So HP’s $13.9Bn acquisition of EDS became official this week – the largest-ever merger between two IT and business services providers.The merged services entity resembles a reverse-takeover of the combined services business, with all the management positions remaining in Plano, with the exception of application services.
Overall, there were few surprises in the deal-finalization announcement. However, the fact that there seems to be no initial definitive plans to integrate the businesses at a service/product level beyond the newly-outlined organization structure, gives me some cause for concern, especially considering the fact that HP/EDS has already had three months to draw up a merger-strategy. We're operating in a market where crafting and developing a global delivery strategy quickly is critical. We've seen far too many failures in recent years from services providers that have sat on their traditional revenue streams, while others have pushed aggressive services agendas to win over clients looking for vendors with new thinking and focus on driving innovation into engagements.
From a BPO perspective, there are no plans announced to go-to-market with broader IT-BPO bundled offerings across finance, HR and other vertical-specific functions.In addition, the fact that EDS’s “ExcellerateHRO” service line has been absent from the announcement is notable, especially when you consider the massive investments EDS had previously made in developing that offering. A lack of continued investment and management focus on ExcellerateHRO could well be a missed opportunity (which we discussed here) when you look at the major strides Infosys, TCS, and Wipro have made to enter this market in the last couple of years, not to mention the determination of Accenture, Capgemini and IBM to lead this bundled IT-BPO market, which many of us see as the future of IT-BPO.HP needs to work swiftly to integrate these service lines more effectively, or risk slipping behind the competition.
I'll be commenting more on the ramifications of this merger over the next few days… stay tuned. And feel free to chip in with your views – it's a huge sea-change in the competitive landscape and the next few months are critical for the newly merged entity.
The software industry has – for decades – dealt with the whole "best of breed" versus "integrated application suite (ERP)" quagmire, the scenario centered on whether clients are better off trying to manage a whole variety of individual products themselves, via-à-vis having a ready-made integrated suite of applications. These arguments are surprisingly similar to the debates raging in the outsourcing industry today.
While a best-of-breed (b-o-b) approach can provide the client added quality (or functionality) and control over its suppliers, the prohibitive cost of managing multiple service providers (or applications), combined with the increased need for unique skillsets to integrate them into the business, favor the multisourcing (integrated-suite) route. And, while many enterprises have persisted with a b-o-b software strategy, both Oracle and SAP have been vacuuming up many of the niche application products, whereby presenting the client with the integrated-suite strategy, whether they initially wanted it or not. While outsourcing providers are generally not as acquisitive as software providers for a number of reasons, their need to add process depth, industry expertise, technology enablement and scale to their global services offerings naturally narrows down the playing field over time, as outsourcing engagements become more global and complex.
The crux of the b-o-b versus integrated-suite debate isn't centered on the client receiving the best technology, or the best functionality, it lies in its skills to integrate the applications into the business and create a training ground for its staff to continually optimize the platform to help the company keep costs at a minimum, streamline processes to eliminate efficiencies on an ongoing basis, and operate in a global economy. It's alarmingly similar when we examine clients' outsourcing strategies. While in the ERP world, everything centered on the capabilities of IT to support the business direction with the optimal IT backbone, in the sourcing environment, a similar onus is being placed on all the operational leaders with an optimal global sourcing backbone.
While many companies have gone down the path of selecting one "b-o-b" vendor for applications development and maintenance, another for HR BPO, another for F&A BPO, another for procurement BPO etc., an increasing number are now looking to narrow the playing field, realizing that where synergies exist on the vendor side across applications and processes (often termed as "bundling"), deliberately driving breakages between these synergies creates an extra layer of governance to piece these together. And while the client may have more control and contractual leverage over its vendors in these situations, it is often adding increased inefficiency to the overall process, in addition to the incremental cost of having a larger governance team to manage it. Moreover, acquiring and developing those governance skills is a tall order for most companies today.
In most sourcing instances, one ITO provider may be more accomplished at application development and maintenance than the BPO provider providing the corresponding business processes, or vice-versa. However, if one provider can demonstrate its application staff will be working in tandem with its business process design and operation delivery team in an organized and orchestrated knowledge transfer process, then the odds are the client will be better off deploying that single provider for a bundled engagement.
As the ERP experience taught us, it's often not the quality of the individual components that deliver the ultimate business value, but more the synergies and integration points between those components. In outsourcing, those integration points are delivered by a combination of people, technology and processes, so why should a client separate these out in instances where these integration points will be made less efficient and harder to manage?
When I arrived on these Western shores a few years ago from the Old Country, I made it a personal mission to ensure (some) Yankees around me learned that special brand of humor termed as sarcasm. This habit of mine seems to have spilled over into my blogging… My recent post “The Calamity Clients Awards, 2008” enticed a couple of people to contact me – one person asking where she should submit her vote, the other kindly advising me to find a way to scrap the vote before I offended someone.
For clarification, the purpose behind the Awful Outsourcing and Calamity Client awards was to
1) Make you laugh;
2) Have a subtle dig at some of the awards being banded around the outsourcing industry;
3) Raise some real issues concerning some struggling outsourcing engagements, and the fact it actually takes two-to-tango in this business (both vendors and clients).
Thanks for the many, many messages I did receive from those of you who did realize all three of the above points – very much appreciated, and makes me feel my original mission to induce sarcasm into the North American outsourcing industry is largely working 🙂
Anyway, I’ll lurch back to more serious stuff next week… peace out
Due to popular demand, we’re adding an additional category to the 2008 Horses awards for Awful Outsourcing: “The Calamity Clients”. Yes, it’s not always vendors which are responsible for outsourcing calamity – it often takes two to tango, and this is the vendor’s chance to counter-punch.
As there are several well-trodden paths towards calamitous outsourcing, we will be distributing several awards across the following non-specialist areas:
The Multisourcing-mayhem maestro
Did your client get a bit too clever and decide to multi-source to everyone under-the-sun with no idea how to manage the pandemonium? Then nominate your little multi-source maestro…
Governance-goulash
No idea what they’re doing? They think a service level is a button in the elevator? Oh dear…
The Bring-it-Back buccaneer
Client trying to bring back half the stuff they tasked you with from day-one… ended up re-hiring half the department?
HRO-hellraiser
Your HRO client thinks HRO stands for “Hell-Raising Outsourcing“? Their HR execs spending their entire existence trying to hang you out to dry? You’re not alone…
The Pricing-poker protagonist
Getting squeezed by some CFO who thinks contract negotiation is like procuring a Persian rug? You suspect he spent his youth pulling off the legs from spiders…one-by-one? Your margins getting a closer shave than Roger and Tiger combined? You know what to do….
In light of all the recent banter on the credibility of awards, I thought we'd serve up our own awards ceremony - and I reckon we can put all of the other lists/awards companies out of business in a heartbeat, because only one vendor will get upset with each award (genius 'eh?)… Here are the categories:
Worst Outsourcing Provider of the year:
Vendors – are you just so plain awful you can't hold down a client? Then, this could be for you! This is restricted to vendors which have had a minimum of three clients bail on them over the last 12 months, whether they "backsourced", or paid millions to switch to another provider.
The "Awful Advisor" award:
Rarely is a sourcing advisor ejected from client-site, but it's happened – and a few times! Buyers – please nominate that team of consultants that drained you of billable hours, before coming up with recommendations that you could have got from a taxi-driver.
The "Bait-and-Switch" special:
Buyers – did you sign up with a vendor, when the minute the ink was try, the entire team who worked their guts out to woo you simply vanished? Those Six Sigma black-belts, LEAN luminaries and Kaizen karate kids never materialized? They leave a zero off from the attrition-rate in their Hyderabad call center? Then nominate your favorite bait-and-switcher today.
The Lousiest HRO provider:
We're spoiled for choice with this one - how many payroll runs did your supplier miss? Do you blame it for all your dysfunctional HR processes? Of course you do! Here's your chance to throw your HRO provider fully under the bus.
The Funkiest FAO supplier:
Still closing the books from Q4 2007? Got 2,748,547 unpaid invoices? You know what to do…
And finally…. Thought Laggard of the Year:
Sick of the same old bleating from past-it, out-of-touch old industry windbags? Tired of reading their dreary old articles that they probably got some freelancer to write for them anyway? Worn-out with ego-filled luminaries starting their own blogs then leaving them stranded after three posts? Well, now it's time to recognize their anti-contribution to the outsourcing industry!
Outsourcers Hone European Savvy: Niraj Sheth, of the WSJ, comes up with some compelling examples of how the leading Indian outsourcers are training their staff to understand European business etiquette. With a weak dollar and tight economy, the offshore leaders are increasing their focus in the high-cost European countries, where expensive currencies, high wages and a challenging economic climate are driving outsourcing to the top of the agenda. However, it's not quite as simple as adding americanisms to English…
Carl, a German customer, gave Indian programmer Koshal vague instructions to get a report done by the end of the month. Koshal, expecting to receive more details — such as what the report should cover, what method to use in his analysis — and a firmer deadline than "the end of the month," didn't deliver on time.
A programmer attending the class defended Koshal, arguing Carl should have sent out a reminder, as would have been customary in India.
"Why would Carl have to remind anyone?" replied Ms. Ashok. "He doesn't have to. He's German."
China: Low Cost No More: Jason Busch (pictured here) picks up on some recent examples as to why China is no longer a low-cost provider and is rapidly moving up the manufacturing food chain.
Foxconn will be opening new factories in low-cost markets like Hungary and India to reduce the pressure caused by cost increases
(I assure readers that Jason is far more of a corporate hippy than this picture suggests)
Clients tend to put off making decisions about the retained/governance team for multiple reasons, including:
All energies and efforts are focused on “the deal” in terms of contract terms, conditions, and pricing, with no time/resources devoted to post-contract issues.
Clients may postpone making staffing decisions and communicating changes until they are sure about the final outcome of the outsourcing agreement.
Clients expect that since they are outsourcing the work, the service provider will take care of everything and the client can “wash its hands” of ongoing management responsibilities, resulting in a lack of governance staff.
Shawn – we can bleat these lessons until the cows come home, but will they listen? But thanks for pounding-out the common sense…
Outsourcing the Offshore Operations : Businessweek's Steve Hamm has become the mainstream business media's authority on outsourcing over the last couple of years and articulates well the movement away from captives in this article. Nothing new to many of us here, but he articulates to a mainstream audience why it no longer makes a lot of sense for many firms to continue to invest in their own offshore operations:
There has been a steady drumbeat of similar large deals in recent years, but industry executives and analysts say the pace is quickening—driven by currency swings, the increased costs of doing business in India, and the need for some Western financial services to raise cash to handle shortfalls elsewhere.
I get asked this question from someone nearly everyday, so here is the reason: It's a horse-racing term. Certain horses run better on certain courses.
HORSES FOR COURSES – "A mostly British expression urging someone to stick to the thing he knows best, 'horses for courses' comes from the horse racing world, where it is widely assumed that some horses race better on certain courses than on others. In 1898 a British writer noted in the first recorded use of the expression: 'A familiar phrase on the turf is 'horses for courses.'" From the "Encyclopedia of Word and Phrase Origins" by Robert Hendrickson (Facts on File, New York, 1997, Page 339); "A course of action or policy that has been modified slightly from the original to allow for altered circumstances. A horse that runs well on a dry course will run less well on a damp course and vice versa."
I always felt this phrase sums up the experiences of both vendors and buyers which have danced around with outsourcing relationships over the years. An outsourcing engagement that works well for one firm in its particular circumstances, may not be as successful for another; there is no one-size-fits-all solution, when you are dealing with a company's people, processes and technology. It took me about 30 seconds to come up with this goofy name after a few glasses of vino when I decided it was high-time to get a blog going…
Capgemini is making some waves in the world of F&A BPO this year, winning some major global engagements, one of which is likely to be down in Tampa. Not a bad return from new Sheriff David Poole (he claims he is no longer a deputy). I have gone on the record to describe the current climate as crucial for Capgemini to break heavily in the global F&A BPO business – and they seem to be doing just that in a highly-competitive market. They will be pushing hard for the number 3 market share position in the F&A BPO market by year-end behind both Accenture and IBM, but leading the large pack of outsourcing vendors jostling for position.
Overall, there were few surprises in the deal-finalization announcement. However, the fact that there seems to be no initial definitive plans to integrate the businesses at a service/product level beyond the newly-outlined organization structure, gives me some cause for concern, especially considering the fact that HP/EDS has already had three months to draw up a merger-strategy. We're operating in a market where crafting and developing a global delivery strategy quickly is critical. We've seen far too many failures in recent years from services providers that have sat on their traditional revenue streams, while others have pushed aggressive services agendas to win over clients looking for vendors with new thinking and focus on driving innovation into engagements.
They will be pushing hard for the number 3 market share position in the F&A BPO market by year-end behind both Accenture and IBM, but leading the large pack of outsourcing vendors jostling for position. 
