We
hear all the time about relationship and performance issues between the client
and the service provider. That’s because service management and governance
practices are relatively immature. At least that’s what our findings point to.
TPI
conducted market research through its Governance Excellence Program and found out
the following:
Sixtypercent of the teams deployed to manage
outsourced contracts had no prior outsourcing experience
Forty percent of
the respondents said they provided no initial training to the team staffed
for managing the outsourced contracts
Only 20 percent
of the respondents felt that sufficient training was provided to the
outsourcing management team.
While
outsourced relationships have certainly grown in size and volume over the
years, we find that there’s a significant lag in maturity of managing relationships
and contracts to results. There’s also considerable loss of anticipated value
from such contracts simply on account of the fact that no one is managing the
contract to performance and expectations tightly.
Institutionalization
of strong service management and governance disciplines and processes appears
to be a “past due” requirement. The pain can only increase as time elapses
given the increasing momentum and growth of the outsourcing industry. To fill
the void, we, at TPI, have started offering ongoing “Governance Services” to
our clients – a service that implements the discipline leveraging the
intellectual property of the firm and executes the processes on behalf of the
clients using an automated tool.
The
onus is on individual industry participants to take action. Act fast and
prevent further loss of value.
The need
for non-linear revenue models finally dawned on service providers. Having
reached a significant size and scale, they need to be able to offer solutions
or services to customers which are not just based on billing the time of their
employees. This new paradigm is known as “non-linear revenue,” where revenue
growth is independent of the growth of the billable employee base.
So why such
a shift at this point in time? I guess the reasons are twofold: First, it is
getting harder to find scores of employees in the talent crunch. Secondly, the long-term
sustainability of a pure linear revenue stream is questionable.
Under
business pressures, companies outsourcing are expecting more for spending less.
Interestingly, the wave is driven by evolving customer expectations for
bundled, platform-based solution offerings over just white collar workers. That
is why service providers are aggressively in the process of developing the
depth of expertise in various industry segments and domains, enabling
non-linear revenue generating solution offering.
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
With this week’s release
of the Global TPI Index for third quarter 2008, I’ve been presented with a
number of hard-hitting questions by the media, service providers and the global
equity research community. Instead of addressing these one-on-one, I wanted to
share my answers with all readers. If you have added questions, feel free to
post them here.
It’s clear from the
questions that the current economic meltdown is driving concern for the future
of the outsourcing industry. The objective of my answers is to bridge the gaps
between market expectations that precipitate from the current economic crisis,
as well as future trends in the outsourcing industry. Several forces are at
play, ranging from budget cutting, debt limitations, pressure on profit
margins, dramatic restructuring of corporations comprising the financial
services industry, and government involvement. There’s a lot of speculation and
even more questions, which is understandable given the current volatility and
uncertainty in the global economy.
Let me know if you
agree or see things differently. I’m interested in hearing your point of view.
Q: Are
you seeing budgets getting cut in 2008 compared to previous years?
A:
Budgets for “back office” functions in virtually all companies in all
industries are being scrutinized and, in many cases, reduced. We hear of some
rather extreme challenges being laid on CIOs, CHROs, and business executives. There’s a focus on entering the new calendar
year with an adjusted run rate for operational expenses – run rates that better
align with the demand profile for goods and services for those companies. This
is prudent management in the face of uncertain economic circumstances. In
recessionary markets, when consumption decreases, it is natural to reduce
capacity for servicing that demand. The percentage of impact varies by industry
and function. If a company isn’t hiring new employees to service growth, then
the HR department isn’t going to get investment in new capacity. It’s as simple
as that. What this means to the outsourcing industry is two things.Firstly, existing contracts will be called
upon to dial-back aspects of service to reduce the total costs to the Client.As I said on the TPI Index call, a
well-designed outsourcing contract has many levers available to achieve
variability in costs.The second effect
is a delay in starting new projects, even those that have positive implied
returns.
Q: As
times get tougher going into 2009, shouldn't we see the growth rate towards
outsourcing accelerate?
A:
Yes, and growth will come in two forms. Existing outsourcing arrangements may
see scope expansion as clients conclude that the favorable economics of those
relationships allow for near-term benefits by doing more work via cost-effective
service providers. This is not the inverse of my prior point about Clients making
selective use of available cost-control levers.Rather, this growth will come through added scope to those providers who
have weathered the recessionary storm with their Clients.Secondly, we’ll likely see an upturn through
divested operations and associated services agreements. I think this will be a
significant characteristic of the early-2009 marketplace. Those are the
near-term upsides via outsourcing. Broader, transformational-oriented
outsourcing may take a while to return to flight.
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
In today’s 3Q08 TPI
Index
we reported that the third quarter delivered significant softness in commercial
outsourcing contract awards – not entirely unusual for third quarter results,
especially when those third quarters follow quarters of unusual strength, as
did 3Q08. Yet, in the face of the unrest in the global financial markets, this
report is significant for what it might foretell for the coming quarters. (To
download the complete TPI Index findings, visit: http://www.tpi.net/knowledgecenter/tpiindex/)
The softness in
outsourcing contract awards comes at a time when the instability of the world’s
financial markets is top-of-mind for most of us. And, looking at the record for
the Financial Services industry, which has been the preeminent buyer of
outsourced services for as long as records have been kept, we see that
uncertainty has continued to impact the deal flow.
Softness in the
global Financial Services industry’s use of outsourcing, which started late
last year, was a definite contributor to the third quarter’s soft market
activity. And we have yet to see the full impact. That’s because the TPI Index
metrics for Q3 and 2008 YTD, represent the results of outsourcing initiatives
begun in more “stable” times. The uncertainty and unrest of today’s global
economic climate has yet to show up in our measurements of the outsourcing segment
focused on the Financial Services industry. Those tallies are ahead of us.
So, in such a
climate, what’s in store for the big picture of outsourcing?
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI
The
acquisition by TCS of Citigroup’s captive BPO operations feels to us like the
latest in what’s becoming a series of industry restructurings. It also
sets the tone for what’s likely to become the agenda in 2009 for the financial services
industry and certain outsourcing service providers.
Following on from the Aviva-WNS transaction, although that deal occurred
moderately in advance of the current meltdown in the global financial services
markets, the TCS-Citi transaction represents a strategy to fundamentally
restructure and realign certain assets. These assets maintain essential
operations for the likely survivors of the turmoil in today’s market. Their
realignments will touch many balance sheets, especially in the case of Citi, as
it reinvents itself through acquisitions and adjustments to its market
offerings, and TCS which has a strong cash position and relatively little debt.
The service provider universe will certainly grow through creative combinations
such as defined in this deal – an asset purchase with a companion, long-term,
services agreement. This transaction comprises a 9.5 year commitment by
Citi to buy services from TCS, which represents a $2.5 billion “mega-deal.”
So, Citi is making a significant commitment to the ongoing viability of the
offshore FSO market as well as a restructuring of its cost profile.
Today's blog comes
from Dinesh Goel, Director, TPI.
Foreign exchange (forex) fluctuation risk
takes high priority during contract negotiations. It changes the price service
providers charge and the price outsourcers pay, which can be significant and
detrimental to the bottom line. So businesses need to make sure the safety nets
are in place before jumping into a sourcing arrangement. Otherwise, merciless
speculators may determine the fate of the relationship.
Forex fluctuations can be significant, and
may lead to either currency appreciation or depreciation. If the supply-country
currency appreciates against the billing currency of the demand country,
service provider revenues and margins decrease, as they’re reported in terms of
the supply-country currency. On the other hand, if the currency depreciates,
service provider revenues and margins increase.
Today's blog comes from Peter Allen,
Partner and Managing Director, TPI.
I spent last week in India, meeting with leaders of several prominent India-based IT/BPO services companies. I also met with a few reporters. You can only imagine the number of times the same question was asked: What’s the likely impact of the U.S. financial services crisis on the IT/BPO ecosystem in India?
Financial services firms have been among the most prolific employers of the India technical populace. While their loss to bankruptcies and acquisition over the recent weeks doesn’t directly translate into job impact in India, the fact of the matter is that pain will be shared across the globe.
Without any specific attribution, I will tell you that there is a decidedly alarmed tone among the corporate leadership in India. Forget about particular client relationships, such as amounts owed by Lehman Brothers to its service providers. Rather, the concern is as much social as it is corporate.
