There was a suggestion recently (see “Busting the Innovation myth”) that innovation in back office operations wasn’t important and it’s all about the “front” office. We would argue that achieving innovation in the global support operations of businesses, is often the only lever most firms can pull to remain competitive in this economy.
In most cases, it’s not enterprises’ products and services that have to change, but the speed and efficiency with which they can adapt to the changing environment, that now provides the competitive edge. Here’s an overview of the secular changes impacting the very core of today’s industries:
Can BPO engagement models broaden to help businesses stay ahead of secular changes?
Our research delves into the heart of major industries, to understand how sourcing engagement models can enable firms up and down their entire supply chains. Let’s take a closer look at a few examples:
Life Sciences and Manufacturing
In the pharmaceutical business, for example, the increase in the use of generics is bringing the issue of cost and speed-to-market into play. In previous times, innovation was focused primarily on research and development of new blockbuster drugs, but with those becoming fewer and further between, combined with the massive M&A activity in the sector, the innovation focus has quickly shiften to the support operations and the supply chain. With generics, there really isn’t much you can do to differentiate by product, but you can compete on price and respond to market demand quicker than your competitors. Driving down production costs across both manufacturing and business operations processes is critical, and having a global support infrastructure to get these products to market, and keep inventory levels optimized is how to stay ahead of the competition.
Core sourcing challenges: BPO providers need to step up their competency delivering managed supply chain processes that encompass master data management processes and other supply chain functions, to help their customers. It’s not simply about payroll and payables anymore; life sciences firms need to drive their providers to invest in taking a greater interest in creating new ways to reach their markets faster and more intelligently.
Media and Entertainment
In the media business, the impact of web 2.0, social media etc., hasn’t altered the actual “products”, but the way in which they are delivered to – and consumed by – the end-customer. For example, the diminishing need for printed media products is shifting the focus to driving out as much cost from the operation as possible so media firms can invest in quality content to remain in business.
Core sourcing challenges: The bottom is getting ripped out of the media business at an alarming pace and media firms have no choice but to eliminate as much cost from their distribution channels as quickly as they can, in order to survive. Many media firms have run out of time to go through gradual transformation; in most cases, they simply have to find providers which can enable rapid lift and shift deals to rip out as much short term cost as possible. Then they have to streamline the operations in the BPO environment as quickly as they can to take advantage of the cost take-out (see Surviving the Aftermath of a Lift and Shift Transition). Being able to grasp – and live – with such rapid change, and find a provider which can work with you to ahieve that is the only way forward. Selecting the wrong provider in this market could be fatal.
Financial Services
In financial services, the appetite to move away from captive-only support models is helping many firms find new levels of cost-elimination, but also new flexible models for improving the delivery of their current services. Banking and insurance services aren’t changing that much per se, it’s how effectively they are delivered to market that is providing the competitive edge. Deploying more flexible and sophisticated global sourcing models, is the only way to go for most financial services firms today. By staying with jaded and often expensive captive operations, is holding many financial services firms back from being exposed to new ideas, new process flows, and the new energy some BPO providers can bring to the table, based on their experience with many other enterprises.
Core sourcing challenges: The majority of financial services enterprises are busily shopping their captives at present, and only a few will find willing service providers to buy them. Most providers now have the scale they need, and are only interested in specific niche competencies that give them new capability. Many financial service firms are facing the prospect of having to phase out their captive operations in order to move into a blended, or fully-outsourced, operational support environment. They will need to decide whether or not to write-off years of investment in their captive operations, in order to transform their delivery model.
The Bottom-line: We’re caught in a relentless pursuit of cost elimination and efficiency
We’ve spent the last few weeks having intense dialog with buyers regarding how the uncertain, but recovering, economy, is impacting their stance on outsourcing, and the common thread is one of speed and urgency. There’s a genuine impetus from business leaders to act on new efficiency drives that were formulated during the recessionary months – and global sourcing strategy is right at the heart of these. The conversations dominating this week’s SSON show in Orlando left us with the phrase “the relentless pursuit of cost elimination and efficiency” firmly etched on our minds.
Our argument with current BPO engagement models is that they have to encompass more than simply a few administrative processes to be truly effective. If your BPO provider is only fulfilling a few standalone functions such as purchasing, or invoice processing, it’s going to be very difficult for them to achieve much more than a few dollars shaved off the labor cost, and perhaps some elimination of duplicate tasks and unnecessary process steps.
In order to find that next level of performance, you need to take a broader view of your entire global business operations and find ways to bring your BPO partner into the heart of your critical data management processes, so they can help you source unique and creative ways to be more productive and source new avenues for growth.
Folks – it’s not too late to make the trip to the charming Georgian town of Savannah for next week’s Global Sourcing Summit. The Horses will also be present, co-leading session on Cloud Computing Delivery with Mayer-Brown, in addition to hosting an all-star panel entitled “The Future State of the Sourcing Industry: what the future holds, and how on earth we can manage it better” (hmm, who could have thought that one up?).
Featured guests (pictured above, left-to-right) include Michael Koontz (Aditya Birla Minacs), Mike Atwood (Horses for Sources), Ben Trowbridge (Alsbridge), Cindy Morrell (Clorox) and Dan Masur (Mayer Brown LLP).
As usual, we’ve twisted their arm to offer a discount to Horses readers.
We would like to thank so many of you for the fantastic support since we’ve launched the Horses for Sources research organization and are giving away three of our new research pieces in response to such a warm welcome into the analyst industry.
While we thought this was going to be a quiet little venture, where we sneaked onto the analyst circuit virtually unnoticed, it’s been the total opposite, with so many people wanting to know what we’re doing, why we’re doing it and – most importantly – why we’re different from the regular dog-and-pony analyst thing.
So why do we think we’re a little bit different?
1) We have a massive social media presence where we have the ability to survey large numbers of practitioners very, very quickly. We think we may just have the pulse on the outsourcing industry;
2) We track the demand for outsourcing, as opposed to simply racking and stacking canned data from suppliers (and taking their word for it);
3) We give practical advice to buyers of outsourcing services, backed up by demand-side data;
4) Our audience is the buyer of outsourcing, which is why we’ve partnered with the SSON to service the largest buyer-audience of BPO services. Yes, our team spends most its time interacting with buyers, and not solely suppliers;
5) We’re not afraid to call it how it is. While most analysts puff up their markets to keep their paying vendor customers happy, we’re just giving our audience the real deal. Outsourcing can represent the toughest, most challenging experience for executives today – careers can either be made or broken over specific choices and decisions. Our goal is to educate our audience with real, practical advice.
6) We’re letting our research do the talking. Unlike other research entities who stick their stuff behind a paywall, we’ve decided the proof is in the pudding, because we want people actually to read our stuff and call us up. So as a gesture of thanks for all the support we’ve received during our first month on the job, we’re giving away three pieces of our latest research to give you an idea of what we’re all about:
And we really do welcome any comments / input on research you want to see from us, surveys we can run, webcasts you want us to do etc. Drop us an email to [email protected]
Did you hear about that lame analyst firm which uses the first ever anonymous analyst? Apparently, they convinced the outsourcing governance leader of a Fortune 100 healthcare organization to write for them. Yes, it just had to be us didn’t it? So bloody predictable…
Over to you, Mr. Anthony Calabrese for a sensational debut as the “Mark Twain” of the analyst world…
Surviving the Aftermath of a Lift and Shift Transition
Well, now you’ve done it. Instead of fixing things first, you outsourced your processes almost completely intact. The result? Your junky processes are now in the (hopefully) capable hands of your lower cost vendor and, not surprisingly, the outcomes are the same. While it is quite possible that you took the time to image and digitally distribute your previously paper-based processes, there’s nothing remarkable about a digitized bandage hiding a poorly performing, wounded process. Worse yet, there are few things more restrictive than your IT organization’s standard prioritization process – and one of those “things” happens to be your 300-page multi-year outsourcing contract. What can you do you?
You Are Not Alone – Misery Loves Company
The “Lift and Shift” outsourcing paradigm is a choice of many companies for several reasons. It speeds transition, so labor arbitrage savings can be quickly delivered. Conversely, vendors frequently recommend it because revenue can be quickly generated and the implementation risks are minimal (Remember the multi-phase pitch they gave you?). Some clients believe that their vendors are more capable of turning things around than internal resources. Lastly, a thoughtful, very small minority of companies reinvests the initial labor arbitrage savings into innovation.
For these reasons, and many others, you are not the only person facing the task of transforming a recently outsourced function. In fact, the overwhelming majority of companies need to tinker with recently outsourced processes to some degree. Unfortunately, few have come to grips with the situation.
Equaterra's COO, Mark Robinson, shows us how to innovate
In case you missed it, there’s been another scintillating debate on the “I” topic. If you have a few minutes, we suggest you visit the recent piece entitled “Busting the innovation myth” submitted to us by a top cabernet-infused advisor choosing to remain anonymous (for obvious reasons…).
A couple of insightful and accurate views worth highlighting were contributed by Equaterra’s enigmatic COO Mark Robinson (pictured innovating) and CSC’s President of the United States of global sales and marketing, Peter Allen:
Mark Robinson:
In ‘mainstream’ outsourcing, innovation is often external to the process (i.e. it does not take place within the bounds of the contracted services, but rather as an add-in contracted on a case-by-case basis, either by the incumbent provider of base services, or by other service providers. There are many reasons for this, but they boil down to three primary factors:
(i) Contract terms and obligations that are ‘fit for purpose’ for managing day-to-day service delivery act to suppress innovation;
(ii) The people engaged in the delivery of base services are not innovators (or, if they are, then they are probably not providing world-class base services); and
(iii) Clients find it hard to take the risks (and share the rewards) needed to spark innovation with a service provider that they are engaged with in managing the daily grind of commodity services.
However, there is innovation in outsourcing in two major areas. First, service providers are innovating in the design and delivery mechanisms for their service offerings, although this innovation occurs outside of client accounts and is most readily available to new clients (or to existing clients at major inflexion points, such as renewals). Second, there is an entire class of services known collectively as Knowledge Process Outsourcing where innovation is endemic to the services.
Peter Allen:
A toxic term, Innovation.
To most Providers, they are suspicious whenever that terms is used. Too often it is interpreted as “Client wants something for free.”
To most Clients, but not all, what it really means is, “Please give me proposals for ways to improve.”
A sourcing relationship can be a pathway for innovation only if the parties create an environment to nurture that outcome. Nurturing includes shared investments and shared risks/rewards. Else, it’s just one element on the checklist of “what don’t you like?”
In the new economy … innovation is a derivative benefit of a relationship that starts with solid delivery on core commitments.
One industry legend transformed by the world of social media is HR software columnist, host of The HR Technology Conference (which you must come to by the way), sailing enthusiast and all round entertainer on all things HR technology related: Mr Bill Kutik. All you need these days is a Skype headset and a blog, and you’re ready to play…
Anyhow, I was privileged to get the chance to plug shamelessly the new Horses for Sources research organization in exchange for airing some unrestrained views on the HR outsourcing industry and where things are headed. So, before I get slapped with a lawsuit or carted off to a secure facility somewhere, have a listen to the show which is aired today at noon Eastern Standard time. You can still listen to the recording if you miss the initial airing. Just click below to get transported to the Bill Kutik Radio Show:
So for those of you accusing us of glossing over our ITO coverage… do we have news for you 🙂
Today, we’re delighted to announce that we’ve managed to persuade one of the services industry’s true veterans of sourcing advisory to put aside his executive platinum card, don an analyst cap, and impart his years of experience into some actionable research-based advice, for our quickly-expanding base of unsuspecting clients. Without any further ado, let me introduce Mike Atwood as the Horses’ own Expert Contributor for IT Outsourcing strategies.
Mike’s experience with outsourcing spans 35 years, much of which was spent leading three major divisions at EDS, before turning his hand to sourcing advisory work in recent years, where he’s served as a Principal with Everest Group, and leading Hackett’s ventures into the advisory space. Mike has also worked extensively in Tehran (during the Shah’s days), Jeddah and Mexico.
I caught up with Mike earlier to get his views on the state of the outsourcing business, and to tee up his new role as the Professor of ITO:
Phil Fersht (PF): Mike, firstly, what are the main issues you’re hearing from enterprises these days, and how is this impacting their attitude toward outsourcing?
Mike Atwood (MA): The conversation hasn’t really changed but has gotten more intense. Everyone is looking for ways to reduce cost and increase productivity. Many people equate Outsourcing with Offshoring and so this has become something that is more top of mind than it once was. However most of the conversations tend to be around using low cost labor locations. The productivity boosts that come with a better, more efficient process tend to be things that the C-suite believe they have to do themselves. The outsourcing community hasn’t done a very good job of explaining and quantifying what is has to offer, as well as, talking about how they can reduce the time to benefit to weeks rather than years.
PF: What are the main contrasts between now and before the economic crash last year?
A couple of years ago other than CIO’s it was only those C level executives that were forward thinking that were thinking about outsourcing or offshoring. Now everyone is thinking about it.
PF: You’ve been such a consistent figure in the world of IT sourcing over the years, since its early days… What’s different these days? Is it really all about commodity services, or are there new solutions on the horizon?
MA: When I got into outsourcing EDS was pioneering a concept that today we’d call “an industry specific BPO’. They were doing health care claims processing and doing it more efficiently and effectively then any insurance company. Over the next decade EDS kept looking for the next process that they could impact as much as they had done health care claims processing, but that sort of innovative think is rare and seldom comes out of a corporate environment. So they went into “systems integration” and not long afterwards were selling IT infrastructure services as a stand alone offering. This service is so basic that it didn’t take long for it to become a commodity. In the 1990 with the expansion of the internet programming services from India became economically viable and in today’s world we have BPO services but these are mostly using lower cost labor to perform non differentiating tasks often paid for based on the inputs to the process (time and materials) rather than the outputs to the process.
Many companies have recognized that if they came implement a process that can be shared across multiple clients then they can charge by the unit of output but that hasn’t really happened yet except for a few industry specific processes like Health Care Claims Processing.
PF: Can you see the industry eventually moving away from the “rate card game”, and is outcome-based pricing going to be widely adopted in the future?
MA: As I said earlier, I think the firms that can do this will win in the market place. Most outsourcing firms have recognized this and are moving that way, but it isn’t easy. HRO is a great example where the market exploded and everyone was selling custom solutions and then discovered they couldn’t leverage the book of business they’d bought. We now have a couple of new entrants into the field, but they are saying they are delivering a standard answer based on SAP or PeopleSoft. It’s the right approach, but it remains to be seen if it will sell.
The issue here is to have an innovative solution that you price in terms that are easily understandable to the customer (such as claims processed). Simple to say, hard to do.
PF: The service provider playing field is clearly leveling out in today’s market, but what do you see as the main differentiators for clients over the next year?
MA: As you said the market is consolidating. If history is any guide this will continue and eventually there will be a handful of large firms offering very similar services. Differentiation will be minimal and occasional price wars will break out since price will be the prime differentiators. However there will always be a market for the innovative solution and if some firm can develop an innovation center that produces major significant innovations, they will dominate. If not innovation will be left to the start up with new radical approaches.
PF: In your honest opinion, are customers really getting the advice they need today when they tackle outsourcing, or does the advisory business need to change the way it engages with them?
MA: All businesses change with time and the third party advisor business is no different. It began as a group of people who would run a procurement process for you. Most firms today don’t need someone to run the process for them but they can use some expert help understanding what the outsourcing providers are saying, what they will do, and what are the pitfalls. They don’t need a group of MBA’s running a procurement process and producing endless stacks of power point slides.
They could also use much better data on pricing and performance. Some pricing data exists and is provided, but since pricing is not costing a lot of the data provided by third party firms is not very accurate and does not take into account varying service levels and them price impact of that variation. Data on performance of outsourcing firms is just about non existent. To some extent this is caused by the third party firms using the outsourcing providers as a source of sales leads and not wanting to upset them by publishing some data that indicates they aren’t doing very good. However it is an extremely complex subject and trying to develop a statistically valid comparison would require a large effort in data collection even if you could get the customers of these firms to agree to provide the data.
PF: And finally, Mike, based on your vast experience, what’s next in this strange world of outsourcing as we limp out of this financial crisis? And what do you see happening in the next decade?
As I said in the first article you published. I believe the expanded use of outsourcers is inevitable. It is simply the specialization of labor that is at the basis of capitalism, and as long as we have a free market firms that specialize, provide a better cheaper service than you can do yourself will continue to expand and do well.
PF: Thanks for your time – we’re excited to have you contribute to the Horses
Mike Atwood (pictured) is Expert Contributor, IT Outsourcing Strategies at Horses for Sources. You can read his full bio here.
Would you like to pay now, or when we have a measurable outcome?
The “I” discussion has certainly dominated debate on the Horses these past few weeks, and one of the finest outsourcing advisors in the business has anonymously volunteered us his thoughts.
This fellow has been working on some of the largest and most challenging outsourcing engagements in recent years and lives on a plane somewhere between London, Bangalore and the US (take your pick where he was when he wrote this, and whatever fine brand of fine screw-cap Merlot he was supping).
What I find most interesting about his anonymous submission is this following statement:
“I’d argue that innovation has been a massive distraction in outsourcing. Any client that pushes innovation dollars towards the back office rather than their differentiating, market-facing offerings probably needs to re-connect with its shareholders”
Interesting point of view – some would argue that outsourcing their back office is an enabler for clients to focus innovation investment in market-facing offerings, while others hold the view that innovation in the back office isn’t an investment – it’s simply a quest to find new and creative ways to improve performance. And then there are businesses who shun market-facing innovation and simply want to churn out their profitable products quicker, faster, cheaper… the argument goes on.
Personally, I’d question whether innovation should even be deemed an “investment”, but more of a culture and mentality enterprises should simply have embedded in their DNA to be constantly trying to be unique and creative in their respective business. Anyhow, take some time out to read this piece and weigh in with your views:
Busting the Innovation Myth
“Innovation” has been amongst the most used—and overused—buzzwords in outsourcing for the last three or so years. Until clients and providers can have an honest conversation about what it takes to innovate, and what to do with the results, I don’t think it will ever happen. I’ll stop short of saying it’s impossible, but entire galaxies of stars will have to line up. Here’s why:
First of all, let’s get serious about what innovation means. True innovation is new. New means “hasn’t been done before”. So implementing SAP to make accounting efficient is not innovation. Consolidating servers? Not innovation. Per-employee pricing in HRO? Sorry. Developing software ate PCMMI level 5? Please. All of these are good things, but none of them are innovative—they’ve been done before.
Second, not all innovation is good. It’s only good if it creates some kind of value. Seems fairly obvious, but all of the contracts I have seen that mandated innovation have resulted in lots of “changes” that might even be “new” but have made nothing better.
So why is it so difficult to create something new and valuable in outsourcing?
Outsourcing providers havevery little incentive to create bespoke innovation. Their business model and brand is best supported by deploying any worthwhile innovation to as many of their clients as possible. When a provider creates something new—their instinct is to spread it around, so the innovation becomes a “best practice” and loses its differentiating value quickly. Can you call something new if all of your direct competitors could haveaccess to it? By the way, there is nothing wrong with best practices or what the industry now calls “transformation”, but neither of those is innovative.
Clients, on the other hand, have every incentive to keep innovations developed in their shop to themselves, and their attorneys generally write language into the contract to do just that. In the process, it’s likely they discourage the provider from even trying. But innovation is also a bit of a gamble—one must risk something to win. Many innovations just don’t pay off; even if they seemed like a good idea at the time (see Betamax, New Coke, motorized seatbelts, etc.) So the scary scenario facing client executives is this: to get any kind of innovation, someone must invest. Providers, most of them not interested in the not-for-profit tax filing status, aren’t likely to invest in my innovations out of the goodness of their hearts. So it’s going to cost money whether I see it or not and I am not sure whether it will yield anything good—hmmm, can’t wait to take that proposition to the boss!
Humans, regardless of which organization they work for, don’t innovate on demand. Try it: Please invent something now…
Time’s up. Ok what did you invent? See? Not that easy. Now add the complexity that most of the people on either side of the transaction are there because they know how to standardize, repeat, execute—hardly fertile fields for game changers. But even with an Einstein or two on the team, innovation takes trial and error, failure, non-standard approaches, and one-off solutions. Imagine writing the last eleven words into an outsourcing contract!
Like anything else in outsourcing, innovation will only be successful if both sides stand to gain from it. Starting from there, providers and clients should engage in meaningful discussion about how much they want, how much it might cost, how many failures they are willing to withstand, and how they will create the environment in which game-changers—not just incremental improvements—will be conceived. Generally, when I have seen this type of conversation, one or both parties ultimately decides it is too complicated and returns to “business as usual”
I’d argue that innovation has been a massive distraction in outsourcing. Any client that pushes innovation dollars towards the back office rather than their differentiating, market-facing offerings probably needs to re-connect with its shareholders. Any outsourcer that focuses on innovating for only one of its clients is betraying the fundamental economics of its business model. Both parties’ interests are best served by pursuing broadly applicable process and efficiency improvements. That said, I am very interested to hear from the “Horses” readership—have you found an example where innovation (not process improvement) was delivered in a profitable way?
If anyone here has managed to sit through a vendor presentation lately and not heard “New Normal” being uttered, we want to hear from you. And we’d like to know when Normals stop becoming New and just become, well, simply Normal Normals.
Anyhow, as we approach this Normal Normal (note, no longer New), here’s the re-run of the webcast we conducted with or friends over at Global Services Media and SSON, where we surveyed the intentions of 1,055 buyers, intermediaries and vendors on current outsourcing industry dynamics:
Stay tuned for out next webcast entitled “Did we ever find a New Normal, and was it really any different from the Old Normal”. Actually, I kinda like that…
