In case you missed our joint webcast with Ed Caso of Wells Fargo Securities on Friday, fear no more, as here’s the replay. You can also download your copy of the slides here.
And if you can’t be bothered to listen to any of it, here were some of our predictions* highlights:
1. Outsourcing Providers will shy away from mega-mergers
2. European market going to be in limbo for first half of 2012 with limited major outsourcing contract signings, due to economic paralysis
3. Threat of recession will hold back one-in-four buyers from signing contracts until current economic uncertainty lifts
4. Buyers are looking more broadly than simply outsourcing to drive productivity improvements in today’s climate
5. Buyers will seek assistance from advisors with sourcing strategy, governance and Cloud
6. Focus shifts from cost savings to standardization, global flexibility and better technology
7. Many Advisors and Providers will still be overly-focused on Cost-Reduction for their clients, as opposed to process improvement and innovation
8. Global Companies need more Global Support
9. 2012 to be Year of the Mid-Market
10. Account Management of outsourcing to take Center Stage
* All these predictions have already expired and no longer valid
There will be technical weenies that exhort today’s acquisition of Emptoris by IBM as yet another acquisition that will cause cosmetic commerce IP networks to collide in a dizzying array of cloudy business models. With $20 billion allocated to their acquisition war chest, IBM’s incoming CEO clearly intends to accelerate commerce particles until a thick blue fog settles around us all. The most technical of these weenies will explain this acquisition with their aaSes (PaaS, BPaaS, and SaaS) leaving procurement geeks with an impression it is all a stinky game of charades.
And then there will be the procurement weenies that scratch their heads and wonder why anyone would want to run a reverse auction for enterprise software on a platform managed by the service provider competing in the bidding. Especially when eRFX management, Emptoris’ bailiwick, is widely available from a long list of competitors who are busy pricing themselves out of business. Frankly, it wouldn’t be surprising to see a $0.99 iPhone app for strategic sourcing. Except, they’d soon be confronted with the king patent troll of all patent trolls, the so-called inventor of competitive bidding. LOL.
So what’s the skinny on this marriage of Emptoris and IBM and why should you care?
The story begins with Procurement BPO. For a long-time the red-headed stepchild of the $50bn Finance and Accounting BPO market, Procurement BPO has silently grown into a respectable market with more than 400 deals with an estimated expenditure of of $2.5 billion this year. It is primed to be the most widely-adopted virgin BPO category at the enterprise level, with a fifth of them exploring first time adoption over the next year (Exhibit 1).
Exhibit 1: Procurement BPO tops Enterprise buyers’ outsourcing intentions for new areas of adoption
Procurement BPO is a real winner in the marketplace because service providers have proven capabilities that internal procurement executives have toiled against all the odds to create. Casting off the shackles of labor arbitrage, Procurement BPO service providers bring heavy category expertise to bear in sourcing events and category management. The results are impressive – the average Procurement BPO deal creates a ROI of almost 200% per year.
However, despite the rise of procurement technology and the hubbub with the likes of Hubwoo, SAP, Coupa, and Ariba, technology is simply not a major factor in most current Procurement BPO engagements. Our data shows more than 73% of procurement BPO deals neither upgraded the existing system or implemented a new system (see exhibit 2).
Exhibit 2: Percentage of Contracts that Excluded New Systems or Upgrades by Procurement Process
Source: HfS Research, 2011
Our research has concluded that there are many reasons for the lack of investment. Namely, the technology is expensive, the ROI is perceived to be low, and most buyers have existing applications that are under-utilized. Possibly more importantly, few technology partners have built successful, monogamous alliances with outsourcing service providers. In fact, technology service providers like Ariba, SAP, and Oracle will happily kiss anyone who has licensing dollars to spend. This confuses buyers who think these messy arrangements are all about marketing dollars and kickbacks.
Capgemini saw through this and acquired IBX to bolster its procurement capability – and more recently VWA in accounting. Other Procurement BPO service providers white label their technology to keep their stories straight. We view the acquisition of technology platforms, such as Emptoris, which providers can deploy as part of an integrated “Business Platform” offering, as the future of driving productivity and growth for their services lines as they seek to break from a heavy reliance on labor-based pricing models. In some specific processes and functions, ownership of the technology by the service provider is proving to be a major differentiator, and we see procurement and sourcing as one of these with real potential.
What we think IBM is really up to: Becoming the intermediary overlord of B2B commerce.
IBM is already one of the two largest service providers of procurement outsourcing services, outdistancing the nearest competitor by more than 70 deals. Not only do they pack the punch of their mega billion dollar global procurement spend, but they bring together billions of dollars from their clients. While Accenture’s acquisition of Ariba’s Freemarket’s team created an extremely competent sourcing factory, IBM is likely heading down the path of creating a marketplace where buyers can leverage RFX tools built by sourcing gurus, request category assistance on demand from IBM’s procurement gurus, and allow buyers to participate as desired in the services. Whether buyers want to make a single vehicle purchase, develop a category strategy for fleet management and execute competitive bids, or ask IBM to manage this non-core purchase on their behalf, IBM will have the capability to support clients. This is a lot different than how most Procurement BPO deals are constructed and will allow IBM to rapidly move into the long tail of middle and small markets, which has been largely ignored (see exhibit 3).
Exhibit 3: Size of Buyers’ Companies which have adopted Procurement BPO
Source: HfS Research, 2011
Bottom-line: IBM made a smart acquisition to advance its B2B commerce and procurement market leadership
Emptoris’ well-regarded user interface and strong brand recognition among the procurement crowd make it an idea mate for IBM’s technology-driven focus and market leading Procurement BPO capability. While the integration of Sterling, DemandTec, and Emptoris will take some time to become “smarter commerce” (IBM’s catch phrase), there will be some immediate upsides. Emptoris’ Rivermine telecommunications capability will be a boon to infrastructure outsourcing clients. Emptoris’ Xcitec brings IBM strong supplier relationship management capability that chief procurement officers need. And, of course, IBM customers will get Emptoris, a leading sourcing and contract management toolset. Down the line, we expect more benefits of this acquisition as IBM develops a cloud business platform in the procurement category. Meanwhile, we wonder if Ariba’s valuation just went up as they remain a major player capable of competing with IBM’s technology advances.
Tony Filippone is EVP, Research at HfS Research (see bio). He can be reached at tony dot filippone @hfsresearch.com
Remember the HfS 25, that elite group of 25 fine sourcing governators, brought together to debate the future of outsourcing? Well, after exactly one year, sadly it is no more…
…because it’s now the HfS 50! Yes, the fiftieth organization has signed up and we’re very, very excited to announce our inaugural HfS 50 event to take place at New York’s Soho Grand next April 24th-25th:
This is going to be a defining two-day working session for power-brokers of the outsourcing industry, where leading buyers of both ITO and BPO services will confront today’s critical issues impacting outsourcing, to establish a Blueprint for the industry in 2015. And this time, we will have a vendor/buyer face-off session where leaders from six of the major service providers will join the debate.
Key Highlights
*The next generation account manager—making the role work for both parties *The next generation governance executive—making the role work for both parties *Disrupting the vendor/client model – getting better visibility and transparency into each others’ pain-points *Trends—what is around the corner for the industry and what will it look like in 2015? *Trust—what has worked in building trusting relationships – and what has not? *Community sourcing—how can social media and community networking drive better cross-client collaboration? *Global Business Services frameworks—the next wave of value-creation, or glorified change management? *The realities of disruptive sourcing: What is really going to change the game and how can these be effective:
Moving to standard business processes and platforms – reality or fantasy?
The uptake of Cloud computing – democratizing outsourcing?
Moving to genuine outcome-based pricing models – reality or fantasy?
Achieving real innovation with sourcing – reality or fantasy?
Do you have what it takes to make an impact?
If you are a buy-side sourcing governator and would like to get involved with the HfS 50, or a lead service provider executive, please email Tom Ivory for more information.
We hope to see many of you in New York in the Spring!
The outsourcing industry is a labor arbitrage bubble waiting to burst. And today’s smartest buyers and service providers are poised to fatally pop it and build a better future.
We know that buyers were accomplices in the run up. After failing to invest in their operations, buyers saw limited value in their business functions. Accounts payable teams were overwhelmed with paper, finance teams struggled with creating process rigor, and human resources teams bungled global resource management.
Struggling with recent macroeconomic issues, buyers simply didn’t have the time or resources to reengineer for greater value. So, they threw in the towel and asked service providers to manage their processes for them at a lower cost. To them, reducing the monetary size of their cost centers was success.
IT was no different and they were the biggest buyers of expensive labor. Their internal customers furiously revolted against swelling technology wai$tline$ and the lack of an “application development factory” mentality. So, in the midst of economic haircuts, CIOs surrendered by outsourcing their staff to offshore companies that brought CMM and ITIL process rigor. Yet, these efforts did little to simplify underlying application and infrastructure platforms that drove their high costs.
Have no doubt – labor arbitrage provided everyone immense value. Yet, at its best, labor arbitrage is a funding mechanism for true best practice adoption. At its worst, it is a circus sideshow absorbing management focus. And we know that most buyers adopted to lift and shift, rather than rushing to adopt best practices at the outset of their deals…
Never before has the future of our industry been more clear: Today’s wiser buyers know that the value of accounts payable, procurement, or customer service shouldn’t be equated to its cost per invoice, PO, or call. They want value. Accounts payable should improve working capital and enforce contract compliance. Procurement should generate hard savings and source best in class suppliers. Customer service should eliminate the sources of customer frustration and create loyal relationships.
Still, the road to our future is unclear. As buyers begin to line up for higher value services, their shift in demand will dramatically affect the marketplace. Service providers that cannot develop IT-enabled BPO platforms, provide insightful analytics, or drive high value business outcomes will lose market share and be relegated to second tier “tactical” supplier status. Service providers that can help extract greater value will dominate and their customers will benefit. Billions of dollars are on the line and buyers need to make bold decisions – many of which involve justifying switching costs of changing service providers on improved business outcomes.
The Bottom-line: Today’s Buyers Face Three Challenges
1) The foremost challenge facing buyers is the immaturity of service providers to provide more than labor arbitrage. In every segment of the outsourcing marketplace, leading service providers are urgently developing solutions. Like Accenture’s acquisition of Duck Creek to provide value to property and casualty technology. Or IBM’s development of Watson and its application in the healthcare industry. Or Genpact’s acquisition of Akritiv to support account receivable departments. Surprisingly, most service providers are non-committal and prefer “dating” through arms length partnerships, but their maze of third party partnerships are hard for buyers to understand. Other service providers are hesitant to invest at all and instead try to talk their customers into co-investing in developing improved capabilities
2) The second challenge facing buyers is determining a fair fee structure of a value-based arrangement. Because buyers have a mindset and past experience based on FTE-based economics, they find it difficult to compensate service providers for the value they will create. Especially when comparing a value-based bid to lower cost labor arbitrage-based bids. Buyers are notoriously cheap. Buyers figure they can start “phase 1” with a low cost FTE-based structure, but rely on the service provider’s unplanned “innovations” that may provide more value. But they are unlikely to be satisfied with the results. The foundation of any outsourcing relationship should be making changes that maximize a process’s business value. Service providers who create better outcomes should be entitled to better margins, which buyers should be willing to pay – if the outcomes are assured and proven.
Tony Filippone is Executive VP for Research (click for bio)
3) The third challenge facing buyers is managing transitions to new service providers that can provide value. If their business cases are not sound, internal pundits will hamper transitions and long-term value. Risk adverse buyers with limited experience with switching service providers will need to manage large transition efforts. Most importantly of all, if buyers fail to establish the right governance leadership, they will fail to achieve their ultimate goals.
Much of what lies ahead is unclear. As the economist Adam Smith said, “On the road from the City of Skepticism, I had to pass through the Valley of Ambiguity.” To this end, HfS Research will continue its aggressive research agenda focused on providing unbridled, industry-leading research to organizations seeking improved clarity.
Tony Filippone is EVP, Research at HfS Research. He can be reached at tony dot filippone @hfsresearch.com
“On the road from the City of Skepticism, I had to pass through the Valley of Ambiguity…”
… and what better way to announce an exciting promotion than this quote from capitalism’s founding father, Adam Smith that, well, pretty much sums up how the outsourcing industry needs to evolve beyond its labor arbitrage model. Yes, at HfS we sure this is what Mr Smith was really referring to when envisioning the wealth of nations over two centuries ago.
People keep asking me what makes HfS different from other analyst firms. Rather that take you through reams of cheesy PowerPoint to demonstrate our unique ways of developing and actioning data and insight, let’s cut to the chase: what makes us different is our people. Essentially, we have a mix of personalities at HfS who come from practitioner, consultative, service provider and analyst firm backgrounds. We don’t just hire kids and stick them in ivory towers, or professional ivory tower-types who just like sitting in their….er ivory towers. We focus on the practical, as well as the insightful:
If you’re a buyer and you want help with your governance, we think you’d prefer to speak to an analyst advisor who has done just that as a buyer, who constantly talks to many other buyers to explore best practices;
If you’re a provider and you want help with your messaging or positioning, we think you’d prefer to talk to an expert who has done just that for a provider and hobnobs with many other providers to explore best practices;
If you just want to get into your own ivory tower and pontificate with other ivory tower-dwellers, well, we can do that too (if you like) and have the ppt primed and ready for your scholarly satisfaction.
Our core mantra at HfS has always been to tackle the issues and complexities of global sourcing through the eyes of the buyer. One analyst who has spent nine years of his life doing just that, leading BPO governance for the $62 Billion healthcare payor, WellPoint, is our Governator himself, Tony Filippone.
Tony "The Governator" Filippone, concealing a baseball bat, is HfS' new Executive VP for Research (click for bio)
No single person in 2011 has written to – or talked with – more buyers about their governance challenges, and we are delighted to reveal to the world today his elevation to Executive Vice President of HfS’ research team. Tony’s role, is to ensure all our research is communicated to the buyer (and not the puffy stuff only advisors and providers pretend to understand). He is also tasked with pulling our ongoing data on industry trends and dynamics from our 63,000 network and making it meaningful and actionable to the world. And his ultimate religious quest is how to figure out, with the rest of the industry, how the hell we can all move on from the labor arbitrage model… so without further ado, I’ll hand you over to Tony, who tweets (click to read on):
We’ve teamed with our esteemed industry colleague Ed Caso, Managing Director and Senior Analyst for the IT/BPO Services Equity Research Team at Wells Fargo Securities, to review the world of outsourcing in 2011… and take a peek at what’s in store for 2012:
And while you are shrugging off your office party hangover and trying to avoid recalling what you were doing the night before*, we’ll be deliberating the following topics:
How this year’s economic uncertainty impacted sourcing behavior with outsourcing and shared services strategies across IT and business operations
How we expect to see 2012 shaping up with outsourcing adoption
How the financial mechanics of outsourcing have been impacted by the economic volatility – and what we can expect to see happening in 2012**
How Cloud Computing and Business Platforms are expected to impact global sourcing next year
Will the rising impact of social communities help buyers and providerhfs-s learn from each other?
December 16th at 10:00 AM Eastern Time, 3.00pm GMT
*Remember to check the photocopier room to destroy any evidence **Please be advised that any predictions made during this session will automatically expire on January 7th, 2012
For better or for worse, for richer, for poorer, until many missed SLAs do us part.
Imagine committing to someone for 15 years? Most marriages are long-divorced by that stage, companies rise and fall, entire countries are created, invaded and may even go bankrupt…
So how about standardizing life assurance and pension policies for said period, which is exactly what TCS’ insurance services delivery subsidiary, Diligenta, has become wedded to in a 15-year, $2.2bn, 1900 employee marital partnership with the UK’s Friends Life. This represents the largest life and pensions BPO engagement by a considerable margin, eclipsing the $1.1bn Prudential contract awarded to Capita in 2007.
At HfS, we believe this move from TCS signals a sea-change in the industry with regards to the growth strategies and ambitions of the leading BPO providers. Simply put, they are no longer keen to acquire each other, and see much more value ingesting large clients with domain and technology value. Taking on new clients, even at low-margins, is simply less risky from an investment perspective, and the value from developing on-shore domain capability and delivery platforms far outweighs absorbing all the unwanted mess you get when you take out competitors.
The BPO Holy Grail is no longer all about scale – it’s also about removing as many manual elements from processes as possible
We’ve been rambling on a lot about Business Platforms of late, and we see this engagement as a genuine move by a provider to develop one that dominates the UK insurance sector. So let’s keep this simple – the other day I made an electronic payment to one of our suppliers. Once the payment was completed, I had generously opted to pay the $25 transaction fee at my end for sending an “international payment” (even though it was all made in US dollars). Still wallowing in the pleasant thoughts about what a nice generous person I was, the next day I received a phone call from said supplier complaining that he had been subjected to a $35 fee from his bank for receiving the payment. “Dude, we’re in the wrong business”, was the conversation that ensued.
Essentially, retail banks are making obscene sums of money from business process transactions that actually entail virtually no human interaction. In this example, both our banks had developed sophisticated Cloud-based transaction systems, and the only human labor costs they were incurring (associated with electronic payments) involved offshore support services to take the odd tech support call, if we couldn’t figure out how to use their online service.
It’s the same with insurance, where the vast majority of processes are standard, high in frequency, completely administrative and commidotizable. Applying for a policy can also be completely automated, based on the applicant’s details (i.e. age, location, previous claims history, desired coverage etc), and so can the claims process, where only occasional human intervention may be required – i.e. making a complex adjudication, occasional routine audits, taking a customer support call etc.
The kernel of this issue is that once the BPO provider has developed a Business Platform that removes much of manual process requirements and can be Cloud-based (i.e. no on-premise software or hardware), their insurance clients can focus their competitive differentiation investments on more subtle nuances – and in many cases it’s purely down to who can deliver their services at the lowest cost, with the most attractive service benefits and the smartest advertising strategy. Essentially, the more automated the process can become, with the least amount of associated labor and IT infrastructure costs, the more competitive the BPO provider can be with its pricing, and the more competitive the insurance client can become, having more resources to focus on better marketing and service differentiation.
So, without further ado, let’s discuss the ins and outs of this strategy:
Positives of the engagement
Absorbing operations from services clients is a lot less expensive and (often) less messy that acquiring other providers. Taking on expensive back office operations is nothing new to TCS, as many recall their $500m punt on Citigroup’s Indian captive just as the last financial crisis was exploding. Clearly, TCS sees more long-term value in absorbing industry-specific scale and capability, than simply acquiring other service providers outright. For example, another play could have been acquiring EXL service, the much-courted, but expensively-valued, service provider with good capability and reputation for servicing insurance companies globally. However, that strategy would have involved either a billion-dollar outlay or a lot of stock changing hands. The Friends Life deal brings to TCS a lot more onshore delivery capability, does not require anything near the initial financial outlay, and given them a predictable path for the future in terms blowing Capita out of the UK insurance sector. At worst, the deal will be neutral to mildy-profitable over the next few years, and doesn’t create a huge hole in TCS’s cash-laden warchest, which it may choose to open if we do hit another recession and some bargain acquisitions appear.
Growing delivery scale in low-cost onshore locations is critical for future BPO development. Unlike the Citi deal three years ago, acquiring additional scale in India is much less attractive today. For starters, most of the providers have what they need in India, or can quickly develop it (or acquire for much cheaper prices these days) if they need it. Adding sizable staff numbers in low cost regions in the UK, such as Peterborough, is comparable with those costs in areas such as Bangalore these days. Moreover, for industries such as insurance with customer-contact requirements, the advantages of up-selling customers and creating competitive edge through quality onshore customer service provision is high.
On-shore investment is politically more important than ever in today’s economy. As we discussed at length recently, the political focus on job creation is reaching intense levels, and could exacerbate very quickly if a further recession occurs. The Indian providers, in particular, are under constant scrutiny regarding their investment activity and immigration strategies. Entering into agreements like this is a major positive for the perception of the outsourcing industry and creates a strong argument for helping clients such as Friends Life be competitive. Moreover, as the leading providers chase more industry-focused engagements that require real domain skills that are tied to both local regulations and process flows, the need for localized delivery is becoming pivotal in the global sourcing delivery mix.
Developing common processes and a business platform will give TCS more teeth as a global insurance BPO provider. Most service providers have struggled to make effective investments in technology platforms that underpin their service delivery, and those that have invested have struggled to develop them effectively in such a way that they can actually sell their platforms multiple times. And by the way, the last point is crucial for the success of this deal – the jury is still out on how much standardization and scale TCS can drive out of this.
Potential to break the linkage between headcount and revenue growth, and the willingness to absorb lower initial margins (or even lose money) to do so. Several of the leading BPO providers, in addition to TCS, are eager to make platform-based BPO services a large proportion of their businesses over time (this has varied between 10 and 33% of future revenues, depending on provider). This suggests that providers are increasingly worried about the longer-term supply-side constraints in India, namely wage appreciation, quality of staff, constant attrition etc. The more that processes can be automated and standardized, the easier it is to train and develop staff, effect uniform process improvements and globalize process flows.
The IT services growth rate is slowing down and this is one way for the likes of TCS to add significant revenue to their bottomline. With the Rupee depreciating, TCS will have higher profitability from the rest of its business, such as BPO services, and this loss can easily be masked. Moreover, the Tata group at large has made successful turnarounds on Jaguar/Landrover and therefore there is a willingness and confidence to make substantial long-term bets, such as this Friend Life engagement.
Challenges with this deal
TCS could find themselves constrained to the UK market. TCS is going to find it challenging to scale these UK-specific investments to insurance sectors in Continental Europe, the US and Asia. Life assurance and pension processes and regulatory issues for UK clients are different from those in other countries, so the current resources acquired in this engagement are likely to be confined to future UK-centric insurance business TCS hopes to win.
This is the largest migration of insurance policies onto a single system ever untertaken in the L&P industry. To be able to migrate 8 million policies onto the TCS BaNCS platform is likely to take 2 to 3 years, which will pose a major challenge in a niche market with only one major competitor, Capita. Essentially, any serious migration issues would quickly make this deal unprofitable for TCS, however, it hopes this new engagement can be as successful as its recent migration of the 3.2 million Phoenix Group policies onto BaNCS.
Platforms are only going to work effectively with transactional high volume standardized processes with very little variation is outputs. While there is a rush in the BPO business for many processes to be “productized” on platform offerings, these are only going to be effective with processes that can be easily automated and require minimal contextual input and customization. While the opportunity to develop platforms to service insurance firms is clear, HfS is concerned too many service providers are already getting carried away with the Business Platform approach, as it’s only going to work with certain industrial and horizontal processes. Hence, the winning BPOs are those which develop competences for both context-based and standardized service provision. We already run the risk of some providers starting to sound like software companies…
From a stock perspective, many Wall St analysts are lukewarm with these platform initiatives. Several investors worry that these investments are going to dilute margins in the near-term and this will impact valuation in the public markets. However, this is because many only care about short-term impacts and do not take the longer view that it takes some short-term pain to achieve long-term benefits. Moreover, too many investors have been blinded by the high-margin profitability of many ITO deals and simply do not understand the different dymanics and nuances that go into a more complex BPO engagement.
The Diligenta proposition does not use wholesale offshoring. This poses a great challenge (and opportunity) for TCS to drive efficiencies through automation and process transformation to make money from the engagement. With such a large base of UK employees, it will have to contend with local UK labor laws and regulations, in addition to a tense political environment with regards to job creation. The Indian offshoring mentality of yesteryear of throwing cheap labor at a problem will never work in this scenario. TCS has no choice but to make this work – and if it can, it will become one of the first leading Indian providers to truly break out of the low-cost wage arbitrage delivery model.
The Bottom Line: TCS makes the boldest move yet of the Indian providers and forces itself to change the FTE game
There’s been so much talk about this move away from the FTE-based model of cheaper bodies to do the same work, but we’ve not seen much of it in practice. However, this deal is different. As much as people like to sneer at the lower margin expectations, the sheer scale of onshore labor investment and the unproven financial model for business platform utility in the L&P business, TCS is forcing itself to make this transformative engagement work. Quite simply, there is little room for error, and there is little patience in the TCS boardroom for unprofitable business. However, TCS has proven to be the most profitable of the Indian giants, and with the ITO model losing steam, it has to look at new business areas to hit the $10bn revenue goal. If it’s ever going to take a risk, now is the time, and this is the right kind of deal that will challenge the firm to embrace new forms of productivity growth. Investing in Friends Life should prove to be a major step forward in evolving their BPO offerings – and surely a much smarter and more cost-effective way to acquire scale, domain depth and extend their BaNCS platform.
"I'll show you how I feel about your license model…"
SAP has made a major move to “Cloudify” its software portfolio with the $3.4bn acquisition of the darling of HR software, SuccessFactors. However, while HfS’ research partner Ray Wang succinctly outlines why this is a winning move for SAP, we do not believe this is particularly good news for BPO service providers and services clients.
This rampant consolidation of business software apps firms makes it tough for service providers to develop their own Business Platform offerings and develop outcome-based delivery models. As we have been discussing at length on HfS, the leading BPO providers are hurriedly developing service offerings that are underpinned by Business Platforms to support transactional, high-volume, standardized processes with very little variation in outputs. HR services are prime candidates to be optimized by Business Platform delivery, epitomized by ADP’s GlobalView payroll and HRO offerings – arguably the industry’s first Business Platform – introduced years before anyone even knew what a Business Platform was.
This means BPO providers have three choices with their Business Platform strategies
Choice 1: Develop and patent their own cloud-based workflows
This is surely where BPO service providers can really clean up, provided they can deliver complete clusters of standard process offerings for their clients that are cloud-based, affordable, scalable, high-quality and – most importantly – can be maintained with quality service personnel that can offer consultative support when needed, as the client seeks to transition onto the offerings. Most BPOs today are developing prototype platforms that they can “productize” as utility services, once they achieve a handful of clients using each offering. Our ongoing research already points to more than 150 business platforms in various nascent stages of development from the BPO providers.
Choice 2: Acquire them from a client or another vendor
Most of the ambitious BPOs are seeking to pick up new clients that deliver the potential to develop industry platforms, such as TCS’ recent $2.2bn Friend’s Life engagement which gives the firm the ability to enhance and deploy insurance systems across multiple insurance clients, and Cognizant’s acquisition of UBS’ India operations to service capital markets clients. In terms of outright vendor acquisitions, the capability to develop platforms is high on the agenda, such as Capgemini’s recent acquisition of VWA and its WebCollect OTC platform, Infosys with McCamish, Accenture with Zenta and IBM with Sterling Commerce.
Choice 3: Partner with a software firm and deliver directly to the client
Both SAP and Oracle have invested heavily in structured programs over recent years to encourage the BPO providers to deliver processing services that are underpinned by their software products. This has included programs to support education and implementation throughout the outsourcing process, in addition to license agreements structured specifically for an outsourced environment. Many BPO “partnerships” have been announced such as Wipro with Oracle and Netsuite with Genpact, however, we’ve yet to see significant evidence of clients chomping at the bit to take up these software/BPO partnership offers. Most of the software firms have “partnered” with as many services providers as possible to maximize their market opportunity, as opposed to co-development and co-investment of product and delivery resources.
While SAP already has been attempting to assemble its own portfolio of Cloud “offerings”, it has been worried about cannibalizing its cash-cow legacy revenue from its ERP licensed products. How SAP structures the licensing and pricing of SuccessFactors is going to dictate whether BPO providers offering HR services will seek to push it proactively to their clients.
SAP joins Oracle in increasing its stranglehold over enterprise software platforms
For service providers seeking to push HR services to large enterprises, it’s increasingly challenging to avoid partnering with either SAP or Oracle in some capacity (Choice 3 above).
For example, if the client already has PeopleSoft or SuccessFactors and wants a BPO provider to service those existing implementations, there really are only two ways for the providers to be competitive from each other:
1) Be cheaper than everyone else. Provide payroll processing or employee-record update services at a lower FTE cost than the next provider. Hmmm… doesn’t sound like a very attractive business for the ambitious provider looking to increase its margins and service value… sounds more like a race to the bottom.
2) Be better than everyone else. Provide HR consultative services, such as succession planning or change management that truly differentiates themselves from their competitors, and allows them to charge higher rates to the clients. Clearly, this is the preferential model for providers seeking higher margin-value, but wouldn’t it be so much more attractive to provide their own workflows and platform?
The dichotomy here is that whatever route BPO service providers decide to take, they can only really achieve price-per-headcount results and can’t truly look at delivering real business outcomes for their clients, if they are delivering someone else’s workflows. For example, being incentivized financially for lowering a client’s employee-attrition, or increasing their employee-satisfaction. Moreover, whichever way they look at it, they are going to have to factor in the hefty Oracle or SAP license fees somewhere along the line.
The bottom-line: SAP and Oracle need to embrace outcome-based service provision to make this attractive for both BPOs and clients alike
SAP and Oracle need to work with service providers to develop outcome-based scenarios for clients. This means they actively need to offer up portions of their license fees to incentivize risk-sharing pricing. This could work if the ERP provider gets paid via the same gain-share model the BPO has structured with its client. However, this is a lot easier-said-than-done, as it’s hard enough for client and provider to broker a gain-share engagement model, let alone invite the software vendor to get involved. (If someone has an example of this type of model actually working in practice, please tell us, as this is where many of these engagements need to be structured in the future – and would be a great advancement for the lawyers and third party advisors, if they dare to venture away from their familiar FTE-based transactions).
Ambitious services providers in the HR space need to look further afield to make smart platform investments. There aren’t too many options left in the market for BPO providers seeking to make their own platform investments. If you read the speculation, Taleo is the next best available, and this isn’t overly attractive, with most of its revenues coming from recruiting. It also puts the spotlight on SuccessFactors’ (arguably) toughest competitor, Cornerstone OnDemand, with its compelling platform of integrated Cloud-based talent management processes.
Beyond Taleo and Cornerstone, there are few public HCM SaaS vendors left worth acquiring, and there is precious little value to be found when examining the HCM start-up space. The darkhorse in all of this is what happens with Workday, and whether it can make itself a more attractive partner for one of the BPOs to make a real play into the HR BPO services market. What would be game-changing, is if one of the leading BPOs were to acquire Workday and create a whole new platform/BPO ecosystem in its own right; however, it’s unlikely that any of them would dare upset their cash-cow Oracle and SAP relationships.
It seems the Oracle/SAP stranglehold is set to continue for a few years’ yet, but the increasing development of the Business Platforms market could be the ultimate force that finally starts to erode their domination.
Fed up with those whiffs of camembert emanating from your latest sales deck illustrating 92 beautifully-crafted graphical representations of your offshore transition methodology, your global delivery model and your “unique” roadmap to achieving innovation? Still wondering why your last three deals went south despite those investments your firm made in PowerPoint designers?
So how can you make the sales process smell less like a Wisconsin dairy farm? Easy – simply join us for our next web event, where we’ll discuss – and officially answer – these questions:
Which common presentation practices are actually detrimental to the efforts?
What are buyer’s pet peeves during sales pitches?
What can buyers do to improve the quality of the communications they receive?
How do successful presenters manage time and use tools like powerpoint?
What makes a presentation memorable?
In outsourcing pitches, how can you achieve differentiation?
How can you separate the hype from the actual capabilities of a provider?
Watch the sparks fly as HfS COO Esteban Herrera leads the discussion with these four cheese-busting industry luminaries:
*Kevin Judice: CIO, PNM Resources (Rumored to turn up to sales pitches with a 12-bore) *John Gustafson: VP, Energy & Utilities, Wipro (Has the bullet-holes to prove it) *David Poole: BPO Executive (A reformed fondue expert and expert salesman) *Chip Wagner: Chief Cheese-Busting Officer, Alsbridge (Spends his days wearing cheese-armor) *Mystery Cheese (We’ll unveil a mystery cheese-buster especially for the occasion!)
There will be technical weenies that exhort today’s acquisition of Emptoris by IBM as yet 
