Consider the Source

New AskTPI and DynamicRFI Services Put the Power of Information in Clients’ Hands

by Debora Card, Partner, TPI; and Kimberly Fey, Director, Sourcing Industry Relations, TPI

A busy February at TPI saw the welcoming of our new sister companies Compass and STA Consulting followed by the announcements of two new services to help clients and service providers make smart, strategically powerful sourcing decisions.

We’re excited to bring to market the new AskTPI information service, which offers clients fact-based answers to all types of sourcing questions with one click of the mouse. This subscription-based inquiry service combines the expertise of TPI advisors with our market-leading research capabilities to offer a wealth of TPI knowledge, including data from the TPI Index, Contract KnowledgeBase, Mark-to-Market® and Prevalence Database®.

AskTPI members can submit questions anytime — from on-the-fly general inquiries to detailed queries requiring our experts to mine TPI databases — or choose direct access to TPI industry and service line experts. Got a sourcing question, or want more information on this new service? Put us to the test — AskTPI today.

We recently announced our second new service, DynamicRFI, in response to the growing need for speed, cost efficiency and accuracy in researching best-fit service providers. On-demand access to the DynamicRFI data repository will help clients make more informed provider qualification decisions without the labor-intensive process of distributing and analyzing their own request-for-information (“RFI”). Service providers benefit, too, by being able to present their company information in real time through a secure and auditable Web portal, which is an equitable and effective way to communicate their capabilities and reduce the costs that are often incurred fulfilling multiple data requests.

We plan to pilot DynamicRFI in the Business Process Services (BPS) market and expand across all our service lines throughout 2011, so watch for further information on this new tool shortly.

For more information about AskTPI, contact Debora Card, Partner. To learn more about DynamicRFI, e-mail Kimberly Fey, Director, Sourcing Industry Relations.

TPI is committed to the success of our clients and to the global sourcing industry as a whole. Whether you’re a client, service provider or industry observer, let us know what you think about AskTPI and DynamicRFI. Also, what other services you could use to enhance your sourcing initiatives?

Why the Price Might be Too Good

by Dr. David Howie, Director, TPI

Winning bidders in auctions often experience buyer’s remorse, a gnawing sense that they have paid too much for something that they don’t need and perhaps no longer want. Something similar can happen in reverse when a client selects the cheapest service provider in a competitive tender for outsourced services. For example, in today’s tough conditions, many clients are anxious to strike deals that shift fixed components of their cost base onto the provider. But this can exert colossal pressures on the provider’s operating model if the services are not fairly priced and consumption falls.

Buyers typically – and often with justification – worry that the deal will come to strongly favour the provider. Here are the TPI Top 5 reasons why the opposite might be the case:

1. The service provider doesn’t understand the requirement. Buyer’s remorse is often accompanied by a feeling of embarrassment where the buyer thinks, “the other bidders must know something I don’t.” Likewise, a suspiciously low bid might indicate the provider misunderstood the scope of services or the level to which they were to be performed. Service levels can be a culprit here, as small changes in requirements can result in step-changes in cost.

2. The provider underestimates the transition and transformation effort. This is a subset of the first category, but worth mentioning separately because it is so common. Many service providers understand their own cost bases well, yet believe their products, systems and processes to be broadly standardized when, in fact, significant effort is required to adapt them to client processes and systems.

3. The provider is “buying the business.” A service provider might offer an attractive price in order to acquire a capability and client base in an attractive business area. This is rarely to both parties’ advantage and often ends badly if the provider’s expansion plans don’t result in the expected revenues. Similarly, changes in the provider’s management or business direction (or both) will lead to suboptimal behaviours that are typically focused on the provider’s profit and loss rather than service to the client.

4. The provider relies on leveraging the transferred assets. Perhaps the provider wants to subsidize the cost of, say, a data centre in anticipation of winning additional business that can be serviced from the same location. As above, this can benefit both parties, particularly if both recognise it as a fundamental part of the solution. The risk in this approach, however, can be costly if the new business doesn’t materialise or is delayed, or it if can only be won if the pricing assumes yet more growth.

5. Corporate activity. A client was able to extract a low bid from a service provider who had already announced to the market a strategy dependent on winning the business. As with any price reduction that is unrelated to a corresponding reduction in cost, clients should be wary of such an approach, as the provider’s rationale will soon be forgotten once the margins are being reported.

The lowest bid can easily turn out to be the most expensive. At best, the relationship will be strained and the service provider will try to recover costs through a self-serving reading of the contractual obligations; at worst the client might find itself depending on a bankrupt provider.

TPI’s seasoned strategy and assessment experts can help you achieve your global sourcing goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. E-mail Dr. David Howie, Director, TPI, or phone him at +44 (0) 7789 771665 to learn more.

Considerations for Emerging Technologies in Your Sourcing Strategy

by Fred Croxton, Director, TPI

There are a number of commonly accepted models for the adoption of emerging technologies and the most effective manner for the organization to consider, test and deploy them. Generally there is a “trigger event” followed by building expectations, then disappointment and eventually a period of more pragmatic expectations and realizable productivity. Here are the TPI Top 5 considerations for how the technology adoption cycle may impact your sourcing strategy:

1. Rationalize technology adoption with your service provider integration strategy. More enterprises these days are employing smaller, more segmented sourcing transactions (along “tower,” region or business units), and hence managing three, four or more outsourcing relationships versus one large one. While there are clear advantages to such a strategy, there are also inherent governance challenges. Make sure you consider expectations for your sourcing partner(s) for their role in adopting and deploying new technologies and have contractual mechanisms in place to enforce these expectations.

2. Leverage SOA investments to rapidly integrate new services. Although service-oriented architecture (SOA) is one example of technologies featured in most views of emerging technologies, it is well along the “slope of enlightenment” and is already embedded inside many organizations. For those with a reasonably developed SOA strategy in place, you would do well to consider how to leverage this architecture to more quickly plug in selected technologies and how to deploy them in the form of services for a quick return. This is, after all, one of the reasons for embarking on the SOA journey.

3. Take a long-term view toward innovation. Clients frequently have inflated expectations of provider-driven innovation as they enter a new sourcing relationship. After all, “they do this all the time, so they should be the experts.” As a practical matter, innovation is difficult, and service providers may be much more consumed with driving down delivery costs than identifying opportunities for real innovation. Look at your governance mechanisms and how you will manage expectations for your sourcing partners to identify, test and introduce new technologies into your organization. Be realistic, and don’t give away the “family jewels” as far as business-driven opportunities for innovation. Consider an “innovation steering committee” comprised of a cross-section of business/user representatives that emphasizes “influential and visionary” contributors as much or more than seniority.

4. Don’t forget “end of life” strategies. Nearly as important as your adoption strategy of emerging technologies is having a clear strategy on retiring “end of life” technologies. For example, cathode ray tube (CRT) monitors are expected to reach end of life within a year or two. Such an installed base may represent a significant investment in physical retirement and disposal of the asset (especially considering today’s “green” movement) as well as replacement cost. Make sure you have practical alternatives baked into your sourcing strategy for end of life strategies. Schedule timely reviews with suppliers of technology assets and build deployment and retirement plans into your agreements.

5. Consider the impact of “transformational” technologies on your sourcing relationships. Emerging technologies may be viewed as “transformational” or “modestly impactful.” “Transformation” itself could arguably be considered a form of “hype,” but in the best of sourcing relationships it can have a real and measurable impact on resource consumption and spending (e.g., server consolidation). Be sure your sourcing relationships have appropriate safeguards built in to protect against punitive revenue commitments.

TPI’s experts can help you achieve an objective assessment of your strategy for managing technology change. We provide objective, risk-balanced, and forward-oriented strategies for sourcing relationships. Contact Fred Croxton, Director, TPI.

October Surprise: Deal Surge, and India Goes Large

The past year has brought a striking slowdown in new outsourcing contracts, but October appeared to break the trend. I offer some commentary on that month here, doing so in the context of the entire year.

Providers got over $15 billion of total contract value (TCV) in October, the highest TCV tally for a single month in the past two years and almost twice the TCV as the next highest month. Three mega deals accounted for almost $8 billion of the TCV, and one -- IBM and AT&T – accounted for $5 billion. Business-process deals figured prominently in the month.

November doesn’t look nearly as good, but more about that month in a moment.

India-based service providers inked several mega relationships in October, in keeping with a recent trend: While many consider 2005’s ABN Amro/TCS/Infosys deal as the high-water mark for Indian providers, since then we’ve seen these providers expand their client list to other large customers. And, in some cases they have done so without employing the relatively slower “penetrate and radiate” method that involves getting a foot in the door then selling the client more services over time. Rather, the India-based providers are showing their ability to win some truly big deals.

While the Indian providers may still be buying market shares (think deals like TCS-Pearl, Genpact-Citigroup and Philips-Infosys) or winning business with a long-time captive client (BT-Tech Mahindra), they also are starting to compete and sometimes win on very large deals that don’t involve clients they’re already working with.

The next trend to surface may find smaller India-based service providers (EXLService, FirstSource, WNS, HCL) starting to look outside their captive client base for a big deal.

Now the cautionary kicker: We have not seen many deals in November, and if this month and December revert to the pattern of the rest of 2007, October could prove to be a blip.

Look for lots more detail when TPI hosts its next Index call in January.

The F&A Paradox

A number of Finance and Accounting (F&A) functions are similar from company to company, as are the goals: Most companies want to tackle costs, improve performance, efficiently spend money and manage revenue cycles, in addition to undertaking the required accounting and reporting.

The relatively standard processes imply that technology can lend a big hand as long as the people who perform those F&A functions have a fair degree of functional expertise and conform to common processes.  That said, tax complexities, revenue-recognition policies, industry specific requirements among other factors present challenges, but these issues are almost always under the watchful eye of an executive who is highly motivated to achieve the desired accuracy and compliance.

Now contrast this situation with what you see in most Human Resources departments of organizations where it’s not uncommon to find many nuances relating to the geography, business-unit operating models, and various employee programs. One might think that achieving common ways of doing things in HR would be more problematic.

The difference between the two functions raises the question: Why is it that the predominant sourcing model for F&A is labor arbitrage? We see much more standardization and “managed services” orientation in HR outsourcing than we do for F&A functions. Whether companies are using a captive operation or outsourcing, F&A has become the poster child for effort-based sourcing.

So far, the promise of a vibrant market for F&A outsourcing is unfulfilled. The contracts are labor-oriented and the investments made by many of the leading service providers to standardize offerings aren’t being employed. Which leads one to ask: What will it take to change this? Why aren’t CFOs more receptive to a managed service around accounts payable? Might this be a situation whereby service providers are not providing comprehensive solutions to F&A executives? Perhaps it a case where finance managers cannot relate to “managed services” offerings? Or maybe it’s a relatively higher degree of integration among and between finance processes that is making standardization so elusive?

Whatever the cause, today’s outsourcing landscape offers a much higher degree of maturity for HR services than F&A services. Is the lure of cheap labor so compelling that the promise of a managed service for F&A is just not worth the effort?

Reaching Out to Touch

If outsourcing is supposed to capture the benefits of global reach in an increasingly connected world, how come so many companies that are using outsourcing services still insist on micromanaging precisely where their work is being performed?

Set aside for the moment those companies that have legitimate concerns about regulatory requirements preventing them from doing work in certain locales. These clients need to review and approve where the job is getting done.

For the vast majority, however, is it really relevant whether their invoices are scanned in Guatemala or China? Shouldn’t the focus be on the quality of the output?

Service providers are becoming more anxious about clients demanding ever more detail on locations used for processing their work. Sure, the Mattel lead-paint ramifications are alarming, but this blog and our discussion is mostly about services, not product manufacturing.

Balancing geopolitical risks is a worthy goal, but it can be achieved by agreeing on a list of processing locations rather than insisting on detailed review and approval of all work flows. In other words: Don’t want work done on your company’s behalf in Myanmar? Say so in an upfront agreement.

The benefits of outsourcing come through giving the industry’s service providers the ability to achieve economies of scale, scope and quality. That means that they must balance supply and demand, flowing work to the most appropriate resource with a fair degree of flexibility.

Focusing obsessively on where the work is getting done is a great example of managing the effort rather than managing the outcome. The benefits of resiliency and cost efficiency come through a truly global delivery model.

Turning the Worm

By all measures, the pace of new outsourcing contract awards has slowed in 2007. The third quarter reports are out any day now.

The paradox here is the continued strength in the flow of work to India-led providers. You can see that from the providers’ earnings reports. My firm thinks clients are opting for effort-based contracts – paying per worker per hour -- rather than traditional outsourcing relationships that specify the scope and quality of services.

Watch the news in the coming weeks, and I’ll bet you start to see a renewed emphasis on productivity-based and outcome-oriented contracting.  The provider community has the expertise and the tools to deliver great value to clients through real outsourcing, but they must surrender the old ways of selling effort. They have to paint houses like pros.

That said, potential purchasers of sourcing will likely be cynical about such quick cycles in business models. Just as they were getting comfortable contracting for people in low-cost destinations, the business model will change to reflect the rising tide of labor costs influenced by currency exchange rates, taxation policies and rising wages. The prospect of higher labor costs for effort-based contracting won’t be very appealing.

I expect outsourcing demand to suffer from these shifts for a while, at least until we converge on a sustainable business model that blends cost, capacity, and capability. That’s the model that will create long-term value.

 

Crowdsourcing

Mix equal parts outsourcing, Web and open innovation, garnish with “The Wisdom of Crowds” and you get “Crowdsourcing.” Just don’t expect to see it in the upper echelons of Corporate America just yet.

Author Jeff Howe (http://www.wired.com/wired/archive/14.06/crowds.html) characterizes this phenom as distributed labor networks using the Internet to exploit the spare processing power of millions of human brains, much the same way that dispersed computing projects harness the processing might of millions of chips.

MySpace, eBay, Wikipedia, and the vast universe of Linux developers further illustrate the power of crowds properly organized. Howe’s article makes the point that these Web initiatives – previously taboo with old-line businesses – now realize that technological advances are allowing them to source to anyone connected to the proverbial network.

At the same time, such advances are dissolving the cost barriers that once separated amateurs from professionals. Now all the diverse folks who make up the crowd can connect with companies in everything from pharmaceuticals to television. Hobbyists, part-timers, and dabblers have a new source of income, and businesses have a new, cheaper, and often more inventive source of solutions.

I get asked whether this Web 2.0 model is taking root at larger companies with serious business processes. Answer: Not yet, anyway.

“The Wisdom of Crowds,” a deservedly popular collection of work by New Yorker writer James Surowiecki explains that for the crowd to be wise, four conditions must exist: diversity of opinion, independence of members from one another, a specific kind of decentralization, and a good method for aggregating opinions.

Similarly, Howe highlights what he sees as the “Five Rules of the New Labor Pool”: The crowd is dispersed. It has a short attention span. It is full of specialists. The crowd produces mostly crap – but also finds the best stuff.

I believe most serious corporate executives aren’t yet ready to let the crowd sort the good from the crap. But I still think it’s worth watching the crowd.

Mad Deskillings

Hip-hop performers are sometimes said to have “mad skills,” and this is a good thing. I’m hearing about what might be called “mad deskilling.”

It is not a good thing.

More often in global outsourcing these days the rather artless (literally) words deskill and deskilling are being bandied about. The dictionary defines deskilling as “the elimination of the need for skilled labor in an industry, especially by the introduction of high technology.” It also refers to the downgrade of a job or occupation from a skilled to a semiskilled or unskilled position.

You can guess how I feel about this. I neither like nor agree with the assertion that jobs can be dumbed down to the point that they can be performed in a piecemeal manner. Performed more efficiently? Sure. But done without any design, master plan or measurement? Absolutely not.

Collaborative work is work done as part of a group. And that means there’s a shared goal or at least a common purpose. As with almost any group activity there is some element of social interaction to the work in addition to the task fulfillment. Trust comes into it.

Again, there are absolutely some work processes that are candidates for simplification and streamlining – to the point that they can be performed by lesser-skilled people. Automation helps.

But if the outsourcing and offshoring industry insists on deskilling work processes as a core strategy for making work portable, how will the aggregate value of process transformation ever come about? And where’s the much ballyhooed value “beyond the scope of work” going to come from in such an environment?

The No. 1 concern we hear today from clients is employee turnover. They view the churn at their service providers as a significant business risk. They’re right. And emphasizing deskilling is part of what’s creating this risk.I believe the workers who make up the global sourcing industry are looking for challenges, not rote tasks. They want to be part of an industry that adds value, not just acts as worker bees optimizing a task to the point of marginal cost.

Beware of the mad deskillings!

So Your Job is in the Outsourcing Cross Hairs

No question: If your job is “in scope” for an outsourcing endeavor, you will experience change, which can be disconcerting to say the least.

Knowing that knowledge often brings comfort, I thought it might be useful to share some of the tactics that companies use when trying to decide how/if to transfer employees to an outside service provider.

They frequently ask these questions or ones much like them:

• How would you describe the culture and demography of your organization? What's your staff turnover rate?

• How will you handle the sensitivities and concerns of transitioned staff?

• How do you typically integrate and develop new employees?

• Describe the process you use to harmonize conditions between a client's staff and your own in line with "generally comparable (contractual) terms and conditions."

Transparency and providing people with as much lead-time as possible are key principles of well-designed sourcing programs, and the good news is that most companies genuinely are committed to ensuring consistent and fair treatment of employees in the event of outsourcing.

At the same time, most of the industry’s service providers are looking to add talent to their ranks.