If you happened to be listening to National Public Radio yesterday afternoon, you would have heard an interesting discussion on the rise of homeshoring on their All Things Considered afternoon show.
“So what’s new, then”, I hear you mutter over your espresso and boiled kippers…
In a bid to sound a bit clever, my good friend Philip Peters over at Zagada (which does some excellent analytics on the global sourcing space), pulled some data to discover that at least 110,000 home-based call center jobs have been created in the US in the last three years by companies such as Alpine Access, Working Solutions,LiveOps, Arise NA and West!@home. Now that’s more onshore jobs than the entire size of Cognizant’s global workforce!
Now while it’s clear that homeshoring is not primed to replace offshore work anytime soon, it clearly is a viable option for front-line customer-facing services at competitive prices. The removal of the bricks and mortar, telecom costs and use of Cloud-based applications to record/monitor calls is enabling the homeworking environment on a serious scale. Other areas, such as medical coding, already rely heavily on homeshoring staff to work on administrative tasks with contextual needs.
Running a business myself, which is entirely “in the Cloud” with folks working largely from their homes, you do start to wonder how quickly the homeshoring model with proliferate, especially with the amount of workers available to switch on their PCs from their houses and start work. This is one dynamic emerging from the Recession that you can see gaining traction, as more and more people opt to work remotely (or have little choice but to). Procurement/sourcing, accounting, medical writing, financial research… the number of possibilities for using homeshoring as adjunct delivery options in other BPO areas is clearly apparent.
We’ve seen a significant shift in in the competitive landscape for BPO providers in the last two years – some of the leading Indian service providers have taken advantage of the Recession to steal a march on several of their incumbent competitors, pushing their own tenacious brand of offshore service delivery. The change has been dramatic, with some of the traditional providers of recent years being knocked off their perch. When HfS produces its new competitive landscape later this year, this market shift away from some of the “traditional” BPO engagements and momentum towards new approaches for pricing, engagement scope and IT-synergy will be apparent.
Abid Ali Z Neemuchwala, Global Head for BPO Services and Process Excellence, Tata Consultancy Services
One of those providers which has evolved significantly into a major BPO provider, in its own right, is Tata Consultancy Services (TCS). Like a couple of the other major Indian IT services providers, TCS has quietly, but aggressively, developed a global operation of scale at a rapid clip, with its 2008 acquisition of Citigroup’s banking captive adding significant offshore BPO scale and financial services competency to its $1.2 billion mammoth multi-tower IT-BPO-KPO engagement with Nielsen in 2007. Quite simply, it’s eye-opening how quickly the likes of Infosys, TCS and Wipro have muscled in on the business process game, as they branch out from their massive IT services businesses.
To discuss this dynamic at length, we managed to grab some time with TCS’s head BPO honcho, Abid Ali Neemuchwala – (more simply known in the business as “Abid”) to talk about TCS’s development, and his views for the future nature and development of global BPO service delivery.
Abid has developed a 17 year tenure with TCS where he expanded the firm’s operations in Mumbai, Pune and Gujarat (in India), the Midwest of the US and Japan, before moving his family over to sunny Dallas to lead the firm’s global BPO surge. Abid kindly relented from one of his evening city strolls to spend some time with us…
Phil Fersht: Good morning Abid. Let’s start with where TCS is today, how things have changed in the last six months, where you see the majority of demand coming from and how the business is shaping up.
Abid Ali: Phil, we ended our financial year on March 31 with about $720 million in pure BPO revenues. TCS overall is $6.7 billion, so our BPO revenue is now more than 11 percent of the TCS revenue pie. Last year was very successful and rewarding for us, which means our strategy has been playing out well throughout the downturn and the recent upturn.
From a market perspective, I continue to see very good uptake in transaction processing in the verticals. We’re especially seeing a lot of activity in banking and financial services, accelerated by our Citigroup acquisition, which gave us some unparalleled capability. We also see a lot of activity in the insurance vertical. For that sector, we embarked on licensing on three key aspects of transaction processing in the U.S….collections, mortgage origination and third party administration licenses. This is quite complex because all the licenses for each of these streams are administered at an individual state level. So acquiring these licenses positions us as a committed and serious insurance industry player. We also continue to see traction in the pharma space, both vertical and horizontal.
Most of our new client acquisitions have happened based on the IT-BPO synergy proposition. And if you look at all the deals we have won in the last 12 or 18 months, about 70 percent of those have come from cross-selling to existing IT customers. That works very well for an organization like TCS because we have strong C-suite relationships and so are able to position ourselves very well. If you look at TCS’s growth over the past 20-25 years, account mining has been our strength. This many times makes our cost of sale lower, makes it easier for us to penetrate, sometimes makes deal closure much faster. Especially in the recession when a formal bidding process was taking anywhere between nine to 12 months, we saw certain deal closures in three to four months simply because we were cross selling into existing accounts.
Over the last six months, we have seen many relatively small deals coming up. We have not seen too many big bang $300-500 million deals, but the smaller deals — $50-%70 million – plays well to our strategy of penetration, establishing track record and then growing within the account once we prove our capabilities and are able to cross sell and up sell our offerings.
Phil Fersht: You mentioned 70 percent of your business in the last year has come through cross selling into IT clients. Does that signify that more BPO discussions are arising around industry-specific processes at this point, or are you seeing more horizontal BPO business opportunities?
Abid Ali: We are definitely seeing much more vertical process interest in the market. Many of the cross-sold deals have been in core domain areas. And more than 50 percent of those deals are cases where we either developed the IT application or we were supporting the customer’s application enabling that particular vertical process that we took over in the BPO area. So our domain knowledge and understanding of the customer’s process is playing to our advantage in those deals. We are also seeing a fair amount of horizontal deals, but more of them are still coming in through the traditional bidding process. The vertical processes are the ones coming more as cross-sell opportunities from IT into BPO.
Phil Fersht: Our recent discussions with the buy-side on vertical focused processes, have shown common concensus that the next wave of optimization comes through IT-enabling the process within the outsourced environment. So when you talk about cross selling into the IT customer base, I immediately think about ‘vertical processes’. You mentioned taking on customer applications and delivering the process around them in vertical areas. Would you say most of your vertical business is taking on the customer’s existing IT platform, or are you actually pushing your own application IP into the client base?
Abid Ali: In verticals, we have developed some of our own very focused platforms, most of the vertical processes we deliver are on our customer platforms. And in most of those cases, we support it from an IT standpoint. We have a platform for U.K. Life and Pensions companies which originally germinated from our Diligenta/Pearl Group deal, and we now have a couple of additional customers on that platform. Another of our platforms, which we call Aspire, is for reconciliations. We started that about three years back with our Deutsche Bank deal, and have about four other customers on that. Our third platform, which includes solutions from our acquisitions of TKS in Switzerland and FNS in Australia, is our BaNCS products for the banking industry.
On the horizontal side, we are seeing a lot more traction on going in with our own modular technology platforms, whether it is F&A, supply chain, HR or analytics.
Phil Fersht: One thing we are seeing this year is more sole-sourced activity and less involvement with the competitive sourcing advisory process, particularly with the vertical deals. Is that something you are seeing as well?
Abid Ali: Yes, especially when I look at the vertical business and deals we are able to cross sell. We are able to proactively go to our client and say, “You have this process. This is what your process matrix looks like. This is what our best in class industry process is, this is what we think the process matrix should look like based on our knowledge of the industry, and we see an opportunity for improvement.” That’s how a C-level conversation gets started, and then we get into due diligence which helps us create a business case for the customer. And after that we pretty much see a sole source engagement happening. In some verticals like manufacturing and retail where there is a strong sourcing organization, they still undergo an accelerated sourcing process. But most of the contours of the deals are shaped during demand creation, rather than during the vendor evaluation process.
Phil Fersht: So what’s changed since the Recession has faded, and how is the new, less conservative mindset impacting your business?
Abid Ali: Let me answer this from two perspectives. On the buyer side I am seeing much more certainty. A year back, survival was the big thing, so the decisions being made could have been more tactical than strategic. Today, we are seeing customers coming out of the Recession already thinking about how they will cater, not only to the growth that is going to happen in the next two or three years, but also how to be better prepared if they were to undergo a similar Recession three years from now. And obviously, since organizations like TCS were such a strong part of the solution to the challenges clients had, they are now engaging with us on a more strategic basis. This also means we are getting to try newer things we would not have been given a shot at earlier, and all of the vertical transaction processing, vertical BPO, platform transformation etc. is part of that.
We’re also seeing smaller deal sizes. We’re also seeing more pilots that start with a model where their own in-house staff is the “champion” and we are the “challenger”, do part of the processing and then they have a roadmap over the next year or 18 months to scale it up. Risk becomes an important criterion on the buyer’s side as we do that. They understand there’s a huge component of learning custom processes, but they are very focused on whether we have the right risk and control mechanisms in place. And a process-centric organization like TCS does have a significant advantage with the risk and controls, quality, tools and ecosystems, which enable better process capability and delivery.
On the supplier side, we are making more investments in our global delivery network. We have delivery centers in the US, the UK, India, Mexico, Chile, Uruguay, Brazil, Ecuador, Budapest, the Philippines and China. Some of our more recently added sites – such as the Philippines and Michigan – were a direct outcome of everything we learned through the Recession and the political dynamics that come into focused play during an economic hardship.
Phil Fersht: As you build out globally, is it in response to the way companies are morphing their shared services? Two or three years ago, people were talking about the death of shared services, but clearly that hasn’t happened. What’s your view on the future development of shared services and how it ties into BPO?
Abid Ali:Client organizations are still investing in shared services. On one end of the spectrum, there are companies that have done shared services earlier, and are looking at the next wave of value, and that is where BPO is becoming more compelling to them. There has been mixed success of process standardization and process transformation in internal shared services, where, for example, four separate P&L managers are hiring four different teams in those shared services, and they may be able to put in some common recuiriting processes, for example, but all these services are being directly controlled by the end-user. They have delivered consolidation and a certain amount of labor cost arbitrage, but they have not necessarily delivered IT-led transformation.
So the next wave we are seeing, is where the customers are coming to us saying, “We have put the shared services together, now either can you take it over, or partner with us to deliver IT-led transformation and the next wave of business effectiveness and process efficiency to it.” So that is one side of the spectrum. The other side today, is where some customers are embarking on a two-stage process, where the first stage of doing vertical BPO is actually creating their own shared services and consolidating processes in their shared services.
So I don’t think shared services is over. In many cases today, we actually see shared services as an enabler for an eventual BPO. I would partner early on with the client and encourage the movement to shared services, because a lot of times doing direct BPO from a current state, may not necessarily be manageable by a third party provider because of the amount of change that needs to be driven within the client organization. I see this as a continuum with shared services and BPO on two different ends and many stages in between.
We continue the discussion in Part 2, where we talk about gain-sharing, the Cloud and developing consultative BPO partnerships
Abid Ali Z Neemuchwala (pictured), is Global Head for BPO Services and Process Excellence for Tata Consultancy Services. In his 17-year TCS career, Abid has been executive sponsor for a number of key clients of TCS. He is a director on the board of TCS eServe Limited. Earlier, he managed TCS’ operations as Regional Manager for the Midwest US and in Japan. He currently lives in Dallas with his wife and 7-year old daughter.
I received a ton of email and blog comments this week from various people airing their views on Senator Schumer’s visa-fee hike. They tended to be in the form of one of the following:
“Right on – this guy is all about protectionism and has little idea how to create jobs”
“The policy is so toothless, it’s barely worth talking about”
“It’s only targeting firms who excessively use H1B staff, so what’s wrong with that?”
“We have to protect American jobs”
“I never knew you were a Republican”
All fair comments – except the last one. Firstly, my politics have always been left-of-center – I am merely a global realist and believe in intelligent, informed debate on these tough issues. Secondly, it never ceases to amaze me how polarized people in the US are when it comes to politics. You’re either Democrat or Republican – there’s now common ground on anything. And thirdly, I’m not American anyway, so it’s a moot point.
The other major point that needs to be made, is that this policy does nothing to create American jobs – it’s merely political grandstanding from the protectionist lobby. As we pointed out, the visa-hike will only encourage further offshoring, and the inflated fee is not enough to have any meaningful impact on altering current dynamics. Moreover, it’s pretty hard to couch these political actions as anything but protecti0nist politics when the Senator in the driving seat brands one of the leading Indian IT services firms a “chop shop” (detracted, or whatever – he said it).
What options, then, could the US government consider, if it wants to “stop” Indian IT services firms bringing temporary IT staff over to the US, and create an environment for fostering onshore technology employment and innovation?
1) Give Indian services firms tax-incentives that would sufficiently motivate them to hire and train US IT employees. Many of these firms provide a great training ground for new IT talent – now let’s ensure they are motivated to train and develop talent in the US and not just offshore staff. Many leading Indian firms have proved extremely good at training, developing and motivating young IT talent, so why not get us a piece of the action?
2) Give US enterprises tax-incentives for creating new onshore IT jobs. This won’t be any harder to administer that call center tariff etc.
3) Establish an oversight committee that will devise an immigration strategy to encourage top talent into the country and ensure it stays here. Ensure immigration policies are focused on developing the talent pool in the country and not open to abuse;
4) Establish more dynamic partnerships between academic institutions and businesses. We don’t see enough involvement from the academic sectors in the global sourcing industry today – a few firms, such as Systems In Motion, are pushing the agenda, but these firms need a lot more investment to get anything like the scale and execution capability to be effective in the global market place.
We live in global economy and we need to focus on being competitive for a larger piece of the pie, not trying to protect limply the dwindling one we have left. The Chinese economy is the new powerhouse – we need to ensure we have the innovators, thinkers and operators to compete effectively. Countries with developing talent, such as India, can help us be competitive, as long as we create smart entrepreneurial environments to work with them.
Chuck (center) and his selfless buddies strategizing how to stimulate the US economy
Senator Charles E. Schumer, not content with ludicrous attempts to tax the US consumer for taking an offshore call, has continued his personal tirade against the use of offshore services, by pushing through legislation to add a further $2,000 tax for an H-1B visa application, and $2,250 more for an L-1 visa application. This CIO Magazine article by journalist Stephanie Overby does an excellent job discussing the situation.
You have to wonder about the motives of a US senator, who describes Infosys as a “chop shop” and pushes through legislation that is deigned to antagonize service providers, as opposed to what he should be doing: helping to make US service providers become more competitive, and US IT / BPO workers more attractive to be hired than those offshore.
In terms of creating more US IT jobs, this is a further backward step in trying to re-energize the US IT industry for the following reasons:
1) Indian IT services providers will attempt to conduct more IT work offshore / outside of the US, whereas in the past they would have conducted the work locally with either a US employee, or an Indian visa holder in the US. Impact: more work moves offshore as opposed to onshore work being created
2) Indian IT service providers have been investing heavily in hiring onshore staff, and have been creating local employment. However, the new visa taxes will only help to accelerate the movement of more complex IT work offshore. The Indian providers have a proven successful strategy of taking on complex IT projects and “learning on the job” with their offshore personnel. This new fee will only encourage them to take bolder steps to take more work offshore. Impact: more work moves offshore as opposed to onshore work being created
3) When Obama was elected and voiced potential moves to slowdown offshoring, several Indian IT providers made investments in locations such as Canada (especially Ontatio) and Latin America. They will now look to leverage these investments more aggressively. This is great news for the developing nearshore IT services markets. Impact: more work moves offshore and nearshore, as opposed to onshore work being created
4) With the global IT services industry poised for consolidation, this may encourage several of the leading Indian IT giants to acquire onshore US firms, now they have more financial incentive to do so – which would likely have further negative ramifications for the US IT job market. When Indian firms acquire US IT services firms, they will seek to rationalize the existing onshore staff to support their offshore operations, while keeping salary costs at a minimum. Impact: more work moves offshore as opposed to onshore work being created
5) The US IT and hi-tech industries grew up on bringing talent into the country that added new skills and ability – and was often more affordable. By further discouraging bring the talent to the states, Schumer and co are driving the next wave of IT development out of the country. Impact: innovation moves offshore, and more vacant office-lots in Silicon Valley.
President Obama has set out to be a transformative president, who can elevate US competitiveness in a global economy and create jobs by intelligent fiscal stimulus. He needs to drive policies that will stimulate employment, and stimulate innovation. The economic wonder that became America, was centered on an immigrant society, and attracting talent to these shores. My fear is that policies like Schumer’s are moving the US further away from the very principals with made its economy what it once was. The imperative word here is “was”…
we'll be happy to deliver that to your door for an additional $20…
Today’s outsourcing industry is balanced on a knife-edge as costs continue to level-out across service providers for operational work. Business leaders are demanding more innovation and productivity from their outsourcing endeavors, but their delivery teams tend to be more concerned with the work culture of their provider.
So how can leading service providers deliver all the goodies CFOs and CIOs want, in addition to being really flexible and easy to work with? Quite an ask, but those who can deliver both will win out. So how did we arrive at this impasse?
During the early years of this Millennium, the onslaught of the Indian-headquartered outsourcing providers was centered on low-cost service provision, and a willingness to do whatever clients wanted to win the business. This strategy has proved especially effective for the less-complex IT application development and maintenance work, and several operational business processes, such as invoice or claims processing.
In today’s market, the Western providers have been forced to bring their costs in line to be competitive for the “lower-end” work, by expanding and optimizing their offshore/nearshore operations. Once their prices are within 10-15% of the offshore-centric providers, the provider selection decision veers away from price, and towards one of with whom do we actually want to work?
Two different services cultures have defined today’s outsourcing business
We’ve witnessed an incredible dichotomy of styles in the outsourcing business over the last decade – one of top-down dictation from our traditional incumbents, in stark contract to the bottom-up tenacity from our growth machines from the sub-continent. To put it quite simply, the Western incumbent providers show up at the CIO’s or CFO’s office and tell her/him how they can change their world to do things their way, while the Indian-headquartered providers have typically operated a rung or two down, offering to do whatever their clients need to get the job done – and make them look good in the process.
One set of providers has grown considerably over the recession years, and continues to outperform the industry, while the other is maintaining a status quo, with far more modest growth. And, as we’ve mentioned, it’s not all about price anymore – several hundred thousand Indian and Philippines citizens are proudly showing up to work in an Accenture, Capgemini , Deloitte or IBM polo-shirt. Both the traditional providers and the newer Indian breed can offer low-cost services to take on new business. So if it’s not really about cost anymore, and the Indian-headquartered providers continue to gain marketshare in this environment… the secret sauce must really be about work culture. Let’s examine further…
C-levels don’t get so involved in service provider selection. Most IT or discreet business project decisions are overseen by the direct report to a C-level (or even lower than that). If you’re a VP / director level executive, why would you want some flash MBA-infused team of hotshots telling you what to do, while constantly trying reach over your head to your boss to let him (subtly) know you could run your department a lot smarter, and more cost-efficiently? In this post-recession environment, people are incredibly nervous about their job security, and the last thing the VPs and directors want is a provider that is going to threaten their cosy world.
Conversely, a team of humble, dedicated and determined service provider staff, who see you as king of their world, and are prepared to do anything for your business – and promise you outcomes you probably realize are unrealistic (but who cares, right?), are far more appealing providers for your custom.
Peer pressure up the chain trumps a round of golf. In the old days, when CIOs were wined-and-dined at offsites in Monte Carlo, they made the provider selections. They could afford the occasional $100m project-wastage and no one really cared (hey – it’s just IT, right – it’s just a black hole of lost cash, right?)
Today, most CIOs are tied to their desks staring at a spreadsheet trying to keep within budget, while trying to prove they can deliver value to their board – they are in a pressure-cooker environment, with ever-decreasing tenures. They are completely reliant on their teams to bring them results. When their two, three, or four direct reports come to you with a suggestion to “use this provider”, it’s very hard to challenge a consensus from your own team – you’re the boss and you need you team to like you, or you’re in serious schtuck. You don’t have time to mess up, and you may be out of a job soon anyway, so short-term success works better for you anyway. If you recommend your consulting partner buddy (who just three-putted to let your win on the 18th) propose work for your managers down the ranks, the chances are they’ll find every excuse not to use them. If your team isn’t happy and you’re making multi-million dollar investments, you can’t afford mistakes, or a lot of dissention from the ranks beneath you. Might be easier just to keep everyone happy as long as you’re staying on budget.
So what can the CIO do? Risk upsetting your team, or keep the costs low and find a way to keep the machine ticking over and meet the operational goals?
The next wave or productivity requires a new approach from the industry. Quite simply, most of the managers, a rung down from the CIO, have squeezed as much as they can out of the easy work. The app support, the testing, the simple coding is running about as cheap as you can – you even bring in sourcing advisors to keep the contracts running as low as you can manage. There’s no more room for maneuver. That nice Indian head-quartered provider – who still loves you as much as the first day they showed up at your office – can’t find anymore wiggle room to keep making you look good. Besides, today they’re a multi-billion dollar eneterprise with a lot more overhead, and have sales heads forcing them to start raising prices.
At the same time, some of the old Western providers you abandoned a couple of years ago, can now match the prices you’ve just been quoted from the “low-cost” provider. They want you back and are begging for that second chance, promising delights that you forgot that failed to deliver in the old days…. WHAT DO YOU DO?
Bottom-line: the Indian providers are trying to be more like the Western providers, and the smart Western providers have studied the Indians who’ve been eating their lunch, and are working out a game plan to win back lost business. The cultures are moving closer together.
Does that mean we may actually see one of the Indian biggies merge with a Western one? I’ll put a stake in the ground and say we will. In the next year it has to happen – a blending of the two cultures to form a mega-provider which can do it all.
Leadership: a very fine line between love and nausea…
I got a few of emails today from people who claim you can’t only blame Hurd for HP’s current malaise, moreover it’s the whole HP leadership that should be held accountable.
I say it’s all about the leader and the team he or she molds that drives the vision and instills passion down through their organization.
Today’s winning services firms are being shaped by their leaders:
Accenture’s Bill has charisma, is pragmatic, and has had the guts to bring in new blood and thinking to constantly break new ground; Cognizant’s Frank’s incredible energy, youthful thinking and intellect defines his firm; Genpact’s Pramod relentlessly drives his firm on with a consistent vision; Infosys’ Kris has a determination to shape the industry; while Wipro’s Suresh has stuck to his guns to deliver his own brand of global sourcing to clients. These are just some examples of today’s services leaders who define agendas for their firms and are prepared to adapt to change. And one other thing – if a large deal was on the line, they would be personally involved.
Several other providers have forgotten their personalities, are lumbering along trying to meet certain metrics, but seem to be following trends, as opposed to leading and defining them.
Now, none of these providers are perfect – they all have their warts (hell, we all have warts), but what they do have are leaders with a vision and an understanding of how to position their firms in unique times like these, where there is no “set” way of doing things. Today, there is no rule book. Instead there is passion and energy, creativity and innovation. Moreover, services companies need to forge an identity to survive.
Hurd’s challenge was that HP was too big and too focused on hardware. He needed 5% annual growth, which was about $6-7B a year. He would much rather sell a hardware device to a business or a retailer with a service contract attached, than sell a more strategic and “sticky” business process contract.
HP doesn’t have time to make a poor, or even an average, decision. The firm needs a vision, it needs to detail specifically how it intends to service its customers, and how it intends to help them find new thresholds of performance. It needs a leader who can step in to re-energize the firm, set out its agenda, nurture the cash-cows, while investing in the growth opportunities. The industry is watching which direction HP takes – and this one’s crucial.
When Mark Hurd took up the reins as HP’s boss back in 2005, the company badly needed him to stabilize the business, drive up the stock price, while instilling discipline and cost-control into many of its global operations.
Whatever the reason for his demise (and quite frankly, he’s not Tiger Woods, so who cares?), he’s done what HP needed him to do – and this is a good time to put someone else at the helm who can start closing the gap with IBM and others. In fact, he should have gone sooner, because there’s a lot of ground to be made up right across the board.
One of those is a flagging BPO business that had outperformed anyone’s expectations before the EDS merger threw it into a confused shambles. The addition of EDS should have been the cherry on the icing-on-the-cake to drive the emergence of a major BPO powerhouse to challenge the likes of Accenture and IBM.
In pre-EDS days, HP was giving everyone a run for their money winning several mega F&A engagements, such as Nestle, P&G, Clorox and Molson-Coors, and were doing a great job bundling IT and ERP-enablement services around their BPO. The firm was also discretely picking off payroll-centric HRO engagements and building an impressive competency for running multi-country SAP-based payroll services. HP also boasts one of the world’s largest supply chains it could have leveraged to drive its source-to-pay offerings.
But Hurd rarely mentioned BPO in his speeches or strategy discussions – the business relied firmly on the determined leadership of some great individuals (you know who you are) who drove that business in spite of lacking much senior leadership support. Consequently, since the EDS merger, more of the BPO leadership exited the business, the ExcellerateHRO business was sold to rivals Xerox(ACS) and the firm is rarely seen in major pursuits. Instead, most of its BPO focus is polarized on the healthcare sector, which is smart, but not when the rest of the BPO areas are neglected.
Bottom-line, Hurd is one of those IT operations guys who didn’t quite understand the value and stickiness BPO engagements can bring to a IT-BPO services provider – he’s a dollar- and-cents guy, not a business transformation one. Accenture and IBM have multi-billion dollar BPO businesses. Infosys, TCS and Wipro are tenaciously growing BPO business that are threatening to surpass HP’s. Capgemini has also moved in front of HP in the pecking order in most deal pursuits – particularly in Europe. And even in the verticals, such as healthcare, up-and-comers like Cognizant are edging in front.
HP is a great company and has a solid base of BPO from which to build. But it’s “lost years” in BPO need addressing quickly by whomever next takes the hot-seat. And this time, there isn’t much time, in a polarizing industry with twice as many competitors. An acquisition or two will likely be needed to turnaround its stuggling BPO service lines… and we’ll be hinting on where this should come from very soon.
Like an ’86 Margaux, some things just mature with age, and one of those is the good ol’ newsletter.
Read the Finish Line, edited by HfS analyst Bruce McCracken
So we asked another fine vintage, HfS senior analyst, Bruce McCracken, (whose claim-to-fame is once receiving a fat check from the State of Texas), to pull one together for us.
This month we’ve featured industry dignitaries such as Vinnie Mirchandani, Naomi Bloom, Ben Trowbridge and Mark Trepanier airing their views about Mahindra Satyam’s re-emergence and AON’s takeover of Hewitt.
And don’t miss a superb interview with EquaTerra’s Stan Lepeak, discussing the latest Industry Pulse and its new findings on Cloud Computing adoption.
Bruce McCracken (pictured center) is senior analyst at HfS Research, and editor of the Finish Line.You can read his bio here.
You can submit news and views that you deem appropriate for inclusion in future Finish Lines by emailing Bruce at bruce dot mccracken at horsesforsources dot com.
The Windy City will be injected with some additional hot air on 28th September for the ultimate finance and accounting shoot-em-up.
Yes, HfS has teamed with its networking partner, SSON, to present a superior discussion across the ‘hood of F&A and sourcing, with Northern Trust’s Jay Desai, one of the buy-side’s most respected voices on sourcing governance, Capgemini’s own sourcing sheriff David Poole, the pontiff of procurement Jason Busch… and bossed by HfS. We’ll be debating the burning topics in finance technology, shared services and outsourcing, waste management, and presenting some new research findings from our recent F&A studies.
As usual, we’ve haggled a blazing 15% discounts for hungry horses readers – just quote promo code “HfS_FT2010” when you register.
During Part I, we talked about social media and marketing, a little bit about outsourcing, and touched upon the late-night cannoli scene in Baltimore.
Rebels without much pause…
In Part III, we will discuss the merits of ricotta versus custard cream filling, but for now, let’s dive into where the outsourcing business is heading…
Phil Fersht: I’ve observed, at several recent forums, that most software folks still don’t really understand the services market. They seem to think services people do the grunt work and it’s still all about the app. Do you agree that software people still don’t have their head around ITO, BPO and how it all fits together?
Ray Wang: I think software people see that the value-add in the solution is what customers are looking for. And that last mile, which is still in services, is even harder to deliver as customers’ requirements continue get tougher. Flipping that around, do you think the service providers see that their solutions are increasingly differentiated by software or their own IP?
Phil Fersht: Let’s look at a growting BPO area like F&A (finance and accounting), where clients want service providers to handle their AP, procure to pay, payroll and other related processes. The providers can partner with a company like NetSuite or Workday and deliver to their clients the hosted application and the processing around it. But if you have 10 service providers offering NetSuite F&A, what’s differentiating them? Their ability to process invoices? No. For the service providers to gain competitive advantage, they need to develop their own IP and their own applications to add value for their clients. And when we’re talking about the coming together of SaaS/Cloud and BPO, it really becomes more of a business transformation issue than a technology transformation one.
Ray Wang: Yes. With the Cloud, all the pieces of what I call commoditized infrastructure go away. Think about it. Do I really care what hardware, databases or applications are out there? No. All I really care about is that you’re giving me a service level guarantee. But then I want more. Can the service provider give me value add on top of that? Can someone give me those services with strategic economies of scale and innovation? The providers that help with commoditized processes and incrementally add more value are going to make a big difference.
Phil Fersht: One of the most fascinating aspects of the way the industry is developing, is the rapid rise of the Indian pure play providers. They’ve really been a game-changer in how these solutions get adopted. Their attitude is increasingly, “Let’s try and sell a solution first, be flexible and as easy-as-possible to work with, and then figure out how to deliver it.” In many cases that has actually worked for them. We’ve seen that have a huge impact in the ITO business, where you’ve seen the rise of companies like Cognizant, TCS and Infosys as they’ve adopted this bold attitude of marching into clients and increasing their footprint by being very easy to work with, and very eager to take on business. Quite frankly, if I were an IT VP these days and I had one of the Indian providers coming to me, begging for my business and offering to do whatever it took to win that piece of the pie… it’s becoming vogue for IT professionals to start dealing with these folks. That’s been a major change from everything we’ve previously seen, and it’s reaching a fever pitch with the Indian providers, and poses a lotof critical questioms regarding where things are heading next in the outsourcing business. They’ve really proven themselves in the IT services space, and are now trying to do something similar in the BPO space.
Ray Wang: What we’re seeing among the Indian providers – no matter what their entry point was, whether testing or break fix or maintenance – is that there’s a certain level of confidence that wasn’t there 10 years ago. They’ve been doing a fairly decent job across the board, and each one of them has a stronghold with achieving “quote unquote” trusted advisor status. As they’ve been trying to achieve that status, they’ve started looking at IP for differentiation.
A related question for you Phil: are the service providers becoming less reliant on the large software vendors, or do they still see them as an important part of their income stream, especially dealing with SaaS?
Phil Fersht: I do think the way service providers engage with technology, is proving to be one of the major differentiators, and the service providers who are developing their own IP and actually acquiring SaaS solutions are gaining quite a significant advantage within industries. So let’s take an example of Navitaire, an airlines reservations solution Accenture acquired, and now leverages to deliver full scope F&A services, hosted and fully BPOed, to all the major low cost airlines. It’s very hard to compete with them on that business because only one other competitor we know has developed a similar reservations system. It’s the same in the insurance industry, where providers like Infosys and Genpact have acquired specific insurance platforms and are delivering them as their own hosted applications to their clients. On the flip side, you have five or more different service providers offering an off-the-shelf application like SmartStream, which does trade settlements in banking. And all are trying to differentiate themselves on how distinctive they are. But, “We do it better than they do because understand GAAP better,” just isn’t a selling point. It’s much harder to differentiate on operational capability than it is on having something no one else has. That’s why technology IP is becoming so important for the service providers. And I think we’re going to see more exclusive partnerships pop up. The software vendors are going to want to have exclusive arrangements with services companies so they can provide them with the support and the capabilities to deliver and manage it properly. And having exclusive partnerships with cutting edge software is going to be a major differentiator for the providers, especially as industry specific solutions become more important in this market.
Taking it beyond exclusive agreements into acquisitions…do you think at some point we could see some one of the big ERPs purchasing one of the leading service providers?
Ray Wang: It depends. It seems most companies are headed in the direction of having both technology and services businesses. If you look at the transition for software vendors and getting tighter services partnerships, they can easily build their professional services units. Instead of doing an acquisition, it may be cheaper just to recruit everyone into their unit. I mean kind of like the old IBM model – you can’t beat them, they’re just going to be the largest provider in India. What do you think?
Phil Fersht: Well, you could argue that Oracle buying Sun was the first start at looking at this space a bit more – even though I think Larry’s motives for buying that company were very different from making a services play. It’s already invested in BPO by buying an Indian company called i-flex Solutions, (which they renamed Oracle Financial Services Software Limited.) It wouldn’t surprise me if things got so competitive at some point that one of the software companies decided it needed to have a greater services channel. Because, for example, when you look at SAP’s revenues, isn’t its consulting business one of its fastest growing units right now, and it has to sort of disguise some of that revenue?
Ray Wang:Well, some vendors are actually claiming license revenue for custom maintenance work, so that makes things very interesting. For example, Amdocs has been 80 percent services revenue for a long time. But is it a software company or a services company? I argue it’s a DSI shop focused on telco that happens to own software.
Phil Fersht:I agree, and looking at it very simplistically – if a company is increasingly moving to hosted SaaS-based applications and the amount of IT reconfiguration is consistently decreasing, we’re not really talking about these massively drawn out, painful systems reengineering projects. Instead, the company is going to have to change all its processes and completely transform its business to run on this type of solution. Since we’re really moving from technology transformation to business transformation, I believe that means the winners in this space are going to be the ones that can take their clients through transformative business change, not technology change.
Ray Wang: Interesting, huh?
Phil Fersht: These are certainly interesting times, Ray…
Ray Wang (pictured top right) is Enterprise Strategist, Disruptive Technologies Expert and a Managing Partner at analyst advisory firm, Altimer Group. You can rach Ray at R at Altimetergroup dot com. You can also follow his tweets at @rwang0. His personal blog, “A Software Insider’s Point of View” is one of the most visitied in the software business.
If you happened to be listening to National Public Radio yesterday afternoon, you would have heard an interesting discussion on the rise of homeshoring on their All Things Considered afternoon show. 
