The Industry Speaks, Part VI: Customers increasingly look to industry-specific BPO solutions, but which vendors will ultimately invest to define and deliver them?
As we discussed during the previous five chapters of this encyclopedic journey to over-analyze our industry, customers are looking beyond the old simplicities of outsourcing to find new and creative ways to find new performance thresholds.
One of these areas is to exploit BPO opportunities within industry-specific domains, especially where there is opportunity to bundle both BPO and IT services together under a single vendor’s provision to generate more efficient business outcomes.
To cut to the chase, the industry-specific (vertical) process domains are where some of the newer vendor entrants are infiltrating, almost unnoticed, into the BPO industry. Most of the strong IT services vendors have been developing BPO niches in specific verticals where they have developed some strong process acumen and client credibility, and have the determination to invest in becoming best-in-class within that industry.
We’ve seen plenty of examples, for example, in both the financial services and life sciences industries, where some of the offshore IT services vendors have been seeking to expand their footprints, and layer-on BPO processes to their existing IT relationships. What’s more, some of the IT services shops have begun to realize that BPO is a great lead-in to help themselves to future IT work within clients.
For example, if you’re already crunching data for clinical trials, why not also manage and develop the supporting applications and infrastructure? Bottom-line, customers see more opportunity within some domain-specific areas, and our recent “Seeking a New Normal in Outsourcing Delivery” survey points to a continued upswing in BPO demand within verticals:
Figure 1: Financial Services and Life Sciences firms seeking to exploit domain-specific BPO
Industries undergoing major fundamental change are moving aggressively into domain-specific BPO opportunities.One-in-ten financial services firms, and one-in-five from life sciences, are looking to move into some form of domain-specific BPO this year for the first time. These are typically areas where there is some immediate labor arbitrage opportunity, based on the availability of processing expertise offshore. For example, in financial services, we’re seeing a lot of trade settlement transactions and mortgage processing move into BPO scenarios, and in life sciences, many of the data storage and management processes that enable the drug-to-market cycle, are similarly evolving towards this delivery model.
Why these industries specifically? Simply put, the financial services sector has gone through such a fundamental change in its very infrastructure, that moving into a BPO environment is no longer the strange, abhorrent procedure and experience it once was. Similarly, in life sciences, the major drugs companies know their blockbuster drugs models aren’t going to last forever, and are facing toughcompetition from lower-cost generic manufacturers. Hence, they are similarly exploring new and radical means to improve productivity, source new revenue opportunities and drive-out cost.
The success of existing domain-specific BPO engagements is driving broader scope-increase. Over half of all the financial services and life sciences firms surveyed, are looking to expand existing BPO engagements this year, and very few are seeking to pull work back onshore. Firstly, it’s easier, and far cheaper, for operational executives to add scope within a BPO engagement, than hire new staff onshore, when they need more work done. Secondly, in many cases, these engagements started small, often with only a handful of staff provided by the vendor, so it’s only a natural extension of the engagement to add more staff and additional process scope as the BPO environment develops. However, this doesn’t necessarily entail massive increased spending overnight, but more a gradual incremental increase in engagement scope.
The Bottom-line: industry-specificity is clearly a major driver in outsourcing, but the financial pressures on vendors to maintain their profit margins may override its development. The capability to deliver genuine domain-specific process acumen to clients is quickly becoming a major differentiator in the market. However, investing in the talent to truly scale these capabilities is expensive, and the margins aren’t as appealing at those currently being displayed by several vendors delivering the easy, operational work. While some vendors are clearly content with a thin veneer of vertical capability, others are stealthily picking verticals where they feel they can gain an edge over the competition. But it’s a gradual development, and you have to wonder whether every vendor has the patience and attitude to invest in the depth of talent they need, when they’re more concerned with satisfying Wall Street’s short-term demands.
While financial services and life sciences are both becoming saturated, we’re already seeing many new BPO opportunities arise in industries also going through fundamental change, for example retail, manufacturing, healthcare and media. Moreover, the move to greater domain-specificity is intrinsically tied to the business utility model of the future, where we are starting to see signs of the convergence of SaaS, Cloud and BPO/ITO models within an engagement structure. The need for clients and vendors to define, develop and implement holistic end-to-end process solutions is slowly coming to the forefront… and industry-specific BPO is ultimately just one piece in a larger jigsaw.
I've recently had two rather disturbing conversations with friends interviewing for client management positions with outsourcing vendors. In both cases, they were only being asked to bring in new logos from selling low-cost IT/BPO services, as opposed to working with existing clients to up-sell more consultative, higher business-value offerings.
Both these chaps are senior-level execs who are highly experienced, well networked, and can engage in C-level conversation. You would have thought several of the offshore-centric vendors would be clamoring for people of this caliber to raise their level of conversation within their existing accounts, rather than utilize them to go after a handful of remaining logos. Most of the top-tier vendors have relationships with most of the major enterprise buyers these days, so you would have thought their strategy should be centered on developing deeper footprints with them, as opposed to simply increasing the number of low-end operational engagements (or at least a combination of the two).
While some vendors are talking a big game regarding how they intend to broaden their outsourcing services and consulting work with clients, a lot of their current management clearly don't have a lot of confidence to bring on the talent to help them do just that. As several vendors seek to raise the bar and become more innovative service partners, they have to be brave and look to bring on the talent that can engage in the right dialog with clients, at senior levels, in order to get there. While it's important to remain loyal to the client managers who scaled the business, vendors need to find ways to empower them to bring in new talent to deepen their client relationships. It seems the politics of client protectionism is still rife within outsourcing vendors and could seriously impede their ability to broaden their relationships over the long-term.
2010 will really see the men separating from the boys in this business, and it's those vendors which have the appetite to bring in the talent to raise the bar, and become more innovative with their clients, who will forge ahead. It seems some vendors are content to stay right where they are and pick off low-value work. Our next research series will ask customers to rate the caliber of their vendor executives, and whether they are bringing the right level of business acumen to the table to raise performance.
Trust the Brits to tone-down the hype of the outsourcing sales pitch, with BSkyB broadcasting organization being awarded $313m in damages for a $75m EDS (now part of HP) CRM implementation with didn't quite pass muster. So is this a major warning shot for vendors over-hyping their capabilities to win deals, or is EDS simply falling foul of failing to satisfy Rupert Murdoch?
While several people are calling this verdict a one-off, I take the view that this sets a dangerous precedent for the outsourcing business, when you consider the sheer volume of complex outsourcing deals that are currently (and soon to be) in play.
Another one of these verdicts (especially if it's State-side) and we really could see a damaging domino-effect of lawsuits that could change the whole way deals are priced, negotiated and delivered. I even met with a consulting firm the other day, which is making a killing "rescuing" contracts, but in reality is mediating between vendor and customer to annul the broken marriage.
My fear is that the outsourcing industry is currently operating in a pressure-cooker situation for the following reasons:
1) Outsourcing vendor sales executives are under enormous pressure to hit sales targets this year;
2) Vendors are finding it harder and harder to differentiate themselves and are promising ambitious business benefits based on business outcomes, process transformation and innovation to get their noses in front during sales pursuits;
3) Some vendors are drinking too much of their own Kool-aid right now to realize they may be over-promising;
4) Customers too often fail to realize how challenging their outsourcing experience is going to be for them, and vendure headlong into engagements that are geared for failure.
My mantra is very much centered on the fact that we need to steer the vendor/customer relationship away from punitive contractual clauses, away from the letter of the contract, and focused on collaborative working partnerships. Customers are ultimately hiring vendors to work with them, and both parties need to find behavioural ways to make their outcome successful. Responsibility for the business outcomes of outsourcing engagements rests with both parties and the industry cannot afford to have more of these fractured relationships aired in the courtroom.
Has it occurred to you how unromatic and unsexy outsourcing can make you feel sometimes? Fed up with those rate cards, those legal wrangles and those penalty clauses, when all you really want is a nice big hug?
Well, the team over here at the Horses wants to make you feel loved this year on Valentine's Day. So drop us an emailand we'll make send you a free copy of our recent "Seeking a New Normal in Outsourcing Delivery" survey findings… whether you're a customer, a vendor, or even a consultant… we love you all equally (well sort of).
I took a rather embarrassed peek at the very first post I wrote on the Horses and, having been revived from the camembert fumes of consultant-speak from yesteryear (did we really write like that?), I realized that we were actually onto something back then.
The only major difference today is that this is no longer a game for the glitzy F100, when clients could demand their vendors take their existing processes, and simply run them at lower cost, with very little change to the actual way they did things. And if the resulting savings weren’t quite as good as originally promised, and the books weren’t getting closed promptly, the vendor always bore the full brunt of the blame.
The big difference today, is that more clients are tending (though not always) to take more responsibility for the success of their BPO engagement. If clients take flawed processes and run them offshore, it’s only going to expose how flawed they were in the first place. Plus, if you’re put in charge of managing a BPO engagement today, you’re charged with making it work, not coming up with reasons for failure. If you can prove you can do this successfully in one firm, many other firms will want to hire you to do it for them too. I’m trying to convince a good friend of mine to guest here and talk about how he’s managed to oversee two major F&A BPO transitions for two companies, because it’s truly becoming a lucrative – and scarce – expertise for customers today.
Like anything else, we have to learn through trial and error, and F&A BPO is certainly no exception. Once clients realized they weren’t making anything near the savings they initially thought, it forced them back to the table to work with their vendors to understand why it was the case. In nearly every instance, it wasn’t the fault of the vendor for supplying inadequate personnel, but more the inability of the client to use the BPO as an opportunity to iron out those flaws, examine some better process flows for getting things done more effectively, and to work more collaboratively with their vendor to implement them. In the case of F&A BPO, most the work today is relatively transactional, so the argument not to look at more standard ways of doing things doesn’t wash anymore. How many ways can you “transform” an accounts payable workflow?
As we discussed in Part I of this series, many customers, especially in the mid-market ($750m-$3000m revs), now view outsourcing an a change agent to go beyond simply driving out cost. They want to exploit the opportunity to globalize processes and become more effective in the way they do things. And as the supplier based has matured and started to move into smaller-scale engagements, the impact on customer demand, emerging from the economic crisis, is eye-opening:
Figure 1: Mid-sized customers are ready to exploit Finance and Accounting BPO
So, what does this mean for the BPO industry?
No turning back for the large customers. Our study clearly signifies that many large-scale customers have now outsourced some elements of the F&A, with only 7% moving in for the first time in 2010 (see Figure 1). However, 40% of current F&A BPO customers are going to increase their engagement scope this year. This is a strong endorsement that once customers take the plunge, they are seeking to enhance their engagements. And when you drill deeper into the numbers, it’s clear that customers are seeking to add more capability to support management reporting and analytics.
Once you’re using a BPO to do our work for you, why hire new staff? Another reason why so many customers are looking to increase scope is the simple fact it’s easier, cheaper and more flexible to have your vendor provide the staff, as opposed to hiring it yourself. Moreover, the process many firms have to go through these days to have staff requisitions approved is often so prohibitive, that it’s a lot less hassle to contact your outsourcing PMO to ramp up a few FTEs on an engagement.
As the high-end saturates, attention turns to the mid-market. When you consider that close to a quarter of mid-market customers will seek their first forays into F&A BPO this year, you know where this industry is headed. Vendors have got much more organized with how they push more standard processes at the mid-tier, and they are becoming more adept at taking on smaller-scale employee transitions and still turning a healthy profit. While just a couple of years ago, most the top tier service providers would only look at engagements with a minimum of 50 FTEs involved, most will now dabble in must smaller affairs, especially where there is strong future upside to increase scope and cross-sell other services. Moreover, some customers are bundling F&A BPO with IT systems development work (see Part IV of this series), which allows for vendors to take on smaller-scale BPO engagements as part of a larger contract.
The Bottom-line: F&A BPO has opened up to the broader market, but the tough transitions for clients really start
With the industry-at-large widely looking at F&A BPO, it’s clear that the main difference today is customers being more prepared to change their existing processes to move onto a more standard delivery model. Those services vendors that adopt the old “lift and shift” mentality when taking on smaller engagement in this space will quickly fall-short – there simply isn’t the same wiggle-room in the mid-market to throw bodies at the problem.
The core to success with smaller-scale engagements stems from encouraging customers to standardize much of their workflows onto process maps vendors can understand, and have the vendor staff-up quickly to service them. The transition for clients will often be painful, but at least the realization is there that they have to do things differently and take more responsibility for their own outcomes.
For once I am stumped for a catchy title, and am opting for some good ol’ jargon-laden gruyère to tee-up Part IV in the series discussing our New Normal in Outsourcing Deliverysurvey. At least I’ve avoided the ‘T’ word lately, to grant myself a morsel of poetic license to indulge in a little schmolz…
But we all love the term “Cloud” (c’mon, you know you do…). It gives us a nice fluffy visual of ripping out all that complex, clunky computing chaos from our organization, and having some nice services vendor deliver us everything we need for our business… leaving us with simply a screen, a keyboard and lots off additional space in the office to set up that Fussball table… or a Twister mat in the corner…
Why Cloud Computing is the future of outsourcing delivery
While I am probably the first cynic to de-odorize the latest cheese fumes that infuse our industry, I have to admit I am rather taken with the whole philosophy of Cloud Computing. Cloud signifies the coming-together of business process and IT delivery in a fully outsourced model (see earlier post). Cloud’s not simply about outsourcing the heavy-duty computing grunt – it’s about the delivery of real business services, enabled by the applications needed to support them, powered by the requisite computing and network infrastructure to host and deliver them.
If Cloud was only about gutting the clunky, expensive and environmentally-unfriendly infrastructure, and having Amazon and co. deliver the computing power, then it’s really just an infrastructure utility offering. However, if you’re going to have your data and applications hosted externally in the Cloud, do you really need to manage them yourself anymore? It all depends whether you need to customize the applications yourself because it gives you some sort of competitive advantage. For example, do you really gain a competitive edge with the way you run your benefits administration, or process your insurance claims, or isn’t it time to find a services vendor that will host the app, the associated infrastructure and even process the transactions for you? If you feel your edge is customer service, or great internal employee care, then you can keep inhouse staff to take care of that, but what’s the point in managing all the related IT and back-office processing if someone can do it for you?
To refer back to the fundamental principle of outsourcing, if a third-party services vendor can perform a task for you at lower cost, and to an equal or higher standard, and the costs and risks of transitioning into the outsourced environment are outweighed by the business benefits, then there’s little sense in doing it yourself. And if that vendor can add genuine consultative value to improve that task and add to your overall business performance, then we’re talking about real business effectiveness, and not simply a cost-arbitrage scenario.
Cloud’s value will only be reached when vendors and customers are honest with themselves
The challenge posed to the outsourcing industry to find new performance thresholds, is shared equally by both customers and services vendors:
1) Customers: do you know how to take business performance to the next level, and are you having the right conversations with the right services vendors who have the process depth and delivery model to help you determine what that next level is? Do you have full confidence in the solutions being touted by the vendors with whom you are talking, or are you afraid you’re simply being heavily “sold”? Have you seen real evidence of their capabilities to deliver real business effectiveness?
2) Services vendors: have you determined where you’re truly distinctive in the market and can bring real business performance improvement to your clients beyond simple cost-efficiencies? Or are you simply following the crowd and adding a thin veneer of industry jargon over your standard capabilities? And if you choose to ignore the hype and focus on standard service delivery, will you get squeezed out of the market in the future by smarter competitors with deeper process and delivery capability?
The question is how long it takes for our customers and our services vendors to dig deep and find honest answers to these questions. We knew back in 1995 that e-commerce was the future of retail, but it really took a decade for it to become widely-adopted. Cloud will likely take 3-5 years to become fully-formed as a business utility offering, but we can be sure its seeds have been sewn and its roots already taking shape, as our new study essentially reveals:
Figure 1: The roots of Cloud in an outsourced environment: Two-thirds of customers now evaluate ITO/BPO solutions as bundled options
The roots of Cloud services can be found in today’s blended ITO/BPO engagements
Just a couple of years’ ago, it would have been unthinkable that so many customers would be entertaining the concept of “hybrid” BPO/ITO solutions, where they would seek to outsource business processes alongside the IT componentry that supports them. Only a handful of customers had “bundled” both their BPO and supporting apps management with a single provider. And these tended to be in cases where large customers had opted to “lift and shift” entire shared services operations over to their service provider and it was simply easier (and contractually more attractive) to lump everything over to one vendor to take care of everything. Today, as Figure 1 illustrates, close to two-thirds of customers are evaluating their outsourcing options looking at both both ITO and BPO in a more blended model and nearly one in five are doing it extensively (that’s a lot of engagements).
In many engagements today, we are seeing both ITO and BPO feed off each other, where services vendors are getting much more proficient at cobbling together hybrid teams of systems architects and business process analysts to develop broader engagements that tackle end-to-end business process flows. Many of the more recent BPO engagements we are seeing have been extensions of existing ITO relationships, where the incumbent IT services vendor has brought in BPO teams to layer on business services.
Being predominantly a BPO person myself, I am getting increasing calls from infrastructure guys trying to find out how “BPO fits in with their Cloud strategies”. Simply put, BPO provides that layer of flexible personalization to a Cloud/SaaS offering that can make it workable for a business. I may be somewhat biased towards BPO offerings, but I am going to put a stake in the ground and declare that those service vendors which successfully develop Cloud offerings, that are supported by deep BPO expertise, are going to win out in the long-term. While today, these “bundled” offerings may not be anything nearly as sophisticated as fully-integrated Cloud solutions, pulling together the business process and supporting IT apps and infrastructure, within an outsourced model, is the first step on road to achieving integrated Cloud services.
The bottom-line: Cloud will separate the real business services providers from the body-shoppers
As companies increasingly look to take advantage of standardized business processes, the fusion of IT delivery supported by business process services will accelerate. The ultimate challenge is for IT architects to understand how BPO delivery works, and business delivery analysts and operators to understand how to standardize their services on standard applications and infrastructure.
Moreover, services vendors need to decide whether to provide the data center and networking capability themselves, or manage it via partnerships. Customers care about where their confidential information is housed, and many will prefer it to be within the confines of a trusted service vendor. Don’t be surprised to see some partnerships and mergers between strong infrastructure services and BPO vendors in the coming months as the move to Cloud services picks up more steam.
To cut to the chase, Cloud Computing presents the biggest opportunity for today’s services vendors to deliver blended IT/BPO services, where they can not only drive down costs through labor arbitrage and the removal of IT hardware with its associated energy costs (that surmount to 60% of the costs of maintenance), but also to improve business performance through holistic, integrated business solutions. The ability to demonstrate real industry business process depth to compliment a robust Cloud infrastructure is the only way to do it, and the time to develop that acumen is upon us. 2010 will see separate the men separated from the boys in this market. Vendors pushing standard labor arbitrage services under a thin veneer of “Cloud marketing” will quickly get cast aside as the table-stakes get a lot tougher.
An "Awful Award" goes out to Technobabble 2.0 legend Jonny Bentwood for this truly hilarious parody of the Magic Quadrant. I was going to warn readers of some naughty language, but realized that would only encourage you further…
Industry analysts are often accused of hyping the market they cover, creating hockey-stick growth projections to get everyone excited and avoiding ever reporting a worrying decline in growth. I just heard you gasp in shock and horror at this revelation…
So what do you do when you’re actually in a position to dust-off the old hockey-stick, last seen used adorning a forecast for online vacuum-cleaner parts from ’99, and slap it under a title such as “Outsourcing spending to reach $250 Gazillion by 2016”?
Which brings us to the topic du jour: what are customers intending to do this year with their outsourcing strategies? When we spoke to 1055 customers, intermediaries and vendors across the global sourcing industry earlier this month, they gave us the real picture:
Figure 1: How 2010 will play out (from the customers’ perspective)… IT Outsourcing reaching its peak and a banner-year for BPO likely
This chart is revealing the dynamics of enterprises now looking to execute on plans to reduce costs and drive change into their business operations after hunkering down during the recession.
The green represents where customers are intending to initiate outsourcing for the first time, the amber where they are intending to increase scope of existing outsourced processes, the red where they intend to pull-back scope, and the gray where they haven’t made any plans, or just intend to maintain their status quo. Let’s take a closer look…
Applications and infrastructure: most larger firms have already been using IT services vendors to deliver work in outsourced contracts for some time now, hence the relative small percentage of customers starting ITO for the first time. The notable trend here is the sheer magnitude – over 50% – of firms intending to increase the scope of their existing IT outsourcing engagements. We’re already seeing significant revenue growth from several of the ITO vendors over the last couple fo quarters, as they layer on work for customers. As we’ve discussed at length, there’s still a lot of room for labor-arbitrage deals in the short-medium term, with 75% of ERP still being maintained and supported onshore. Hence 2010 will constitute something of a land-grab for the arbitrage work from the leading services vendors. The big question will be who wins the higher-value transformative work when the obvious arbitrage opportunities eventually dry up.
Our take – IT outsourcing to peak this year.The delivery models for standard ITO services are mature and scalable enough to cope with the demand. 2010 will be a peak year for the ITO business as the services vendors rapidly mop-up the labor-arbitrage deals. The gauntlet really gets laid down towards the end of this year, as customers want to find new ways to drive productivity after the arbitrage is exploited, for example virtualization and cloud-based services.
BPO: simply put, many BPO functions are a lot less developed, less scalable and less “productized” than those of IT outsourcing, so expect a lag-effect between the resurgence in ITO and a bounce-back in BPO engagements being signed. We’ll delve deeper into the BPO dynamics, in the coming days, to discuss the development path of the process areas and their blend with IT delivery. However, similar to ITO, it’s clear a lot of pent-up demand from business case evaluation in the recession months, will come into play in 2010.
Transactional finance and accounting (F&A) outsourcing (i.e. payables and receivables) has become well-resourced and supported by a number of vendors, with over 70,000 delivery staff working for services vendors across the globe. One-in-six customers expect to venture into an F&A BPO engagement for the first time this year, but more significantly, 40% of them will be layering on additional F&A processes to existing engagements, with only a small fraction actually pulling back work. Much of this demand is coming from mid-market firms, so expect a multitude of smaller transactions in the $5m-$20m range being signed this year.
In a similar vein, some HR outsourcing functions will be outsourced, with 11% expecting to outsource for the first time, and a third of customers adding additional scope. Unlike the multi-process HRO business of yesteryear, most of the new HRO engagements will be single-process in areas such as payroll, staffing (recruitment process outsourcing) and benefits administration, where vendors have established and more scalable delivery models, underpinned by technology platforms and a blend of onshore, nearshore and offshore delivery.
Other areas of note, that will be discussed in further detail down the road, involve an uptake in call center work, to be expected during a period of some economic recovery, and a lot of firms exploring analytics / knowledge process outsourcing, especially among mid-market customers. Most interestingly, we’re seeing a real interest from customers to explore industry-specific BPO models, most notably in the financial services and life sciences sectors.
Our take – BPO to re-emerge, but demand will outstrip supply. Simply put, many firms that laid-off heavily during the recession are opting for more flexible support models as we move into an uncertain period of economic recovery. Outsourcing fits the bill in many cases, as it provides a more flexible, lower-cost option that can support uncertain business volumes. Moreover, outsourcing can provide a unique change opportunity for firms, as they look for better payroll systems, flexible recruitment support, a streamlined global accounts payable process flow etc. However, BPO areas usually necessitate more intricate business re-engineering and change management than those in IT support areas, and the cost-savings can be a lot less attractive in many instances. In addition, a lot of the fresh demand is coming from the mid-market, where the numbers of process staff involved are fewer, and the labor arbitrage savings less attractive than those of larger companies with greater scale. Not to mention the pressure on vendors to maintain their profit margins, which is going to make it tough for them to be as cost-competitive with mid-market deals as they are with higher-end pursuits.
The bottom-line: outsourcing is back on the table, but the industry will only be able to respond initially to demand in commodity areas. It’s encouraging for the outsourcing industry that customers are seriously looking at outsourcing to solve many of their performance issues, however, trying not to insert too much of a damp squib into this positive data, many services vendors are not geared to give them the cost-savings they hope for, in many instances. Not many customers will turn away opportunities to drive out 30%+ cost-savings and the chance to improve their support operations, hence the resurgence in demand after such a long period of careful planning. However, the industry has been geared to solving low-hanging fruit outsourcing opportunities, such as application support and standard transactional business processes, where the common denominator has been cost-reduction via high-scale labor arbitrage.
While there is clearly a lot of new business to be taken on in this environment, the real issues are arising in the mid-market, where lesser-scale necessitates a vendor partner which can deliver more than low-cost staff in a scalable delivery model. The transformation many mid-market customers need to move into an outsourced environment, often requires new technology implementation that incorporate elements of SaaS and Cloud computing, deep domain-specific consultative support and a skilled change management program. While several services vendors have these capabilities today, they are scarce and come at a price. As a consequence, many of these customers will be disappointed at the level of immediate cost-savings on the table and will be challenged to create outsourcing business-case justifications to their leadership, in order to proceed.
The challenge is on for services vendors to craft creative solutions for clients that provide more than merely standard delivery underpinned by labor-arbitrage. The winners will be those that can step up and craft creative, innovative offerings and convince their shareholders they are doing the right thing.
The Industry Speaks, Part II: When the labor arbitrage deals dry-up (and they will), customers will select vendors that can deliver business-value beyond basic low-cost services
Fed up with short, punchy news titles such as “Outsourcing is Dead”, or “My Delivery Manager Ate my Hamster“, designed purely to capture your attention with minimal substance?
Well, salvation can be found right here, as long-winded rambling ones are going to be all the rage this year, so here’s one to send you into a tail-spin: “Infosys will buy Capgemini, then IBM will acquire the newly-merged entity before spinning it out as part of a joint-venture with Deloitte, GE and Macdonalds”. Actually, before you hurry out to purchase some stock in the Golden Arches, I just made that up…
Instead, let’s talk about outsourcing vendors, and what on earth they are going to do when these tasty labor-arbitrage deals start to fizzle-out. As we discussed at length back in November, operational service provision is commoditizing and leveling the playing field. Customers did their planning during the recession, and, now armageddon has (apparently) been averted, it’s time to execute on that planning. And part of many customers’ planning right now, is to take advantage of moving operational support offshore and driving out some cost.
This is bonanza-time for the offshore-specialists that can deliver basic IT and BPO services at competitive prices. Contract-signings that were delayed during the painful recession months are now in full-swing, service vendors are reporting healthy results and even the sourcing advisors have stopped moaning about their lack of deals, and are making money again.
However – let’s not get too carried away. While the outsourcing market has rebounded, and it’s likely to remain strong for most of 2010 (read Part III when I get around to the next piece shortly), these labor-arbitrage deals are not infinite. Once customers have moved out as much of the easy work to service providers as they can, their focus will move to finding that next tranche of productivity, and it’s not going to be as simple as documenting standard processes and training an offshore team to replicate them. Customers may be delighted today that they trimmed 30% on this, and 50% on that, but next year those costs are eradicated and they won’t keep harking back to that successful outsourcing initiative they did back in ’09. They’ll be looking at what initiatives they can take advantage of next.
So when we spoke to 1055 customers, intermediaries and vendors across the global sourcing industry earlier this month, we drilled into the criteria behind vendor selection decisions, with an eye on how these decisions will be made in the future:
Figure 1: When evaluating vendors, financial stability and operational excellence are the table-stakes. Business transformation capabilities are the differentiators
Vendors need a proven delivery record and financial stability just to get to the table. The vast majority of buyers now see these as table-stakes just to start a discussion. The Satyam fiasco has left some sore memories with customers, who do not want to experience a repeat of their vendor going belly-up, like Satyam almost did. Would you sign up with an electricity provider who might go out of business? The same applies to whomever is processing your business transactions and managing your IT.
Moreover, with the industry for commodity work (i.e. technical support, application development, transactional accounting etc.) now quickly maturing, there’s little room for companies without proven customer successes and experience within the customer’s industry.
Once at the table, customers are asking “what else can you give me?” Quite simply, there are several vendors today pushing services within a similar price-band and sufficient track record of successful delivery. Furthermore, most large enterprises have already experienced offshoring and outsourcing varying degrees of their operations for several years’ now, and are smart enough to realize outsourcing provides an opportunity to deliver more than simply cost-savings (see Part I). Consequently, the ability to provide outcome-based pricing is now a critical component among a third of customers, and an important consideration for most of the rest.
Global presence and scale are less of an issue these days. Merely a couple of years’ ago, this would have been among the most critical selection criteria, however, today’s customers are less concerned with these issues, as most of today’s vendors are already expected to have a multi-shore strategy and sufficient ability to add resources when required. Moreover, most of today’s deals have an onshore / onsite component complemented with offshore support from India, Philippines or some other location. Everyone has that in spades. It’s like asking whether your electricity provider has enough generators…
Innovation / transformation now becoming major decision-swayers.While on the surface, it may appear that transformation and innovation are only secondary considerations (i.e. not a “deal-breaker” for three-quarters of customers), when you take into account that most vendors are offering similar solutions at similar prices, it is these categories that are fast-becoming the decision-swayers.
Brand not nearly as much of a consideration. I do view this skeptically, as people rarely admit they are swayed by brand, however, the fact that it is the least important selection criteria does tell you that service delivery these days is much more about the realities of delivery excellence, than the label they under which they are delivered. Engaging with a second-tier offshore brand is now seen as acceptable as a household Western brand. Moreover, executives these days can get fired for using a big brand and messing up. The sheer number of customers that have engaged the new breed of offshore service providers, in recent years, has significantly leveled the playing field when it comes to brand.
The bottom-line: those that fail to invest in the future delivery model will likely get cast aside. To conclude, it’s clear this business has reached a critical juncture where providers are being judged on their ability to go beyond standard services and deliver real business value for their clients. Decisions are made on which vendors have invested in creative staff with industry domain skills, backed up by the table-stakes of delivering bread-and-butter services at competitive prices.
Everyone’s talking a big game right now, and it may get them to the table… it may even win them new business, but their real challenge is whether they can truly move clients up the value chain and help them find new avenues for productivity and growth. While a lot of basic services contracts are being divvied out in this post-recessionary era, if today’s winners fail to invest in upping the value of their service provision, they may find these clients seeking alternative service partners before long. Some vendors will always be happy delivering low-end services, however, if they see their business going to competitors with higher-value propositions, they will desperately seek out ways to remain competitive. The question is whether they have the appetite and culture to invest to find that next level of performance for their customers.
Whether it's cash management in Casablanca, or payroll in Patagonia, there's one guy who'll have a Harvey Ball polished and ready for you. Enter Everest Group's rock-loving, paint-balling enthusiast, Anand Ramesh, who lives and breathes global sourcing locations.
However, before you read the excellent guest article he's submitted for us, please spend a few minutes assisting Anand with his new study to understand how companies are leveraging offshore locations – particularly for high-value services – and how the landscape is likely to evolve. Just click here to access his study, and he'll send you a summary of the "Market Vista" report in return for your efforts. Over to you Anand…
Global Sourcing Destinations: Perspective 2010
The ripple effects of the global economic slowdown made 2009 an interesting year for outsourcing and offshoring. Rapid growth in offshoring slowed in 2009, despite the fact that the trend of high wage inflation in offshoring markets diminished significantly.
Although India and Philippines witnessed significant slowing down of hiring and consequently slower growth, these countries will continue to be the hubs of activity in 2010. In the last 12 months, India and the Philippines accounted for nearly 40 percent of new delivery centers set up globally. A combination of low-cost, large-scale, highly skilled talent pools and a high degree of offshoring maturity will contribute to both countries retaining their dominant position in the market. By Q3 2010, we expect the conversations around India and Philippines to center back to where they were two years ago – inflation, attrition, pressures of rapid growth!
In recent months, several other countries saw increases in activity. Most notable are Brazil, Argentina, Central American countries, and parts of Africa. Buyers and suppliers expanded to these geographies by setting up new delivery centers. Several offshore-centric suppliers such as Polaris Software, TCS, Patni, Genpact, and Cognizant announced large plans for Latin America. The hot location pick for 2010 will be Peru – with more activity than before, new local suppliers entering the market, expect at least one major global supplier to set up a delivery center in the country.
Delivery centers in Latin America and Eastern Europe are increasingly focused on more niche services. For example, centers in Eastern Europe support language-specific requirements and high-end R&D or engineering services. Similarly, Singapore is increasingly emerging as a logistics and knowledge-services hub.
These factors point towards an increasing focus on specific services in these locations in smaller scale, in contrast to a broader suite of services supported from India and the Philippines at large scale.
As buyers’ focus shifts to cost reduction, low concentration risks, and improved productivity levels in the future, they will tend to seek greater flexibility in service delivery models. This is already manifesting itself in multi-geography, hub-and-spoke models. In 2010, we expect to see an increasing number of buyers push towards globally integrated networks where locations both complement and supplement each other.
The result will be a mix of domestic, near-shore and offshore delivery /shared-service centers – often in a “hub and spoke” model. Suppliers will continue to explore the new terrain and tap specialized skills and language capabilities to address the outsourcing needs of local and regional economies.
In summary, as the offshoring industry recovers, the location landscape will see substantial changes in 2010. Buyers will increasingly focus on developing the right portfolio of locations and suppliers will continue to push the envelope into new countries. The key challenge for all participants will be to think beyond selecting single locations to develop a portfolio view of locations.
Anand Ramesh (pictured) is a Research Director at Everest Group’s Global Sourcing practice. He tracks global sourcing market trends across buyers, suppliers, captives and locations and plays a leadership role for the company's quarterly Market Vista research.
As we discussed during the previous five chapters of this encyclopedic journey to over-analyze our industry, customers are looking beyond the old simplicities of outsourcing to find new and creative ways to find new performance thresholds. 
For once I am stumped for a catchy title, and am opting for some good ol’ jargon-laden gruyère to tee-up Part IV in the series discussing our 
This chart is revealing the dynamics of enterprises now looking to execute on plans to reduce costs and drive change into their business operations after hunkering down during the recession.
