complimentary new report, “The Global Business Services Industry Study“, produced in conjunction with KPMG LLP, where we interviewed 416 enterprises across a cross section of regions and industries about their GBS activities, priorities, drivers, constraints, and plans.
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Big mega-mergers in IT services are fast-becoming a thing of the past. Noone wants to blow billions on services firms when you’re bound to have a horrible clash of cultures, management teams, legacy unwanted business lines that can’t be killed off, not to mention the impact on the clients and the risk of losing half your decent executives. So why not revisit that age-old practice of partnering? Why not play the field and experiment with your future possibilities as opposed to tying the knot too quickly and regretting it later? (Thank god my wife doesn’t read this…)
As we embark on our fifth year in operation at HfS, I’ve been reflecting on where the research analyst industry is going.
