When I talk with firms about outsourcing, the conversation almost always circles around whether the client should sort out its internal processes before it can consider outsourcing opportunities. In most cases for large global enterprises, transformation can be carried out concurrently as part on an incremental outsourcing transition. However, for mid-market firms which may not have the resources, technology or the expertise as larger enterprises, moving too much of its back office too quickly to a third-party can often prove more damaging to the business than any savings generated. That is not a risk you want to take in a cut-throat economy, where you may not have a chance to recover from poor decisions.
To this end, an old friend of mine, Bill Rieke, shared his experiences with CFOs of mid-market firms trying to drive cost-efficiencies into the financial processes. Bill is a respected veteran of the BPO industry, having worked on multiple international engagements with Convergys and subsequently Genpact. He now works independly with firms as an advisor with BPO and process optimization. Over to you Bill…
In American Heartland, Optimization Finally Brings Hope of Accounting Transformation
I have been networking with several mid-market companies in Cincinnati, Ohio, and the surrounding states in the American heartland during our economic downturn. The concerns expressed by CFOs are not unlike the rest of the country or the world – lack of demand, availability of working capital, etc.
However, these heartland CFOs appear to be tackling their concerns not by outsourcing finance and accounting and other back office activity but rather by eliminating activities. They are doing so by optimizing the integration of their sunken expenditures in information technology, i.e., ERP platforms, and by reengineering their legacy internal business processes.
Let me explain
The Sarbanes-Oxley Act of 2002 (SOX) mandated a range of new standards from Corporate Board responsibility to new accountability by external auditors. SOX also dictated dramatic increases in internal control assessment and enhanced financial disclosure.
To implement SOX provisions, consultants were engaged to document business processes, assess the risks of these processes and then implement new procedures to cover internal control weaknesses. The goal of these efforts was not based upon efficiencies but rather rigid compliance. In fact in 2004, the SEC Advisory Committee found that 2.55% of revenue was spent on SOX 404 compliance for small public companies.
So while attention was devoted to SOX compliance, the global economic boom ushered lots of cash and corporations used that cash to acquire new ERP platforms such as JD Edwards, Oracle and SAP. These systems brought the promise of integration, streamlined operations and improved working capital management. But often, the value of these platforms fell well short of the marketing literature. Sometimes this was the failure of the systems themselves (thus the age of application wrappers) and at other times, it was the failure of legacy internal business processes surrounding these ERP platforms. And yes, consultants were used to implement these platforms – often without the skill or knowledge to optimize the business processes as well as the platforms themselves. And there is one well-documented Ohio company whose decision to outsource a new ERP platform was later rescinded.
So as we entered early 2008, we had business processes around legacy operational departments with incremental, SOX-mandated internal controls. We also had newly deployed ERP platforms whose actual financial benefits were far short of those promised. And finally we had very few heads of finance and very few heads of operations seizing control of costs and operational efficiencies. In short, we had profit leakages in a so-so economic environment, but now have significant working capital holes in a down economy.
Late 2008 – Today
Progressive CFOs in the heartland have now engaged a handful of very skillful, business savvy niche consultants and consulting firms to merge, integrate and optimize their technologies and business processes. These niche players are bringing six years of SOX experience combined with practical working knowledge in ERP deployment thereby quickly monetizing value that ERP specialists and working capital improvement consultants had promised. Outsourcing is still an agenda item especially in a handful of non-core functions and periodic analytical projects – but the financial improvements from optimization are now quickly being harvested to bring forward true accounting transformation.
Bill Riekeis a seasoned veteran of the BPO industry and advises CFOs on BPO and process optimization
Lee Ann Moore sent me this interesting analogy of Slumdog's Millionaire's success at the Oscars, and whether it could enhance India Inc's image in the wake of the Satyam scandal and the "Buy America" protectionim we're seeing at the moment…
The post-Academy Award media has declared 2009 the year of India. Will that hold true for outsourcing and Indian workers? Perhaps this push is just what our political leaders need to keep protectionism policies at bay. It is too late to impact the recent bailout package that bans recipient companies from hiring H-1B workers, many of whom are well-educated Indian nationals. Can this Oscar favorite change our attitude toward work in India?
How could our sentimental side not cheer for all the Jamal’s and Latika’s of India who grew up in an impoverished country and work every day to create a better life for themselves and their family? Granted the movie presents a well-written yet fanciful tale, but it helps us understand a unique and beautiful culture. Only time will tell if Hollywood can help the American worker minimize his fear of losing a job to India or perhaps treat the tech support personnel with a bit more respect. Shall we track the call center escalations pre and post-“Slumdog”?
There are many challenges in understanding how a global economy will benefit the American worker and corporations. Thomas Friedman’s recent post, The Open-Door Bailout, provides a compelling argument for open borders and challenging Americans to focus on innovation over fear or job loss. Perhaps the emotional appeal of “Slumdog Millionaire” will allay the fears of the American worker and challenge Washington to think and act global.
What I detest most about recessions is when firms put all their focus on short-term cost-reduction measures and take their eye off the ball with initiatives that can reap much more lucrative efficiencies over a longer period. I am somewhat hopeful this recession is a little different: shaving a few percentage points off the bottom-line is unlikely to make a huge difference when your very survival is at stake, and several companies are exploring more radical, longer-term strategies that will lift them above the depressed morass. Moreover, many smart executives are seeking to tie themselves to longer-term projects that give them added job security and enhance their own roles in changing times.
Cloud computing has all the attributes and potential to support a global outsourcing environment with lower infrastructure costs, lower energy costs from eliminating hardware boxes, and much better scaleability to provide computing resources to meet demand in an unpredictable global market. My view is that we are in a global delivery continuum, where many organizations will originally evolve from crude BPO environments (a lot of lift and shift), explore SaaS delivery to optimize that environment, and ultimately dabble with SaaS apps that be deployed in a Cloud "plug-in" model. A flashy diagram will likely ensue, but that's the nuts-and-bolts of how this continuum will eventually play out. Bottom-line, those service providers which persist in a labor-arbitrage-only service model and ignore the benefits and cost-efficiencies of SaaS and Cloud, will get left behind.
"I just knew the mainframe would make a comeback", said an excited industry veteran on Cloud computing recently. He's actually right, but the difference in today's world, is we are creating the applications and the development environment to run real business applications in a cloud environment.
We're not there yet, but smart organizations need to start exploring service provider relationships where Cloud is on the horizon. Cloud computing is not only rapidly emerging as an infrastructure option that is relatively inexpensive; it is also becoming a buyers' market.
Cloud has come a long way since being a small blip on the radar in 2007 when the likes of Microsoft, HP, Google
, and IBM teamed up with universities in developing virtual data centers. Much as software as a service (SaaS) did earlier in this century, Cloud will revolutionize the delivery of technology. The key question now is whether this economic downturn will derail its development. In the very near-term, it's adoption will likely be impacted as many firms put anything "discretionary" on the back-burner, but as the fog clears (or the clouds part…), Cloud will surely be at the forefront of new investment plans for companies seeking more computing bang for their buck.
Cloud providers have invested millions of dollars to offer data centers where users enter a massive shared data center to access Web based applications. The robust infrastructure of the providers allows users to scale server needs and data storage capacity up or down as needed. Fee structures are commonly based on usage or as a monthly subscription, often with no upfront expense, contract or commitment. Without a commitment, the risk of buyer’s remorse is minimized. Like SaaS business models, fees are carried as an expense. This is a very appealing value proposition in a tight economy – especially tying elements of Cloud and SaaS delivery into a BPO model, where the savings from lower-cost labor and increased process efficiencies can be combined. These three delivery vehicles for business services are going to become increasingly intertwined as business move towards these lower-cost on-demand models – not solely for getting their software applications services on a cheaper, more scaleable model, but also to get these support functions delivered a business services on-demand. I hate to keep going back to the payroll analogy, but if you can get your business support functions delivered in a way that works on a global basis, provides the data your leadership needs in an integrated fashion – and at lower cost that you can do internally, then that is the future.
Cloud business offerings come in a timely fashion. Data storage requirements are ballooning as a result of increasing automation, blogging and Web 2.0 adoption. Data storage capacity is particularly critical for customer facing organizations. By using a cloud provider, an organization can alleviate capacity problems rapidly without an up front expenditure of scarce funds and avoid having to invest in continually building out the data center.
The value proposition also embraces many other appealing elements of SaaS:
* Economy of scale – one to many
* Continuous infrastructure upgrades
* Performance monitoring and management
* Robust redundancy and disaster recovery
* Improved network reliability
* Increased application security
Moreover, in many cases energy costs for computing hardware can account for up to 60% of ongoing maintenance costs. Outsourcing service providers can significantly decrease the cost of their services by adopting green datacentersto underpin their Cloud delivery, which have much lower running costs. Hence, going Green with service delivery should not be an added cost-burden to outsourcing service providers – it will provide a cost-advantage.
Cloud is by no means a silver bullet to alleviate the challenges of all organizations, but it does represent a weapon that can be quickly added to the mix of the arsenal for many. Large enterprises may have sufficient resources internally to accommodate routine business requirements. But should a need arise to quickly ramp up a business unit or product line; cloud becomes a valuable arrow to have in the quiver to quickly enable agility. For companies of any size that have a seasonal business or product lines, having this capability is very valuable to accommodate peak demand periods without having in-house servers sitting idle at other times. Touch-wood we'll start emerging from this economic slump in the coming months ahead, and companies need to be ready to scale-up their support infrastructures in a smart fashion to respond.
Not unlike SaaS, cloud has produced niche providers that specialize in empowering their clients to take advantage of the new environment. For example, application development has seen the emergence of providers offering a myriad of tools for developers to work within the cloud environment. By utilizing cloud, developers are able to tremendously reduce the time of server configuration and reduce the internal disruption throughout the R and D process all the way through to the proof of concept.
Increasingly, on into the future, buyers will reap the benefits as more major providers enter the market. Many established providers with robust infrastructure, skilled staff and a legacy of delivering high quality service are finding their traditional markets saturated with competition. Cloud provides a logical emerging market that offers opportunities for growing their business. The scramble to offer more benefits at a lower price could well rival the marketing wars we see today in the automotive industry. This can only result in brighter prospects for organizations seeking cloud cover in an economic storm.
Outsourcing for the sake of cheap labor will generate some savings in the short-term, but these costs will quickly spring back if you don't follow-through with improved processes and technology that allow for a global operating model. Simply shipping out your mess for less is never going to make much of a difference to your bottom-line, and will often end up costing you more in the long-haul. Bottom-line, when you move into a global outsourcing model, you have to transform the way your business deploys its technology platforms and business processes if you are to generate real cost-efficiencies. Embracing the new developments in SaaS and Cloud are sure ways to make an outsourcing experience work on a continual basis.
Just a reminder that the Global Services Conference in next Thursday at the Sheraton New York Hotel. Seems like a good group of industry practitioners and buyers will be there in force (judging by the number of meeting requests I've been getting).
There's a distinguished speaker line-up including Linda Tuck Chapman, and Thomas A. Stewart, Chief Marketing and Knowledge Officer of Booz & Company and former head of the Harvard Business Review. You'll also have the chance to rub shoulders with a very impressive array of sourcing leaders from F500 enterprises – for more details check out the agenda here. I hope to see many of you there – drop me an email if you can make it… If you would like more details on the show, contact my good friend Ed Nair, editor of Global Services Magazine.
Ladies and gentlemen, these guys need no introdution. Each year we are treated to a new set of rankings that gets everyone talking. Yes, it's the infamous Black Book of Outsourcing's top advisors and consultants guide! Forget your sourcing advisors, forget research reports, forget client references – these guys will simply tell you how it is with their magical rankings.
You have to hand it to them, they never fail to stir up emotions, excite some small outsourcing vendor, or boutique advisor… when it comes to the Black Book, anyone can get in on the game. This year we're treated to several one-man bands, outsourcing vendors posing as "independent advisors", and some firms who don't even do what their category states… can you guess some of them?
Some excellent feedback and comments from you regarding our recent discussionabout the cost and delivery models sourcing advisors need to deploy with cost-constrained clients. Lee Ann Moore of sourcing advisory firm Equaterra, has shared some experiences her company has been finding in this market, and offers some alternative services advisors can deliver, beyond trying to crack a wall-nut with a sledgehammer. Lee Ann is one of the behind-the-scences brains behind the rapid rise of the firm since 2003, being the company's first employee and Chief Marketing Officer. Over to you Lee Ann.
"Corporations are in a state of flux and uncertainty. Many of our clients are announcing layoffs and going through divestitures, mergers and acquisitions – activity that places pressure on their sourcing organizations that often exceeds capacity and capability. These companies must demonstrate productivity improvements and cost savings now. Doing nothing is not an option, and many organizations avoid a doom loop by using flexible advisory services when they cannot afford full-time employees or consultants for business transformation projects.
"Sourcing advisory firms are adapting to the client demands. They are offering more flexible services, and are trying door-opening tactics to help client’s begin engagements. One offered a $500 research report for clients to get the inside story on the Satyam situation. Many firms are staffing engagements with a single sourcing advisor, and these projects may feel more like a staffing model than a consulting project. In other instances we see advisory firms providing only tools and templates with limited or no advisory support. Other projects are workshops and training sessions to support knowledge transfer for the client to tackle the project on their own. Fixed fee arrangements are much more popular this year than last. We have seen gain sharing projects with fees tied to cost reduction. The list of options goes on.
"As an advisor, the market has driven us to be more creative and we have introduced software into the sourcing and governance processes to help clients reduce costs. We also offer flexible pricing models several that spread advisory fees over the life of an engagement to help our clients incur the cost as they achieve savings. We deliver the sourcing and governance support through the software we developed with Microsoft and the savings result from automated processes and streamlined decision-making and reporting.
"Advisory firms continue to support clients on complex engagements with multi-person teams that possess a cross section of skills and expertise. But, all advisory firms have been forced to modify their approach and cost structure to provide the flexibility clients now require. Questions remain on global sourcing, service delivery options, flexible contracting and right-sizing the back office. Analysis of those questions and the format for rationalizing the answers continues to change. Companies are forced to demonstrate results yet have leaner staffs now than they likely did a few months ago.
"With staff reductions, and limited consulting budgets, who is going to do this work? The advisors who respond with service offerings that flex up and down and demonstrate a strong ROI will be best positioned to meet these new demands."
Lee Ann Moore is Chief Marketing Officer for Sourcing Advisory firm Equaterra
I have never (I repeat never) witnessed such an intense level of interest in global sourcing than the current environment. I simply am struggling to find the time to do anything but take calls from companies in deperate need of working out their sourcing options. In fact, if anyone wants to send me compeling guest posts, be my guest, as this thing is creeping into my weekends far too much these days 😉However, I have been alarmed with the recent retrenchments that several of the leading sourcing advisors are being forced to make. Their problem is simply the cost model – if large engagements close out with nothing immediate to re-staff the advisors, they simply cannot afford to keep them on the bench. What worries me is how buyers are getting their advice and direction.
Bottom-line, buyers are being forced to avoid spending on consultants unless deemed absolutely essential, and investing a few hundred grand on getting the support, methodology, data, ideas, knowledge and experience they need, seems to be beyond many firms at the moment. So what are they doing? The answer is scratching around for snippets of wisdom, being courted by service providers offering "free" evaluations, turning up at industry events hoping for free info and joining LinkedIn groups hoping for a silver bullet solution for helping them through the sourcing maze.
So what's the answer?
Advisors need to be onsite with their clients at least two days a week. The "do it yourself" sourcing model doesn't work, unless the buyer is extremely exprienced with the outsourcing process, or has hired a former advisor to manage an internal program. As an analyst (and former advisor), I can tell buyers what they need to do, but I don't have the time to hold their hand and execute their sourcing agenda for them. They need consultants who can come in and do it for them. Moreover, it works much better to have an external party run a sourcing evaluation, than an inhouse staff member, due to the sensitivity of the situation. So the cost model needs to change, and it probably will, with more unemployed advisors looking for work (and there are some really good ones coming onto the job market at the moment).
I can see most of the sourcing advisors moving to "billable-only" compensation models for their consultants (some already are), and away from having them on full-time salaries, which they simply cannot afford when they are not being utilized. In addition, the rates need to change to a retainer model, and away from a billable-hour model, which simply gets too expensive for clients. Yes, the FORTUNE 500 can still shell-out for Big 4 consultants, but outside of that I see the need for a more cost-friendly advisor model that leverages the advisor talent in the market and doesn't cost the earth for buyers with severe spending restraints.
I know many advisors frequent here regularly, so please chime in with your views…
There’s currently a certain sense of déjà-vu within the IT community, as companies look at shaving even more cost out of a function that has been battered since the 2001 dot-com bust. However, when we look at the lessons of the past, you do have to question companies which decide to sharpen their knives once more when they address their IT costs. Companies need to offset the cost of every layoff with the cost of replacing that talent when the economy improves. It is not so much who is left standing, but rather who is in position to grasp the brass ring of prosperity when it returns.
If economic conditions improve in 2010, then the amount of costs saved by releasing an employee may only be $50-100K by the time all the lay-off costs are incurred. How can you put a price on replacing the inherent business knowledge of that staff member when you re-hire a replacement? It may take another year or two to get the replacement up-to-speed, and will not only end up costing you more, but may also impede your executives from accessing critical data in a timely fashion. The overall cost of replacing that staff member could easily be three times the costs saved by laying her off. And these easily-identified direct costs are only the beginning; the costs incurred to your culture and morale can prove even more damaging.
There are lessons to be learned from those who did it right and those who failed to do so during the recession of 2001. The frequently cited observation by George Santayana warrants consideration, “Those who do not remember the past are condemned to repeat it.” Furloughed IT employees in the RIF of 2001 were often reluctant to return to their previous employer. Having been viewed as expendable, the trust and bond between the two may have become a casualty. Often the company belatedly discovered the employee was not at all expendable.
Companies often failed to realize that internal technology is an ongoing work in progress with parts of the past moving forward into the future. With essential team members no longer on board, projects bogged down due to a loss of internal expertise. If new employees were brought in, there were reduced capabilities with a learning curve to scale brought on by a unique IT environment.
IT is the glue that provides the connectivity within an organization and stakeholders. Every environment is unique, often featuring proprietary software and customized legacy systems. The complexity and diversity that results are best left in the hands of those who understand and are familiar with it. In 2001 firms laid off across the board only to discover that when times improved and IT projects resumed, many key people needed to implement them were no longer available. When entering into new engagements, some companies discovered that the chickens had come home to roost and that they were in the coop.
Whether outsourcing or aligning with business partners, management teams are built involving IT. And while outsourcing provides access to technical skills to support your tactical software support and maintenance, it rarely provides the inherent understanding of your business processes and environment that several of your key staff have.
Companies facing the challenges of 2001 with the foresight to prepare for renewed business opportunities in the future fared well. Instead, being reactive to the recession, they became proactive in their business. As opposed to across the board cuts, they applied due diligence and root cause analysis into their business. They prioritized strategically. In so doing, they were able to make adjustments to reduce unneeded expenses. Much of this involved taking advantage of global labor arbitrage for routine work. They also invested in initiatives to improve the business, often involving technology. It became apparent that the success of these initiatives was very much tied into keeping their key IT in-house people on the team.
There is a form of a parable concerning competitors who are prepared and those who are not. Two friends were walking in the forest when a bear came after them. They both turned and fled. One was not in very good condition and he breathlessly called out to his fit friend who was jogging along ahead, “You need to outrun the bear!!” “No I don’t,” came the reply. “I only need to outrun you.”
The current economic morass will not produce winners, but it will produce companies that are in more favorable positions to take advantage of opportunities at the expense of their more sluggish competitors when times improve. Cutting people that shouldn’t be cut can be cutting your throat.
When I talk with firms about outsourcing, the conversation almost always circles around whether the client should sort out its internal processes before it can consider outsourcing opportunities. In most cases for large global enterprises, transformation can be carried out concurrently as part on an incremental outsourcing transition. However, for mid-market firms which may not have the resources, technology or the expertise as larger enterprises, moving too much of its back office too quickly to a third-party can often prove more damaging to the business than any savings generated. That is not a risk you want to take in a cut-throat economy, where you may not have a chance to recover from poor decisions.
"I just knew the mainframe would make a comeback", said an excited industry veteran on Cloud computing recently. He's actually right, but the difference in today's world, is we are creating the applications and the development environment to run real business applications in a cloud environment. 
"Corporations are in a state of flux and uncertainty. Many of our clients are announcing layoffs and going through divestitures, mergers and acquisitions – activity that places pressure on their sourcing organizations that often exceeds capacity and capability. These companies must demonstrate productivity improvements and cost savings now. Doing nothing is not an option, and many organizations avoid a doom loop by using flexible advisory services when they cannot afford full-time employees or consultants for business transformation projects.
I have never (I repeat never) witnessed such an intense level of interest in global sourcing than the current environment. I simply am struggling to find the time to do anything but take calls from companies in deperate need of working out their sourcing options. In fact, if anyone wants to send me compeling guest posts, be my guest, as this thing is creeping into my weekends far too much these days 😉 However, I have been alarmed with the recent retrenchments that several of the leading 
