Consider the Source

New Mecca of Outsourcing – Middle Eastern Region

By Dinesh Goel, Partner, TPI

As the outsourcing industry globalizes, new regions and countries are joining the bandwagon both as markets of demand for outsourced services as well as to supply talent for servicing the demand.

With the onset of 2009, TPI has targeted a few countries/regions as new geographies for offering sourcing advisory services. The selection criteria, apart from other factors, obviously included the current volume of outsourcing activity and the medium term potential of these markets. The mid-east region is one example.

In discussions with prospects, service providers and market influencers, we find that this is an interesting and encouraging market for multiple reasons.

• Firstly, we find that in places such as Dubai, businesses are going through a severe downturn due to current economic pressures – a phenomenon that is fueling interest and potential demand for outsourced, or even off shored, services.
• Secondly, in general the consulting industry is well established for important initiatives which are complex, transformational, unprecedented or potentially risky. That seems to be the trend with both the public and private sectors.
• Thirdly, there is considerable demand for implementing contemporary IT solutions and infrastructure with large spends as organizations want to become more competitive and prepare for growth in countries such as Saudi Arabia.

An important indicator of the growing interest in outsourcing: Arab Outsourcing Conference is being held for the first time ever this year in Dubai. The organizers are bullish about senior level participation in this conference.

However, outsourcing of services – other than AMC or break fix support contracts – is not an established and mature model for the most part across the region. Hence all interested market participants should expect, as in any other such market, to spend cycles educating the buyers of these services on the benefits and risks involved.

I am very interested in learning from your experiences and thoughts on this region.

 

Insights from the IACCM Americas Conference (Part 1)

By Bill Huber, Director, CPO Services, TPI

The 2009 International Association for Contract and Commercial Management (IACCM) (http://www.iaccm.com/americas/) Americas conference opened yesterday in Orlando.  The conference theme focuses on the tools, techniques and organizational models that result in the responsible management of risk and ensure high-performing business functions.

In the words of IACCM President Tim Cummins, “Today's market conditions have increased the pressure for responsible risk management. In such an environment, it is tempting to respond with increased review and greater emphasis on compliance. Yet this presumes that risks are themselves well understood and that market needs and opportunities will adjust to fit an accepted risk profile.”

During the opening panel, Conoco-Philips Chief Procurement Officer (CPO) Mark McDaniel focused on the fact that risks are analyzed by various constituents: finance and procurement, suppliers and service providers, partners, government entities and others.  However, as Mark pointed out, “The trick is getting alignment of risk profiles and risk strategies between these constituents.” 

An effective risk strategy cannot be built around risk transfer, as such an approach merely shifts the weak link within the chain, and does nothing to mitigate the overall supply and services chain risk. As a better approach, examples were provided of frameworks to integrate multiple risk scenarios into the negotiation process to encourage a joint mitigation approach as standard part of negotiation strategy

Pervasive challenges also remain in adoption of models that link risks on the enterprise level with those at the contract portfolio level and those within individual relationships and specific contracts. 

In the case of Conoco-Philips, they have taken the approach of conducting regular meetings between the procurement organization and finance, internal economists, and legal to facilitate the formation of this common view.  McDaniel also pointed out that he will ask supplier sales representatives whether they know the names of the CPOs within their companies and uses this approach to gauge whether his suppliers have implemented integrated risk strategies within their own organizations.

Those organizations that are effectively managing supply risk have implemented a formalized governance structure to institutionalize an integrated view of risk and enable efficient communication, analysis and decision making at the right organizational level.  TPI’s presentation; “Global Procurement Design – An Agile Engine During Recession” provided an example of the type of framework that companies can implement to provide an integrated view of risk by leveraging both functional competencies and leadership processes.  While technology is clearly helpful, implementing the appropriate communications and decisioning processes can be highly effective in the absence of any special technology.  This also appears to be the consensus of many of the presenters at IACCM.

Globalization of Outsourced Services Industry

By Dinesh Goel, Partner, TPI

The outsourced services industry is morphing into a truly globalized industry – and sooner than later. This acceleration is fueled by the current recessionary conditions in the traditional markets of demand for outsourced services. I believe this is a desirable by-product of the current downturn.

Large service providers – both of multinational and Indian heritage – are challenged to achieve growth and profitability in their current large markets. However, if you carefully review the results of Accenture and IBM vs other (read: Indian heritage) providers, you will find that there is a much higher degree of resilience reflected in their results despite the current gloom and doom environment. What is that attributable to – clearly the good old principle of diversification of their books of business. Not all economies are reeling under the same degree of pressure, and on top of that, the emerging economies are highly under-penetrated (read: immature) in their services outsourcing. All in, it makes perfect sense for providers to look elsewhere when faced with challenges in the more developed markets hence their focus on markets such as India, Brazil, the Middle East, Central Europe, China etc.

Additional flavor of this globalization trend is that it is bringing home the point – one size doesn’t fit all – very emphatically to the providers. Each market has different nuances, and it’s not just a cost arbitrage (off-shoring) play. Markets are at different points of maturity in their trajectory of services outsourcing, not to mention very different economic growth rates, cultural and linguistic factors, regulatory scenario etc., thus requiring differing winning themes in creating healthy outsourcing demand. The value propositions range from variable capacity on demand, investments from providers for supporting high business growth needs, specific service delivery capabilities to increase speed to market or service delivery performance, innovative solutions, commitments to allow predictability of cost and performance over time, releasing management bandwidth to focus on core business, transferring the headache to service provider for delivering competitive services on a contemporary infrastructure, multi tenancy platform based solutions, etc or any combination of the above.

I believe this trend will compel the service providers to enhance the maturity of their service offerings and capabilities, thereby contributing to the overall higher level of industry maturity and globalization. Who said everything related to the current business environment is gloomy?

Outsourcing in Q1: Back to the Future?

Today's blog comes from Peter Allen, Partner and Managing Director, TPI

When our January TPI Index summarized 2008, I wrote that “the stable and nimble ships will ride out the storm and move further up the value chain as a result.” Well, with Q1 in the books, we can report that the storm looks a lot like what we saw around the recession of 2001, and prior to the EMEA-driven surge of 15 months ago. See our TPI Index report at:  http://www.tpi.net/pdf/index/1Q09_TPI_Index_Presentation.pdf

With 141 contracts awarded in Q1, valued at about $19B in Total Contract Value (TCV), and nearly $4B in Annualized Contract Value (ACV) the quarter was down 21% Q/Q and 22% Y/Y. The ACV awarded in the quarter decreased 18% Q/Q and 27% Y/Y.  In fact, among first quarters the TCV was the lowest since 1Q01 and the ACV awarded was the lowest since 1Q03.  This weaker award profile has been apparent since 3Q08.

That’s not a surprise to the followers of the booking reports of the major service providers. There were 48 different service providers winning at least one contract award in Q1.

So where will the market go from here? Looking forward, we expect this quarter’s pace to continue into next quarter. Although outsourcing service providers tell us that their pipelines are robust, recent experience suggests that it is taking longer to convert the pipeline into contract awards. There’s conservatism evident in the decision-making and the scale of the outsourcing deals being brought to market.

I still think that 2009 will be a defining year for outsourcing.  We’ve weathered the Satyam disruption, and the underlying flow of smaller outsourcing contracts appears to be healthy.  What’s missing is the volume of big, transformational deals that excites the industry.  Discounting the impact of mega relationships, we observe a noteworthy sequential increase in ACV for the most recent three-quarter periods. Without mega relationships, the past three quarters represent an all-time high in ACV for any three-quarter period, at $8.5B.

When we looked closely at industry activity, we found that some sectors were adopting outsourcing at a more robust pace than they have in the past, especially during the recent economic downturn. We found four industries that met the criteria on a global basis: Media, Retail, Utilities and Telecom. Together, the four represent about one-third of recently awarded contracts. Each sector accelerated the number of outsourcing contracts it awarded by at least 20% over historical levels during the past 12 months. We discovered that each of the four industry segments presented a unique set of circumstances.  More details are available here: http://www.tpi.net/resources/service_providers/TPIMomentum.html

THE ROLE OF PROCUREMENT IN A RECESSIONARY ECONOMY – HOW TO ATTAIN SAVINGS QUICKLY – Part 2

By Bill Huber, Director, CPO Services, TPI and Shahid Bhatty, Senior Advisor

In our previous post, we commented on the recent IACCM (International Association for Contract and Commercial Management) survey of procurement professionals, across a broad spectrum of industry verticals, on the most pressing issues facing them in the current recessionary environment.  Similar to other business functions, effective procurement leaders will prepare and secure executive support for a business plan annually, and update it as required through the year.
 
However, in order to create and implement a procurement business plan (planned strategic sourcing activities), organizations need resources and tools to gain visibility to spend, change management skills to implement procurement policies and procedures, and their key resources focused on the core activity of generating savings.  Many organizations have attempted to take on these challenges and have had varying degrees of success, as attested by the results of the IACCM survey. As a consequence, some procurement organizations have lost credibility.  In fact, in the IACCM survey, when asked how procurement is viewed by internal stakeholders, only 20 percent viewed procurement as a trusted advisor!

This is not surprising, since it is uncommon to see organizations or individuals perceived to be in a compliance role treated as trusted advisors.  We believe that in procurement, governance needs to be clearly differentiated from compliance. Enterprise governance must rely on an effective compliance approach to provide real time business intelligence to executive decision makers and reinforce the objectives of procurement policies, but the two activities need not be performed by the same set of individuals.  In fact, it is usually more effective to separate the two, since governance requires leadership and influencing skills and compliance requires transactional and auditing skills.

One way to raise the effectiveness of procurement governance is to engage outside service providers to perform many of the activities that will improve compliance.  Based on an organization’s maturity profile, these service providers can be engaged selectively to:

• Perform transactional activities and a few non-core functions/categories so that retained resources can concentrate on the core activities of managing critical relationships and driving savings strategies
• Conduct strategic sourcing activities for certain commodities where they bring the category expertise and necessary tools to achieve rapid time to savings; the scope can range from a few categories to almost all non-unique indirect spend categories
• Provide or support tools and technology that procurement can leverage to offer greater spend visibility
• Provide change management expertise to help procurement implement the new programs and create greater visibility across the stakeholder/user community
• Support governance structures with participation from key executives within the company that outline defined/structured programs to generate savings create operational efficiencies and manage the associated change, thus helping raise the profile of procurement within the company

This approach optimizes the strengths and economic advantages of internal and external resources. In today’s recessionary environment where procurement is under tremendous pressure to achieve greater savings, working with outside service providers may be the quickest and most cost effective way to meet objectives. 

Pricing Pressures: Living and Dying by the Sword

By Peter Allen, Partner & Managing Director, TPI

Many outsourcing industry service providers are talking about the demands they are receiving from their clients for pricing concessions. We know of several cases in which clients are calling for a 5-15 percent reduction in the rates they pay for offshore labor and market analysts are following with reductions in the earnings estimates for several of the industry leaders.

I can’t resist pointing out that this is the downward edge of the labor arbitrage sword.

In these situations, I offer a different recipe to the parties.  Rather than focus on squeezing the price of the commodity – and an hour’s worth of work or a day’s wage – why not look to maximize the value created through the relationship?

I tell the service providers:  if you’re a leader in our industry, then turn the knowledge that you have gained from the work you’ve performed for your client into a different proposition.  Take more risk, in return for the ability to sustain your margins. 

I tell the clients: pushing the providers on their unit prices only creates issues at other places in the value chain.  There are only so many levers available to the providers in a wage-arbitrage relationship.  They will need to take actions in response to your pricing mandates that transfer more risk to you, the client.

At the risk of over-generalizing, these market conditions demand that companies increase the variability of their cost base and focus on total costs rather than unit costs. That means that your outsourcing service providers should be narrowed to a cadre that are able to scale down and up with your business, and do so without exacerbating your risk profile.

Ironically, I think this is best achieved by giving those providers more work – by leveraging the knowledge they’ve gained around your systems and applications to take on more scope, perhaps to include operational responsibilities.

Beware the pressure on unit costs when the bigger prize is improved total costs.

THE ROLE OF PROCUREMENT IN A RECESSIONARY ECONOMY – HOW TO ATTAIN SAVINGS QUICKLY

By Bill Huber, Director, CPO Services, TPI and Shahid Bhatty, Senior Advisor

IACCM (International Association for Contract and Commercial Management) recently commissioned a global study of procurement professionals, across a broad spectrum of industry verticals, on the most pressing issues facing them in the current recessionary environment.  Almost 80 percent of the respondents indicated that the most pressing challenge facing them in 2009 was generating cost savings for their organizations.  The other challenges outlined were risk management (resiliency of supply/service chain, managing of legal terms and risk) followed by an ability to procure goods/services.

The survey respondents were also asked to identify which areas had the greatest impact on their ability to achieve their stated goals. The results are listed below:

 

So, the question is – how can procurement organizations overcome the barriers listed above? What can a procurement organization do to raise its profile within the company and be seen as the primary vehicle in setting up supplier relationships and performance? How can it overcome the lack of resources or the lack of visibility into spend patterns? How can it ensure that procurement policies and procedures are implemented? 

One obvious solution is to grow from within and raise the stature of the procurement organization with the C-suite.  But in order to do this, a procurement organization has to know how to relate to the C-suite. This includes abstract skills such as managing perceptions, framing procurement in the context of the big picture (not single mindedly framing the big picture in the context of procurement), and managing provider relationships judiciously and collaboratively (not autocratically).  It also includes the financial savvy to articulate the business case, risks and operational requirements for real benefits. For example, the procurement group of a major IT services company created a procurement business plan every year outlining:

• Savings to be generated by the group, typically via planned strategic sourcing activities
• Planned investments by the group in order to attain the savings
• Participation level required from internal stakeholders/users to participate in sourcing activities
• Operational services levels that will be established with internal stakeholders/users of the procurement group

The plan, presented to C-suite annually co-signed by business unit leads, ensured that the group received a higher profile within the company and that changes implemented for savings were used to monitor the group’s performance in a similar manner to any other business unit. 

Getting a Handle on Total Absence Management

By Felicia Palmer, Director, HRO Services, TPI

Did you catch the tidbit about a new leave bill proposed on Capitol Hill?

In case it escaped your notice, it essentially builds on the Family Medical Leave Act and offers the same 12-week leave on a “paid” basis. Yes, “paid”. It strikes me that the number of births, adoptions and ill parents to care for is going to skyrocket – once foregone compensation is no longer a factor in an employee’s decision. Note that this legislation was proposed in 2008 and is being re-proposed in the new session of Congress. Technically speaking, it is bill 1723, the “Family Leave Insurance Act of 2009”.

For HR professionals trying to get a handle on absence management, this is just one more dynamic – albeit dramatic – one to consider when grappling with managing absence. The topic of Total Absence Management (TAM) is getting more attention as employers come to realize there is an opportunity to influence the quality and cost of this HR function.

So, some of the key issues facing companies with respect to leave administration include:

• Decentralized management, which results in inconsistent application of policies
• HRIS systems don’t generally provide effective functionality to support comprehensive intake and management of leaves
• Employers without adequate tools to manage absence are likely less restrictive in granting leave, thereby increasing loss of productivity unnecessarily
• These factors, in combination, increase the risk of noncompliance with regulations governing leaves

And the financial aspect is intriguing, if not compelling – per Mercer Consulting, the direct and indirect costs of absence - including overtime, lost productivity, overstaffing and hiring/training of replacements - can exceed 14% of payroll.

So, as an unscientific sample, where is your dial as it relates to TAM? Is it an area of concern where you see a need to tighten and/or improve the process? Is it on the radar at all?

Change on the Horizon for LMS Leader

By Jeff Croyle, Partner, TPI

On April 6, SumTotal Systems received an unsolicited $3.25per-share cash takeover bid from investor Vista Equity Partners. Already the largest shareholder in SumTotal with a 13 percent stake, Vista has begun a hostile takeover for the rest of the firm. Since this cash offer provides a 62 percent premium over the closing share price from last Friday, we expect that Vista will be successful in this acquisition.  In the coming days we’ll take a deeper look at the deal but for now, we’ll focus on how this announcement could impact existing SumTotal clients and potential customers. 

SumTotal is a leading global provider of talent development solutions and its Learning Management System (LMS) is used by hundreds of organizations as well as many major Human Resources Outsourcing (HRO) providers.  Vista is a leading private equity firm focused on investing in software and technology-enabled businesses and this deal fits well with their stated investment philosophy.  Vista recently completed a buyout of the Cyborg business unit from Hewitt Associates and an acquisition of SumTotal will expand their investment in HR technology companies.

In a letter explaining its offer, Vista questioned the value of SumTotal’s migration from the current business model with revenue from license purchases and annual maintenance fees to a new subscription SaaS model.  It appears Vista feels that the management attention and investment needed to build the SaaS infrastructure could damage the larger revenue stream from SumTotal’s existing clients under the licensed model.  If successful in their offer, we would expect Vista to slow down the migration to the SaaS model and focus more on the reliability of the larger recurring revenue stream from the licensed model.

TPI continues to believe that SumTotal has one of the most robust LMS applications available in the market today. If you’re a current installed on-premises SumTotal LMS client, we don’t envision much downside if this takeover goes through. However, if you are a SumTotal SaaS customer, there is far more uncertainty ahead. It would be wise to begin exploring your options well in advance of your renewal so you are well-positioned once Vista’s intentions on the SaaS model become clearer.

If you are currently in the market for a LMS, TPI recommends keeping SumTotal on the list of potential options, particularly if you are interested in a hosted or on-premises solution. If you are intent on a SaaS LMS model, then you will need to exercise caution. SumTotal might not be the right solution for you, but competitors such as Saba might find themselves in a similar situation shortly as they strive to support two different business models as well.

We expect SumTotal to increase communications on the takeover attempt with current and prospective clients to the fullest extent it legally can. The last thing either it or Vista wants is to hurt SumTotal’s pipeline for software licensing and fees.

 

Private Equity Sees a Pony

By Peter Allen, Partner & Managing Director, TPI

I wonder if others have noticed the recent activity levels of private equity investors. They have internalized the idea that innovation emerges from recessions.

There are a fair number of initiatives underway where PE investors have proposed carving out back-office functions from companies in certain industries, combining them with technology enablement investments, creating platform companies to service a broader market.

Of course, what I tend to see are situations in which the carved-out operation continues to provide services to the parent company.  The service agreements take the form of outsourcing contracts, but also have the characteristics of a joint venture or other shared go-to-market activities.

In my discussions with private equity players, they are sensing that the current economic dip is the ideal time to set up new creative businesses that benefit from a large cornerstone client and leverage new technological capabilities.  The result?  We’re likely to see some interesting new industry-specific BPO offerings emerge.

I think we should monitor these occurrences to help gauge how the outsourcing market will look when the return to growth arrives.