November 8th, 2008

The change imperative: it's back-to-basics time

Posted by Phil Fersht @ 8:03 am

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Outsourcing & Politics, Procurement Outsourcing, The Future of Outsourcing

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Even though you are probably more interested in the breed of puppy Barack is going to buy his girls, I have had a chance to ponder the realities of the recession.

In a nutshell, we have reached a crucial juncture in our economic history:  gone are the days we can borrow whatever we want to subsidize ambitious business ideas, buy houses we cannot really afford, or fritter money away on expensive holidays. Walking down Boyslton Street at 7.30pm last night - one of Boston’s prime restaurant areas - every restaurant had vacant tables and was taking walk-ins.  It really hit home to me that things have finally changed.  Years of over-spending have finally caught up with us and we’re now feeling the pinch.  But whether this was to be a rapid banking meltdown, or a long painful slowdown, this had to happen eventually. 

I recall sitting on a panel at at outsourcing conference in New York City back in 2004, and there were protesters outside, demonstrating their frustration about US jobs “moving offshore”.  In response, a sourcing attorney declared, “outsourcing provides a great opportunity for the US - we can offload low-value jobs and focus on higher-value, more innovative work”.  I recall thinking to myself, even then, that that argument didn’t quite add up. 

While it sounds like a nirvana, the reality is we’re competing globally for labor, for making cheaper, better cars, for delivering good quality IT services, for delivering quality finance, HR and supply chain support.  If the US is to truly deliver “higher-value”, the government needs to invest in education programs that develop this talent.  The reality is that the rest of the world caught up.  People in Chennai, Manila, Bucharest, Guatemala City, Guangzhou etc are being trained to compete with American, British, French and German workers, and the Internet and new technology have been a huge enabler to make this happen.  A good friend who works for one of the leading India-based BPOs confided in me recently, ”we should bring over the training leaders from the top Indian outsourcers and have them work with US businesses to get their act together”.

What continues to irk me, is the fact that industry has become so focused on making its quarterly numbers that it has taken its eye off the long-term picture.  We saw this financial meltdown coming - and did nothing (wasn’t the Asian crisis of the ’90s warning enough?).  We are seeing further deterioration of the environment - and still do little.  We saw the US automotive industry grind down to its current predicament - and have done nothing.  And we are seeing the IT and BPO industry rapidly develop across the globe - and have blissfully ignored it to meet these cost-containment targets. 

And how to we respond?  Bailouts.  We’re now talking about bailing out the flagging automotive industry.  How did it come to this?  Years of greed, a deterioration of our work-ethics, and eager developing nations eager to get a taste of what we have.  It’s as if we had a major cardiac arrest and are now hoping we can recover fully from open-heart surgery. 

And this time when we do recover (and we will), we simply have to make sure this never happens again.  Some will argue this is all about natural economics of globalization and a free market - and they are probably right.  However, this time we have truly reached an inflection point. 

It’s about accepting we now operate in a global economy and that we are competing at a level where we need to work as hard, and as smart, as the next nation.  I hope President-Elect Obama can help instill a new work culture in the US.  The US people have spoken that they want change, and they have voted in a President promising change.  The core question now is whether they are really prepared to change.

June 18th, 2008

Outsourcing highlights for June

Posted by Phil Fersht @ 8:00 am

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, Offshoring and Captives, Outsourcing Locations, Procurement Outsourcing, The Future of Outsourcing

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Click on these links for recent happenings in the outsourcing world:

A final word from India: moving beyond “old BPO”

Musings from abroad: Futuristic BPO

The Legacy of Global Sourcing – What is (Y)our Legacy?

NASSCOM dispatch: “We’re now past the era of BPO” (Pramod Bhasin)

How do you feel about Human Resource Professional Organizations?

Musings from abroad… dispatch #3… Indian drivers

BPO: It’s all about taking ownership to get results

IBM/Bristol-Meyers: a shot in the arm for HRO

Finance and Accounting BPO continues its growth path

HRO Redux: 8/10 buyers don’t look back, while the vendors look ahead

BPO partnerships are opportunistic, rarely strategic

Will the EDS acquisition spark a BPO feeding frenzy?

Can this Marriage Be Saved?

Bored? Look no further

HP/EDS redux

Whom do you trust for balanced outsourcing advice?

Is it time to dump the term “outsourcing”?

Are we reaching an inflection point of business globalization?

Quest for an Organic Approach to Offshore Outsourcing

Is the sub-prime lending crisis placing outsourcing engagements on the backburner, or providing an impetus to proceed faster?

Cost-cutting measures for troubled companies in these tough economic times

Blog-culture is ripping up the rule book for the outsourcing services and technology media industry

Taking control of your vendor relationship

Can outsourcing be a catalyst for driving down the cost of healthcare?

May 18th, 2008

Will the EDS acquisition spark a feeding frenzy?

Posted by Phil Fersht @ 12:36 pm

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, The Future of Outsourcing

Tags: HP, EDS

So HP acquired EDS.  Wow.  Biggest services news since HP acquired Compaq a week before 9/11?  In my opinion it is, anyway.

We discussed here in January the issue of consolidation among large outsourcing suppliers, and the general view was one that we would be unlikely to see acquisition among services firms that were similar in nature:

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.

So the HP / EDS merger goes against the grain.  We noted some specific areas where there are some strong complimentary offerings - namely in BPO areas - but the overwhelming motive for the merger is  one of scale and going-big to compete more effectively with IBM.  The increased BPO delivery capability also puts HP on a firmer footing against the other global BPOs, namely Accenture, ACS, Capgemini, Infosys, Wipro and TCS.  The newly-merged entity needs to examine how it builds out its business consulting and transformation expertise further if it wants to challenge the both IBM and Accenture’s BPO market leadership.

This merger-event could change the game considerably, and we could see other BPO suppliers to re-evaluate their acquisition strategies to generate more global scale and increase their client-bases.  With the cost of client acquisition becoming increasingly prohibitive, the valuations of services firms decreasing in these market conditions, and the desire of many enterprises to move into more rapid outsourcing engagements, the leading vendors need additional scale and capacity.   So this begs the question whether we could see some similar-scale outsourcing services mergers in the near-term? 

Please vote on the toolbar to the left whom you think is likely to be acquired over the next year - you can have up to three choices. 

December 20th, 2007

Outsourcing Predictions for 2008... in a nutshell

Posted by Phil Fersht @ 9:09 am

Categories: Business Process Outsourcing, Finance & Accounting Outsourcing, Human Resources Outsourcing, IT Outsourcing / IT Services, Infrastructure Management Outsourcing, Offshoring and Captives, Outsourcing Locations, Procurement Outsourcing, The Future of Outsourcing

Tags: Oracle Corp., SAP, BPO, Business Process Outsourcing (BPO), Phil Fersht, 2008 Outsourcing Predictions, Economic Downturn, FAO, HRO, IT Outsourcing

 Let’s not beat around the bush…here’s what happening next year in the “O” world:

1) Offshoring panic will continue, but will force providers to innovate. Concerns over the appreciating rupee, weakening dollar, wage inflation and employee attrition will continue to have a powerful impact on the global outsourcing industry.  The onus on the leading outsourcing providers is to focus on building constant ongoing efficiency and dynamic working environments for their staff, price their engagements on business services as opposed to offshore staff wages, and expand their delivery centers into other low-cost global locales like Latin America, Philippines and South East Asia to minimize the risk from their offshore delivery models.

2) The standardization of technology platforms within Business Process Outsourcing (BPO) engagements will take center stage.  You have to take your hat off to SAP for recognizing the significant opportunity BPO is providing for the leading ERP vendors.  They invested significantly in implementing programs for the BPO service providers to deliver outsourced services on their platform three years’ ago, recognizing that the future success of BPO lies in standardizing processes across business functions and global regions.  And how else can you do that without having common processes underpinned by standardized technology platforms?  Oracle has also followed suit more recently, as it too has realized it must compete for business with firms looking to moved towards an outsourced end-state.  To put it quite simply, when you are moving processes into the hands of a third party, or offshore, it is much easier to train staff to manage these process for you if they are well documented and are underpinned by software that staff can be quickly trained to use.  It is much easier to find staff who are, for example, familiar with running reports from Oracle financials, or SAP R/3, which significantly lowers the risk of staff attrition, and also allows for outsourcing providers to hire fresh graduates and train them on standard tools and processes, many of which they already gained experience with during college, or in their previous employment.

3) Intense competition among the IT Outsourcing vendors will drive the uptake of Remote Infrastructure Management (RIM).   Up until this year, the growth of RIM - the management of a company’s databases, desktops, servers, networks, security and applications from a remote location - has been timid.  However, with the majority of IT infrastructure now manageable from a remote location, it is making less sense for firms to engage in outsourcing engagements where the vendors supply all the kit.  Of course, vendors can command higher fees if they are also supplying the hardware and applications, but they are also footing the bill for asset depreciation and renewal.  With so many vendors competing for a piece of the ITO pie, RIM provides an aggressive entry point for the ambitious offshore providers, for example Satyam, HCL, Patni and Cognizant, to compete with the traditional incumbent ITO vendors.  These companies will be prepared to bid for much smaller contracts to gain a foothold in the market and build operational scale (remember the 90’s when the US IT services giants unwittingly let Wipro, Infosys and TCS jump into the IT services game…).  What’s more, enterprises can explore RIM solutions on a piecemeal basis and do not have to go for a “big-bang” approach;  outsourcing solutions have often proved more successful where firms can try out one or two processes to begin with.

4) Adoption of Business Process Outsourcing will continue to grow, but at a slower - more cautious pace.  The early wave of Human Resources Outsourcing (HRO) deals was centered on multiple processes across multiple geographies being bundled in a single contract, where the HRO provider delivered multi-lingual services and often multiple technology platforms.  2007 pretty much signaled the end of an era, with the J&J / Convergys HRO engagement being the only end-to-end HRO global mega-deal of note.  However, we did see a plethora of smaller-scope engagements which covered payroll, benefits administration and HR-IT areas.  Expect these to continue in 2008 as providers refine their delivery models and include more offshore services to support HR processes, but the day of the large, global, complex HRO engagement is very much fading.

Finance & Accounting Outsourcing (FAO) has enjoyed unprecedented growth over the last three years as firms take advantage of low-cost offshore services.  However, 2008 will see a slowdown in the 30%+ growth spurt as the leading providers ingest a lot of the recent business they have taken on, and look to build efficiencies in their delivery models that take advantage of better technology, more standardized processes, and incorporate new locations - namely Latin America.  Expect more modest growth in 2008, in the region of 10%.

Procurement Outsourcing (PO) will continue to be adopted at a slow, but steady pace, and will be increasingly bundled onto existing FAO engagements as many of the more experienced adopters seek to add more indirect spend management processes into their outsourced portfoilio of services.  Like HRO, the offshore vendors are learning how to service these processes more effectively, and expect this to be a driver for more adoption next year.

5) An economic downturn will accelerate some outsourcing adoption.  As we discussed here, each outsourcing inflection point has been driven by urgent financial needs of companies to curtail expenditure on general and administrative functions.  The waves of ITO deals in the early ’90s, HRO and ITO deals after 9/11, were primarily driven by the need for buyers to experience a “quick fix” with their costs, combined with ambitious provider pricing designed to have immediate financial benefit to clients.  The more recent wave of FAO deals has been driven by manufacturing, automotive and consumer businesses under serious competitive pressures.  However, the relative economic comfort of recent years has allowed many enterprises to take more time over their sourcing decisions, and adopt a more “start-small” exploratory approach to understand what works for them.  When you look at the anatomy of outsourcing expenditure over the last couple of years, we have seen a surge in smaller contracts that do not make the media radar.  Outsourcing is a complex business, so why should a company enter into huge multiple-process outsourcing engagements, when it can afford to take it’s time a move out select functions on an incremental basis.  However, as we stare hard at the prospect of an economic downturn in 2008, will we see companies step up their urgency to cut costs?  Is the maturing provider landscape ready to take on a new wave of more complex services?  I believe it is…

One of the toughest years to predict?