We’re going to release our 2011 Finance and Accounting Outsourcing (FAO) industry landscape next week, and one dynamic that has really stood-out over the last three years, is the different competitive strategies going on at the high-end of the market versus the smaller engagements.
Most striking, are the divergent strategies of the market leaders, Accenture and IBM. While Accenture has consolidated its commanding presence with the large-scale enterprise customers, IBM has determinedly gone after the mid-market.
You may recall we highlighted, back in January, that the average FAO engagement fell below $20m TCV for the first time last year, we also pointed out that those providers with scale and flexibility of delivery resources are those best-positioned to pick up the smaller engagements:
Scaling a global BPO business based on multiple small client engagements is wearing on resources – and profit margins, and the providers scrapping for their share of the smaller business, are faced with a simple choice: Either stick with it and view this as a 10-year journey, or if you simply don’t have the patience or appetite to put in the investment, then get out and refocus your services on other activities. For those who stay the course (and we expect most will), they need to keep putting in the grind to win small engagements, and attempt to scale their BPO delivery resources, while trying to turn some sort of profit.
Our deeper-dive analysis shows that exactly this scenario is happening with several providers over the last three years. Let’s contrast both the enterprise-level market performances (engagements over $25m in TCV) and the mid-market (engagements below $25m TCV).
Accenture has developed a commanding position with enterprise engagements, while IBM has gained a lot of ground winning smaller-scale and mid-market clients. As these market share graphs illustrate, all the FAO engagements signed since the beginning of 2008 that have a Total Contract Value (TCV) of more than $25 million, dominate 80% of the total market, with a total expenditure of close to $8 billion. Accenture has been dominant in retaining and developing its client base of enterprise-level engagements, with Capgemini, IBM and Genpact providing the main competition with enterprise-level engagements.
The FAO newcomers, over recent years, have struggled to win many (or, in some cases, any) enterprise-level deals, and have sought to grow their respective market footprints by taking on smaller-sized engagements – many of which fall into the sub-$5m TCV category. The following graphic illustrates the service provider shares of the smaller-scale FAO engagements signed since the beginning of 2008, where the one notable market-mover in the mid-market segment has been IBM, winning the lion’s share of business with a commanding 25% market share.
The onshore order-to-cash specialist, Vengroff Williams and Associates (VWA), also performs strongly in this segment, while there has been a relatively even-spread of business across all the major service providers, such as TCS, WNS, InfosysBPO and Cognizant, in addition to the FAO pure-plays, WNS and EXL. Genpact has proven the most consistent at developing a balanced portfolio of enterprise and mid-market clients over the last three years.
So what do these competitive dynamics mean for the future of the FAO industry?
Essentially, the FAO industry is readying itself for life beyond the simple “lift and shift” deal, where margins were made off labor-scale being shifted offshore. Labor-arbitrage doesn’t amount to nearly as much, when you’re dealing with, for example, a 30 employee transition. What’s more, most of these providers need to start scaling their resources across multiple clients, or face a depressing race to the bottom, where their only real differentiator is their ability to provide low-cost labor. Having scale and flex from ingesting several large-scale clients is extremely valuable for providers, but only if they can leverage those resources to new clients as they take them on, in order to optimize their margins on the new business and remain cost-competitive.
Our take is that providers need a good balance of both large and mid-scale engagements, whereby they can allocate delivery resources and process acumen across their customers in order to develop repeatable process flows with application wrappers to enable them. While small-scale engagements can struggle to be profitable, they do force the provider to develop a utility model that keeps then in the black. Clearly, we’re in a highly-competitive market situation, and this isn’t a market for the faint-hearted.
Latin America really is emerging as a nearshore powerhouse for both IT services and BPO, and we thought it high-time an analyst firm actually took a close-up look at the region. The result is a broad-ranging study, the results of which were distributed by Softtek today.
We’ve got a quick glimpse a the study’s six key findings:
Global IT delivery strategies more frequently include Latin America: The power of a well-crafted global delivery strategy lies beyond labor arbitrage and low-cost offshoring from India. Although most projects featuring a global delivery strategy stick to application development work, there are opportunities for more advanced relationships beyond staff augmentation and software engineering services. New remote infrastructure management offerings and service offerings that focus on niche areas of application expertise now see global delivery locations spread beyond India into Latin America. The region is vast and offers the ingredients to make any nearshore move successful: it has a thriving technology economy, it brings competitive software development rates, it can demonstrate industry innovation, and with vast human capital it has the potential to scale.
Latin American strategies underpin global delivery with increasingly mature services: Firms investigating service delivery from the region like the cultural familiarity bred by the influence of the US and Europe. Customer interviews reveal how distance and time-zone repeatedly offer real-time collaboration opportunities and reduce the burden of oversight and resourcing through physical proximity and better resource alignment. The region continues to offer coding, testing and other IT support but this paper uncovers US firms sourcing niche application services for specific industries (e-banking/gaming), analytics (retail), and bilingual back office support services (finance and accounting). Buyer choice continues to grow as a diverse set of providers continue to invest in new locations in Latin America and customers find more opportunity to realize value as client/vendor relationships develop over time. HfS has developed a location scorecard tool to help buyers assess each country in Latin America as a global delivery destination.
The region offers buyers three routes to value:
Specific skills at lower costs than onshore in the US or Europe. The region still offers labor arbitrage for desirable skills.
Reducing the risk for immature processes. Portfolios of applications that demand more interactions between onsite and offshore teams or that have highly interactive methodologies in play require more oversight especially if their internal processes are weak.
Supporting a broader market move into the region. Engaging with local providers and using local resources demonstrates a broader commitment to the region.
Calculate the true TCO and measure risk: This report finds that rate cards for services don’t tell the whole story. Although the region offers labor arbitrage for desirable skills, it’s fading just as quickly as anywhere else. Pure labor rate comparisons must factor in costs for staffing levels (onsite, offshore, nearshore) during different phases of the relationship, such as knowledge transfer and transition. Clients attest to lower attrition levels and fewer site visits, and when they were required, these site visits as part of the governance were much easier to do—these and other soft factors impact the total cost of ownership. Taking work to Latin America does not guarantee success or drive instant savings however—any move nearshore needs careful consideration against the type of work that needs to be done, the maturity of the internal processes and the challenges it creates for corporate culture.
Build the business case with care—resource levels need careful consideration: Quantifying resource levels on a typical nearshore engagement and comparing this to an offshore engagement from India is difficult to do when firms have to factor in that the number of resources flexes depending on the stakeholders involved and the IT process maturity in play. Highly leveraged offshore relationships may demand the provider lands resources onsite with the client to make the deal work—the net effect could be that highly leveraged offshore relationship costs more when landed resources at the client site are factored into the cost rather than blending of going 90% offshore to India rather than nearshore to Latin America.
Local providers must play the global delivery card too: Outsourcing in Latin America will continue to grow because the region can serve many different types of demand. The business services industry is at a stage of globalization, which means for buyers that it’s really going to be a competition between different providers rather than different countries. This paper recommends buyers conduct due diligence and check what path their prospective providers are following. Do they offer the opportunity (i.e., tools, methodologies, best practices) for more advanced relationships beyond simple staff augmentation services? Local Latin American service providers must operate their own service operations with service delivery mechanisms and capabilities to support their customers as they enter into emerging markets beyond Latin America such as China or Russia.
As customers mature in how they buy their services from providers in the region, so too does the suite of services on offer. As a result, firms can tap into more sophisticated functionality from their nearshore partners—the study found finance transformation and outcome based relationships superseding low-cost staff augmentation.
To give you a further glimpse of the report, this figure provides a profile of the projected growth in sourcing services spending by major service category in Latin America from 2009 and 2014. The report also includes forecasts for each region within Latin America.
Click to enlarge
Discover How Latin America Powers Global IT Delivery:
SourceCorp and HOVS Services are two companies that rarely make the news. These are blue collar outsourcing organizations who have each been in the marketplace for over 20 years with deep specialization in backoffice transaction processing and document management automation.
However, the announced merger of two competitors into a new entity with combined revenues of almost $500m, a strong positive cash flow, 14,200 employees, and a combined customer segment of half the Fortune 50 is intriguing for several reasons.
Have no doubts – this merger is all about synergies, just as we said about the Patni –iGate merger. These are two remarkably similar organizations operating remarkably similar businesses, but with very few shared customers. There is plenty of opportunity to improve profitability of the combined entity. However, for the merger to be successful in the eyes of current and potential customers, the combined organization has to not only eliminate administrative redundancies, it has to rationalize its core transaction processing technologies in a manner that will improve the value of its clients.
From a competition perspective, this merger accomplishes two marketplace changes. First, it eliminates a tough competitor with a similar approach and cost structure. Second, it creates a $500m competitor to Xerox/ACS (itself dealing with post-merger headaches), Accenture and IBM, but with a simpler story to tell, as SourceCorp+HOVS is an accomplished pure play BPO provider and doesn’t have to talk about copy machines, consulting, or software. Importantly, the combined entity earns 27% of its earnings from the healthcare sector, making it a formidable provider for clients to consider. Also, the organization has almost 100 US domestic locations, which is a considerable footprint for regulated clients or clients that need a vendor located close to their operations.
From an industry perspective, there is little doubt that Xerox’s ACS acquisition was a partial impetus for the merger. Surely pure play BPO providers are an important aspect of the marketplace, but clients who have outsourced are now looking for transformation, and the newly combined entity will have to decide whether synergies and scale are sufficient to carve out meaningful market share, or they will need to reinvest savings into creating transformational market offerings that will compete with the big boys and keep existing companies happy.
One more aspect of the industry is worth noting: SourceCorp and HOVS Services have largely focused on transforming printed material into transactional data. As clients increasingly seek to eliminate manual paperwork and automate transactions, the marketplace for the bread and butter of these two companies’ services will erode. So, this merger may offer an insight into the impact clients’ internal investment activities have on the demand for BPO services.
Despite the promise of a strong future, there are plenty of risks. If core synergies are to be obtained, clients have to be migrated to new platforms as old ones are eliminated, and some clients may be resistant or slow to do so (buyers, you know who you are). Less tangibly, management teams that competed head-to-head for many years will need to learn to collaborate and build a new company. Lastly, potential clients may balk at working with a company deeply focused on internal merger.
HfS Research VP of Marketing Mark Reed-Edwards got together with HfS Founder and CEO Phil Fersht and Dawn Evans, President and CEO of Sourcing Interests Group, to discuss the new groundbreaking industry research and networking partnership announced on March 8.
Click here to listen in on why on earth they decided to do this:
In Part I of our interview with Francisco D’Souza, President and CEO of Cognizant, we discussed the rampant growth Cognizant has experienced, the global economic environment as we emerge from the Recession, and Frank’s point of view on the Cloud and the sourcing industry.
Now, in Part II, we get a bit more personal about what makes Frank tick…
HfS Research: Frank – tell us a bit about yourself and your upbringing and how you ended up leading a $4.6 billion global corporation? Did you imagine you’d wind up doing something like this?
Francisco D'Souza, President and CEO of Cognizant (click for bio)
Francisco D’Souza: After finishing my graduate work at Carnegie Mellon University, I took a job as a management associate with Dun & Bradstreet. Early on, I was presented with an opportunity to work with a team to build D&B’s first IT captive in India. I jumped at the opportunity. In 1994, that captive was spun off in to Cognizant and the rest, as they say, is history. I can tell you with a great deal of certainty that I never imagined running a $4.6 billion business! On the contrary, I just focused on doing things along the way that I enjoyed and which provided me opportunities to grow and learn. The rest just happened… I also have to say that we have the best team in the industry at Cognizant and my achievements are a reflection of their work; it was by no means an individual effort.
HfS Research: If you had your time again, would you choose the same path? If you weren’t a techno-preneur what would you choose to be doing?
Francisco D’Souza: I am incredibly happy with where I am today and Cognizant’s trajectory for the future; it is impossible to look back and wish I had taken a different path.
But, if I had to do anything else in life I would have wanted to be an inventor. I am overwhelmed by the power new technologies have on people’s lives – the power to dramatically change people’s levels of productivity or their standard of living. To contribute to that would be incredible. Plus, I love to work with my hands. In my basement, I have a room that’s just for me. Even my wife and kids aren’t allowed in because it’s a mess. I have all sorts of things in there, like a whole collection of old brass telegraph keys that are anywhere from 50 to 150 years old. I love this period; the days of Morse, Marconi and Edison and the beginning of electronic communication.
HfS Research: And finally, being one of the youngest CEOs on the Nasdaq today, what advice do you have to many of us forging our careers in today’s services industry? Are the core traits of success today different than they were 5 years’ ago?
Francisco D’Souza: In my mind, the key to success is the same for anything you do – dedicate yourself to something you love and don’t be afraid to take risks. If it feels like work, or if you are not passionate about what you’re doing, you won’t have the energy to put in the time and effort needed to be successful.
HfS Research: Frank, thanks for your time today – we look forward to sharing this discussion with our readers.
If Sigmund Freud was alive today, you might just find him at a sourcing trade show avidly observing some unique quirks of human nature.
And when considering his conclusions, you’d likely find him deep in discussion with HfS contributor and part-time behavioral psychologist from SourcingChange, Deb Kops.
Over to you Debs, for your evaluation…
Goin’ to the trade show, and I’m gonna get bu-i-i-is-ness
All weekend a parody of the 60’s song, “Going to the Chapel and I’m going to get married,” was tripping through my head as a result of spending a few days at an industry meeting complete with the proverbial “exhibit hall.” With so much time and resource spent in order to get the seller’s name out. I can tell you what I took away—dishwater coffee and a few logo’d pens, rubber ducks and thumb drives. What did they get?
Think of a trade show in any industry and the same elements come to mind—booths chock a block with graphically glowing descriptors, a great array of giveaways, a tray of chocolate, the proverbial “drop in your business card and win a Kindle,” bowl, and even in this day and age of online collateral, a few brochures declaiming leadership.
As it’s high season for expos, weeks, summits and what have you, it’s clear that the outsourcing and shared services industry hasn’t veered away from this recipe. With exhibitors keen to get prime booth real estate while sponsors happily take their money, it’s a good time to ponder whether spending all that dosh really moves the dial on brand.
Some of us trip through the hall only to register, while others religiously show up during breaks for muffins and popcorn. Some use the hall as a meeting point, while others traipse around each booth for the giveaways which go down so well with the kids we left at home. And perhaps even a few of us are sincerely interested in finding out more about Outsourcing-R-Us, or the advantages of locating a center in Trans-Mesopotamia or even the latest and greatest software that depreciates widgets automatically. But do exhibitors gain brand by setting up? And do we give them the attention they expect to get?
Walk into any exhibit hall and you’ll see a similar cast of characters:
Software vendors. These folks, generally mature guys, selling both platforms and apps to the sourcing industry, are always in their booths and seem to run in packs. Savvy enough to secure the 100 percent corners in the layout—or the spot directly across from the bar, they conscientiously man their booths both during exhibit hours and sessions. You’ll always see two or more together, proudly wearing their logo golf shirts or button-downs. A crowd is always around—is it the sexy set up, the great giveaways or are the folks in attendance already clients who are stopping by?
Niche providerswhose delight at having the marketing money to show up for the first time at a conference is palpably written in their smiles. The shiny new booth is equipped with a backdrop that lists about every service they deliver from any location that any end-user could conceivably want to buy—if they had the inclination to stand there and read the fine print on the list. For the young men who represent these firms, getting a pile of business cards and being able to talk about ‘why they are different’ seems to be the name of the game.
Eco-developersThe lady from Latvia or the man from Mauritius, sitting in a small booth, often seems uncomfortable when you stop by to mention that your grandmother grew up on a farm outside Riga, or that you once enjoyed a great holiday on the beach. Unsure of his or her English, and not wanting to let on that s/he did not fully understand, s/he thrusts a brochure extolling the virtues of locating a delivery center in said region/city.
Deborah Kops, Contributing Analyst, HfS Research (Click for Bio)
ConsultantsExhibit booths can perform like Venus fly catchers for consultants. Every once in a while some guy who is looking for a sourcing advisor just happens to stroll by, making the effort to set up a booth totally worthwhile. And when there are no buyers in site, the booth will serve as a meeting place for team mates who rarely have the opportunity to see each other.
Established providersput up a booth for brand enforcement, generally manning it with the marketing “gal” or guy whose main job seems to be playing go-fer for the brass who show up on Day Two to deliver the plenary speech. Often the booth is unmanned, perhaps under the assumption that the name in lights speaks enough about brand.
Now I’m the last person to say that building brand is not important. Indicating that an organization is part of the sourcing industry by showing up is a good thing. Walking through an exhibit hall is a quick way to see the latest and greatest in apps, new providers, which countries want your business, and, as importantly, meet old friends. And even the coffee is drinkable when it’s free. But do exhibitors get real business? You tell me.
The biggest issue in today’s sourcing industry is the need for a truly independent and high-value environment for sourcing and outsourcing practitioners to collaborate and share knowledge.
The type of environment where buyers and industry folks can meet with each other, share their pain and success, access research, knowledge and data, and have the coaching, education and the advice they need to help their organizations cope with one of the most complex issues facing them today – how to source value from their global business operations.
At HfS, we’ve been micro-focused on helping the sourcing industry get past the puff and fluff to help them access and share research, knowledge and best practices, ideas and views. Oh – and have a bit of fun at the same time.
Today, we are delighted to announce an exclusive industry partnership with the premier membership organization that has served sourcing and outsourcing professionals from Global 1000 companies throughout a 20-year history: the Sourcing Interests Group.
Having personally been associated with SIG for many years and attended many of their events, it has always set itself apart as a venue where senior practitioners feel comfortable sharing their experiences and knowledge. The quality of their events, the detailed effort to develop superior content, debate and speaking line-ups, and its “family” atmosphere has always stood-out. You always came away wanting to be part of the SIG family and planned for their next gathering, as opposed to that “one off” feeling you get at so many other industry gatherings today.
And when their dynamo leader, Dawn Evans, took over the organization a couple of years ago, you could immediately sense the renewed energy and determination within the organization to establish SIG as an innovative networking environment.
So what does this partnership mean?
* SIG’s members have access to HfS Research’s extensive published research and knowledge. HfS has a prolific library of published research covering business process outsourcing (BPO), information technology outsourcing (ITO), cloud business services, shared services and governance strategies in addition to deep coverage of industry trends across financial services, manufacturing, utilities, energy, healthcare, retail and media sectors. HfS’ service provider performance evaluations, pricing strategies, market forecasts and sourcing best practices will also be available to SIG members.
* SIG will host the HfS 25 Sourcing Executive Council during its Global Leadership Summit in Seattle this October. The “HfS 25” is our exclusive research network of leading buy-side sourcing practitioners who meet regularly to share knowledge and experience to help shape the future direction of the sourcing industry. SIG provides the right type of professional environment for our council members to meet a broad network of sourcing practitioners and industry-side executives.
* Other benefits of the partnership include analyst time for members at SIG events, HfS research presentations, workshops and state-of-the-industry discussions at SIG events, and SIG member webinars led by HfS analysts.
Bottom-line: The sourcing industry now has the collaborative environment it has craved. Together, the SIG and HfS teams are providing the collaborative vehicle where sourcing executives can meet, collaborate and extend their learnings – both physically and from their PCs. This is Networking 2.0 – the new collaborative environment where the sourcing industry can create some value for itself – that is sticky, ongoing, self-perpetuating and educational.
We’ll see you all at 2011 SIG Global Sourcing Summit, March 15-17 on beautiful Amelia Island in Florida. If you haven’t already, I encourage you to register today. HfS COO Esteban Herrera will be one of the many speakers at the summit, which features a keynote by Steve Forbes, Chairman of Forbes Media and Editor-in-Chief of Forbes Magazine. We look forward to great year with SIG and many more to come after that.
We have always enjoyed your interaction at support at HfS and are excited to involve so many of your with our broader networking family. Stay tuned for many new ways you can all get involved. I want to personally welcome Dawn Evans and her great team to the HfS family.
Warm regards,
Phil
Phil Fersht | CEO and Head of Research, HfS Research | Tweet @pfersht
For more information in the HfS-SIG partnership, please email us at [email protected]
Cognizant had an unprecedenced growth spurt in 2010, attaining annual revenues of $4.59 billion – up 40% year-over-year. We have arrived at the growth peak of offshore IT services, and Cognizant has led this acceleration coming out of the Recession.
Things have certainly kicked on since we talked with President and CEO, Francisco D’Souza, a couple of years’ ago, and what’s alarming for the rest of the industry, is that “Frank” (as Francicso tends to be called these days) isn’t resting now. The company has provided guidance for 2011 predicting revenue growth of at least 26% – and this is a firm that tends to stick to the conservative side of its financial predictions.
So we caught up with Frank this week to discuss the dynamics behind Cognizant’s growth, the state of the services industry, the global economic outlook and (of course) his perspective on the Cloud, among other issues. Here is part 1 of this 2-part interview:
HfS Research: Frank, firstly, congratulations on such a barnstorming financial performance – and over such a prolonged period of time. What’s the “secret sauce” you can share with our readers? Is it all about focus on revenue growth and account management, or are there other critical elements to achieving such prolonged financial success?
Francisco D’Souza: Thank you, Phil, and congratulations to HfS Research for a great inaugural year and to you on being named Analyst of the Year.
As for Cognizant’s success, we have always been very open about our “secret sauce” – we put our client first. Of course every professional services firm approaches the market that way, but we have made some unique business decisions – namely our reinvestment model – to support that principle.
Cognizant manages our non-GAAP (before the impact of equity compensation expense) operating margins in the range of 19 to 20 percent – below that of many of our competitors. We invest that difference back in to our business in a number of different ways.
For example, in strong client facing teams. Our 2-in-a-box model – which pairs an on-site client manager with an offshore delivery manager — provides superior customer intimacy and an enhanced relationship experience. We continue to strengthen that experience through investments in consulting teams and, most recently, in Program Management resources capable of driving large-scale organizational transformation.
We also invest in new service offerings to stay on top of our clients’ evolving business and technology needs. Offerings such as Infrastructure Services, Business Process Outsourcing, Enterprise Analytics, and Engineering & Manufacturing Solutions give us entrée to serve clients in new areas as the offshore “share shift” continues.
And, finally, we hire and retain the best talent in the marketplace. Last year we added over 25,000 associates in over 50 centers across 22 cities around the globe. We improved already strong relationships with key Indian universities – a primary source of talent for the company – and began an undergraduate recruiting program in the US and Europe to capture a new pipeline of strong talent. And we continued to provide the best career opportunities for our existing associates by, for example, promoting nearly a third of our workforce in 2010.
HfS Research: We’ve talked a lot about the changing economy and secular change within industries over the Recession years. Now the fog is lifting, is your outlook any different?
Francisco D’Souza: While we continuously refine our outlook, we see things unfolding the way we had anticipated. The economic environment is generally more stable, IT and Outsourcing budgets seem to be showing modest increases, and Cognizant’s investments over the past few years position us well for growth at the intersection of three large trends.
The first is expansion in the scale and scope of global sourcing to new areas – the so called “share shift”, which accelerated during the Recession. Our clients’ intense focus on operational efficiency served as a catalyst to examine what activities are core to their business and what should be done from somewhere and by someone else. As a result, companies are driving more work and corresponding budget to a global delivery model, thus expanding the addressable market for traditional outsourcing. We also see significant opportunity as we continue to take the offshore model to newer geographic markets such as Europe, AsiaPac, Latin America and the Middle East. In aggregate, scale expansions in to new geographies and scope expansions in to new processes represent a market opportunity that is as large as, if not larger than, the traditional ADM market.
The second is continued spending on discretionary projects as companies embark on transformational programs to address secular changes in their industries. These projects range from companies rationalizing complex back-office infrastructure by consolidating data centers, virtualizing servers, and modernizing legacy applications – to implementing or upgrading packaged software to support efficiency and effectiveness in the middle and back office. Once again, we see clients becoming increasingly comfortable using a global delivery model to execute these large, complex transformational engagements.
And the third is a new set of services and solutions that companies are adopting to embrace the new business models, new technologies and new generation of workers and consumers that form the foundation of a new Future of Work.
HfS Research: Cognizant talks a lot about the Future of Work. In a nutshell, how is Cognizant gearing up to service its clients, bearing in mind this future vision?
Francisco D’Souza: Cognizant has very publicly shared our view that three global trends that are rapidly redefining the “new normal” and reshaping the way forward-thinking companies operate.
The first is a new generation of highly distributed and virtualized business models that push global talent integration to new levels in search of dramatically better efficiency and effectiveness.
The second is a new generation of cloud, mobile, and social technologies that are redefining the range of business problems that technology can help address.
And third is a new generation of workers and consumers that grew up with technology and has dramatically different expectations about how they interact with companies.
Francisco D'Souza, President and CEO of Cognizant (Click for bio)
In this virtualized, globalized environment where new technologies like cloud computing and social networks intersect with the millennial generation, clients are looking for better ways to organize teams, cultivate innovation, allocate resources and reinvent knowledge processes. This is how we define the Future of Work.
To illustrate how we’re gearing up to support clients, let me use two examples. The first example relates to a new class of “Business Process as a Service” (BPaaS) outsourcing solutions. Through the investment in new services that I mentioned earlier, Cognizant can provide clients with a fully integrated solution including IT infrastructure, applications and business process outsourcing to solve a specific business or functional problem. The client pays for the outcome and, generally, does so on a transactional basis. This model appeals to a client base that’s looking to replace fixed capital expense with variable operating costs that scale with demand.
An example of this is the work we are doing at Eli Lilly & Company, where Cognizant is deploying a comprehensive BPaaS solution to support US sales and marketing operations. Our solution covers a range of functions such as sales force planning, sales incentive compensation, customer relationship management, business reporting, data warehousing, analytics and state compliance reporting. We are excited about expanding our portfolio of solutions aligned to these unfolding secular changes.
A second example where we are geared up to help clients is in the adoption of new technologies to improve employee and customer experiences. Today, technology expectations are increasingly being shaped by the consumer world where sleek smartphones, always-on broadband, and boundless virtual personal interactions are the norm. Yet in the corporate world, the technology environment is far different. Clients recognize that the chasm between the state of technology in the consumer and corporate worlds is unsustainable and they are investing to bridge the gap.
We recently developed a mobile application for a global consumer products company that allows delivery personnel to collect competitive intelligence about product placement in retail stores. The application captures information about where competitors’ products are placed in each store, the amount of space they are allotted, and a qualitative opinion of how their own placement stacks up. Once analyzed, this information – which was previously not captured – provides valuable input to promotional decisions.
We increasingly see clients conducting pilots in areas around the Future of Work. While still early days, we are convinced that we are witnessing another large inflection point in the technology industry which will be a significant revenue opportunity in the long term. Our investments in creating practice areas around mobile computing, Cloud computing, social networking and a host of other areas position us well to take advantage of the opportunities raised by the future of work as this market opportunity unfolds over the coming years.
HfS Research: Your peer at HCL recently declared that private Cloud is “overhyped” (ahem) and will struggle to make a real impact. Other providers are jumping on the bandwagon and puffing up the marketing-volume, but many are guilty of defining it incorrectly and confusing the market. What’s your take on the whole thing – isn’t the Cloud a threat to the core offshore business model? India is branded as a good value location where you will get lower cost reliable services, however, doesn’t the ‘Cloud’ concept dilute the Indian brand…e.g., Come to the Cloud, which can be anywhere, not just India and get affordable, reliable, on demand services….any concerns?
Francisco D’Souza: Cloud computing represents a profound paradigm change in the way computing is delivered to end users. I would argue that the impact that Cloud will have on enterprises will be more profound than the impact of the client/server and Internet paradigm shifts. And while it’s true that there’s a lot of hype out there about the Cloud, we should not let the hype obscure the business value that cloud will increasingly deliver as the underlying technologies become more robust, secure and industrial strength.
Having said that, I see the Cloud as accretive to the offshore business model; it is not at all dilutive. Businesses are becoming more technology intensive – not less. So our clients will continue to need access to the best talent – regardless of where that talent is located. We view ourselves as a global service provider, not an Indian service provider. We are continually expanding our delivery network in to new geographies where we can tap in to world-class resources. There is no doubt that India is and will continue to be an incredibly important pool of talent, but by no means is it our only focus.
HfS Research: Clearly, these are the hyper-growth years for the offshore-centric services business, but we all know this growth can’t be sustained at such an intense pace for much longer. How does the offshore IT/BPO industry need to adapt to continue to be successful – where do the winning firms need to invest? Can everyone win out, or do you see only a few of the leading providers really staying the course?
Francisco D’Souza: As I mentioned earlier, there is a considerable amount of opportunity in the market. IT and BPO services represent a large market that remains very underpenetrated by offshore providers. This is especially true as companies rely even more on new technologies and expand the scope of services that they outsource to parlay the efficiency and effectiveness gains they see from IT into new domains. Having said that, I expect growth rates will inevitably slow as companies face the impact of the “law of large numbers”.
From a competitive standpoint, the model is changing. Labor arbitrage has become mainstream requiring providers to innovate and push the envelope to stay in front of evolving client demand. Companies that don’t will struggle to remain relevant. At Cognizant, our reinvestment approach has ensured we sustain our relevance. We are focused on new services – like Engineering & Manufacturing and Enterprise Analytics, delivering complex transformational engagements, and innovating new offerings driven by the Future of Work – such as BPaaS delivery models.
Last week’s outsourcing advisory bombshell wedding between KPMG and EquaTerra may well prove to be a turning point in the way buyers are serviced in the future. Management consultants need to have deep experience, knowledge and data on the operational guts of outsourcing, while boutique advisors need to offer a much broader consultative value proposition for clients who are tackling global operational issues.
HfS’ Esteban Herrera, himself a veteran advisor and consultant prior to venturing into the analyst community, asks the question that many of you raised after last week’s announcement: So what on earth does the future hold for sourcing advisors?
Over to you, Esteban:
Advisors: What next?
KPMG’s acquisition of Equaterra has raised a lot of questions about the future of the advisor business. I, for one, have been forecasting the demise of the traditional advisor model (which, by the way is how I have made my living for the last decade) for at least five years, and the consultants stubbornly prove me wrong by staying in business and acquiring new clients.
That said, I do believe winds of change are blowing, and KPMG may well be on to something—something difficult to pull off, but something potentially special and different. The bad news, for them, but the good news for customers of outsourcing and outsourcing consultants, is that others are onto this idea too. First, let’s look at what is happening:
Every one of my friends in the business believes that “transaction advice” projects are getting smaller and less profitable. This has allowed most firms to contract to their very best folks, but these are folks with lots of years of experience and correspondingly high costs. Nobody has figured out a model where inexperienced “kids” are leveraged by cynical grey-hairs to execute a deal on behalf of a client.
The big clients that can pay hundreds of thousands, if not millions, of dollars for transaction advisory deals have learned their stuff. They’ve done their deals and they don’t need an army of consultants to renegotiate an existing deal or launch a new one.
The next tier of clients, which might benefit from experienced advisors to do deals because it is newer to them, rarely have deals big enough to warrant the investment, so they go at it alone or hire one of the many talented lone rangers who are out there.
Procurement departments are getting more savvy or over-confident, depending on who you ask, but either way they are looking to carry a much heavier load of the work in an outsourcing transaction
While all the major (and minor) advisory firms have made big investments in “governance” and the myriad of things that go on post-transaction, none of them has established a large enough practice to merit much notice. There are a number of reasons for this: rates are too high, additional investment in the deal erodes the business case, the client believes its retained staff should handle these responsibilities (whether they are qualified or not), etc. But I have always felt there is another, more compelling reason not to hire consultants post-transaction: the provider generally knows what they are doing! Every single one of their clients has had to transition, and has had to govern, so they are kind of experts at it. The fox in the henhouse argument falls of deaf ears because outsourcing providers are not nearly as incompetent as many make them out to be, and because paying for transition/governance once is better than paying twice.
So given this precarious state of affairs for transaction advice, what is it that KPMG sees in Equaterra? Why are PWC and Deloitte roaring back into the outsourcing advice business? And why are there constant rumors about the other boutiques being snatched up? I cannot speak for the strategists at these firms, but my take is that even as the deal advice gets commoditized, it is a powerful sub-product in an overall offering that aims to optimize the operating model. Outsourcing is here to stay, and it has to be part of every enterprise’s back office. But it does not replace that enterprises back office. The notion of a single firm that can optimize the entire back office is an attractive one.
But this type of offering requires a very different skill set. Twenty-five years at EDS may have made you an expert at outsourcing IT, but it did not teach you how to run a recalcitrant back office environment that is just plain hard to optimize. In order to do that, you need to combine:
Vertical expertise (which the boutiques, no matter their claims, never had the scale to provide, but the audit/consulting firms have in spades)
Business Process expertise. Nobody knows the gotchas in existing processes as much as the people who spend their lives trying to find them—auditors.
CFO-level relationships. Like it or not, this is where big cost decisions are made. I’ve lost count of the times that a CFO overturned a sourcing-advisor selection in favor of her/his preferred advisor. Advantage audit firms.
Big picture focus—its not about MIPS, or SLAs, or throughput, though all those things matter at some point. It’s about how you build a well oiled machine that supports an enterprise well at a very, very, very low unit cost. I’ll argue that nobody has an advantage here, because if someone had figured it out, we’d know about it because they would have stopped messing with their back office.
Shared services expertise. It’s been painful to watch the outsourcing advisory firms pretend they can do shared services. The large-scale consulting firms have a slight advantage here.
Transaction Expertise. Run them quickly, run them well, run them in such a way that they leave behind a mutually professional relationship that lasts. I’ll give the advantage to the sourcing advisors over the big audit firms on this one.
Esteban Herrera, Chief Operating Officer, HfS Research (click for bio)
Operations focus. This is the holy grail. Can any consultant be valuable enough to stick around for years? It’s rare, but if they combine the six points above with a relentless focus on execution that works in the context of the client’s business strategy, they might get there.
Clearly, I believe the transaction advice is a critical arrow in the quiver of any firm that wants to fix your back office. In fact, they are just not credible without it. The issue for the multi-service firms is this: Can they defeat their own silos to bring the combined capability to a client? The services required to transform the operating model may actually all reside in a single firm today. But no firm I know of can beat the politics inherent in a bunch of partners/executives whose concern is their own P&L, and not the integrated fantasy offering I’ve described above. It’s a challenge that we hope the various firms now playing in this space can embrace.
