Thanks Dana Stiffler, AMR’s application services guru, for contributing this

Posted in : Absolutely Meaningless Comedy, Sourcing Best Practises

With the recent announcement that Starbucks and Convergys have mutually agreed to terminate their HRO engagement after only eight months, serious questions are being muttered about the future direction of enterprise-wide HR outsourcing. 

I, for one, have always been a strong advocate of the potential business value of HRO.  The opportunity for enterprises to aggregate multiple suppliers of HR services under a single "throat to choke", take advantage of self-service tools and have their retained HR team aligning themselves more closely with driving higher-value HR initiatives, are compelling.  However, a number of factors have created serious issues with HRO:

1) Inability to take advantage of low-cost offshore labor.  It has proven very difficult for HRO providers to take a great deal of the operational work offshore, which has prevented suppliers offering more sizeable cost reductions for their clients.  Having offshore service staff handle direct issues with onshore staff for many HR issues is simply not workable, not to mention the political, data privacy and compliance issues restricting the movement of sensitive employee data offshore;

2) An HRO engagement affects the whole enterprise.  It hasn’t been possible for any HRO deal to be kept under the public radar.  Any HRO deal impacts the whole organization, and is immediately held to public scrutiny.  Other outsourcing initiatives, for example finance and accounting, procurement, or some aspects of IT outsourcing, are typically engagements between a service provider and a single company department.  It’s far easier for enterprises to keep these engagements away from the public radar and give themselves time to get it right;

3) HRO engagements are not given enough time to reach a steady-state.  All outsourcing initiatives are painful at first and take at least 2 years to move through transition to a steady state.  The Starbucks engagement was only 8 months along… that is not enough time to get near a fully operational state for the firm;

4) HR staff have been largely resistant to HRO.  When executives resist outsourcing, it makes it extremely challangeing in may cases to execute effectively through the complex transition.  HR trade press have been constantly on the alert throughout the last few years to find the next "HRO tragedy" to dramatize.  In reality, there have been close to 200 enteprise-wide HRO engagements, and barely 6 of these went back in-house.  That’s a 3% failure rate.

5) The costs of benefits management have proven greater than suppliers anticipated, which have eaten into their projected profits;

6) The absence of a common one-to-many HR platform. This has plagued HRO since its inception 10 years’ ago. The complexities of HR technology integration have driven up the costs of broadscale HR transformation and have clearly slowed adoption over the last year.

What I see happening, is an industry going back to basics.  While the mega-HRO deals have dried up, the amount of less complex and smaller-scope outsourcing engagements in core transactional processes such as payroll and benefits admin are still experiencing healthy growth.  Moreover, recruitment services are growing in adoption and interest, and the focus on talent managemt is at an all time high, as we discussed here recently.  HR consulting services are booming like never before.  Moreover, HRO offerings have the future capability to deliver the value that enterprises unlimately need – we’ve simply reached a juncture in this market where the current flock of adopters need to be left alone to work this out and deliver their success stories in the future.  I predict a quiet year for HRO, but enough enterprises have taken the plunge, and there are some highly capable providers out there (both services and software) quietly working on getting this right. 

p.s. a big hat-tip to the Inflexion man for tipping me off on this one….

Posted in : HR Outsourcing

Outsourcing has proved to be a major "hot potato" for the US healthcare industry.  Coming from the UK, the healthcare system in the US is like comparing a Porsche with a Lada, but the British National Health Service (NHS) has, in recent years, been resorting to outsourcing major pieces of its back office infrastructure in efforts to slash cost, centralize and standardize processes, and access skilled IT services it simply does not have inhouse.  I don’t believe the NHS would have dragged itself from a 1950s infrastructure to something vaguely resembling a modern-day organization, if it wasn’t for the outsourcing services that have been provided by Accenture, EDS, IBM, Steria (Xansa) and others.  Outsourcing provided a shock to the system that forced reform and modernization it was never going to achieve on its own.

When you spend time studying the improved efficiencies and cost saving opportunities from which hospitals, managed healthcare providers and ambulatory services can benefit, simply by centralizing and standardizing their operational processes, you will scratch your head to understand why this industry has been so resistant to change.  These operational functions include specific healthcare processes such as revenue cycle management, contract management, clinical data management, patient accounting system management, in addition to the classic general and administrative processes such as application management, payroll, benefits admin, transactional accounting and management reporting services.  I have seen cost savings opportunities well in excess of 50% from original budget (and sometimes even more) that many healthcare providers can take advantage of, by outsourcing many of these processes to providers such as ACS, Perot Systems or Vengroff Williams, which specialize in taking on healthcare processes from both onshore and offshore locations.  Perot, for example, has significant medical coding resources in Bangalore, which comprise qualified medical personnel to take on routine revenue cycle processes such as medical insirance coding.  Vengroff Williams has service centers located onshore within the United States for healthcare providers nervous of taking processes offshore.

So why is this industry one of the least willing to adopt third party services?  Much of the problem is cultural – healthcare managers tend to stay with organizations for very long periods, and if they do switch jobs, will move into other organizations with similar infrastructures.  Things do not change much.  Most of the administrative functions are layered with top-heavy management structures that are highly resistant to change and argue that outsourcing will severely disrupt the quality of their services, and ultimately the quality of healthcare.  Perspectives of third-parties are that they will never be able to deliver the quality of services as well as they do themselves.  The healthcare industry has also been, on the whole, highly profitable, and the onus to take on "disruptive" strategies such as outsourcing has never been as strong as it is for highly competitive industries such as manufacturing and consumer business.  And I can tell you from experience, that outsourcing is rarely successful where the resistance is deep and senior managers simply will never buy in.

The US healthcare industry is plagued by high costs throughout its value-chain – from the drugs companies, through to the doctors’ salaries and finally through to the heavy administrative costs of healthcare services.  My view is that we need to see a knock-on effect throughout this value chain to reduce the overall cost of healthcare in the US, and outsourcing is just one catalyst to enable this.  The pharma industry is going to be the spark for change ultimately, as competitive dynamics, globalization and low-cost generic products are forcing the incumbents to look towards new ways of stripping out cost and driving efficiencies.  GlaxoSmithKline, Novartis, Bristol Meyers Squibb and some other leading pharma giants have recently entered into BPO engagements, and last week Astra Zeneca announced a significant engagement where Cognizant will provide clinical data management services.  At the end of the day, competitive dynamics drive change, and this is the prime vehicle for outsourcing adoption in pharma.  With increased competition and pressure to reduce costs among healthcare providers, surely it’s only a matter of time?  Perhaps the next occupant of 1600 Pennsylvania Avenue will have a say in this?

Posted in : Finance and Accounting, IT Outsourcing / IT Services

I’ve just returned from an excellent InfosysBPO customer event in Philadelphia.   Was refreshing to have a services firm allow industry experts, its customers and prospects talk freely about the industry and the burning issues.  I especially enjoyed:

• TPI’s Sue Danino, leading a panel discussing pricing models;
• Wayne Mincey from the Hackett Group treated us to some confidential new data on world-class performance (a lot of vigorous note-taking during that one…);
• Jason Busch on top form discussing the exorbitant price of zinc and how this impacts procurement BPO;
• Micheal De Zeuw, Infosys’ VP in charge of their Philips BPO engagement, discuss their journey;
• AMR research’s panel discussing service provider governance, led by some British guy.

One of the key issues that came out of the AMR panel was the discussion centered on whether "your vendor is really your partner".   Sunil Narang, VP of Finance for Level 3 Communications, vehemently argued the case that his firm would have never achieved the success it has with its BPO, if it hadn’t developed a partner-style relationship with its provider, based on a great deal of mutual trust and working together.  On the flip-side, I have had many discussions with other sourcing executives who claim their vendor relationship is definitely not a partnership, but a contractual agreement.

My view is you really have to take control over your vendor relationship and drive the agenda, and it often takes a couple of years to get to the stage where you and your vendor feel you have a good understanding of what you need.  If you can develop a relationship which feels like a true partnership, then you must be doing an great job, as this is not the case with everyone.  Much depends on the skill of the sourcing leader within the buyer to create a mutually workable outsourcing environment.  However, this is a skill that most executives need to learn "on-the-job" through real-life experience.  So if you have not lived and breathed an outsourcing relationship, treat the situation like a marriage with a very solid pre-nuptual agreement.  Love to hear your views on this….

Posted in : Finance and Accounting, HR Outsourcing, IT Outsourcing / IT Services, Procurement and Supply Chain

Is there such a thing as being over-networked?  While it’s practically impossibly to get finance professionals, for example, to do anything but worry about their work and pry them away from their offices, HR folks can’t seem to get enough of seeking out the next shindig where they can listen to best-practices all day long and hobnob with their peers from other firms.

My good friend Mark Stelzner, over on his blog Inflexion Point, has hit upon this issue with his coverage of the litany of member-based HR associations and consortiums.  I have never witnessed an industry which is as networked as HR.  Everyone knows everyone, and senior HR personnel seem to spend an exhorbitant amount of their time traveling to these conferences:

It’ll be interesting to hear your views on associations you frequent and whether your industry has the peer networking you need to do your job more effectively.

Posted in : HR Outsourcing, HR Strategy

I’ve been deluged with many private emails and comments since I posted "The low-cost outsourcing advisors are on the march".  Some passionate views out there,  but one thing’s for certain, there has never been as great a need for sourcing advice as there is today… and there has never been such a plethora of advisors competing to give their advice.  And whether you are a highly-sophisticated enterprise with your sourcing experience, or a complete novice in this domain, you will most likely have to engage a third-party, whether it’s simply to administer and negotiate a complex contract, or to hold your hand through the entire evaluation process, contract signing and beyond.  At the end of the day, it’s "horses for courses" with every firm… you should know best what help you need, so make sure you engage an advisor with experience in those areas who will give you value for money.  If your enterprise has been through complex outsourcing in the recent past, the chances are you will need a lighter-touch approach, but if this is a first-time experience, my recommendation is to seek expert help throughout the whole process.

My view? 

On the whole, you get what you pay for.  However, I have seen situations where enterprises paid top-dollar for third-rate advice, and others which received great service from one of the smaller, cheaper firms.  Buyers are also getting smarter and better educated with sourcing issues, and I am also seeing more firms (mainly FORTUNE 500) trying to do more themselves and rely less on advisors. This is a natural control mechanism when companies take themselves through such sensitive change.

I am getting questions almost daily from buyers asking who/how they should approach selecting a third-party.  It’s becoming almost as important as which vendor to select.  I’ll be expanding more in a forthcoming research article on sourcing advisors, which will focus on the core competencies enterprises must look for in a sourcing advisor firms. 

An advisory firm’s competences, in my experience, must include the following:

1) The ability to share IP internally to leverage for its client engagements;

2) The depth of experience of its advisors within the firm.  Harvard MBAs are a nice-to-have, but this is largely deep operational work conducted at a level below the ivory tower;

3) The advisory firm’s mix of experience – this should be include talent which has come from operational backgrounds who have experienced sourcing from the receiving end, not simply staff with outsourcing provider and previous sourcing advisory experience;

4) The firm’s ability to "advise" and not just "consult".  I’ll expand more on this in the forthcoming article;

5) True "independence" in achiving the optimum outcome for its clients.  They must be focused on YOUR best interests, and not their’s;

6) A deep focus on IP, benchmarking data and research – their own and from reputable research firms.  An advisory team of 3 or 4 people will never know everything… they need additional knowledge and support;

7) The operational business focus and experience of its advisors beyond simply negotiating contracts: i.e. post-transaction support, retained org design, vendor governance support

8) A sensible, proven and flexible process for business case evaluation and vendor selection

9) Having the respect of vendors – vendors will work well with advisors when they know they will get a fair crack of the whip.  The last thing you want is an advisor who can’t rally vendors to propose on your business;

10) Multiple client references with whom you can talk to directly and discreetly.

‘

Let’s keep the conversation rolling

Posted in : Finance and Accounting, HR Outsourcing, IT Outsourcing / IT Services, Outsourcing Advisors, Sourcing Best Practises

Having just returned from a few days in snowy Dallas (?) I realized I should pre-warn people of my whereabouts in the coming weeks, as I will be speaking and paneling at several upcoming events:

March: Philadelphia, New York, Boston

April: LA, New York, Boston

May: Phoenix, Bay Area, Boston

Posted in : Uncategorized

Check it out… Forbes used our counterpunch… thanks for your contributions! 

I was going to write somethng dramatic about the "power of blogging"… but you can work that one out for yourselves.  And a major hat tip to the Forbes technology editor, Elizabeth Corcoran, for publishing this.

PF

Posted in : Confusing Outsourcing Information, HR Outsourcing, IT Outsourcing / IT Services

Following hot on the heels of "34% Buyers Axe Their BPO Deals", I woke up to an even more breakfast-choking shocker this fine morning with Forbes.com’s Sramana Mitra declaring "The Coming Death of Indian Outsourcing" . 

So I checked out the credentials of the author.  I couldn’t find any other outsourcing literature, but plenty of Yahoo-Microsoft commentary, which was pretty informative.  However, I did find Sramana’s blog where she comments that the "Indian BPO industry is very much at risk because of the SaaS trend, and if they do not start to get their act together and respond to the trend, they are going to get punished".  This is incorrect. SaaS applications actually enable delivery of BPO services for certain processes.  Where software can be delivered as a pure web application, and does not require onsite maintenance and development, what better for a global delivery model where services are delivered from remote locations?  True, SaaS threatens the traditional software model, but it actually compliments an outsourcing model.  And surely SaaS is much more threatening to software providers than services firms, which dominate India’s outsourcing economy.

Moreover, Sramana claims "Yet, India, for all its glory, is still the world’s back office. India’s tech industry is a "services" industry. The Indians don’t do the thinking. The customers do. India executes".  Er… isn’t that the point?  However, what she plainly fails to discuss is the fact that the better the Indian services become, the greater the number of services that require the "thinking". It is no coincidence that IBM, Accenture and HP have employed 10% plus of their workforces in India today to perform tasks that go beyond pure execution work.  When you look at the scale and type of services being delivered from India today, as opposed to 5 years’ ago, the move up the value-chain of services being delivered from India is impressive.  Services such as remote infrastructure management, financial reporting, insurance claims adjudication and industry-specific application development were a far-flung fantasy back then, but today are high-growth outsourced services being delivered for enterprises today.

Sramana picks on on ADP’s global sourcing model, which only has 2,500 staff in India.  However, what she doesn’t comment on is that fact that very few firms outsource payroll to India, largely as this industry was established long before India came to prominence, but also because of the regulatory and privacy concerns tied to sending payroll data offshore. 

I empathize with her concerns over wage inflation, staff attrition and rupee appreciation.  These are the challenges the Indian industry is dealing with, which we discussed here last year, and it will slow down the breathtaking growth in the long-term, however, to proclaim the "coming death" of Indian Outsourcing is absurd. 

Posted in : Confusing Outsourcing Information, HR Outsourcing, IT Outsourcing / IT Services, Sourcing Locations

I am seeing increased demand for outsourcing advisors early this year to facilitate outsourcing transactions.  The applications outsourcing space, in particular, is showing no signs of slowing down as companies seek to renegotiate existing contracts and a host of enterprises are evaluating their options for the first time.  Having spoken to several outsourcing providers over the last couple of weeks, I am increasingly seeing small advisors with low cost-bases in on the game.  These firms can afford to work with clients and run deals for $250-600K for a typical 4/6 month outsourcing advisory engagement. The 4-6 month time-frame is what it typically takes to conduct a baseline analysis, develop and administer an RFP, downselect vendors and negotiate a contract.  When firms want to negotiate a $10m ADM deal, for example, they do not want to spend more than 5% of the TCV on advisory fees to do the deal in the first place.  This causes issues for the higher-cost advisors, who simply cannot afford to entertain low fees at this level to conduct the same work. 

I am seeing smaller advisory firms such as W Group, Argea, TBI, Pace Harmon, Alsbridge and Archstone Consulting as very active in the industry facilitating client engagements right now, and competing very effectively with the established outsourcing advisory brands, namely Deloitte, TPI, PWC, Equaterra and Everest Group. So what is going on here?

1) Enterprises need advisors to facilitate and negotiate deals for them.  Quite simply, most enterprises do not have the inhouse expertise to manage these complex transactions themselves.  They have to use third-party support, or risk getting a poor deal and poor service levels.

2) Once an enterprise has made the decision to outsource, it wants a transaction done with "no frills".    Advisors are differentiating themselves in the market with their experience, their existing IP from previous deals, and their skills in helping firms make strategic outsourcing decisions, developing post-transaction governance programs, helping to manage the initial vendor relationship(s) and develop change management programs.  While enterprises like these offerings, they only really care about getting a deal done and think they can take care of all the additional issues themselves.  While we have outlined here the potholes many firms have fallen down in the evaluation process, many still only view the world in a short-term "transactional" way. 

3) Short-term thinking is rife.  Many executives put in charge of the outsourcing decision-making are not being made accountable to think long-term about the ramifications of outsourcing, and only really care about the short-term dynamics of performing a transaction with an outsourcing services supplier.

4) The small firms can afford to do this for less.  When an advisory firm has a handful of employees, its running costs are often not a great deal more that its advisors’ salaries.  It can outsource its marketing, IT support, travel support, and even switchboard.  Normally, advisors work from home, so there is no office rent.  Kit out some smart experienced outsourcing veterans with a laptop, blackberry and a corporate AMEX and you are in business.  When you aren’t dragging around corporate overhead, such as heavy marketing, HR, IT and management costs, you can, quite simply, afford to do this work for far less cost.   

5) The objective of outsourcing is usually to save money.  When an enterprise is in the mindset to outsource, saving money is normally the prime driver, and this mentality normally transfers over to the cost of using an advisor to broker the transaction.  If you can find someone to do the same work for you for 300K, as opposed to $1m, then you may be tempted to take a few shortcuts to get the same outcome. 

6) The smaller firms may have some impressive consultants. At the end of the day, advisory services are only as good as the advice from the advisor giving it.  If an enterprise feels the smaller firm knows how to broker an outsourcing deal as well as a bigger branded higher-priced advisor, then the choice to go with the smaller firm is a no-brainer.

Posted in : IT Outsourcing / IT Services, Outsourcing Advisors, Sourcing Best Practises