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…
Mindy Blodgett, Research Director, Horses for Sources
One of the facets of outsourcing that always challenges industry observers is fuguring out the timing of when (or if) companies will take the plunge. Delivering a value proposition for outsourcing isn’t enough – it’s proving that those processes can benefit a company’s competitive position if they are externalized in a managed services environment.
For example, most companies would never have dared move the management of their entire recruiting function over to a third party, but the squeeze of this post-recession economy, combined with fresh thinking from company leaders and a willingness to explore global sourcing models in business functions that can benefit from added expertise and flexibility, is moving services such as Recruitment Process Outsourcing (RPO) up the corporate agenda for many firms.
We’ve decided to take a deeper-dive into the RPO market, and have asked our new research director for HRO, Mindy Blodgett, to tee up her research into this area for us. In fact, taking a closer look at Mindy’s bio, I see she likes “eating at expensive restaurants”, so hopefully you’ll like what she’s working on enough to sign up for our research program and help her maintain this past-time… over to you Mindy:
Can RPO empower a flexible and scalable workforce?
Although the global financial picture is still unclear, the signs of an economic recovery are tentatively drifting into view. However, this isn’t your typical cyclical post-recession market: industries are facing fundamental shifts in their very make-up and competitive dynamics, and this is impacting how many firms need to approach their recruiting strategies.
Many firms, fearing the worst, laid off staff aggressively in the crisis months, and now have to readjust their talent resources quickly to meet the business demands of a recovery that is – in many industries – appearing faster than many had anticipated. Without an agile recruiting strategy, vital market opportunities could swiftly pass by those firms with talent shortages. But there is risk in taking a bold recruiting stance; no one can be sure that the economy will not take another nose-dive, and the need for greater workforce flexibility has never been so strong as it is in today’s environment.
Staffing back-up in the midst of uncertainty – Four critical questions to address
2010 is a year that threatens to expose many firms. Uncertainty drives some to be conservative and hold back on major re-investments; others to be bold and use the conditions to forge ahead in their respective markets. Whatever stance firms choose to take, they need to answer these questions:
How best to add qualified staff – and what should an expanded workforce look like? Which talents make sense in an uncertain economy going through such secular change?
How to meet the new demands for a flexible workforce, capable of expanding and contracting quickly?
How to meet a growing demand on the part of workers for a more “1099 “ work culture, one where employees have contracts and are not bound by long-term commitments?
How to take advantage of the latest recruiting techniques, for example, social networks such as LinkedIn, as well as the latest talent management application suites, to source talent quickly and at much lower cost than dated recruiting models?
Those who fail to answer these questions and define a coherent recruiting strategy could well find themselves left dog paddling as more nimble competitors surge ahead. Enter the concept of RPO, which attempts to help firms tackle these issues without significant upfront investment and business risk…
Is now the time for RPO to finally emerge?
Recruiting, onboarding and training a global workforce is a daunting challenge for companies of all sizes and industries, and enterprises have traditionally invested in large inhouse recruiting functions to manage this process. However, many HR leaders today do not have the bandwidth or focus needed to keep up with the latest in recruiting management technologies and best practices. Maybe it’s finally time to use a third-party specialist to help manage this process?
Therefore, the increasingly smart answer for a number of enterprises is to turn to Recruitment Process Outsourcing (RPO) to manage some or all of their recruiting processes.
At Horses for Sources, we believe that RPO, one of the HR functions that has historically lagged in the HRO space, is now poised to finally come of age in this growing, but uncertain, recovery.
Hot off the presses survey data tells the interesting story. Data from the Seeking the New Normal in Outsourcing Delivery survey, conducted by Horses for Sources in January of this year revealed that in the coming year, close to 50% of respondents report they are either likely to increase or are already increasing their participation in some form of HRO.
The survey also showed that there is a growing interest in RPO, whereby some 35% of buyers said they were actively evaluating the outsourcing of some aspect of their recruiting function, while another 12% said they were actively interested in pursuing RPO. More importantly, some enterprises are moving into RPO immediately, with 6% reporting that they are engaging in RPO in the 2010-2011 timeframe.
So while RPO is still relatively low on the HRO totem pole, it is occupying a more significant piece of the total HRO pie. As enterprise leaders are increasingly scrutinizing RPO as a viable, and potentially formidable, weapon in the HR arsenal.
Why RPO claims to make sense:
Managing the talent life cycle has always been an intimate process for many firms, and finding staff which are a cultural fit, as opposed to simply filling immediate task-oriented and transactional needs, has been a major reason why enterprises have clung to managing the bulk of this process inhouse. However, in today’s maturing outsourcing environment, both providers and buyers are vying to become more sophisticated at working together to achieve common business outcomes. RPO is no exception, and there is no reason why a quality RPO provider cannot work with a client today to understand its culture and work in a personalized manner to meet its recruiting needs. In an ideal world, an RPO provider should be able to deliver:
Faster time and lower cost to hire
Easier requisition management
The potential of better talent retention
Standards that meet the need for regulatory or corporate compliance
A more organized, focused, modern and swifter hiring process that should lead to improved service quality and lower cost-per-hire
Removal of some non-core and low-value functions, allowing greater focus on developing talent, as opposed to acquiring it
Access to the latest in technology, applications and recruiting best practices, including such benefits as updated skills and behavioral assessments
Breaking old habits is hard, and many enterprises cling to the belief that their recruiting needs are unique, not easily adapted or standardized into universal templates. Hence, a rapid increase in RPO adoption is not yet a sure bet as many HR leaders will continue to resist transferring such processes into the hands of a third-party. Still, it’s clear that RPO is now firmly on the agenda for many firms ready to embrace new recruiting strategies that add agility, and do not cost the earth to deploy. Enterprises pursuing RPO need to be committed to change and to effective outcomes – but the goal of finding a true service provider/partner is not easy to attain.
At Horses, we’re committed to tracking RPO in addition to many other developments in the wonderful world of HRO – stay tuned! We’ll be asking the hard questions about adoption challenges, analyzing buyer successes and failures, as the markets mature.
If you are an organization engaging in RPO, are interested in RPO, or if you are a service provider with an RPO solution and a strong message for how these relationships are working to build a new global work culture, we want to hear from you. As part of our research efforts in the near future, we will be surveying buyers; analyzing service provider offerings; conducting case studies – you name it, we’ll be doing it.
So please email me if you’d like to participate in our RPO research, or whether you have some suggestions or questions. It’s an exciting time to be watching the RPO space, and we look forward to sharing our insights and hearing about your experiences.
Mindy Blodgett (pictured), is Research Director for Horses for Sources, her prime focus being Human Resources services and Business Process Outsourcing areas. Mindy’s role is to deliver research analysis and thought leadership for Horses clients and readers in areas related to recruitment process outsourcing, total benefits outsourcing, workforce analytics, talent management and broad HR areas, such as compliance, payroll and compensation. You can read more on Mindy’s background and expertise by clicking here.
Horses for Sources and the Shared Services & Outsourcing Network (SSON) Create Alliance to Provide Unique Analyst Insight and C-suite Forums for Senior Operations Executives
Horses for Sources to provide research for SSON’s buyer community
So you may have noticed a few changes around here over the past week… not only did we retire those rather plump horses on the old site, but we went out and turned ourselves into a fully-fledged research analyst firm.
We’ll be introducing you to several of this motley crew who are feverishly working on their new research schedules over the coming days and weeks, but we did want to talk some more about why we’re doing this and why we believe we’re significantly different.
Essentially, we are providing the customer of outsourcing services with rapid, engaging, no-holds-barred insight into what BPO and global sourcing is all about, how they need to think about governing it, and how they should go about selecting service partners that can actually help them do more than merely cut costs doing operational work. What’s more, we’re using our social networking capability to keep us close to the industry and engage you all so quickly and readily.
For example, our little piece on the NorthgateArinso/ConvergysHRO deal received 14,000 web-visits in the space of 24 hours. That was caused either by NorthgateArinso’s CEO Mark Ettling repeatedly admiring his handsome features, or it may have simply been the fact that we have found unique ways to engage our industry, via our Digest, via our LinkedIn Group, via our Subscribers and via RSS feeds.
Anyhow, as part of our goal to reach the executives who are grappling with the whole outsourcing quagmire, we are delighted to announce that we a formerly creating an alliance with our long-standing friends at the Shared Services and Outsourcing Network (SSON). Not only have we run a terrific survey with the assistance of their network, but we’ve also streamed a global live panel over the blog and also conducted some of our discreet buyers’ groups in secret rooms at their venues. Here’s the full announcement which is going over the wires tomorrow:
Horses for Sources and the Shared Services & Outsourcing Network (SSON) Create Alliance to Provide Unique Analyst Insight and C-suite Forums for Senior Operations Executives
March 9th 2010. London, New York
Horses for Sources, the leading analyst advisory organization focused on outsourcing strategy support, has teamed with the Shared Services and Outsourcing Network (SSON), to provide a unique platform for senior outsourcing buyers to access knowledge and peer advice.
As part of the new alliance, senior operations executives in SSON’s premium community can benefit from research being provided by Horses for Sources, including all aspects of Business Process Outsourcing, shared services and governance strategy. Under the terms of the agreement, the “Horses” expert analyst team are available to support SSON’s members with their outsourcing and shared services decisions.
In addition to the research analyst support, SSON’s buy-side executives can benefit from C-level discussion groups, which will be facilitated by Horses for Sources analysts on-site at SSON’s premium events. Upcoming groups will be featured at the forthcoming Shared Services and Outsourcing Week events in Orlando and Edinburgh.
The Horses for Sources organization has been working informally with SSON for the last two years. The success of previous buy-side discussion forums served as the impetus for the formation of a more formal partnership.
Phil Fersht, Founder and CEO of Horses for Sources, stated, “Our goal at Horses is to deliver unbiased insight, research and advice to senior BPO and shared services decision-makers. We have found the community at SSON great to work with, and are excited to engage with their executives on a regular basis. Based on our long-standing relationship, we feel that SSON has the broadest and most comprehensive network of senior operations executives in the sourcing industry, and we are excited to be supporting them with some of the toughest – and most complex – decisions of their careers.”
Sarah Clayton, Global Head of Strategy at SSON added, “The proven depth of insight provided by the Horses for Sources team is exactly what our members demand, and their ongoing popularity and influence with many of our senior executives has driven us to formalize our partnership with Phil and his team. Our goal is not only to provide our community with great knowledge and networking opportunities, but also to help them benefit from the best and brightest minds in the industry. We believe Horses provides that for us, and are delighted to have them with us on this journey.”
Horses for Sources is the foremost social networking community and advisory analyst firm, focused on helping enterprises make complex decisions with their global outsourcing strategies.
Horsesprovides the most impactful and frequently-visited collaborative community platform in the global services industry, providing rapid and insightful commentary, analysis and debate of enterprise outsourcing dynamics. The organization is unique in the fact that it integrates personable social networking with market research and advisory services.
Horses’ mission provide a unique environment for collective research, opinion, experience and knowledge across the global outsourcing industry to help enterprises explore new performance thresholds. Led by industry expert Phil Fersht, the Horses for Sources team is a multi-disciplinary group of analysts and experts with deep domain knowledge in Business Process Outsourcing, Industry Specific Process Outsourcing and Cloud Computing.
Launched in 2007, the Horses for Sources blog has more than 80,000 regular visitors across the global outsourcing industry, and is widely recognized as the leading destination for collective insight, research and open debate of industry issues and developments. The Horses LinkedIn community is thriving with 9,000 industry professionals sharing views and information daily.
SSON is the largest and most established community of shared services and outsourcing professionals, with over 18,500 members and more than 350,000 visitors to the community portal per year.
SSON provides the roof under which key industry experts and organizations share their experience, knowledge and tools, and practitioner peers connect with other all over the world, both face to face and online.
SSON focuses on developing its members through providing training, tools, and networking opportunities. Its staff works from international offices in New York, London, Singapore, Sydney, Berlin and Dubai to research current trends and developments in shared services.
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In Part I, cabinet-maker, gentleman and Fellow of Research, Lee Coulter, spoke about the misalignment of the sourcing relationship when the business objective and strategy becomes polarized on one aspect: cost.
Everyone loves to save some money, and often the misalignment isn’t felt for the first couple of years. Striking a deal that optimizes cost generally sub-optimizes other aspects. As I like to say, you can have speed, quality or cost; pick any two. This principle applies to the balancing of business objectives in an outsourcing relationship as well.
A study was released last year showing that more than half of the largest 2000 companies in India actually outsource parts of their back office to other Indian service providers, often at a slight price premium. Why? Top answer is focus. Sure, these companies have access to the same low cost labor and could keep the processes in-house, but chose to do so because their business objective is focus. The message here is to spend the time to build strong linkage from the business objective to the business strategy to the outsourcing strategy and finally to the deal structure with an outsourcer.
Avoiding sourcing catastrophes, continued…
Catastrophe strikes when the strategic misalignment becomes profound enough for the client business to suffer strategic restrictions because their outsourcing relationship was optimized for a different business objective and can’t change fast enough to meet the needs of the business.
Second on my list is what I call the Mutual Assured Destruction (MAD) versus Mutual Assured Success (MAS) conflict. The simple fact is that there cannot be a single winner in an outsourcing partnership. This implies that if both parties are not actively holding (and working toward) the business objective of both parties as their own objectives, then the relationship runs the very real risk of MAD. Whatever issues exist with one party will eventually become issues for the other party – it is only a matter of time. At the time the partnership is formed, both parties believe there is commercial success potential.
However, things change and change fast; often before Day 1 of the active service relationship. Economics change, companies change, strategies change, and people change. It is the leadership challenge to constantly keep in crystal clear focus the ever shifting set of goals the parties each have. More importantly, both management teams must overtly discuss, integrate, and feed back into their own organizations a unified set of objectives. In the absence of working for mutual success, the default behavior is to place your own interests over those of your partner. That does not imply bad intent. That is just what happens. It doesn’t take conscious decision to find you are on a mutual destruction path. Think of the mutual success path as one that takes constant effort to maintain, and the mutual destruction path as the default long-term path.
Real business partnerships do not come naturally to most organizations. The vast preponderance of experience companies have with other companies is of a more tactical nature. When I speak on this topic, I use an analogy to human relationships. Most B-B relationships fall into the “Friday night hook-up” category and occasionally evolve into a “serial dating” type of relationship, but rarely ever turn into a marriage-like long-term partnership. How do you manage this new kind of partnership? All too often, organizations revert to the only methods they know and when all you have is a hammer, everything is a nail.
It is unnatural for most organizations to do kind of work necessary for the health of a long term relationship. As anyone who has been in a long term relationship knows, the interests of both parties must always be held together, and often, one party must place their needs subordinate to the others’ to ensure the relationship endures. I do a lot of talking and coaching on this topic. I will again say that this is the leadership challenge in outsourcing. This cannot be legislated, although you can build governance structures and processes that are more conducive to it. To make matters more difficult, when it is working as it should, outside observers on both sides are critical of this new kind of behavior. The service provider account team might hear their own organization tell them they have “gone native” and the client management team might get the question of “who are you are working for? Us or them?”. Not easy words to hear.
Because of the depth and length of most outsourcing relationships, anything other than results that enable both parties to be successful over the long term, will eventually end in a significantly disruptive way that result in great loss and misfortune. Most (but not all) other symptoms of troubled relationships can find their root cause in either strategic misalignment, or the lack of committed action to keep realigning and adjusting the mutual goals and doing the work necessary to change the relationship to be able to deliver for both parties.
Lee Coulter is Research Fellow and Distinguished Analyst for Horses for Sources. Lee supports Horses for Sources’ enterprise customers with their outsourcing and shared services strategies – you can read his fill bio here.
So one of the worst-kept secrets in the HRO business finally came to fruition today, when the British HR services provider NorthgateArinso acquired Convergys’ HRO business for $100m.
By our calculations, that gives the newly-formed entity a 15% market share of the enterprise HRO market (engagements with firms greater that 15,000 staff). We’ll confirm this fact when we update our HRO market landscape in a couple of months.
The merger effectively moves them above IBM, Accenture, ACS and Hewitt into the leading position in the market from an employees-served perspective; not a bad day’s work from a British payroll firm that acquired an upstart Belgian SAP-payroll integration shop. This also elevates NorthgateArinso firmly into the high-end of the enterprise HRO business, in addition to the mid-market scrap with the likes of ADP and Ceridian.
Why this merger makes a whole load of sense
Payroll-centric HRO is in high demand. As we revealed in our industry study last month, there is renewed appetite for HR services as businesses limp their way out of recession. This is especially the case where payroll is at the heart of the customer requirement and customers need a solid mix of software implementations expertise, backed up by low-cost processing capability (near shore and offshore) and HR domain expertise. So this acquisition is timely. It’s also been a long time in the works, and NorthgateArinso has clearly thought long and hard before making the plunge.The US market was the gap in NorthgateArinso’s armoury. NorthgateArinso could have made an alternative play into the benefits outsourcing arena and bid for the likes of ExcellerateHRO or ACS’s HR business, but it’s decided to stick to its knitting and fill out the one yawning gap in its armory – it’s ability to win US business. “We were winning too many of the international components of deals, and customers kept the US services inhouse”, CEO Mike Ettling (pictured) told us earlier today. Convergys gives them US strength and depth in spades. The highest concentration of multinationals are still in the US and their expenditure dominates the HR services market. Moreover, Convergys’ international presence is quite a snug fit with NorthgateArinso’s business (the addition of Sao Paolo and Budapest, along with a promising Asia/Pac benefits business are good additions to have for the future).
Convergys’ woes appear to be behind them. Only two of Convergys’ 21 clients had contrived to be unprofitable, but these are now in a much healthier position, having been ring-fenced and restructured. NorthgateArinso will have the challenge of delivering on Convergys’ promises, but they’ve looked long and hard at the issues here, and know what they’re letting themselves in for. Moreover, $100m is a great price for a strong book of business. Even if one of those two remaining deals is problematic, they can deal with it.
Both SAP and Peoplesoft (Oracle) clients can be serviced. While Northgate has enjoyed expanding the Arinso EuHReka business, which focuses on an SAP-based SaaS/BPO delivery model, the Convergys element really does beef up the company’s Peoplesoft capabilities. And, unlike the unrealistic promises being made by some of its competitors, Northgate is being refreshingly realistic that it will not attempt to develop genuine multi-tenancy around Peoplesoft. That would be no easier to achieve than healthcare reform…
The Bottom-line: Great buy for NorthgateArinso at a great price, but the hard work begins now
Noone denies that old-world HRO turned into a bit of a train-wreck, where many contracts became unprofitable and providers struggled to ring-fence them and re-structure them. Convergys and others were guilty of taking on some deals that brought down executives, upset Wall Street and cast a dark shadow over the HRO industry. However, smart firms like NorthgateArinso are sticking to their knitting and focusing on global client work they know they can deliver profitably. The global payroll market opportunity is massive – CFOs cannot function properly when they can’t have a handle on their global employees, and our research repeatedly reinforces this desire to improve the effectiveness of global operations.
NorthgateArinso now truly has a strong foothold with multi-national opportunities, however, their real challenge starts now. They now have to compete even more aggressively with the likes of IBM and ADP, where they will need to bring the best out of their existing client portfolio to prove they can truly take on that missing piece – the US market. Convergys gives them a bigger engine, now they have to fine-tune it to a performance level noone’s really attaining in the HR services industry right now. Here’s a chance to make HR services history – they now need to shore up their management and delivery talent to achieve it.
