Innovation is now the critical ingredient for most buyers of Business Process Outsourcing (BPO) services –unequivocally proven by a new HfS Research study of 588 shared services and outsourcing executives, as revealed in our new report Desperately Seeking Innovation in Business Process Outsourcing: Enterprises Speak Out.
Most buyers of BPO services are initially delighted when they trim 30% of their costs on one process, and 50% on another, but once those costs disappear from the balance sheet, they are quickly looking at new initiatives to help them attain new thresholds of productivity or revenue growth: what HfS Research terms as “innovation”.
Moreover, while half of buyers are dissatisfied with the innovation they are currently achieving from their BPO endeavor, the majority are seeing significant potential to achieve it across certain processes within a two-year time-frame.
Essentially, once they have out-tasked as much of the feasible routine administrative work to service providers, they quickly discover that next tranche of productivity is not nearly as straightforward as documenting standard processes and training an offshore team to replicate them effectively (commonly termed in the BPO industry as “lift and shift”). Those buyers realize they actually need to introduce new, creative methods to actually change the old way of managing processes to find improvement. This scenario continues to dominate the vast majority of large-scale BPO engagements today.
The answers lie with both BPO buyers and their service providers working together to achieve measurable business outcomes as part of organized and collaborative long-term partnerships. However, too many enterprise buyers jump into a service provider relationship polarized on the initial cost take-out from the “lift and shift”, and gloss-over the future initiatives they will need to implement in a couple of years, when they seek to find new value through better processes, talent and technology.
We believe buyers need to put the innovation track-record of service providers high up the decision-making tree when they select make selection decisions. As earlier HfS Research has demonstrated, service provision is commoditizing and leveling the playing field, with several BPO service providers today pushing services within a similar price-band, and sufficient track record of successful “operational” delivery.
Most large enterprises have already experienced offshoring and outsourcing varying degrees of their operations for several years, and are smart enough to realize outsourcing provides an opportunity to deliver more than simply cost-savings through lower cost labor. Consequently, the ability to provide outcome-based solutions that encompass helping BPO buyers achieve innovation, is fast becoming a crucial differentiator.
We’ll be highlighing more snippets from our new report, entitled “Desperately Seeking Innovation in Business Process Outsourcing: Enterprises Speak Out” this week, but if you can’t wait that long: [emember_protected]click here to download your very own freemium copy[/emember_protected] This report dives into the experiences and expectations of today’s enterprise BPO buyers when it comes to achieving innovation, and offers actionable recommendations for devising a strategy to improve their innovation agenda with their BPO endeavor.
Check out who’s at 15th in the latest analyst “power rankings” by ARInsights, a dynamic content rich database that contains comprehensive information on 5,511 analysts from 694 different firms.
While our aim is (ahem) to be number one, for an analyst firm that’s been in existence barely 4 months and competes with billion-dollar competitors, we’ll take it. And Ray Wang of fellow analyst newbies Altimeter Group made the top-ten. Maybe says something about the power of social media? Hmmmm…
ARchitect™ Power 100 analysts, 19th June 2010
The top 100 analysts ranked according to their activity level among all ARchitect™ users. These are the analysts with the most sustained “buzz” in the industry right now:
1 Allie Young Gartner Inc.
2 Eric Goodness Gartner Inc.
3 Alex Soejarto Gartner Inc.
4 Pascal Matzke Forrester Research, Inc.
5 Dane S. Anderson Gartner Inc.
6 Kimberly Harris-Ferrante Gartner Inc.
7 Brian Partridge Yankee Group
8 Rona Shuchat IDC
9 R Wang Altimeter Group
10 Susan Tan Gartner Inc.
11 William Martorelli Forrester Research, Inc.
12 Ken L. Dulaney Gartner Inc.
13 Matthew Goldman Gartner Inc.
14 Mike Cansfield Forrester Research, Inc.
15 Philip Fersht Horses for Sources
16 Sudin Apte Forrester Research, Inc.
17 Khalid Kark Forrester Research, Inc.
18 Elisabeth Rainge IDC
19 Frank E. Gillett Forrester Research, Inc.
20 Norbert J. Scholz Gartner Inc.
21 Ronni J. Colville Gartner Inc.
22 Frank Ridder Gartner Inc.
23 Euan Davis Forrester Research, Inc.
24 Arindam Banerjee Heavy Reading
25 Richard T. Matlus Gartner Inc.
26 Milind Govekar Gartner Inc.
27 Karl Whitelock Stratecast Partners
28 Ellen Daley Forrester Research, Inc.
29 Michele Pelino Forrester Research, Inc.
30 Liz Herbert Forrester Research, Inc.
31 Daniel O’Connell Gartner Inc.
32 Lydia Leong Gartner Inc.
33 Phil Sayer Forrester Research, Inc.
34 Chris Wolf Burton Group
35 Jonathan Penn Forrester Research, Inc.
36 Benjamin Gray Forrester Research, Inc.
37 James Staten Forrester Research, Inc.
38 Bhavish Sood Gartner Inc.
39 Frances Karamouzis Gartner Inc.
40 Peter Jarich Current Analysis, Inc.
41 Christopher Andrews Forrester Research, Inc.
42 John Madden Ovum Summit
43 Michele Cantara Gartner Inc.
44 Roger L. Kay Endpoint Technologies Associates, Inc.
45 Neil Chandler Gartner Inc.
46 Camille Mendler Yankee Group
47 Bob Hafner Gartner Inc.
48 Shira Levine Infonetics Research
49 Michael von Uechtritz Gartner Inc.
50 Rachael Stormonth NelsonHall
51 Cornelia Wels-Maug Ovum
52 Ali Zaidi IDC
53 Henry Dewing Forrester Research, Inc.
54 Sebastien A. Ruest IDC
55 Joe Barkai Manufacturing Insights
56 Martina Kurth Gartner Inc.
57 Jouni Forsman Gartner Inc.
58 Kevin Lucas Forrester Research, Inc.
59 Ted Friedman Gartner Inc.
60 Ben Pring Gartner Inc.
61 Christine Tenneson Gartner Inc.
62 Andras Cser Forrester Research, Inc.
63 Mark Schrutt IDC
64 Dana Stiffler AMR Research
65 Timothy Zimmerman Gartner Inc.
66 Gianluca Tramacere Gartner Inc.
67 Rob Enderle Enderle Group
68 John C. McCarthy Forrester Research, Inc.
69 Martin Reynolds Gartner Inc.
70 Rishi Sood Gartner Inc.
71 Jean S. Bozman IDC
72 Alexander Simkin Ovum
73 Bern M. Elliot Gartner Inc.
74 Peter Mottishaw Analysys Mason
75 Kelly M. Kavanagh Gartner Inc.
76 Andrew Butler Gartner Inc.
77 Mike Sapien Ovum
78 William Stofega IDC
79 Jim Duggan Gartner Inc.
80 Dominique Raviart NelsonHall
81 Katja Ruud Gartner Inc.
82 Susan McNeice Yankee Group
83 Simon Mingay Gartner Inc.
84 Zeus Kerravala Yankee Group
85 James G. Kobielus Forrester Research, Inc.
86 Andrew White Gartner Inc.
87 John-David Lovelock Gartner Inc.
88 Chris Barnard IDC
89 Gareth Herschel Gartner Inc.
90 Mark A. Margevicius Gartner Inc.
91 Jon Peddie Jon Peddie Research
92 Richard L. Villars IDC
93 Rodney Nelsestuen TowerGroup
94 Evelyn Hubbert Forrester Research, Inc.
An HfS analyst spotted earlier prepping for his next Rapid Insight…
You’d have thought, having an analyst in Australia, we’d get contributions such as “How to outsource all your work and spend all day on the beach”, or “Precautions to avoid business failure now the local pub has WiFi”.
But no. What do we get? Endless reams of insight on the Cloud – I didn’t think they had Clouds over there? All jesting aside, Andrew Milroy poses some profound challenges for software giant Microsoft, which may be set to miss out with Cloud computing in a similar vein to its struggles with internet search market and mobility…
A Cloudy Future for Microsoft?
Microsoft urgently needs to address its approach to Cloud Computing, together with the closely related tablet and smart phone markets, if it wants to avoid falling further behind the likes of Google and Apple in these interrelated markets.
At the turn of the 21st century, Microsoft’s position as the world’s largest, most dominant, and most influential IT vendor seemed unassailable. In recent years, however, there have been seismic shifts in the IT industry, much of which has been driven by two companies, Google and Apple. Both are massively disrupting Microsoft’s traditional business model. These shifts have been centred on a move away from on-premise models of computing, towards a model where data and other computing resources reside offsite, or in the Cloud.
Google generates revenues from advertising so has been in a position to offer software that competes directly with Microsoft products, free of charge, while driving the Cloud computing model.
Apple has been leading the development of smart phones and tablet computers which are undermining the dominance of PCs and further driving the Cloud Computing model.
These developments are being compounded by a shift away from Microsoft’s operating systems towards Open Source alternatives.
The shift towards the Cloud model is now taking place at breakneck speed, and is threatening to choke revenue streams that are dependent on selling software licenses. Frost & Sullivan estimates that the market for public Cloud computing will grow at a compound annual growth rate of just over 40% between 2009 and 2014 – while Gartner and Forrester both come up with similar forecasts.
In the short term, we will be working within hybrid computing environments, consisting of both Cloud computing and traditional models of computing, but the Cloud model will dominate in the next few years. Soon, managers will need to present very strong business cases to justify the expense of keeping computing resources on-premise.
Microsoft’s two key competitors have Cloud-based business models and lots of cash.
Google has only ever had a Cloud-based business model. Apple, on the other hand, has brilliantly made the transition from an ailing desktop-oriented IT supplier to a cash generating machine, by fully capitalizing on technology shifts. Its iTunes business is a Cloud business and its iPhones and iPads have driven the development of a huge number of Cloud-based applications. The tablet computing market that Apple has pioneered, will speed up the demise of PCs. Where is Microsoft in this market?
Right now, the market is dominated by Apple and Google. A rapidly growing number of Android devices are appearing on the market and taking on Apple’s iPhone and iPad products. It is reminiscent of the battle between Apple and Microsoft in the early days of the PC. Apple had a ‘walled garden’ strategy. Its software ran only on its hardware. Microsoft, on the other hand, licensed its software to run on PCs produced by anyone. Microsoft’s Windows Phone/Slate 7 is expected to provide competition but, the market is growing very fast without Microsoft’s product having been released. Has Microsoft been too slow this time? Will Windows Phone/Slate 7 be well received or will it be considered to be a sluggish and unreliable product? Does the product name suggest that Microsoft has not recognised or anticipated the growth in tablet computing and its impact on Cloud computing? Is Microsoft designing its mobile/tablet products specifically for these new environments or is it merely re-coding its existing PC oriented products?
To be fair, Microsoft now offers Cloud products. Its applications can now be offered over the Cloud and its price competitive, platform as a service (PaaS) product, Azure, creates a development environment that is simple to get to grips with for those that are used to working with Microsoft products. This, of course, represents most developers. Microsoft seems to be banking on developers believing that it is simpler to stick with Microsoft, with whom they are familiar, as they move into the Cloud, rather than using products from Cloud, pure play, suppliers of PaaS products like Amazon, Google and Salesforce.com.
Microsoft’s current approach is to ensure that it can offer Cloud services to its customers if customers seek these solutions. In doing so, it is shifting substantial numbers of its customers into the Cloud and it has been working closely with its partners to support these efforts. But, is it working hard enough to move its customers into the Cloud? Has it anticipated the huge growth of Cloud computing?
Andrew Milroy, Expert Contributor, Asia/Pacific Sourcing Strategies, HfS Research
Has it created sufficiently attractive sales incentives to encourage sales teams and partners to sell Cloud services instead of on-premise alternatives? In order to enjoy success, Microsoft must proactively ensure that its Cloud offerings become embedded within the world’s leading corporations before its competitors, as it did in the PC-oriented world. If it does not do this, it risks losing its very strong, but no longer dominant position in the IT industry.
Microsoft needs to improve its speed to market with new products. It needs to act faster than it has ever acted before and it needs to do this now.
Andy Milroy, pictured right, is Expert Contributor for Horses for Sources Research. You can access his bio here. He likes to be tweeted at @andy1994
Anyone in the HR industry knows the best show of the year – and always the most entertaining – is the HR Technology conference in Chicago each September. And this year’s effort promises to be the best so far.
And this year it’s got the whole gamut: big HR practitioners, big bloggers, big analysts, big technology vendors and big outsourcers. And as most of my friends know – I’m being particularly choosy this year attending these types of events, now I’m chained to my desk actually doing some research, but the lure of the maddest, raddest HR shindig has proved too much this time. Why not join us? We’ve even got them to agree to a whopping $500 discount for HfS subscribers: simply REGISTER HERE and use the code HORSES10 (case sensitive).
Contrary to rumor, analysts sometimes do more than get themselves inebriated at industry boondoggles (hmmm….). And as much as we’d all like to spend our days being wined and dined at tennis tournaments and totting up our Starwoods points, we’ve had to knuckle-down and put pen to paper with our views and insights on where this market is heading.
We tried to explain to our sales chappy that clients don’t care about research anymore, that they just wanted to hang out with us, but he wouldn’t listen, signed up a bunch of them, and now we have to do some hard work.
So four months on, and we’re beginning to sneak a few publications out to market. We’re developing a fully-fledged research agenda which we will be excited to announce in September, when we will also be announcing the arrival of some new analysts (who also claim they will write some stuff). So feel free to visit our sexy (ahem) new RESEARCH LIBRARY and check out what we’re writing about.
Some stuff is freemium (I love that word), and some is premium for our subscribers, but there is plenty there for all to read, that is being regularly updated with new publications. So spend a few minutes registering an ID and password with us, and enter our research world. C’mon… do you have any better offers on a Thursday morning?
Waking up this morning to hear the news of Hewitt’s acquisition by AON signalled a sad, bad day for HR Outsourcing.
The HRO industry is now consolidating faster than any of us imagined… forget ADP/Workscape, this is BIG – and leaves the global HRO market with three major global HRO enterprise-level providers – IBM, NGA and Xerox (ACS). While there were some positive synergies with NGA / Convergys to create a global provider, Xerox / ACS was an odd match of two very different cultures and providers, and AON/Hewitt isn’t far off in terms of a weird fit.
I am concerned with the impact on Hewitt’s culture and brand, which is steeped in HR consulting culture over four decades. While, on paper, we can see some minor synergies, in terms of scale, geographic presence and financial offerings, you have to question two very different cultures and the potential impact on Hewitt’s consulting and managed services offerings, once the AON corporate machine gets its claws in.
Hewitt needed to be acquired by a true enterprise global provider with real HR heritage, and global HR offerings (especially pan-Europe). Moreover, a provider with deep technology integration expertise would have been hugely beneficial. AON will not provide that, unless it hasn’t finished its shopping excursion. Let’s hope AON’s leadership has learned from it’s earlier foray into multi-process HRO, which netted the firm a solitary client (AT&T) and an IT-integration partnership with CSC that achieved little, before beating a hasty retreat.
This time, AON needs to figure out its HR technology services strategy – there are several willing partipants out there, with real HRIT acumen (for example Deloitte may be looking at new HRO partners since Convergys’ HRO business was acquired), and there are several Indian providers with deepening HRIT capabilities (Infosys, TCS and Wipro all have developing practices).
Maybe this will provide the impetus for Accenture to make a renewed push into the market, with so much open space being created? It’s deep HR transformation experience, HRIT and HRO client engagement experience, put it in a strong position to up the ante – and we’ve see it winning some deals of late. Let’s hope so – the industry needs to be competitive and we are quickly reaching a situation where clients have limited choice.
When we recently spoke with close to 600 shared services and outsourcing executives across both the buy and sell side of BPO, the tough news for much of the industry is that most enterprises are unwilling to collaborate with other firms in their industry to foster innovation with their outsourced business processes.
Our new research reveals clients’ desire to collaborate with non-competitive firms in other industries is much more powerful. Simply-put, new service delivery models must emerge between collaborating partners that will help them innovate, share their ideas and experiences. For example, over half of enterprise buyers are not prepared to collaborate with industry competitors:
I hear you gasp with shock and horror at this revelation. But why, then, do so many service providers still persist in stove-piping their business into vertical groupings, when their clients don’t want to talk to each other about their business processes? While it’s clear that clients like to be “sold to” by executives who clearly understand their business issues, once the engagement is “live”, the vast majority of governance and process management issues are generic across all firms who outsource.
To win more business, outsourcing service providers must innovate by creating and unleashing a multi-client collaborative model that isn’t restricting their clients to their industry vertical silos. Our distinguished analyst (I love that title, but he is very distinguished…) for shared services and outsourcing governance, Lee Coulter, investigates further. You can also read on this issue indepth in Lee’s new report, available as a freemium pick on our research page for a limited time.
Innovation? With THEM?!
I am almost afraid to write yet another article lamenting the lack of innovation in the BPO industry, but this time, I have some thoughts on how to change the game and I am spreading the blame around a little more evenly. There is plenty of blame to spread around on this one. It’s not entirely your BPO provider’s fault. Innovation is a delicate thing. It is really hard to coax into life, and remarkably easy to kill. That means it takes everyone doing the right things to create it, and anyone doing the wrong thing can stop it.
I am constantly asked about innovation in shared services and BPO from enterprise clients. I have a special place in my heart for innovation because in today’s world, innovation often isn’t about getting ahead; it’s a case of running to stand still. Business consultant James Morse said it best, “The only sustainable competitive advantage comes from out-innovating the competition”.
In the world of BPO, I tell folks innovation is absolutely possible. It just takes four things:
Organize for it
Contract for it
Fund it
Govern it
Sounds pretty easy, but there are a few nuances. First is, that both client and provider need to organize for innovation. Most people don’t have a clear idea of what that really means. It is the most foundational part of the equation, and the one that is often overlooked. I’ll come back to this in a moment.
Contracting for innovation is not actually that difficult. It does mean however that both parties should be expecting to describe it in words, fund it with real money, and resource it with the right people. There is some weird amnesia that afflicts clients the moment they contract for BPO services. They forget that when they ran their own shop that they had specific people and budgets committed to projects and innovation. Somehow once a BPO provider is involved, there is supposed to be some miraculous automatic innovation machine that churns out valuable innovation without any effort or cost.
Funding it is pretty straightforward, however it means everyone needs to clearly identify the funding for it and be clear about what benefits it should generate, and most importantly, don’t strip it out of the deal during price negotiations. It should be a separate part of the contract and pricing so that it doesn’t muddy the waters when evaluating the cost of service delivery.
Governing it isn’t that hard as long as everyone realizes that the people that are dealing with crisis-of-the-day are not the right people to be managing innovation. Different people and different outcomes mean it should be governed separately.
So really it comes down to organizing for it and this is where there is a fundamental breakdown, as our new research data emphasizes. By and large, BPO providers are organized around industry verticals. What is an industry vertical? Simply put, companies that aim to solve the same or similar problems in the marketplace. These companies are typically competitive, due to the overlapping focuses of the products and services that are provided to their customers.
Hmmm, let’s put six or eight or ten competitors in a group together, and then tell each of them that because they are all customers of the same provider, that they will enjoy rich benefits of innovation. I am not sure that strategy was thought all the way through.
Not gonna happen; for a whole lot of reasons. Most notably because each of the clients in an industry vertical group would really like to find a way to smash their competitors in the marketplace! About the last thing they are really excited to do is go share their best practices with a competitor!
There is a better way… introducing a new model I call the Ecosystem of Collaborating Industries and Processes (ECIP) is based on organizing clients in non-competitive groups that share similar business practices along with clients that are affiliated by process. By combining clients that operate businesses with similar processes in non-competitive spaces, the model accelerates the leverage of assets and creates new channels of cross collaboration while preserving, and in fact enhancing, the provider’s credibility in a given industry space.
Lee Coulter is Research Fellow, HfS Research
Lee Coulter’s new report, entitled Service Providers siloed by Vertical Industry are Stifling Innovation with Clients is available, for a limited time as a freemium report over at our published research page. Go check it out…
Lee Coulter (pictured here) is Research Fellow and Distinguished Analyst for HfS Research, having previously led global shared services for Kraft. Prior to that, he had senior roles with General Electric and AON – you can read his full bio here.
And now that it’s the worst-kept secret, let’s finish our discussion on “the interesting arm wrestle” with Xchanging CEO, David Andrews…
Phil Fersht: David, you asserted that providers today need to be really strong in both BPO and technology, rather than dabbling in one or the other. I’ve looked very closely at a lot of the Indian ITOs. They like BPO because it has a huge IT tail on it and they’ll even bid on small BPO deals because they see the IT opportunity. But the mindset required to lead a BPO engagement is very different than what is needed to lead an ITO engagement. Do you think we’re going to see a consolidation in the industry between the BPO and ITO sides? Or do you think it’s going to meander for a little while longer while everyone figures this thing out?
David Andrews: I think you’ll see a lot of meandering around, and denial, from either angle because we’re all prisoners of our heritage. But I think you’re going to see one or two get it. And those are the ones that realize BPO has got to be technology powered.
Phil Fersht: Do you still see this as a very industry-centric business, or do you think we’re getting to a stage now where industry spin “sells”, but it is really about operations and delivery?
David Andrews: I’ve always been industry agnostic. When I was at Accenture, functionally I was an expert in systems building, but knew nothing about stock exchanges when I went to build the London Stock Exchange system. You’ve got to be able to operate in an industry, but if you focus on only a couple of industry perspectives you are often bound by tradition and what people historically have found possible. And I think that really applies to BPO. BPO is all about being a great operator of processes, and those processes can be standardized across industries as well as within a company. So, for example, Cayman’s processing and the sorts of things you need to do there can be similar in insurance and financial services and telco customer billing, as it’s all transfer of money. It’s really all about reinvention, and I don’t think you get reinvention by being an industry expert. By knowing a tremendous amount about a particular industry you are almost a prisoner of it. That’s not to say it’s not important knowledge, but if you’re going to cause reinvention you have to come in with some new ideas. So in 4G cloud computing – a new idea – you don’t have to be an industry expert but you have to be an expert in how to apply it to an industry.
Phil Fersht: One of the things I am grappling with, is who is going to be leading BPO deals from the vendor-side. In the early model, Accenture and PwC started off with BPO services that formed a platform for their consulting businesses. Now we have companies like Genpact which are trying to incorporate transformational support as a standard practice within BPO. But when we get into more of these synergized technology-driven BPO engagements – how are these going to come together from a delivery perspective? I spent a lot of time recently with the SaaS companies and software thought leaders and many of them still have the attitude that they can come and slam in a SaaS application, and the customer should just be able to figure it all out and run it itself. But BPO guys like you and me know companies need a lot more help and support in getting there. So who is going to be leading these deals down the road? Is it going to be the BPOs or do you think it is going to be the technology-led companies that develop more comprehensive BPO skill sets?
David Andrews: I think it is going to be the companies that understand how to build market infrastructures that take advantage of economies of scale which enable them to invest in reinventing – I think that’s the combination. That is why I am so excited about Xchanging’s future because I think we’ve mastered the art of – or we’ve understood – the power of market infrastructures and put them into a commercial context, and realized you’ve got to power that with technology. You can do the process optimization, you can do your arbitrage and all that stuff, but you’ve also got to be really creative in the ways in which you apply technology, and be prepared and courageous enough to cannibalize what you have in order to move to that brave new world. I don’t think there are very many of us out there doing that, but there is the opportunity over the next five to 10 years to build the next IBM or Accenture. In my view, some companies will master this and become very big corporations. I think you could well argue that Xchanging has got what it takes to become a lot bigger. I also think you could say Genpact has characteristics along those lines. You’ll find one or two of the big shared services boys will spin out. Then there will be a couple of surprises none of us have thought about. But I think there will be five or 10 out there. The advantage I think Xchanging and Genpact have today over pretty much everyone else is that we are pure play and genuinely global. So if you go into our centers you will see us exchanging work flows within a business day. So it’s not just a question of lift and shift – it’s lift and shift, lift and shift, lift and shift –shifting backwards and forwards all the time between our centers. And for that you must have a very strongly engineered standard environment.
Phil Fersht: You made a very good point that some of these vendors are really going to get it, while some, simply, won’t. At HfS, we’ve started to look at two camps – the “innovators” and the “operators”. While some vendors have high-growth, multi-billion dollar businesses, most of their client relationships are with the director of applications…they operate two or three layers down from the business decision-making. You know they are really struggling to get to the higher layers. Are these guys always going to be good “operators” because they are pretty much happy where they are, and make enough money doing what they are doing – and do you think they should start to be honest that that is what they do, versus “innovators” who generally are trying to operate at the higher levels of the organization, and drive more gain-share outcome initatives with their clients? We are starting to see some vendors step it up and try to become innovators, whereas you’ve got these operational companies who clearly aren’t investing heavily in the talent they need to do this. Do you think this dynamic is going to continue in this vein for a while?
David Andrews: Interesting arm wrestle, isn’t it? Innovators will say that operators are boring. Operators will say that innovators are nut-cases. I think each of those is necessary but insufficient. I think the new sufficiency is that you need both. You need to be an innovative operator.
Phil Fersht: We’re starting to hear from several experienced buy side BPO leaders that they’re beginning to invite more and more vendors into their mix in order to move away from the “single throat-to-choke” model, where they feel beholden to one vendor which hasn’t really stepped up to the task. They’re starting to look at bringing in some innovative type players to add more value. Do you think this is a sign of BPO maturation where buyers are now getting smarter and wanting to increase the competitive mix from their suppliers, or do you think we’ll stay with a one supplier model for quite a lot longer?
David Andrews: I think to embrace multiple providers into the mix you need to be very organized with a really good framework for operating. So my guess is those companies that are talking in the way you suggest have already figured out how to operate a standard framework into which they can plug best in class, and they might decide they can’t invest enough to do best in class themselves. That’s certainly where we are going because we realize you can’t be good at everything. And therefore we have to bring it in to get the quality. This make versus buy decision…it’s a constant decision within our organization. Ideally you prefer to buy it from best in class. The areas in which it’s really happening at the moment are where you’re putting together quite innovative sets of processing and you probably have to add three or four products you’ve put together in order to deliver the outcome. So there’s quite a lot of assembly going on today, certainly in our organization. Maybe three or four years ago we were doing development, but we’re now assembling best in class. And of course there are a few companies you have to have a strategic relationship with because they dominate their particular environment.
Phil Fersht: David – this conversation has been most interesting – and could go on for a while yet! Thanks for much for your time today – HfS readers will enjoy reading your thoughts.
David Andrews: Thanks, Phil. Glad to spend time with your readership.
David Andrews (pictured above) is CEO Xchanging plc, founding the company in 1999. Previously, David built up Accenture’s outsourcing business and had responsibility for managing major technology replacement programmes in Europe. Before joining Accenture, he managed a major programme of hospital refurbishment and health care infrastructure renewal in Congo.
There are a lot of secrets in the BPO business (oh, if only you knew), however, one best-kept secret that is worth revealing, is the Xchanging story. The UK-headquartered firm is the largest pureplay BPO today, with revenues over $1.1bn.
BPO purists will recall some significant developments, back in the late ’90s, when private equity investor General Atlantic pump-primed two BPO providers to enter enterprise markets: Exult and Xchanging. While the former went after the big “lift and shift” enterprise engagements, the latter quietly went about developing BPO services focused on partnering with enterprises, co-developing technology and processes, and developing industry-specific process skills that could be blended with horizontal administrative processes.
Wall Street investors, industry analysts and business media loved the Exult model – it was focused on big-bang deals, exposed the shortcomings of enterprise HR operations, and brought the BPO business to the attention of the media and the industry. Meanwhile, Xchanging, led by the pragmatic David Andrews, quietly went under the radar building a business that focused on servicing industry vertical processes, namely insurance and banking, and two fulcrum bridging processes: payroll and accounts payable processing, in addition to other administrative functions.
In today’s market, the message couldn’t be clearer: the old “lift and shift” model only works when there is tremendous discipline applied to process standardization tied to common technology workflows, while the partner-orientated approach, where buyer and provider work together towards common outcomes, is proving to be the model where both parties are vested in making the engagement successful – and within budget.
As part of our CEO series of interviews, we thought it about time to drag David away from one of his hazardous Dartmoor runs (the invisible cliff edges keep his shareholders constantly on edge) to share his story with us.
Phil Fersht: Good afternoon, David. When you look back at Xchanging over the its first decade, how would you say it’s developed from when you started out. How different is the vision from when you began, to where the company is today?
David Andrews: Phil, if you look at the original business case, we’re pretty much bang on track. We set up in 10 years of operation, 10000 people and a billion turn over dollars. And 100 million dollar profit. And that’s where we are now. Got our first contract in 2001. Financially, it’s gratifying, we’re on target. We’ve weathered the financial crisis pretty well, despite having a pretty heavy reliance on financial services. I’m delighted that the enterprise partnership model has become accepted in the business community. When you start a business you’re never quite sure whether it’s your own stupid idea that no one else will think is any good, or whether it has legs, so it’s really been proven that it has legs. Certainly as we now globalized, which is crucial. I don’t see how you can do national BPO for corporations. As we’re globalizing, we’re finding it has a lot of support in Asia as well as the states.
Phil Fersht: For those of our readers who are not all that familiar with Xchanging, tell us about your enterprise partnership model and how it works.
David Andrews: In my view there are three generic third-party delivery models in the marketplace today. One is an M&A-type model where you buy a piece of processing and then seek to develop it. The second, sitting at the other end of the spectrum, is outsourcing, so lift and shift either on a time and materials or on an output price basis. What we’vedone is put something in the middle which has some characteristics of M&A – which is your seeking to do a capital upside – and some characteristics of outsourcing – which is your seeking to create a discontinuity and a mindset by moving the process. The enterprise partnership is actually a jointly-owned business which not only serves the client customer, but can also serve other customers. Some of our enterprise partners are Deutsche Bank, BAE Systems and Lloyd’s.
The enterprise partnership model is highly attractive when you are dealing with complex things you can’t absolutely define on Day One. If you are doing an M&A or an outsourcing transaction you’ve got to put very tight boundaries around what you’re dealing with because you are either offering a price or a discount on Day One. If you’re dealing with very large, complex back offices, it can be very difficult to put the boundaries with sufficient accuracy. There will be lots of interconnections with other systems. There won’t necessarily be ready-made SLAs and measures as you would find in ITO. So you need different mechanisms for handling complexity and uncertainty. To do so, the enterprise partnership model says let’s go open book, let’s define some outcomes and let’s create a commercial arrangement around the outcomes rather than the inputs. So it seeks to put some commercial certainty around the uncertainty of the complex back office. It enables you to do stuff you couldn’t otherwise M&A or outsource.
Philip Fersht: So what you are talking about, is really what a lot of the leaders and your competitors are now talking about. We’ve gotten to the point, particularly with many of the big horizontal BPO deals and things like F&A, where the price points are pretty similar and the presented differentiator now, is one vendor offering better gain-sharing than another. Do you think this is a reality or a lot of smoke-blowing to try and close the business? We’veseen a couple of recent deals with some pretty innovative gain-share approaches, but you guys have been doing this for a very long time, and it seems only now that your larger competitors have begun trying it as well.
David Andrews: Hopefully, a few more will. I welcome the competition as I think it creates a bigger market. The only thing I would say is that it is quite difficult to do gain share as just an add-on to what you already do. I think there is quite a fundamental mind shift you have to bring about. Without talking ill of my previous company Accenture, I found it very challenging to get them into a gain share mindset. They understood time and materials really well, and we all understand that an input cost-based time and materials model has been brilliantly exploited by the Indian companies. But what we’re talking about here is…”I’m not going to make any money at all unless I create a gain. So I am at risk. I’m not just creating a company but creating an outsourced arrangement where unless I do really well, unless I get the costs down, unless I get the productivity gains up and unless I attract third-party revenues, I am not doing anything.” And that’s a really different and very important mindset because it does take you beyond what you otherwise do. You’ve got to have that absolute determination to bring about the benefits otherwise you don’t make any money. So I am a bit worried about gain-share being a “sweetener”.
Philip Fersht: I completely agree with you here. I think we’ve seen some deals recently where the vendor has done it because they felt they needed to in order to win the business, and now they’re going to be forced to actually try and deliver what they promised or they’ll be punished for it. And I’ve seen some rather cleverly worded gain-share initiatives where the provider might be able to get away with not delivering on some of what they’ve promised, however, I do think some of them are almost deliberately sticking their neck out so they can try and prove they can do this. But as you’ve said, it is very difficult when it is more positioned as a “sweetener” than as something they genuinely feel they can deliver.
David Andrews: Yes, people often rationalize this in their own way and I’ve seen this in large corporations. You are seeking to create a different set of motivations for both the provider and the customer, so you move away from an adversarial relationship by putting in some sweeteners to win this and then hope it will go back to normal. And the provider who is going to squeeze the maximum out of the supplier by way of promises upfront – that’s a misalignment. I think in the future we’re going to see a different set of motivations where the provider and customer agree that if they cooperate and align as partners they’ll get more out of it. Now that’s a very different mindset than what has historically existed in outsourcing. And it isn’t a soft mindset…actually cooperating as partners is tough stuff because you have to be very transparent. There is a lot more relationship to it, and there are breakdowns to get breakthroughs if you stick together. The tremendous advantage I’ve seen with your big partnerships is that you can actually be braver to accomplish some big stuff because you know your partners are aligned with you.
Philip Fersht: What do you see as the main opportunities for Xchanging, and where you are going to make your future investments?
David Andrews: We put a certain level of investment in to make the transformation in all our enterprise partnerships. Part of our model is that we put money upfront. We are at risk with that money and that further focuses our minds on getting the return we share with our partner. So that won’t stop as it’s an underlying cultural underpinning of the company. What has happened in the last two or three years, and is accelerating, is us taking development risk on renewing technology…reinventing it really. I didn’t foresee that. I thought it would be more of a partitioning of the industry, where you’d still have the systems integrators and the outsourcers and we’d subcontract to them, but we’re finding that we’re investing for our own account in large-scale technology. So, for example, in the U.K., I thought we’d be able to subcontract data center processing but we found we couldn’t get the quality to financial services standards of delivery. We’d get it to maybe a telco standard billing reliability, but not to something beyond Six Sigma that you need for payment systems in financial services. So we have found ourselves investing in things we thought we could buy in, which is causing us to be a much more integrated technology and BPO company. And that is half the reason we did the deal with Cambridge. We knew we had to have strength and depth in advanced systems development, web-based development, and fast transaction-based, real-time systems development for payment systems/exchange systems for us to move into a world where we could genuinely offer that standard of service. I think that would mark out what has changed over the last ten years in BPO. You’ve seen technology companies dabble a bit in BPO. You’ve seen BPO companies dabble a bit in technology. But I think that dabbling at each end of this is out. You’ve got to be really seriously into both of those.
In Part II, we’ll focus in on the market dynamics, where buyers are achieving some innovation and the convergence of IT and BPO within industry processes…
David Andrews (pictured above) is CEO Xchanging plc, founding the company in 1999. Previously, David built up Accenture’s outsourcing business and had responsibility for managing major technology replacement programmes in Europe. Before joining Accenture, he managed a major programme of hospital refurbishment and health care infrastructure renewal in Congo.
Capgemini has emphasized its global delivery acumen, by showcasing its expanding European delivery center in Krakow, Poland, to industry analysts and advisors.
This dovetails with Capgemini’s strategy of positioning its delivery centers in Latin America (see earlier post), Guangzhou (China) and India, to present a compelling global delivery capability, based on a network of proven locations, where educated, multilingual talent is readily available to support its clients’ global General and Administrative (G&A) processes. However, while the firm is clearly focused on investing in quality nearshore/offshore delivery resources, does this enable it to compete aggressively with low-cost offshore-centric providers for BPO/ITO engagements?
Capgemini is one of the largest and most well-known European IT/BPO service providers and consulting firms, with revenues of $10.3 billion, but has struggled in the past become a household name in the US. However, its recent aggression in the BPO market, resulting in notable client wins such as Bunge and Coca-Cola Enterprises, has helped elevate Capgemini as a serious contender for global enterprise BPO engagements.
Capgemini has been providing BPO services, primarily Finance and Accounting (F&A) and Procurement, for more than 6 years, and boasts one of the few integrated global delivery networks, from which the firm supports enterprise its customers, which include the likes of Coca-Cola Enterprises, International Paper, Zurich Financial, and Hydro One. This support is provided by a global network of delivery centers in Guangzhou, Bangalore, Chennai, Guatemala City, Sao Paulo, and Dallas.
The Polish cities of Krakow, and nearby Katowice, are the centers for the majority of its Pan-European operations. Similarly to its Latin center in Guatemala City, Krakow is marked by a youthful energetic staff, and acts as a control center for the entire European support operations, similar to the function of Guatemala for Latin America.
The center, which opened 5 years ago, has grown to 3,500 employees, of which 2,100 provide dedicated support for Capgemini’s BPO operations. This growth has provided compelling career opportunities and contributed to the enthusiasm and energy that is apparent within the centers. Much of the staff have studied in universities across Europe, which allows this center to provide voice support in all European languages, as well as having the necessary understanding of local accounting and procurement practices, to support the F&A and procurement activities of its customers.
Capgemini is working hard to provide differentiation for its offerings. In Krakow, it emphasized its “Global Command Center”, which is a concept based on a set of procedures and tracking programs, that allows global customers to be managed as a single entity. Capgemini can share work between centers to balance loads, or use its global distributed work force to solve problems in a timelier, synergistic manner. This command center concept, combined with its multi-lingual ability, is its greatest point of differentiation for delivering pan-European BPO operations for its clients.
Moreover, Capgemini has also have developed approaches to try and get more customers to move to solutions whereby it can share resources and knowledge across customers, rather than setting up the “virtual captives” that have become the de facto solutions for most BPO providers. It’s philosophies for a “Global Process model” and the release of its governance dashboard solution, BPOpen 2.0, are strong value enhancements for enterprises seeking global process improvements.
Capgemini has also recently purchased IBX, a procurement services and SaaS provider, to provide a unique enhancement to its overall procurement BPO capabilities. This gives Capgemini a standardized technology platform to SaaS-enable procurement clients and the ability to provide the technology cost in a variety of ways, competing directly with the likes of Ariba, but also providing an alternative to other BPO/Procurement partnerships, for example IBM/Hubwoo and Genpact/ICG Commerce. Moreover, Capgemini can genuinely offer a one-stop procurement-as-a-service competency, whereby in the past it had to rely on subcontracting to other procurement software and services providers.
The HfS Viewpoint: Capgemini has global delivery quality in spades, but has to continue to develop cross-client synergies and processes to be competitive
Capgemini’s Krakow center provides the type of operation that will make a client feel comfortable in using it for its G&A activities. What remains to be proven, is whether Capgemini can develop common offerings for G&A process that will be accepted by clients, which is the common challenge facing all of today’s leading BPO providers. While Capgemini leverages offshore support from locations, such as India, to drive down the cost of its global delivery services, it has made investments in high-quality locations, such as Poland and Guatemala, which are costlier than those of several of Capgemini’s competitors, which focus more heavily on lower-cost locations to be more price competitive.
Developing more common processes will enable Capgemini to provide greater value in delivering process excellence and competitive pricing through efficienctly-leveraged staff, technology and processes. This will be necessary as Poland becomes a fully-fledged member of the EU and labor costs across Europe become equalized.
All-in-all, while the French- headquartered service provider is clearly investing in high-quality, but also costlier, locations, HfS believes these investments should bear fruit in the future when labor-based engagements further commodotize, and cost efficiencies increasingly come more from IT/BPO synergies, common delivery platforms and Cloud Computing delivery, as opposed to primarily low-cost labor.
This post was co-written by HfS analysts Mike Atwood and Phil Fersht. You can upload a full copy of the HfS Rapid Insight by clicking here.
