We've had many animated discussions in the past regarding the trials and tribulations of the HRO market. To cut to the chase, HRO has struggled to live up to expectations as clients struggled with poorly integrated service delivery, overly complex operational issues, the lack of common HR standards and common HR technology platforms. This often resulted in negligible cost savings and fractured service provider relationships. Not to mention some significant write-downs by some of the providers who took on overly complex engagements.
However, new research I've been carrying out in recent weeks
indicates significant recent shifts in this space, which have contributed to a renewed growth in new engagements. The multi-process HRO market grew by 24% in 2007 in new contract signings, and is ontrack to maintain a double-digit growth-rate, when taking into account the number of new contracts signed during the first half of 2008:
Reasons for this renewed growth?
Recent HRO engagements are largely much less complex than the earlier generation of contracts, primarily centered on payroll, contact ctr, workforce admin services
The HRO mid-market has not only arrived, it is now driving the market, spearheaded by a very strong performance by ADP
More efficient deployment of HR technology platforms bundled with HR processes (a dire industry need Naomi Bloom discusses here). 84% of current HRO engagements involved a new system being implemented either concurrently with or just prior to the HRO engagement. In a similar vein, 92% of the current HRO engagements involve the HRO service provider maintaining and supporting the HRO systems
The increased maturity of global outsourcing providers and the rapid deployment of offshore/nearshore HR delivery models
The leading HR services specialists sticking to their knitting
A significant move has come from the India-headquartered global services providers, with Wipro now commanding a 6% market share of the enterprise market with some significant new client engagements, and Infosys and TCS also gaining footholds in the market. IBM has also made some significant traction in the enteprise space.
The industry has gone back-to-basics to provide HRO services that are centered primarily on payroll and workforce admin solutions that are tried and tested, and less complex. The key has been for the service providers to deliver HR services that are based on common standards, common technology platforms, using lower-cost offshore and nearshore resources. Moreover, the entry of aggressive lower-cost competition from the global outsourcing providers has served to create a much more enticing value proposition for today’s buyer.
With a challenging 2009 ahead for enterprises, the availability of maturing HRO models are surely going to be enticing offerings for firms seeing to reduce overhead and move onto a global operating HR services model.
Not many people are better-placed to debate the thorny issues of outsourcing and government policy than my old friend Glenn Davidson. Glenn is synonyous in the public sector world with issues relating to human resources strategy and broader outsourcing strategy, having been one of the founding members behind Equaterra's public sector practice that was launched in 2005 and now a major part of their business. Among several commercial roles, Glenn previously served as one of Accenture's key executives behind their early forays HRO post their e-Peopleserve acquisition, and prior to that as a chief of staff and communications director to a Virginia governor, as the Commonwealth’s chief federal lobbyist and as a legislative director to an Ohio congressman.
With so much heated discussion regarding the policies President-Elect Obama is going to deliver regarding the USA's future stance on offshore outsourcing and public sector contracting (which we touched upon here), I asked Glenn to put together some of his thoughts on where this will lead… over to you Mr D:
"Unlike the 2004 Presidential campaign, where outsourcing was a prominent political issue, two wars, an ongoing financial crisis and broad support for health care reform took center stage in the 2008 race. Now that the election is over, outsourcing may yet become a topic for policy deliberations in a new Obama Administration. But I believe the discussion topic will be more narrowly framed than most people predict.
"President-Elect’s biggest outsourcing-related concern is likely to be offshore outsourcing. He referred to this specific type of outsourcing while seeking the Democratic presidential nomination, saying that as president, he "will stop giving tax breaks to companies that ship jobs overseas, and I will start giving them to companies that create good jobs right here in America."
"As an active participant in the global business community, I know that, in order to be competitive, the quality and prices of our products and services must match or better others that originate elsewhere. So, there may, indeed, be good reason to look abroad for resources, skills and lower-cost labor we cannot find here. The issue of controversy doesn’t surround the intrinsic business value of off-shore outsourcing – or, for that matter, the value of off-shoring to a firm’s “captive” overseas operations – but rather the tax treatment of offshore revenues.
"A Washington Post editorial focused on this point in August. “It's not clear that the tax code — as opposed to other factors, such as lower wages or technological advances — plays a big role in companies' decisions to move jobs elsewhere or that leveling the playing field between foreign and domestic income, as Mr. Obama proposes, would do much to save or return jobs to the United States.”
"But the converse of that argument is also true and President-Elect Obama makes a very strong point – if there are intrinsic business reasons to outsource offshore, then why would companies need a tax incentive? Leveling the playing field would probably have little or no effect on jobs – but ending the tax disparity would, in the long run, promote tax fairness. Perhaps we should embrace a tax code that neither encourages nor discourages the use of off-shore labor and makes the case, instead, for off-shoring purely on its business merits?
"Another aspect of outsourcing likely to draw Obama’s attention is use of independent contractors and staff augmentation firms in government. Prior to the election, the Washington Post’s Joe Davidson asked both presidential candidates the following question: "Federal labor leaders complain that outside contractors perform jobs that should be done by government employees. Do you favor any suspension of contracting out activities? Do you favor legislation that would prohibit the IRS from using appropriated funds to hire private tax collectors?"
"The response from the President-Elect’s campaign was interesting. “Sen. Obama is concerned by the rising number of government contractors that are often unaccountable and frequently less efficient than government workers. As president, Obama will restore effective oversight of the government-contracting process and reduce our Nation's increasing dependence on private contractors in sensitive or inherently governmental functions. Obama will eliminate the Bush administration's ideological bias towards outsourcing of government services and abandon initiatives, like the inefficient use of private bill collectors to collect federal taxes that are a demonstrated waste of taxpayer money.”
"So, is it the provision of technology and services by firms outside of government that concerns the President Elect? Or is it the increasing use of independent contractors and staff augmentation firms that’s the issue? I maintain it’s the latter.
"The government has long relied on outside parties – be they commercial enterprises or not-for-profit organizations – to develop systems for the defense of our country, build roads, operate our telecommunications networks, and manage our research laboratories, among other activities. I don’t believe that will change. Government and industry have worked collaboratively to their mutual benefit for generations.
"However, as for government’s reliance on independent contractors and staff augmentation firms, I believe that will to change. While the concept – of accessing specialized skills and talent on a limited, temporary basis – makes complete sense, the practice has been abused. More and more agencies have turned to this practice in order to circumvent difficult and cumbersome employment policies and practices, including recruiting, diversity, compensation and unionization requirements. What these agencies fail to realize is that, in so doing, the people they secure may not understand the organizations’ mission let alone how to implement it effectively. They also have no commitment to the agency and no institutional memory. The result, as one might suspect, may be a less than optimum workforce.
"Earlier this decade, the outsourcing industry was just taking root and many feared that any government steps to reign in some aspects of it would stunt its growth and prevent the industry from blossoming. Well, the outsourcing industry is clearly flourishing today. And I’m confident it can withstand the increased scrutiny.
"That said, I applaud President-Elect Obama for avoiding the incendiary political rhetoric, that some in the media are apt to employ, and looking at the issue from the perspective of economic benefits and workforce excellence."
Glenn Davidson is the Managing Director of EquaTerra’s Public Sector Practice
As painful as this current economic climate is, we really need to start looking ahead to the positive changes that times like these can bring in the long-term when we recover. Recessions normally occur when many years of bad habits culminate, where certain things were progressing down the wrong track and, finally, the bottom fell out of the market and woke us all up. And, this time, the wake up call is a very loud one.
To correct our future, we need to focus on where our future is going to be molded - our young talent.
So how could this play out?
Career expectations will be re-set. I’ve had this conversation with several people across both the US and Europe in recent weeks: one common theme has been about career expectations of our younger talent. I recall graduating from college in 1994 and there were very few “exciting” jobs available for graduates – you took what you could get, and built your experiences. If you ever get me out for a beer, I may share a few of mine…
These days, most of our graduates seem to want to bypass the first couple of rungs of the ladder, not satisfied to get some ground-up experience before making the big dollars. Graduates in China, India, Philippines and Romania don’t seem to mind taking on some grunt work to learn the ropes. It’s not that we’re mismanaging our young talent, we’ve just created an unrealistic environment that breeds unrealistic expectations. You can even buy advanced software today with algorithms to predict when your key staff may quit, but how about doing something about why they may want to quit in the first place?
The globally-integrated economy will emerge stronger. Meanwhile, the eagerness of developing economies to get a taste of the good life has crept up on us – as we discussed here. Unfortunately, for developing nations, their fortunes are very much tied to ours, and are catching the germs from Wall St. But it wasn’t only Wall St, at the center of this crisis, it was the culmination of years of fat-living and overheated expectations. I take heart in the fact we’re all in this together this time – in past recessions, investors would divert funds into new areas of growth, such as the BRIC countries, however, this time the new growth opportunities are being centered on areas such as transforming flagging industries, investing in new sources of renewable energy, in education and research and revamping broken healthcare systems. It’s going to be painful as the demand isn’t there yet, but I cling to the hope that astute stimulus packages will eventually grease these rusty wheels. This time, the governments have become the new investors, not the private equity firms looking for a quick buck.
We now live in a much more integrated global economy, and this crisis is forcing our finance leaders to put their heads together to correct these flaws in our system. With the massive advances we have experienced in global technology delivery, mobility and the Internet, global supply chains, and the availability of global talent, there is an incredible globally-integrated economy waiting to pick itself up. The speed with which the global economy reacts to situations gives me hope that we may be able to recover quickly, once we have found our equilibrium.
Let’s think about the younger generations. When we look back at this episode in the not-too-distant future, I hope we view this crisis as the jolt we needed to re-set expectations, take advantage of the tools at our disposal to create an economic environment that is sustainable, that doesn’t wreck the environment, that doesn’t breed too much greed, where people can get up for work in the morning with a smile on their face.
I generally feel a sense of guilt when I think of the generation entering the workforce over the next decade. They will be be paying our debts when many of us will be retired. So what if our houses are worth 20% less that they were a year or two ago? Everything else is worth less too. And – heaven forbid – first-time buyers might actually able to buy a property again.
We’ve been talking about this recession for well over a year now, but I sense only now are we really addressing the fundamental issues, after the world nearly went bust. All-in-all, the business world has changed beyond all recognition in barely more than a decade, and the only way forward for our businesses and our career paths, is to grasp how the world has changed, accept the new realities we live in, and carve out fresh plans for growth with fresh expectations. And to coin an old phrase – sometimes a step back is needed before taking two forward.
My esteemed colleague at AMR Research, Dana Stiffler, who works with me in our Global Business and Outsourcing Services practice, has compiled some thoughts about the recent atrocities over in Mumbai, which we wanted to share with you, discussing the impact on the offshore sourcing industry… over to you Dana:
India's financial markets, including technology company stocks, bounced back admirably following last week's terror attacks in Mumbai.
Initial conversations with Western customers of India’s large and mid-sized IT companies indicated no plans to scale back operations. There will, however, be a marked decrease in the frequency of Western employees’ travel to India in the near-to-medium term, a trend that was already in evidence prior to the attacks due to financial pressures and travel bans.
We’ve already experienced this first-hand as AMR analyst Phil Fersht had to cancel his trips to Mumbai and Chennai this week. Looking ahead, the level of participation in the Indian IT industry’s premiere NASSCOM event, held in Mumbai every February, is also uncertain. It’s about dangers perceived and real: While the attacks had no impact on service levels delivered from Indian locations, nearly all Western visitors involved in the outsourcing industry out of Mumbai have at one time or another had lunch at the Taj, or snapped photos of the Gateway of India and Chhatrapati Shivaji Terminus (formerly Victoria Station).
While the situation in Mumbai creates a heightened sense of uncertainty and risk associated with doing business in India, as long as this proves to be an isolated incident, AMR Research believes the outlook for Indian technology and business services vendors is largely a healthy one. However, further coordinated attacks, especially any affecting other major business and IT hubs such as Bangalore, Hyderabad, Chennai, or Delhi, could alter this picture and cause a much more adverse impact to the Indian outsourcing industry.
Most large, global companies are so vested with captives and outsourced operations in the region, they would find it difficult to start pulling work back. Besides, there is no other single location where the combination of resource numbers, quality, and cost are as attractive. Some potential challenges? The negative perception of mid-sized or smaller prospective clients who have been thinking about offshoring is one. These companies will, understandably, be scared off, or at the very least, delay the decision-making process. Another potential issue: Reducing travel of U.S. or Europe-based executives and project resources could put a dent in relationships, slowing down knowledge transfer and extending transition maturity curves.
From a big-picture perspective, we were already seeing intense interest in global delivery strategies that incorporate locations in addition to India. The events of the past week put an added onus on Indian and other global ITO / BPO providers with large Indian operations to locate incremental resources in other locales, such as Latin America, lower cost US areas, and additional Asian locations. Overall, service providers with more distributed global delivery networks will have an advantage over those relying 100% on India-based delivery.
Dana Stiffler is a Research Director at AMR's Global Business and Outsourcing Services Practice
One of the most sought-after thinkers in the sourcing industry, fellow-blogger and TPIveteran, is Peter Allen. Peter started his own blog Consider the Sourcearound the same time "Horses for Sources" got rolling, and we've pretty much been bouncing ideas, opinions, advice and outlooks off each other over the last couple of years. Peter spent some time at our offices recently and I wanted to share some highlights from our discussion as we move into this new era of global sourcing:
PF: Peter – You've witnessed the growth and development of the global outsourcing industry and probably have had more conversations with sourcing buyers and suppliers than most people over the years.How critical is this current economic crisis to the outsourcing industry?Do you see increased activity on 2009 as a result?
PA: Thanks, Phil. These are certainly times of considerable stress
among the buy-side and provider-side participants in our industry. Your question is among the most widely-discussed topics these days. I truly believe that the next two years will form the most significant litmus test for the global outsourcing industry that we’ve ever experienced. Up to now, outsourcing has been largely trimming the edges of corporate organizational models. Going forward, outsourcing relationships are likely to take a much more central position in strategies for survival, and for eventual return to growth.
PF: Cutting to the chase, what do you see happening with the service providers in 2009?Consolidation, or shut-downs?Who will be the winners and losers?
PA: I think we’ll see some real upsurge in demand for outsourcing, likely starting with contract awards in late Q1 and early Q2. The service providers that are in the best position to benefit are those that can shift to a true “managed services” model of operation. In my experience, there are very few of these today. Most providers have enjoyed the rising tide of wage arbitrage contracting and those days are ending – quickly. The current economic turmoil will fuel the orientation around vertical industry BPO and leveraged delivery models. I suspect that some service providers will not have the ability to make the shift in the timeframes demanded by the market, and they will suffer.
PF: A lot has been said about the lack of innovation and business value creation in many BPO and ITO engagements.With this current economic crunch, is this an opportunity for businesses to outsource smarter, or do you see more buyers acting out of desperation to slash costs and failing to focus on the bigger picture?
PA: That’s the paradox that frames our industry’s situation. The rareness of innovation through outsourcing, in my view, has been driven by the tendencies of clients and providers alike to chase near-term cost savings through labor arbitrage contracting. While this has fueled many, many outsourcing relationships (and achieved the client’s goal of saving money), it has stifled the ability to innovate around end-to-end service accountabilities. Most of the client executives with whom I speak seem to understand this. In fact, they attest to a renewed sense of senior leadership demand for dramatic structural changes to organizations – changes that simply cannot be achieved merely by moving “positions” offshore but, rather, by radically altering service models. I should also add that many of the decision-makers within Client organizations were acting with a decided tone of self-preservation, as they were expected to deliver cost improvements in a relatively short time horizon.This tended to cloud their strategic thinking. It remains to be seen if this orientation has changed materially.
PF: How can we – as an industry – get better at this?What would you like to see from both service providers and buyers?
PA: Well, let’s start with recognizing that providers sell what the buyers are willing to buy. I keep hearing from senior client executives that there has been too much resistance within their organizations to fundamental restructuring of how work is performed. There have been too many constraints to transformation. That’s what gave rise to all of the arbitrage contracting. Simply said, it was way too convenient to just contract for effort, and the hard decisions about restructuring work processes and delivery organizations have been deferred. If clients want maximum value from the outsourcing industry, they need to demand services that leverage more than cheaper labor. It’s only then that the providers will see the clear signs that they need to make investments in offerings that deliver the benefits of leverage beyond wage. Relationships will necessarily be much more partnership in orientation, with greater risk/reward sharing, but that’s when we’ll see real value creation for both sides.
PF: You've done a great job with "Consider the Source" – how has this impacted TPI's business to date?What have been the pros and cons?
PA: Our blog has been up for over 2 years now, as we were among the first wave. Our visitors come from literally every corner of world and the volumes have been consistently high. We’ve learned a great deal through this – mostly, about how our clients monitor the dialogue inherent to the outsourcing industry. There’s a lot of voyeurism out there! Senior executives among clients and providers repeatedly tell me that they refer to the site for a pulse of the topics being discussed within the industry. In fact, this interaction has led to some interesting client dialogue and engagements.
Recently, we’ve expanded our contributor profile, drawing on colleagues from across our global operations to post their own perspectives. The challenge is maintaining a steady tempo of postings that portray our view points. It’s become a crowded blogshere out there, so it’s key to have differentiated point of views front and center.
PF: And finally, I guess I should give you a chance to plug your world….what do you see happening in the sourcing advisor community in 2009 – how will the sourcing advisory industry look this time next year?
PA: The sourcing advisory segment has really moved through a maturity phase that transformed our world. We no longer measure success by numbers of transactions advised. Looking at TPI’s business specifically, outsourcing transactions today represent less than 50 percent of our projects. The best sourcing advisors today understand business strategy, which allows them to architect the best service delivery options and modes. They blend the internal and external network of participants in a service delivery universe to work cooperatively, and with flexibility, to support the changing business needs of a company.As an industry, we’ve come a long way from the old days of template-driven deals.
We’re serving the needs of a much more sophisticated buyer community, who are willing to considering the best combination of outsourcing, offshoring, shared services and joint ventures. The most successful and sophisticated of which are progressive in their thinking about sourcing of people- and technology-intensive processes, as well as from whom they get their advice.
It’s easy for enterprises to panic in this market and jump at outsourcing opportunities, simply with the goal of shedding some cost from the bottom-line. In too many situations, clients have jumped at the lowest cost option, and now live to regret their decision.
Outsourcing clients have to think more smartly and strategically about creating an experience than can drive new growth, deliver business value to the top-line, and not just take out short-term costs from the bottom. If clients can engage outsourcing to become more competitive, it creates an entirely different paradigm than simply “shipping jobs offshore”.
Believe it or not, many of the smart businesses that survive this economic hardship are going to emerge more nimble, more competitive, and more globally-integrated. Outsourcing alone is not the answer; it simply provides a vehicle for enterprises to gain access to new talent, better process acumen, new technology and global markets, provided they venture into an outsourcing engagement with the right objectives in mind.There is a proliferation of service providers eager for business, and most of them will offer attractive short-term cost savings.However, clients must focus on forging a partnership with a provider which will work with them to add a lot more competitive bite to their business over a multi-year contract.
Key decision-points companies must take onboard when approaching outsourcing opportunities
1. Think globally.One of the core differences between the current economic recession and those of the past, is the fact that all of today’s financial markets and economies across the globe are so much more integrated than they used to be.The Internet and global communications revolution have created unprecedented access to global talent, where you can have your mainframe computers managed in Brazil, your general ledger consolidated in Hungary and your logistics analytics performed in India.The need to enter new global markets quickly has never been as pressing as it is in today markets, and the right service partners can help you grow your business globally.Having a ready support infrastructure that can support foreign payrolls, accounting procedures, local regulations etc. can save your company months of painful work to set up shop in new markets.
2. Focus on common standards and bundling apps / BPO.Engaging an outsourcing provider which can provide common processes around a solid ERP backbone is critical (see earlier discussion on bundling).Smart enterprises are moving ever-closer to developing commons standards to support processes that can enable them to operate and compete as global entities, and this current economic predicament is accelerating this dynamic.When you have rapid access to your global financial, HR, supply chain, customer and product information, you are in a position where you can make quicker informed decisions to enter new markets, sunset dwindling product or service lines and mobilize your resources and partners accordingly to respond to your existing and future customers.ERP platforms are far more globally-integrated now than they were a decade ago.These platforms provide a crucial backbone for supporting global business initiatives, and developing technology standards, such as XRBL and HR-XML, are helping firms re-use and optimize a lot of what they already have.
3. Add discipline to your revenue cycle. A good BPO provider can add discipline to your collections and speed up your cash-flow, eliminate bad debt and free up a more timely cash-supply. On the flip side, quality procurement processes help you keep the cash you currently have. This is critical in today’s tougher environment.
4. Approach cost-containment as an ongoing objective.A good outsourcing partner should be able to help you sustain cost-savings over a long period, not simply at the onset of an engagement, through ongoing quality and process improvements. For example, you may save $10 million in the first year or your engagement, but how about the subsequent years?Those initial costs you saved will creep back if you don’t constantly refine your processes across your global supply chain.
All-in-all, it’s really not a good time to go to your board and demand multiple millions of dollars to add a new service provider to your outsourced delivery infrastructure, or even rip up your current contract, if you rushed into an outsourcing situation without an eye on the medium-to-long term. My advice to clients is to use this economic climate as an opportunity to drive more radical changes into their business and consider the decision-points above when they start engaging outsourcing providers. I'll leave you with a more peaceful scence from Mumbai…
I trust you enjoyed the animated discussionon the woes of the US autromotive industry. My take was that these issues facing Detroit represent a microcosm of the problems facing many of today's flagging industries, with urgent needs to transform their business models, product-lines, management talent, labor unions, global supply chains and outsourcing strategies in order to survive. I wanted to share these comments from Rachel Geiger, who is a lead HR executive at Ford Motor Company, where she has held senior HR positions for both labor relations and procurment strategy. Rachel makes some interesting points regarding why Ford is a little different; namely it's focus on ongoing transformation and strategic outsourcing. Over to you Rachel:
"I agree that it is about changing their DNA, or "What does it mean to work at Ford?". Being in the organizational change business, and taking part in driving this cultural change, I can honestly say that I do see it happening.
"What people need to understand is that this is a change in the fundamental way we do business. It is about doing what is right for the long term for the enterprise as a whole. And you can see Ford making this shift. For example, we went to the credit markets before the credit crisis to fund a PRODUCT transformation – mortgaging basically even the Ford blue oval. We knew that we needed to invest in our product future, and we have maintained that course. At the LA Auto Show, we have introduced 5+ new products, all leaders in fuel-efficiency and technology that build on platforms that already are gaining parity with the Quality leaders in every segment. Other OEMs have withdrawn or drastically reduced their planned vehicle launches.
"In the past, it was all about short-term cost and profit. This is why the domestics AND foreign automakers focused on trucks and SUVs. Don't forget that both Toyota and Honda were and are making pushes into the truck and SUV markets. Past crisis brought cost-cutting on products, marketing, etc, relying on the profits of trucks and SUVs to see us through. We would "change plans" often, trying to convince ourselves that the next one would be a silver bullet.
"Now, however, Ford is investing in the future at a time when future investment also means tough decisions in the short-term, such as layoffs and debt on the balance sheet. But we are maintaining the course laid out in our business plan, and started to see the results with a profit in the 1st quarter of the year before the current economic crisis hit. Are we through transforming? Far from it. But I have seen change gaining momentum in key senior leadership and am starting to see it gain even more traction at lower levels.
"This is why strategies such as outsourcing only have their place at Ford now where it makes long-term strategic sense. Impact on emerging markets? Availability of skills and value-add of the work? We are looking at all these, but short-term cost cannot be the only objective – it must be balanced with the long-term competitive strategy."
Rachel Geiger is HRBO, Global Purchasing at Ford Motor Company
This whole automotive situation is a microcosm of the broader issues facing the crumbling Western economies in this crisis market, and these issues require significant surgery to our very corporate DNA. And outsourcing and globalization are right at the heart of the issues.
Outsourcing provides an enabler for businesses to change, but ultimately we have to be put in a position where we have to change our corporate DNA and stop clinging to the inefficient ways of the past. That time is now upon us and we need to embrace new ways of working, and new ways of doing this smarter. And if it's fear that is driving us, some short-term panic, some short-term hardship, is a small price to pay to find new avenues of growth and value-creation further down the road.
And that doesn't mean businesses should go out and find outsourcing providers to save them a few dollars today, for the sake of making a quarterly target.
Once you take out some short-term cost, that cost is gone. You saved some money, but what are you left with? Where are the next avenues for further optimizing your business? Once companies move into a multi-year outsourcing engagement they are locked in with their service partner for the long-haul. Hence, selecting that provider which can help you achieve value across all four of these vehicles has never been as important as it is today:
Vehicles for change:
1. People: How can you ensure you have people who are creating value for your business, work with pride and energy, and are always looking at ways to improve their performance?
2. Processes: How can you constantly be finding new ways of achieving business outcomes more profitably?
3. Technology: How can you access all the data-points you need to understand how to drive better performance and constantly refine your business processes?
4. Global Sourcing: How are you embracing talent, process acumen and technology from third-parties, shared service centers, captives and partners around the world to produce cheaper, better products and services than those of your competitors?
And this change in our corporate culture isn't something that comes from the top-down – it comes from the bottom-up. An individual business can create its own culture, its own ways of creating products and delivering services by driving these four vehicles more effectively. If you don't want to work for that business, that's your choice, but the successful workers of the future will find companies that get the best out of them. Bailing out Detroit won't change these automotive businesses, unless the automotive leaders truly want to embrace changing their very DNA and use the vehicles at their disposal to make them more profitable, more innovative and more nimble than their competitors.
I am delighted to introduce a long-time industry friend, and one of the pioneering executives in the world of financial services BPO: Michael Koontz.
Michael has spent most of his career (14 years, in fact) helping steer Wachovia’s BPO strategy, where he led over 130 transitions, managed over 1000 SLAs, over four countries and three service providers. He also served as Wachovia’s CFO for Banking Operations. Michael recently made his first foray into service provider world, leading the financial services vertical for up-and-coming BPO and KPO service provider Aditya Birla Minacs.
Michael is sharing his views with us on where he sees the banking sector going with its BPO strategies – namely a further sell-off of captives, service provider rationalization, growth in regional markets, and also the smaller banks opening up to BPO contracts. Over to you Michael:
What we are seeing in the financial services sector is nothing less than a major paradigm shift, as big banks struggle to survive the current financial crisis and many smaller, regional banks leverage this opportunity to play catch-up with offshoring.
Big Banking Trends
There are a couple of distinct trends among the big banks. First, they are moving away from captive models as they try to liberate capital and focus on their core activities. We will see the banks sell off non-core processes, or at least move them from captive operations to third-party providers. Citibank’s sale of its India-based outsourcing arm to Tata Consulting Group (TCS) is one recent example of this trend toward the “monetization” of captives.
Second, those already using a third-party model are rationalizing their current BPO/KPO providers, ensuring they have neither too few (which increases risk) nor too many (which can dilute the value of outsourcing, reduce scale, and limit their providers’ attention to the business). Two or three BPO/KPO partners is generally the right number to effectively segment work, benchmark results, and create healthy competition. Many banks arrive at this magic number as they attempt to achieve efficiency gains while mitigating risk. In addition to ensuring the right number of suppliers, banks are seeking strategic partners that can provide solutions across a spectrum rather than a productized offering.
Regional Banking Trends
Unlike the large institutions, regional banks have not done much offshoring or outsourcing. There are several reasons for this. First, the cost of entry was prohibitive when offshoring began—infrastructure, governance, and consultants, and more consultants drove up costs. Recently, this price tag has decreased dramatically—from 20% – 70%, depending on the service—as the market matured, technology costs dropped, and off-the-shelf options increased. In many instances, a bank can now start a program with very little outlay, and many providers will even cover start-up costs.
Scale was the other issue—most providers were not interested in small banks because they couldn’t provide the scale needed to support the FTE models dominant in the industry at that time. Transactional models are much more common today for many processes, and scale plays a much smaller role in these decisions.
Common Evolutions
All financial services companies will evaluate which processes they consider to be core; as the industry has matured, companies have come to realize that many processes once thought of as central and inalienable can be successfully off-shored. As this happens, we will see many more processes migrate outside the physical walls of companies.
Another big evolution is toward offshore enablers—technology solution providers that make it easier and more efficient for other companies to embrace offshoring. Imaging platforms are one example, as they enable virtual processing of paper-intensive processes such as check processing. With front-end image capture, many of the day-one activities previously conducted in locations across the US can now be centralized at one location anywhere in the world.
The Bottom-line: It’s the smaller banks moving the BPO needle
While the big banks remain distracted by the recent wreckages of the financial markets, many smaller banks have quickly moved ahead with creating and executing their offshore strategies. The outsourcing industry is more mature than it was three years ago, and many of these smaller banks have watched, learned, and are now looking for strong partners to help implement their strategies. Over the next two years, watch for the emergence of many smaller contracts for many more banks. As small banks join the game, they may in many cases surpass the results of the larger companies by leveraging past learnings.
Michael Koontz is SVP and Business leader for Financial Services at Aditya Birla Minacs.
…when CIO.com starts picking up on your posts. They got the context a bit wrong, but it's good to know outsourcing discussions are hitting mainstream media these days. I'll leave you with an autumnal scene from the Public Gardens in Boston this afternoon…
To cut to the chase, HRO has struggled to live up to expectations as clients struggled with poorly integrated service delivery, overly complex operational issues, the lack of common HR standards and common HR technology platforms. This often resulted in negligible cost savings and fractured service provider relationships. Not to mention some significant write-downs by some of the providers who took on overly complex engagements. 
I trust you enjoyed the 
