I am returning to my analyst roots with AMR Research, where I will be studying Outsourcing and Implementation Services markets for AMR’s enterprise clients.
Those of you who know me well, will remember I spent the first 10 years of my career in the analyst community, before moving into the outsourcing advisory world three years’ ago. I have found the practical experience of working on outsourcing and offshoring engagements extremely valuable, but always wanted to go back to my analyst roots at some stage (it kinda gets into your DNA…). AMR sets such a high standard with its research, has some of the finest analyst minds in the industry, and is in my adopted home town of Boston. Moreover, I am delighted to end my days of waking up every morning in airport Marriotts, stuffing free beer from the concierge lounge in my laptop bag each evening, and getting back to what I love doing best 🙂 But I do have some pretty decent frequent flyer status…..
I found myself embroiled in a debate with a colleague today, who covers software markets. 2008 promises to be a year of unprecedented consolidation in many niche software markets… because supply usually outstrips demand in new innovative areas (where software products tends to live), software products often complement each other, and software companies like to buy each other to hoover up more clients. Software is an acquisitive industry, which is so well highlighted over at the Human Capitalist with the example of HCM vendor Workstream hawking itself around potential suitors. (I know several software entrepreneurs who spend all their time trying to find someone to buy them out…. that’s their end-game).
So why do we see zero action happening with the large outsourcers? True we, see growing outsourcers like NCO buying up specialist process vendors like OSI to build out their global delivery model and broaden their process scope, but what ever happened to Accenture buying Hewitt, or IBM buying Genpact, or Infosys buying CapGemini (the list goes on….)? So here’s my reasoning:
Outsourcing industries let themselves flesh out naturally… remember HRO? The only large acquisition of any note was ACS buying Mellon’s HRO business, which seemed like the right move at the time, but did little to bolster their HRO business. After that episode, the leading players saw the market for high-end engagements dry up and they simply watched as the second tier took itself out of the enterprise market.
Well-resourced ambitious outsourcing providers prefer to grow organically and acquire new clients they want to grow their long term business. This way, they can shape the type of services and global delivery model they want. Moreover, why buy up a rival, when many of its clients are not particularly (if at all) profitable, and you will pay an inflated premium to acquire all its assets? As outsourcing solutions mature, each deal is (normally) structured better than the last, buyers get smarter, and the risk of failure decreases. It’s fascinating to observe the leading Indian-HQed providers competing aggressively with the Tier 1 incumbents for high-end clients – they want to build up their client infrastructure their way, and not simply inherit clients whose engagements may not be optimum.
Outsourcers like to acquire firms that bring something new to the table to enhance their outsourcing offerings – for example new technologies, or a niche expertise that gives them competitive advantage. Too many large outsourcers are too similar… they overlap too much and a merger would often end up as an unprofitable exercise and result in a mass exodus of key talent.
The market for IT outsourcing and F&A BPO, which tend to derive from companies which have both offerings (namely IBM, Accenture, Infosys, CapGemini, Wipro, Genpact), are doing well and there is enough business to go around for the time being.
However, I would add that the new tier of Indian outsourcers, namely Satyam / Nipuna, Patni, HCL and Comnet are potentially disruptive to the Tier 1s. They have the capability to aggressively undercut pricing with offerings such as Remote Infrastructure Management, which can drive significant downward pricing pressure on an engagement, and eat into the lifeblood of CSC, EDS et al. Some Indian-based firms are already claiming a 50% cost decrease from original budget with their RIM offerings. It’s not inconceivable that some other Tier 1s will look to take these firms out of the market as a strategic move to protect their market share.
All in all, I don’t expect any major acquisitions in the outsourcing space in 2008. With a likely recession poised to spike demand, there will be enough business to go around. I can see the industry reaching saturation in 2009 / 2010, and then we may see some strategic moves, but at the end of the day, outsourcers simply don’t like the taste of each other.
Away from the outsourcing topic, I watched the Democratic debate (or should I say "slugfest") last night on CNN. Being a citizen of the old country, I am used to opposing political parties viciously going at each other… but never the politicians from the same party. If two British MPs (Members of Parliament) from the same party threw accusations at each other in public anything like Obama and Clinton were doing, their party would have thrown them out, because the only winners from my perspective were the leading Republican candidates. The Democrats should be celebrating the fact they have, for the first time, both the first African American and woman candidates leading the race for their presidential nominations, but instead we are subjected to them trawling through each others’ backgrounds on live TV digging up dirt on each other.
Please can we see their campaign leaders clean up their act for the remainder of the campaign?
You may recall the feisty debate on the H1B Visa and outsourcing issue here and here last year. With the 2008 campaigning now in full swing, the "O" issue is noticeably absent from the candidates’ agenda and our old friend Lou Dobbs is waiting in the wings to shoot pot-shots at any of the candidates who say anything that remotely supports offshoring, outsourcing or increasing H1B visas. Step up Hillary Clinton (see video clip below, taken from Lou Dobbs’ CNN show last year).
Yes, she’s supporting Silicon Valley businesses and has them contributing substantially to her campaign, but at least she’s openly discussing the issue and – more importantly – attempting to tie together the realities of outsourcing, offshoring, immigration and the need for the US government to invest in developing technical and engineering talent. I respect Lou Dobbs a great deal – he’s a passionate man who sincerely believes in his vision for American workers, has a great sense of humor, and conjures up some excellent – and entertaining – political discussion. However, this H1B argument just isn’t holding up.
One key reason is the fact that the average salary differential between a "domestic" worker and his/her supplanted job to an H1B worker is….$12,000 per annum. Having advised on several offshoring and outsourcing engagements over the last three years, I can state categorically that I have yet to see companies go through an offshoring or outsourcing process – driven by the goal of cost containment – at such a low cost-saving per FTE. Most companies will not entertain outsourcing business cases if they cannot achieve cost savings in excess of 25% from their original budget – it’s simply not worth the transition cost, complexity and risk to many firms. I would add that some companies have moved into outsourcing engagements at cost-savings lower than 25% from original budget, but their reasons for outsourcing were nearly always driven by motives beyond mere cost-reduction (for example, the need to re-design and standardize processes and drive rapid change to their enterprise that an outsourcing environment could bring). Bottom-line, most companies can’t be hiring H1B workers for the sole purpose of saving a few bucks… they generally need these staff. More key points regrading this issue:
Clinton’s policy is to increase the current (and already reached) H1B Visa cap from 65,000 to 115,000. Er… is this a big deal – will this type of increase in temporary workers cripple the US economy?
Clinton wants to increase the H1B Visa fees for sponsoring companies. The current cost of sponsoring an H1B Visa for an organization is about $6,000 – which covers USCIS fees and typical attorney costs. Clinton wants to re-invest these fees into grants for training and education of US graduates in these specialized professions. Why not raise these fees to $10,000? This would have the effect of nullifying any minimal "cost-savings" of bringing in a skilled immigrant worker, and would incent the sponsoring US organization to focus on sponsoring higher caliber staff which are really worth the effort of bringing over (normally US firms will have to cover relocation costs, flights home for their H1B staff and devote HR time to administering the whole process).
H1B is "legal immigration" and represents a very small fraction of the total number of immigrants in the US.
The H1B cap is a year-by-year renewable policy. It provides short-term solutions for businesses which need skilled staff.
Dobbs makes the argument that "7 out of 10 H1Bs are going to Indian companies for outsourcing". Let’s not beat around the bush here, but most of the FORTUNE 1000 firms have been outsourcing some elements of their IT services or business processes to firms that have offshore staff in India. As discussed here on this site on many occasions, outsourcing providers – and firms that have their own captive offshore resources, must have strong "bridging" teams that can help manage the work being carried out offshore, particularly for complex tasks such as application development, implementation services, and BPO processes such as accounting, claims processing etc. These bridging teams need native staff from the offshored location who can communicate effectively with the offshore staff, oversee the day-to-day operational issues and manage the knowledge transfer activities, and understand the cultural, management and communication issues that are crucial for ensuring the ongoing success of the offshore work. Without many of these H1B staff, US businesses will suffer as a result of poorly managed outsourcing and offshore captive work. If Lou Dobbs is so desperately unhappy about this high ratio of Indian-centric staff holding H1Bs, then he needs to focus his attacks on the vast majority of today’s FORTUNE 1000 leadership, which made the decisions to use Indian offshore staff in the first place. This high proportion of Indian staff is not the cause of the problem, but merely a symptom of what is happening. The root causes of US firms needing to use offshore resources are set deeply in the culture of corporate America, and the political and educational manifestations of the Unites States over the last three decades. I’m going to tackle the key issues the government needs to address in my forthcoming post "the Outsourcing Equalizer", if it wants to accelerate the development of local IT and business process services centers.
Jason Busch is regarded as the industry’s supreme authority on all issues spend-management and procurment. Jason picks up some interesting points on the slow growth of Procurment Outsourcing on his blog SpendMatters (you must subscribe to this by the way). Vinnie Michandani, on his Deal Achitect blog also pipes in with his views. Go visit!
Thanks to all of you who took the time to vote in our poll "Who whould you LEAST like to see in the White House in November 2008". We’ve had over 100 responses back, so I thought it time to update you all that Hillary, on the back of her sensational comeback in New Hampshire, is again leading the charge… yes, she is currently the overwhelming favorite NOT to be the next President. McCain is the least offensive, but the Obama vote picked up recently, as several of you started to panic at the thought of this guy in the oval office. Anyhow, keep the votes and comments coming (just click on your least desirables on the poll on the left-hand scrollbar).
Got the best piece of advice all of last year from my wife: "Just stop and smell the roses"… so tonight I did, taking a walk through the snow on Boston Common 🙂
Firstly, thanks to all of you who contributed to the lively debate following the recent post "Will the HR function have a seat at the corporate table in 2008?". I was merely highlighting some interesting thoughts from the Inflexion blog, and didn’t expect such feverish input from so many of you! (And before I continue, I promise this will be my final rendition using the corny phrase "seat at the table"). Anyway, I have been under pressure from several people to put forward my opinion in this topic, so here we go:
HR used to be merely "personnel" and looked after the administrative activities related to basic employee needs. It wasn’t until the ’80s when the wider berth of "Human Resources" was developed where HR would be activity involved in all issues people within a firm, and not just the basic admin, i.e. recruiting, organizational design and development, corporate culture, compensation, career planning and counseling etc. The challenge of HR leaders was to get taken seriously at board level and prove their worth to the business. Not an easy task where you are not directly related to revenues and there are always more "critical" issues to be discussed before people strategy. The HR struggle had begun.
Then came the onset of HR suites like Peoplesoft, whereby it became vogue for HR executives to apply metrics to their organizations to help base management decisions. Where else in the company was there a more comprehensive view of staff profiles, compensation, attrition-rates and performance than in the HRIS? Hence, where finance departments could show the board how to budget and forecast the business to aid decisions, HR could (in theory) link employee performance with the business. Part of the problem has been that HR (unlike finance, for example) hasn’t done a good enough job of embracing technology to demonstrate real value metrics to the business. It has been stuck in the weeds of blocking and tackling, and not focused enough in areas that get real board attention.
And then the wave of HR outsourcing hit after 9/11. All this achieved was a very public dissection of the "strategic value of HR" as several high-profile companies grabbed at reasons to move out as many HR people as they could into service providers, or out of the firm altogether. It has taken a few years for HRO to iron out its issues, but it had the impact of alienating many HR leaders within firms, and driving them further away from the corporate table. However, I am convinced the HRO industry has now found its balance and the real HR issues are back at the forefront of many organizations’ agendas.
My view is centered largely on the skillset of the HR professional today – it’s too focused on the legal issues, compliance, managing the basics… and not enough on delving into corporate data to provide real input into driving a talent strategy into the organization. Moreover, we need more "business managers" in HR – people who understand the real business issues, and how to help their firm hire, manage and retain key talent. HR is the most important function in today’s organizations, but it has simply not been developing in the right manner. Hence, my thoughts are around HR helping to instill world class HR principles and practices into today’s managers. I once managed a team of 14 senior people and it was one of the toughest challenges of my life. I needed support, advice – and a venting outlet – to help me do this effectively. The success of my whole business function centered on my ability to be a good manager. This is where HR, in my opinion, comes into play. It is there to support today’s managers, who are under ever-increasing pressure, to get the best out of their people. I have seen so many positive examples of where this works in firms… and, unfortunately, some less successful examples.
Will it get there in 2008? Professor Dave Ulrich, with whom I have enjoyed discussing these issues on several occasions, outlines excellently the roles HR departments must fulfill to deliver value. His mantra is simple: HR must play a role in implementing state-of-the-art strategies that are tailored to the needs of the business... an "operational executor role". In a world of rampant change, where firms are constantly globalizing, restructuring, outsourcing, divesting and acquiring, the need for the operational executor has never been so intense. It is my belief that we will see the roots of this happening in 2008 – otherwise businesses will struggle to survive and change in these complex times.
"Best Practices" are formed through the experiences of firms innovating and trying out new ways of doing things. So – in reality – that means they’ll tell you where they messed up and give advice on how they got it right (or how they would do something differently second-time around). BPO is no exception… in fact, it’s probably a shining example of how to learn from others’ mistakes 🙂
Here, in my experience, are the most common mistakes companies have (and many still are) making when evaluating BPO:
1. Poor communication to key staff: if a company is going to explore outsourcing its business processes, it needs to evaluate how it is going to gather the information it needs to support its decision-making. If – as in most cases – it is going to bring in a consultant/adviser to develop a business case, then the advisor will need to talk with key staff to access data, conduct interviews etc. The minute staff get wind of the fact consultants are in discussing the "O" issue, panic will spread and all sorts of strange behavior can occur. The rumor mill, staff turnover, politicking… believe me, when staff start worrying about their jobs, all hell can break loose. You must identify which of your key staff is needed to conduct the business case, and be open with them from the get-go about what you are evaluating. You have to explain their jobs are not on the line, if you want their support. And you need their support because resistance from staff can destroy the process.
2. Failing to weed out the dissenters: I cannot tell you have many BPO evaluations have led to "no-go" decisions because some key people simply were not onboard with the process. If a function leader is highly resistant to the BPO, he / she will attempt to derail the process at every possible opportunity – and it will most likely fail. If you try and transition a function where no-one is playing ball, you are in serious trouble from the get-go. Constructive criticism and healthy discussion of the issues are important, but some people will be against change… and will never change. Have open and honest talks with key staff about BPO – many simply will not understand much about it. Having a group workshop – perhaps with an independent expert present – will be very helpful in educating your staff. BPO is not rocket science and you will quickly understand who is onboard and who will neverbe. Then you can make whatever decision is needed to get over that hurdle. You may find your company simply does not have people who will allow this to happen – so why not save everyone’s time and money and call a halt to the proceedings before a load of time and money is wasted?
3. Not involving HR: BPO is all about people, job roles, staff reductions, knowledge transfer, training and change-management… hmmm sounds like something HR should help with to me. Too many companies get excited about the economic benefits about BPO and fail to devote enough time and resources towards dealing with the human capital issues regarding how they can execute. And if HR isn’t onboard, you have another serious problem….
4. Not involving IT: BPO always involves a certain amount of process re-design and standardization, and there are always critical issues with data security and privacy that need addressing. Any changes you need to make, will need to be supported by your existing technology platform and IT staff. This doesn’t mean you need a major IT evaluation from stage 1, but having a firm understanding early on of the IT issues and opportunities a BPO engagement will create, can save many headaches down the road. I am actually seeing many companies explore BPO as a result of all the work they have done rolling out new ERP software. When you need to invest so much money in re-designing process and re-training staff, wouldn’t this pose the ideal time to look at outsourcing some of it?
5. Not using a good advisor: You will likely need an advisor to help facilitate the various stages of the BPO process. Beware of any advisor which fails to tell you any of the points above. You must make sure you use one who is going to do more than merely facilitate a transaction, and can talk from experience on how to avoid making these types of mistakes. Get them to tell you how they can help you work through these issues.
At the end of the day, evaluating BPO can pose several issues for firms if they do not address these issues correctly. Yes, BPO can offer firms cost savings and the opportunity to add rigor and standardization to their processes. However, if you don’t go about evaluating it correctly, you may never get the chance to find out.
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Evaluating BPO… it’s all about avoiding pitfalls early on
I am returning to my analyst roots with AMR Research, where I will be studying Outsourcing and Implementation Services markets for AMR’s enterprise clients.
