This truly has been a pivotal quarter for the outsourcing business. As we've discussed several times here, many services contract decisions have been delayed during the economic crisis while organizations worked out the best course of action to get through the downturn.
In Q3 we've started to see definitive action, with many service providers meeting, and some even beating, Wall St. expectations. But while some providers are clearly delivering, others are struggling to compete in this "new normal".
So what is this "new normal"?
Operational service provision is commoditizing and leveling the playing field. Coming out of the recession, there is a backlog of engagements which are largely labor arbitrage-focused and it's often a question of price balanced with the promise of delivery performance for most clients. There isn't a lot of secret sauce these days for what many clients are currently demanding, where in the past, incumbent service providers could play the "capability game". With many of these skills becoming mainstream, the competitive playing field has leveled out.
A not-so-secret sauce is undermining the business models of the old-guard. When selecting a provider in commodity services areas such as ERP software development and maintenance, or transactional accounting processing, it's getting harder and harder for the traditional branded service providers to command higher price-tags against the new breed of offshore service provider. Essentially, everyone's competing for the same pool of talent in commodity areas these days, and for some providers used to commanding higher multiples in the old days, they simply cannot compete effectively anymore. This is especially the case where clients simply want technical support, without significant business transformation.
The recent round of financial results from the service providers is confirming this new reality - and it's happening at a fast-pace in this environment, which is alarming the old-guard. The crux of the matter, coming out of the economic crisis, is that most clients are not yet ready for real business transformation (even though many need it) - that will come further down the road. Their current requirements are to take advantage of operational arbitrage opportunities, and this market is a long way from becoming saturated. For example, 75% of ERP services are still being delivered onshore – hmmm… that's a lot of room for future labor arbitrage.
The winners in the arbitrage game have a future seat at the table for higher end services, but need to reinvest to deliver. Those providers proving operationally-efficient and cost-competitive to win the less sexy work today, will find themselves in a strong positiong to push higher-end business transformational services in the future, because they will already be present within clients delivering operational work. They need to demonstrate they are capable of learning their clients' businesses, in order to move up the value chain to take on more consultative work.
However (and it's a big "however"), in order to move up the services value chain, the winning providers of today need to invest in their talent, their IP, their global delivery platform and their industry acumen to prove they can deliver more innovative services down the road. They need to develop, either through organic investment, or through smart acquisition, this capability to help their clients find the next phase of efficiency gains for themselves and new sources of revenue. Hence, while clients demand cost-arbitrage today, the next wave of efficiency gains can't continue to be found from swapping out higher cost for lower cost (which we discuss here). They're going to come from doing things differently and re-wiring their operations.
The struggle for differentiation. With several providers that can deliver essentially the same service within a narrow price-band, it's getting very tough for some to break out of the pack to prove they warrant being the long-term partner of choice for a client. Simply put, a client needs the following: a provider which is financially sound and is re-investing in its global delivery platform, and has a stellar track record in delivering results for its clients.
Trust trumps brand. Customer references are critical in this business. A consistent voice from multiple customers is now the tell-tale sign as to whether a provider can deliver. In most cases, where a clients have unique requirements, they have to take a leap of faith in whomever they select. It's no longer all about brand and executive relationships for smart customers today; it's about having a unique culture that encourages clients to trust their provider to deliver results and to explore constantly new avenues to make them successful.
All-in-all, as we discussed recently, those business that persist in the old way of doing things will go by the wayside, and the service provider landscape is certainly no different. There's a changing of the old-guard happening, and at a speed which is making it increasingly worried.
If there’s one person who’s been a consistent figure closely tied to the development of Finance and Accounting sourcing over the last decade, it’s Paul Nowacki (or to those of us know him, simply “Wacki”), who today leads F&A transformation for leading sourcing strategy and implementation consultancy, Everest Group.
Paul’s advised on several of the largest engagements in the business (in fact, I do think he’s worked on the largest) and taught me a lot about the space when I worked with him at Everest a few years’ back. Never afraid to speak his mind, Paul is always a popular figure at industry events to talk about what our industry needs to do to get to that next level of performance. He’s truly a “been there done that guy” who’s seen it all… Anyhow, I managed to drag Paul away from his favorite past-time of tracking global financial indices and stock markets (no joke, he does that for fun) to talk to us for a while about finance transformation and global sourcing:
Phil Fersht (PF): Paul, firstly, what are the main issues you’re hearing from your clients these days? What are the main contrasts between now and before the economic crash last year?
Paul Nowacki (PN): The trend toward smaller deals is accelerating. Cost pressures on the buyer community are so great that companies are evaluating small deals that they did not bother to consider in better times. This in turn is putting new pressure on the supplier community, that is, to find ways to provide cost reduction to buyers and make a profit on ever smaller deals. We are really seeing the envelope pushed on the question of how small is too small. There is also increased focus and pressure on the first year impact of deals. In better times, the focus was on the life of the deal economics, now first year impact is equally important.
PF: How are they approaching F&A transformation? Are they increasing focus on BPO and away from captives?
PN: There is significant growth in captives, for engineering, supply chain, R&D, and a number of other functions, but not for commodity F&A transaction processing. Companies recognize that the suppliers have mature offshore F&A capabilities, so when it comes to the make or buy decision, they are buying. When it comes to transformation, it is being baked into the outsourcing agreement. The old idea of transform it and then outsource it is dying.
PF: We’re hearing a lot more about outcome-based pricing in maturing areas of sourcing, such as IT infrastructure and applications. How is this impacting F&A engagements today, and do you view this as becoming increasingly important?
PN: First of all, the term ‘outcome-based’ is an often misused and misunderstood term. Most people who apply that term are using it broadly to represent both transaction-based pricing and business outcome-based pricing. Gainsharing payments for collections work is an example of business outcome-based pricing. Transaction-based pricing, such as the number of invoices processed, is really output pricing rather than outcome pricing, and it is becoming more important to both buyers and providers. However, both buyers and provides are finding that it is not a simple task to properly calibrate the appropriate unit price for various volumes of activity. What is emerging is a hybrid situation: contracts that call for an initial period of FTE pricing followed by implementation of transaction based pricing which allows both sides to take their time to correctly calibrate the unit pricing.
PF: Do you see genuine opportunities for hybrid BPO-IT offerings in F&A, for example, SAP R/3 financials being delivered in a Platform-BPO engagement model? Or is it simply too challenging / expensive to reconfigure most companies’ general ledger data repositories to move them onto these utility models?
PN: If you have not made a large investment in systems, have been growing from a small company to a mid-size company, are starting to outgrow your systems, and are facing a make or buy decision for new core F&A systems, the platform option is a viable alternative. However, the large established firms have ERP systems that have been heavily invested in for many years and are integrated with every other system in the company. These systems also have interfaces with customers, suppliers, and financial institutions. Given the current state of the art for platform BPO for F&A and the associated switching costs, the vast majority of large established companies will not be platform adopters in the immediate future.
PF: We’ve also seen advisors try and step up and deliver governance services, but many have found this challenging (clients don’t exactly ring up and ask to “buy some governance”). What – in your experience – is working, and what isn’t, in F&A BPO environments?
PN: It is challenging for a couple of reasons. First of all, the true core function of governing (cost stewardship, the alignment of business strategy with service delivery, relationship management, etc.) should never be outsourced, so when we talk about governance services we are talking about the administrative and tactical aspects of governance and the tools that support those tasks. Secondly, the service providers are getting ever more sophisticated in the tools that they provide clients with respect to SLA and metrics dashboards, so the opportunity to add value to buyers with these tools is diminishing over time.
PF: And finally, you’ve been close to many of the largest F&A BPO engagements for many years now. What are the three key developments you expect to see in the next couple of years, based on your vast experience of this industry?
PN: One: platform BPO for F&A will grow in the small and mid-market segments. Two: we will see some supplier rationalization. Currently we are seeing some supplier consolidation due to M&A activity, but new FAO suppliers are being created as fast as or faster than suppliers are being acquired; not all of these new suppliers will be viable long term. Three: we will see a maturing in FAO pricing with fewer input based deals, more transaction based pricing, and a better understanding and standardization of transaction based pricing.
PF: Paul – thanks for sharing your views with us today.
Paul Nowacki (pictured here with wife Kathleen) is Associate Principal for sourcing strategy and implementation consultancy, Everest Group with multiple leadership responsibilities including leadership in finance and accounting consulting advisory services. Prior to Everest, he was a senior operations executive for DuPont. He has over 25 years of professional experience spanning industry, consulting, and Wall Street. Paul has an MBA from the Lerner Business School, University of Delaware.
Sometimes life becomes a converged morass of email, reading, writing, number-crunching, slideware-designing, talking, selling, firefighting, and so on – and more so these days than ever. Noone has time anymore to have a quick chat about anything non-important, read an interesting article (or more than 140 characters), have a cup of coffee with a friend, take a walk, read a good book… My long-suffering wife keeps reminding me to take a deep breath, take a walk, and "smell the roses" – just thought I'd pass on her advice…
An Autumnal Sunday afternoon in Boston's Public Gardens
"Most of our managers are happy sitting on a shrinking business" bemoaned a senior executive the other day. Sound familiar?
I hate to say this, but too many senior executives I talk to these days adopted this survival mechanism during the economic crisis, and are clearly struggling to change their mind-set now it's clear that armageddon has been averted. And the main reason seems to be that the last year has exhausted them, preventing fresh, bold decisions to be made. Hey – it's exhausted everyone.
Smart business leaders are now trying to re-energize their staff, take that deep-set panic out of the daily job, and find reasons to celebrate, like a not-so-bad-quarter.
I clung to the forlorn hope that a year-long economic crash, a transformative president, and new approaches to business ideology would encourage businesses to start thinking differently. But, in many cases, I appear to have been naïve . The result is that many businesses are going to have to force real change upon themselves to escape this malaise.
From wanting change… to embracing it
In reality, most businesses are coming out of recession having already cut visible costs to the bone, for example areas where cost can be directly extracted from the business without any form of arbitrage such as travel feezes, headcount reductions from non-critical areas, budget reductions across departments in areas such as marketing or IT, and so on. The next steps are to explore cost arbitrage through labor (i.e. outsourcing), and ultimately process transformation that should accompany any form of outsourcing. Simply put, it's nigh-on impossible to dig out further pockets of cost, without re-wiring the guts of business operations to find new efficiencies.
Global sourcing provides one of those vehicles where businesses
can effect progressive shifts in their business models to approach things differently. It can provide the change agent to make this happen, but only when our management talent has the energy and determination to look at things differently – and refuse to settle for sitting on that shrinking P&L.
This malaise affecting many businesses resembles the one affecting the United States, where the majority voted for change, but now the President is actually trying to enact some, we're seeing a great deal of negativity and resitance from many who voted for him.
I recall the recent survey (see chart below) we ran with Global Services media, where the main drivers behind outsourcing – after cost reduction – are the desire to globalize business operations, effect process change (innovation) and access new skills and acumen. However, when push-comes-to-shove, will business managers really embrace such disruption from their "old normal", or will they resist it, rather like many US voters now resist the change their President is pushing?
So many of our businesses, rather like many United States' voters, have reached an impasse. It's one thing to want change, but a completely different rationale to accept it. It's time to brush off the fatigue, accept this "new normal" and make some bold decisions to start growing again. That ultimately means focusing on where you add value and finding global partners and resources to work with you on maximizing that focus. Not protecting your shrinking fiefdom.
"You are going to keep doing that blog aren't you?" seems to have been the most frequently-asked question I've had since I changed my day-job.
And a few people have asked whether I can still credibly run this blog, now I work for one of the firms actually tasked with delivering the services we have been talking about for the best part of three years. Heaven forbid.
As we have discussed at length, blogs and other social media have been a major game-changer with how we engage with issues, market dynamics – and each other.
We live in a different world today, where the rules are changing and we are constantly seeking out new and innovative ways to reach our industry. To sum up the new constant in a nutshell, credibility is in the eye of the beholder.
So here are the reasons for keeping these hooves galloping:
1) Fresh thinking. We are going to be having a more expansive array of thought-leaders contributing. We will be engaging with leading analysts, advisors, practitioners, bloggers and other influencers from across the IT services and BPO spectrum;
2) Fresh research. With 65,000 industry stakeholders on this RSS feed and 7,500 in our LinkedIn Group, are there any better platforms for guaging the industry temperature? We'll be updating our State of the Industry survey along with our media partners in the coming weeks - and welcome your participation;
3) Fresh banter. Everyone here is involved in either buying, delivering, advising, negotiating, analyzing, commentating, technology-enabling, recruiting, marketing or blogging global IT and business process sourcing services. If you're not, I suggest you see your shrink – and soon. This is an industry resource to share our views, insights and experiences… with a grin 😉
Thanks again for all the sentiments many of you sent in, or commented on the blog. Please keep them coming – your contributions are always welcome,
When I returned to these Western shores 6 years' ago, I was given the the unenviable task of working with the indomitable Andy Efstathiou.
Now, analysts who have spent 20 years working in commercial banks are not to be messed with – and I quickly learned my lesson with Andy, who (literally) has an encyclopedic knowledge and perspective of everything that has gone wrong with the world. I recall Andy warning us years' ago that this was all going to go horribly wrong… and did anyone listen?
Andy has since become a good friend over the years, and has always been one of my first ports-of-call when I want to understand anything about sourcing and the banking sector. He now runs the Banking Sourcing Program for BPO analyst NelsonHall, but his real claim-to-fame is that he finished seventh in the US Olympic trials for sailing in 1988 (pictured). Not many people knew that…
Anyhow, I caught up with Andy last week to pose a few direct questions on the current state of the banking industry, how sourcing strategies will evolve after the recession, and how banks can navigate these choppy waters (sorry):
Phil Fersht (PF): Andy, firstly, let's not beat around the bush here. What's the climate like in the banking, financial services and insurance (BFSI) sector these days? Do you expect things to continue improving, or are we in a false dawn right now?
Andy Efstathiou (AE): Banks will continue to do well as long as they are on performance enhancing stimulus. However, the banks are aware that some day they will have to stand on their own two feet. In order to do that they need to be able to scale operations in both directions without eating overhead on the downside or investing capital to expand on the upside. Therefore banks have been aggressively working with outsourcers to create engagements built around transaction based pricing.
PF: What's different with regards to IT investments in BFSI after the crash? How do you see this changing? Do you see more firms moving to broader outsourced/managed service models, or a continuation of project-based spend?
AE: Global banks have been standardizing their IT environments so that processing is done in fewer regional operating centers. During the crash most investments were frozen. Q4 2008, Q1 and Q2 2009 were way down from historical averages. Q3 2009 has been very strong (up 15% seasonally adjusted) and Q4 is shaping up to be stronger still. Savings are coming from internal consolidations and from greater use of outsourcing in select processes and geographies.
PF: Do you see more BFSI firms moving into BPO models and selling off their captives these days? What do you see as the drivers / inhibitors? Which processes are going to fuel growth for BFSI-specific BPO in the medium-long term?
AE: I think essentially all captives will be sold off over the next 3 years. Most captives never made their business case because they remain subscale. The remaining captives reach a point of diminishing gains when they do achieve scale. Interestingly the captives currently sold or for sale are the ones that have achieved scale economies (e.g., Citi and AMEX). Cognizant's recent acquisition of UBS' India Service Center is the continuation of a trend for global enterprises with Indian captives to sell those captives and source the services from India based 3rd party vendors.
The captives getting sold now are those that have reached economic scale. This is due partially to the need for financial firms to raise capital and partially to the fact that once a captive is at scale further high growth rates from cost cutting in operations is limited by the lack large pools of transactions which can be on-boarded.
PF: Has the fact that several of the major banks received such a large quantity of TARP funds held them back from outsourcing IT/Business Processes? When you talk to banking CFOs/CIOs today, are they less focused on outsourcing as a result, or more?
AE: No one with TARP money wants to be quoted. However, CFOs/CIOs are focused (appropriately) on conserving capital and reducing cost. None of them will commit to an outsourcing project that requires capital from the bank (such as setting up a captive) or reduces cost over the long run (pay back periods have been reduced aggressively in the past year). To the extent outsourcing helps put capital back in their pocket and reduces overall cost (especially if volumes swing unpredictably) then they are very interested in outsourcing.
PF: With regards to protectionism, are you seeing offshore-centric initiatives being put on hold? How long will these protectionist attitudes remain, or do you see them as more bravado than reality?
AE: Offshoring has been on hold because financial institutions were not sure whether they would be here or how much they would have to shrink operations. Now they know the answers to those questions and they intend to aggressively offshore in the next 12 months. In September we asked 480 institutions what their plans for offshoring were in the next 12 months. Only 2% intend to shrink offshore operations. 37% expect to increase offshoring activities.
PF: Do you see the surge from the newer break of service providers continuing in this climate, or are you anticipating the incumbent western providers coming back strongly?
AE: The incumbent western providers will all be bought up by product companies. Most product companies still have war chests to buy even more services firms. It is more likely that new firms will spring up with private equity money to fill the demand void for product agnostic services. I also expect more U.S. activity to come from European services firms.
PF: Do you anticipate a lot more consolidation in the BFSI space?
AE: Yes. As FDIC fees increase, fewer consumers borrow, regulators close more banks, and eventually interest rates rise (bad for interest margin) more banks will be forced to merge or simply close up shop.
This means banks will process work in fewer, larger centers delivering service across North America. States hardest hit by the crisis (e.g., California, Nevada, Florida and New York) will see the highest loss of operations centers. In short, for finance, what happens in Vegas, won’t be processed in Vegas.
PF: And finally, if you are seeking a sourcing career in the BFSI sector today, what advice do you have?
AE: Avoid at all costs the credit and risk based businesses. The credit crisis has killed chances for much growth in credit over the next 5 years. What will grow in the financial sector is non-credit or operational services. Examples of these include payments, asset management, depository services, channel based delivery. In insurance these would include: annuities, retail insurance (e.g. car and home insurance). The biggest opportunity today is in payments which is consolidating old delivery mechanisms and creating new delivery mechanisms (such as mobile payments).
PF: Thanks for your time with us today, Andy. Your views here are very welcome to many who are closely observing this sector.
Andy Efstathiou (pictured) has responsibility for the development and delivery of NelsonHall's research and advisory services in banking processes and the application of business process outsourcing in the sector. Andy has 25 years' financial services experience, having worked for money center banks, including Citibank and Bank of America, in key roles managing the customer and counterparty operations with other financial institutions. You can email him directly here.
You can't understate the importance of relationships in business – especially sourcing, where it's all about cultural fit and working relationships. In business, it's not always about liking people, it's about being able to trust – and work – with them. Sometimes, you will actually grow to like someone, in addition to trusting them and working well with them – and that is special; but let's face it, it's quite rare.
In many cases, people you like are not always people you're going to work well with – and vice-versa. You may not have any affinity or liking for someone at all, but you are straight with other in a working scenario, and have an effective working relationship. You can always develop a professional respect for someone – and that is different from developing a personal relationship.
If there's one thing that irks me, it's those people who only bother to talk to you when they need something, but paint a facade that they're one of your real "friends". I like to create a distinction between someone who is a genuine friend, and someone who is a colleague / industry contact. It's like when you change jobs – you are often surprised by whom was really a friend, versus who was merely toadying up to you, to get you to do things for them…
My real industry colleagues are those folks who I have learned to work with over the years, in various capacities. In some cases, I didn't (immediately) like them much on a personal level – and they probably didn't like me either, but we learned to function together and create a collaborative working relationship. And now, I know I can call on many of these folks for favors – and they me. And we can even enjoy a pint or two together these days.
And those folks who come crawling out of the woodwork every few years just because they want something under the guise of "friendship"? Give me a break…
So what can you take from this? Simply-put, developing professional respect for someone can form the start of a career-long relationship. In today's economy, having workable, trusting professional associations with people, who know your business value and credentials, is a lot more valuable that having random shallow friendships based on self-interest.
In the second-part of this two-part interview, Oracle's Tibor Beles discusses how service providers can be successful at platform-BPO offerings, how the broader BPO industry can improve, in addition to discussing the shifting dynamics with software licensing models. Tibor is also a blackbelt in martial arts (not the Six Sigma category), but spends more time hitting tennis balls these days with his teenage daughter. He also loves political thrillers, but he didn't elaborate whether that was through his day-job, or reading Le Carré novels -:)
Phil Fersht (PF): Do you see platform-based BPO as a major threat to the BPO pureplays which are not experienced in broad-based ERP enablement and implementation services?
Tibor Beles (TB):The first question calls for a long answer but I will try to keep it short. An aggregate BPO service provider must be passionately committed to process and IT excellence in its chosen function. Offshoring for labor arbitrage alone has limited benefits.
I believe platform-based BPO is the best path to transformational excellence. The provider who supports every lift-and-shift platform its customers started with has higher costs, fewer best practices, and less value to its customers. All it can provide is low cost labor and marginal process improvement.
Yes, platform-based BPO is a threat to pureplays. While the traditional service BPO might be a good enough solution for a short-term it has a limited process performance and cost improvement potential.
Legacy platforms of the pureplay BPO providers are often stretched to their limits in the new BPO world. Buyers increasingly expect service providers to add new services and to innovate. What can you expect from a provider running multiple obsolete service delivery platforms?
PF: If the software licensing model is shifting from the customer to the BPO provider for several enterprises, will this be a win-win for Oracle, or do you see good opportunities here for niche software providers to get into the BPO game here?
TB: The outsourcing market can be an opportunity for every software company capable to develop the right product and to offer licensing model(s) meeting providers’ needs. We will continue creating offerings in all relevant markets where all the three market constituents can win – the buyer, the supplier and Oracle. Oracle offers a unique proposition, with the breadth of our offerings, our commitment to open standards, and the integration we provide. Niche vendors may have a functional focus that brings depth to their products, but they can’t match our integration and breadth.
PF: Tibor, all-in-all, what does the BPO industry need to do next to improve, both from the client and service provider standpoint?
TB: This is a huge question. I will try to keep my answer simple and short. Two thoughts only:
I believe platform BPO is the future delivery model. I would like to see buyers to leverage the lessons learned from the ERP market, to make the choice of the service delivery platform part of the sourcing process rather than an afterthought, and also to avoid proprietary and customized software. Configure, don’t customize.
I hope that a provider-buyer relationship will become a partnership more often than it was the case in the past, as it is critical for enabling innovation. The term means many things to many people. It can range from a software upgrade, through introduction of self-services, process retooling, up to a complete process transformation or a long-term, continuous best practice improvement program. I leave it to the readers to define what the term means to them personally.
PF: Tibor, it’s been a pleasure hearing your views on the industry, and am sure our readers here appreciate your time today.
Tibor Beles (pictured) leads Oracle’s Business Process Outsourcing (BPO) globally. Oracle's BPO strategy seeks to expand the "Oracle economy "by placing its applications, technology and ancillary services under the umbrella of BPO provider offerings. Prior to Oracle, Tibor has been with SAP and IBM. He is a graduate of the Harvard Business School.
This truly has been a pivotal quarter for the outsourcing business. As we've discussed several times here, many services contract decisions have been delayed during the economic crisis while organizations worked out the best course of action to get through the downturn. 
"Most of our managers are happy sitting on a shrinking business" bemoaned a senior executive the other day. Sound familiar?
"You are going to keep doing that blog aren't you?" seems to have been the most frequently-asked question I've had since I 
When I returned to these Western shores 6 years' ago, I was given the the unenviable task of working with the indomitable Andy Efstathiou. 
You can't understate the importance of relationships in business – especially sourcing, where it's all about 
In the second-part of this two-part 
