Consider the Source

Lessons Learned from the 2011 TPI Momentum Geography Report

By Paul Reynolds, Chief Research Officer, TPI Momentum

Every region of the world experienced significant outsourcing developments in 2011. The TPI Momentum 2011 Market Trends & Insights Geography Report found that global developments are increasingly connected. The natural and nuclear disasters in Japan, political upheaval from the Arab Spring in the Middle East and Africa and the continuing debt drama throughout the euro zone all impacted outsourcing decision-making far beyond those regions.

Here are the Top 5 highlights from the report:

1. The continental divide is growing. In 2010, for the first time, companies in Europe spent more on outsourcing than those in North America. That trend continued in 2011, as spending in the EMEA region rose four percent, led by stronger growth in Europe, while outsourcing spending in North America fell six percent and is now at the lowest level since 2006. Spending in the Asia-Pacific region reached a record high following nine percent growth.

2.  Currents are changing for offshoring. Long-held attitudes and trends toward offshoring are changing, in both directions. During 2011 clients facing contract negotiations around the world generally were more open to offshoring. However, clients in three of the largest markets – the U.S., U.K. and Canada – bucked this trend. Several high-profile U.S. and U.K. companies repatriated work that had previously been offshored. U.S. and Canadian companies exhibited growing preferences to keep outsourced work within their countries, often because of sensitivity about data security or offshoring in general.

3. The fast-changing world slows down decision making. TPI has observed that the current events that dominated world news in 2011 are also causing companies to slow their outsourcing decisions. Companies throughout Europe, and those around the world who do business there, are moving cautiously while the Greek debt crisis, the future of the euro and other macroeconomic issues play out. The natural and nuclear disasters in Japan had a major effect on business operations and planning. The Middle East and North Africa had been gaining ground as an outsourcing service destination, but, following the Arab Spring, businesses are waiting to make major commitments to the region until the political and business environments stabilize. Outsourcing decision making also slowed in the large banking and diversified financials industries because executives were highly focused on global financial conditions and preparing for the new capital requirements in the Basel III agreement that will take effect around the world.

4.  Clients want more without paying more. Clients around the world are renegotiating existing contracts, converting sole-source engagements into multisource arrangements and asking service providers for more services and lower rates. While this type of activity is typically associated with experienced outsourcing clients, it is occurring in mature and emerging outsourcing markets alike.

 5.  Change rearranges the top. The United States surpassed India in 2011 as the top-ranked country on the TPI Momentum Outsourcing Viability Index (OVI).^™ Though costs and labor competition are rising in India, it remains a leading outsourcing destination, ranking second worldwide on this measure. Rising costs also caused the Philippines to slide in the OVI, from fourth to seventh. Other changes in the top 10 include Canada rising two positions to fifth and Egypt falling from 10 to 16. The OVI ranks 51 countries on six dimensions that measure the country’s suitability to support outsourcing.

The biggest takeaway from the TPI Momentum 2011 Market Trends & Insights Geography Report is that outsourcing feels the impact of political and economic developments beyond national borders. The complete report includes regional overviews plus individual chapters on 21 countries that discuss market developments and drivers in detail. To learn more about it click here or contact Paul Reynolds, Chief Research Officer, TPI Momentum, at +1 508 625 2194.

Service Quality: The Devil’s in the (Governance) Details

by Cynthia Batty,  Global Competency Lead, Governance Services Advisory, TPI

A recent survey of IT executives concludes that poor-quality service remains the biggest risk of IT outsourcing, even though, according to respondents, SLAs are becoming increasingly tighter. In analyzing the results of the survey, conducted by IDG, CIO magazine reports that, “Lax internal governance and an overreliance on contractual obligations may be to blame.”

We couldn’t agree more.   Clients (and their business stakeholders) frequently complain about services – even when service levels are being met and overall services appear to be delivered according to the contract.

Over the past few years, TPI has seen client organizations do a better job defining their objectives, writing contractual terms, and negotiating deals. But this focus on the front end of the process hasn’t been matched by a corresponding commitment to the day-to-day workings of the relationship. As a client quoted in the CIO article put it, “If you’re buying a box or replacing a drive, SLAs work great. But when you’re outsourcing services, it’s still all about people.”

Moreover, management teams frequently lack the experience needed to implement the structured process management mechanisms that a sourcing relationship requires.

Successful outsourcing is characterized by a high-level framework as well as specific mechanisms that client and service provider teams use to manage day-to-day operations and interactions, and to identify and address the people issues that inevitably arise. Similarly, executives on both sides must be committed and prepared to engage in  ongoing governance, as well as resolve particular issues that arise.   The contract alone will not substitute for an active, structured management process.

Since organizations seem to muddle through when services are in-house, the culture shock is all the greater when it turns out that the expected solution is actually a new problem that requires genuine work and effort to resolve.

Not long ago, we informally surveyed our advisor community to ask which party was the source of most problems after an outsourcing contract was signed. In cases where services were generally being delivered according to the contract terms, over half the TPI advisors placed the blame squarely on the client side, while a quarter said both the client and provider were equally responsible. So, in our experience, less than 20% of problems are caused only by the provider.

We’ve seen situations where the client has been able to use various techniques to reset the relationship, resulting in significantly improved services and a stronger relationship. We’ve even seen a client and provider negotiate improved service level targets and achieve them through a collaborative governance process that emotionally rewarded both sides – and didn’t cost any more.

People and process, in a framework that both parties value and subscribe to, measure, and monitor, is the only way to achieve value from the services for which you have contracted. Getting there requires tackling the often unexpected work of outsourcing – the “devil in the Governance details.”

What has your experience been? Is IDG right? Is service your biggest complaint? If so, should you look at your approach to governance?

How to Keep Visa Restrictions from Delaying Your Transition to Global Service Delivery

By Ian Watt, Director, TPI, and Kathy Welch, Senior Advisor, TPI

Implementing a global service delivery model typically requires rapid mobilization of resources. Historically, global service providers have relied on a variety of visas to meet clients’ demand for skills and aggressive deployment schedules. However, this approach is becoming increasingly untenable.

Organizations in the United States planning significant change initiatives could see their projects delayed by staffing shortages due to current restrictions on visas for foreign workers. A contingency strategy is essential, therefore, to adjust for delays in bringing service provider resources on board.

Here are the TPI Top 5 key elements of a prudent transition contingency plan:

1. Plan for delays to impact knowledge acquisition and knowledge transfer processes. The time between assignment of offshore resources to arrival in the U.S. that has been traditionally 2 to 4 weeks is now 4 to 6 weeks. What is worse, you have to expect that some resources will be denied visas, requiring added flexibility in knowledge transition planning.
   
   
2. Develop resource acquisition fallback options. Resource mobilization delays are inevitable, so adjust your internal staffing plans accordingly. During a transition, some subject matter experts (SMEs) will leave the company absent financial incentives to stay on and help. A lag in service provider transition resources can mean higher “stay” bonuses and SME costs. These all directly affect your bottom line, diminishing the value of the transaction.
   
   
3. Find better ways to leverage technology and connectivity. Collaboration software and document sharing have a cohesive effect on virtual teams. Focus on integrating collaboration tools immediately. Setting up the appropriate connections is never as easy or as quick as it appears to be.
   
   
4. Concentrate more transition work offshore. In some situations, the typical transition model can be inverted so that U.S.-based resources move offshore to work side-by-side with offshore team members at the service provider’s site. This can keep transition on track while improving cross-communication. Moreover, you can gain insight into how things actually work offshore, which will ultimately benefit the relationship.
   
   
5. Jointly develop a risk mitigation plan. The current challenges are not isolated to India-heritage firms. U.S.- and European-heritage service providers have also experienced problems with visa processing. Facilitate dialogue between your teams and develop mitigation plans for the entire service portfolio. Given the tight schedules of transitions, these plans should be reviewed and adjusted on a weekly basis.

For more information on transition services, including the possible impact of visa and immigration issues on your sourcing strategy, contact Ian Watt, Director, TPI, at +1 847 452 5897 or ian.watt@tpi.net.

Corporate Social Responsibility: A Global Obligation

by Jodie Janacek, IAOP CSR Subcommittee Member, TPI

Last week TPI announced that we’ve accepted a seat on the Corporate Social Responsibility (CSR) subcommittee of the International Association of Outsourcing Professionals (IAOP). If you’re not yet a member or familiar with the IAOP, it is the global, standard-setting organization and advocate for the outsourcing profession.

The CSR subcommittee is one of the most active bodies within the IAOP, leading discussion among members on how the outsourcing community can identify and address critical social, economic, and environmental issues on a global basis.

According to Jagdish Dalal, IAOP’s managing director of thought leadership, “CSR has become a more important standard for measuring corporate ethics and social consciousness. This is not just an American phenomenon; this standard is being discussed and adopted globally. For example, last December, the largest human resource development conference held in India focused exclusively on this topic, and top company executives presented their views and their companies’ commitments to CSR.”

As a corporate member of IAOP, we’re proud to be in the company of the world’s leading global enterprises, service providers, academic thought leaders and advisory and law firms, all pulling together to make the global outsourcing marketplace a model of excellence for other high-growth industries. We hope you’ll take a minute to read more about the current and ongoing activities of the CSR subcommittee and learn how TPI plans to contribute to the betterment of the outsourcing community through our participation. We also encourage you to complete the IAOP CSR survey to share your thoughts about the role of CSR in outsourcing, a topic that touches each of us now and is steadily growing in importance. Survey findings will be shared at the 2012 IAOP Outsourcing World Summit, February 20-22.

What corporate efforts do you think should be at the top of the corporate agenda to raise the bar on social responsibility in outsourcing? Tell us what you think in the comments section below.
 

Will the Current Macro-Economic Environment be a Drag to the Sourcing Industry?

By Dinesh Goel, Partner, TPI India

The stability of the IT services sector and the growth of the service providers has come under debate again due to several developments in the macro economic environment. The unemployment rate in the U.S. is more than nine percent, Standard & Poors lowered the sovereign credit rating of the U.S. on August 5 and in Europe, several European economies are in need of bailouts by stronger economies or measures to cut budgets and curb spending for improving their fiscal health.

These events may potentially lead to a slowdown in decision making and postponement of IT projects by companies. The argument is that slower GDP growth in the U.S. and several other economies will cause negative business sentiment, lower consumer confidence and cause a decline in state investments and consumer spending, which impacts businesses’ growth outlook and IT budgets. The largest impact for India heritage providers is feared from the U.S. since it contributes about 60 percent of annual revenues.

In my view, the global ITO and BPO services industry may not be impacted as severely as the recent recession (2008-2009) as companies will react in different ways to the situation. The reaction to the uncertainty in the global economy will probably result in:

1. Companies seeking to further tighten their belts with assistance from service providers to achieve these goals. Low cost global service delivery locations enable service providers to deliver a higher level of services to meet immediate, essential BPO and ITO needs potentially at a higher efficiency and productivity level.
2. Higher level of focus on cost and savings by public sectors across the U.S. and Europe – potential for outsourcing growth for service providers to partner with governments.
3. Accelerated adoption of cloud computing delivery models – among mid-sized businesses with a broader scope of services and large businesses with point requirements.
4. The transformational projects and allocated spending to complete these projects that can be deferred will be deferred, but hopefully will not disappear entirely.

The impact of companies choosing to defer budgets will likely mean slowing growth for the providers in the next few quarters, and it will be increasingly important for Indian-heritage providers. According to the TPI Index – which measures commercial outsourcing contracts valued at US$25 million or more – Indian-heritage providers have won a larger share of the sourcing contracts, increasing their market share in the last decade from one percent of contracts to 26 percent this past quarter. This effect could be partially offset by the growing demand for sourcing services from emerging markets such as India, Southeast Asia, Latin America etc… History also offers evidence that management teams that invest in its company’s future during periods of slower growth or recessionary spells are in a better position to catch the next bull phase.

Overall, I am not as pessimistic about the opportunities for the services sector as some economists and industry analysts might be. I’m also very interested in your view. How do you think this situation will play out for the ITO/BPO industry in the near future?

 

Notable Trends in the TPI Momentum Market Trends & Insights 2011 Verticals Report

by Paul Reynolds, Chief Research Officer, TPI Momentum

Look for interesting news in the TPI Momentum 2011 review of outsourcing spending. We looked at outsourcing trends in 27 vertical and 68 sub-vertical industries throughout 2010 and found that, while overall outsourcing spending increased by five percent, conditions were highly variable across industries – with spending up or down by more than five percent in over half of the verticals.

Here are the TPI Top 5 highlights from this year’s report:

1. G2000 companies increase outsourcing spend. In 2010, G2000 companies spent over $72.1 billion on outsourcing services, a five percent increase when compared to the previous year. While Manufacturing and Financial Services spent the most, the Retail sector grew the fastest (with 37 percent growth) among the industries studied. New business models in Retail are driving IT investments, which is a boon to outsourcing.
   
   
2. First-timers join the outsourcing surge. A steady flow of G2000 companies signed their first outsourcing contracts in 2010 while, like the previous two years, overall outsourcing penetration increased by three percent. Twelve of the 27 vertical industries experienced at least 20 percent penetration growth.
   
   
3. Sub-verticals spearhead outsourcing momentum. While some industries showed declining or flat outsourcing activity, specific sub-verticals saw growth. For example, overall outsourcing spending plateaued in the Chemicals industry, but its Life Sciences sub-vertical grew by more than 30 percent. Similarly, the Finance Services sub-vertical grew almost 15 percent while the larger Business Service & Supplies industry remained flat.
   
   
4. Hunting-Farming dynamics shift as specific verticals boost outsourcing. The TPI Hunting-Farming Index measures opportunity across the 27 industries we track. In 2010, the Farming Index showed that both the Utilities and Retailing sectors bumped their ratings from medium to high due to recent increases in outsourcing spending among companies that already outsource.
   
   
5. Fastest growing portion of the market impacts vertical trends. In most industries, outsourcing penetration is significantly higher among larger companies than smaller ones. Much of the new outsourcing growth stems from companies ranked 501-1000 in the Forbes Global 2000.

By and large, 2010 was a year of recovery. The strength and shape of the recovery and its impact on outsourcing spending was far from consistent across industries. More importantly, the measurable activity tells us a great deal about which vertical markets offer the strongest new opportunities and which strategies will be most effective for winning in these markets.

To learn more about the TPI Momentum Market Trends & Insights 2011 Verticals Report, click here or contact Paul Reynolds, Chief Research Officer, TPI Momentum, at +1 508 625 2194.

TPI Index: Outsourcing Industry Sees Growth in Regional Markets, Restructurings

By John Keppel, Partner & President, Information Services

Earlier today, we held our 2Q11 Global TPI Index conference call, during which we discussed noteworthy trends in the sourcing market during the second quarter and the first half of the year.

Compared with the previous second quarter, the second quarter of 2011 offered some welcome lift in several metrics: Europe, the Middle East & Africa (EMEA) total contract value (TCV) was up by 13%, Asia Pacific TCV rose 55%, and Restructuring TCV grew by 30% year-over-year. However, a poor showing in the Americas’ TCV and fewer large contracts drove down the global market by 18%. Despite weakness in the big picture for the quarter and at the half, we anticipate stepped-up second-half activity that will find the market finishing the year at or near typical levels.

It is worth remembering that second quarters are typically weak in comparison with first quarters; that said, our analysis reveals that:

• TCV, at about $16.4 billion in the second quarter, represents about 20% quarter-over-quarter, year-over-year and year-to-date decreases for each comparison. A downturn in large contracts above $500 million, as well as declining values in the Americas and in IT outsourcing (ITO), largely account for these drops.

• Restructurings TCV, while up Q/Q and Y/Y, dropped a substantial 44% when compared to the significant restructuring recorded in the first half of 2010. Despite this YTD decrease, Restructuring TCV now falls within more normal historical ranges. New scope TCV in the second quarter declined by Q/Q, Y/Y and YTD measures alike.

• For the regions, the Americas TCV fell 27% Q/Q and about 50% both Y/Y and YTD. EMEA TCV, nearly twice that of the Americas for the second quarter, grew 13% Y/Y and 10% YTD. In Asia Pacific, a small quarterly drop tempered otherwise ample Y/Y and YTD gains of more than 50%.

• By scope, ITO, at $11.5 billion for the quarter, still made up more than two-thirds of the global market, but dropped about 18% in value both Q/Q and Y/Y, and by 27% YTD. The market is not awarding the large infrastructure contracts of earlier periods. Business process outsourcing (BPO) TCV dipped for the quarter, but thanks to a strong first-quarter showing, half-year comparisons held firm.

• Despite these lackluster results, we believe the second half looks more promising. We note activity building in all three regions, supported by the $7 billion Atos/Siemens restructuring mega-deal already boosting third-quarter values in EMEA.

A replay of today’s call will be posted within 24 hours on TPI.net, where you can also view the presentation slides. I hope you’ll have a chance to listen and sound off with your own perspectives in the comments section below!

(UPDATE: The audio replay is now available at TPI.net).

Crowdsourcing – the Next Wave of Outsourcing?

by Bruce Everett, Director, TPI

In the late 1980s, the first wave of modern outsourcing realised the promise of specialisation, labour arbitrage, risk sharing and scale efficiencies. From the late 1990s forward, the era of globalisation saw the forming of the second wave of outsourcing with the rise of offshoring. Now, in the era of social networking, are we seeing the third wave of outsourcing with the emergence of crowdsourcing?

Crowdsourcing is a means of tapping into the global talent pool wherein certain business requirements a company wants to fulfill are broadcast to an unknown group of virtual service providers. The model is already being used by companies for idea generation, product testing and branding, and graphic and Web site design. Its benefits include:

• The crowdsourcer taps a talent outside its organisation for out-of-the-box thinking.

• Problems can be explored quickly at low cost and with input from the market.

• Payment, if any, is tied to results and recognition, hence only the motivated contribute. 

• Crowdsourcing can facilitate brand-building kinship through a sense of collaboration.

As a large client organisation, how do you fit crowdsourcing into your portfolio of business-grade sourcing options, and how do you manage risk when the virtual service provider is unknown or distant? Our TPI Top 5 tips are:

1. Create criteria for candidate projects. Determine candidate projects based on risk and reward (e.g. testing a Web site applet rather than developing an ERP application).

2. Be clear on requirements. Documenting requirements and the desired ‘end’ (e.g. expected results/service levels/quality standards) while allowing freedom on the ‘means’ will narrow the field of virtual service providers and improve the strike rate of the crowd solution. If you would not be comfortable with your idea being broadcast on Facebook, then don’t use crowdsourcing.

3. Unleash creativity. Provide incentives for competition and collaboration, and value the intellectual property.

4. Make a schedule, but allow for iteration. Seek to balance timelines versus space for creativity and collaboration, seriousness versus play.

5. Give yourself a structured decision process. For crowdsourcing, the decision process often means filtering the ”best few” solutions to take to the next stage.

We will leverage the lessons from previous waves as crowdsourcing forms the next wave of abstraction and distance from our service providers. If not a replacement for outsourcing and offshoring, crowdsourcing will certainly be part of the client toolkit for selective sourcing.

TPI sourcing experts can help you achieve your orga¬nisation’s goals through objective advice, knowledge of your industry and experience with arrangements from simple to complex. For more information on considering crowdsourcing for your organization, contact Bruce Everett, Director, TPI, at +61 407 535835 or bruce.everett@tpi.net.

Waiting for the Innovation Fairy

By Max Staines

If you expect something, you should have some way of knowing whether or not you get it.

A sizable portion of IT executives seem to be missing that point.  According to a recent survey cited in CIO magazine, “67 percent of IT leaders say they rely on outsourcers to turn ideas into new and improved processes, but just a third actually measure the impact of innovation delivered by their service providers.”

Sounds like a recipe for disappointment.

The survey, conducted by the United Kingdom’s Warwick Business School and sponsored by offshore outsourcing provider Cognizant, also found that most CIOs would welcome some sort of framework for innovation, and half would be willing to pay more for such a framework.

From Compass’ perspective, a process for measuring innovation has to address some basic questions, including:  

• What’s my current state?
• What’s the potential benefit of the proposed innovation or improvement?
• What’s the investment, risk, and change involved to implement the initiative?
• What are the alternatives to the proposed change?
• What will we need to manage the future state?

A broader consideration is to make a distinction between productivity improvements on the one hand, and true innovation on the other.  Client organizations and service providers will admit they often make unrealistic demands for (and promises of) both. Yet true game-changing innovation requires specific mutual incentives that allow both parties to envision the art of the possible and work towards a transformative future state.

That’s a very different proposition from optimizing the efficiency of the existing environment. 

Bill Huber, a TPI Partner and Director of CPO Services, suggests building a certain number of consulting hours into service provider contracts that are devoted to identifying and exploring truly innovative ideas. Gainsharing incentives can also be effective, as can governance frameworks that include a specific focus on tracking the introduction, acceptance, and lifecycle of innovation initiatives.  (A recent column in Global Services magazine discusses TPI insights into innovation, specifically in the BPO space.)

To put the improvement vs. innovation distinction into perspective, consider the business world of 100-some years ago.  When efficiency-minded organizations were equipping messengers with bicycles to increase productivity, a few saw an opportunity to make a step change with this new telephone thing.

What were the telephone people doing differently?

Part 2: Creating a Value Plan to Drive Positive Outsourcing Relationship Change

by Cynthia Batty, Global Competency Lead, Governance Services Advisory, TPI

Earlier I posted the first installment of a two-part blog on the importance of using a value plan in performing value assessments and acting on their results. Today I address several steps you should take in conjunction with creating the value plan to help bring about a positive outcome for your company and your service providers. If you haven’t already done so, please read part 1 of the discussion here.

Having a value plan is crucial for successfully absorbing a value assessment and using it to improve outsourcing relationships. In addition to preparing such a plan, you can get the most out of the assessment process by taking the following steps.

Prepare your executive management. Whenever TPI goes looking for value leakage, we find it. Note that this may not be evidence of poor management on your part; we have found that value is lost in various ways in outsourcing relationships. If you start from a premise that “we are going to improve and this is a step in a quality process to achieve that objective” and you prepare your management for the overall program, you will be less likely to face hard questions on the initial exploratory research and findings.

When the overall plan is directed toward governance, management improvement and monitoring, your executive can see a process aimed at continued improvement and may indeed become more committed to the process as a consequence.

Engage your service provider. Assessments are like audits—nobody likes to see the auditor coming. You don’t want to create an environment of defensiveness with your service provider, because you are going to be asking the service provider to work with you to improve services and costs. When you have your value plan developed, invite your service provider counterparts to a meeting and explain your goals and the way in which you plan to go about it. Ask for their advice and support, and ensure that they know they are a vital part of the solution. Then engage them in your plan periodically as you determine what to do and how to do it.

You may also discover in the process that your own team is doing things that are preventing the service provider from delivering all the potential value. Be open to this finding and to making the changes that will enable greater value realization.

Don’t take on too much in the beginning. Although you may not be clear on exactly what your situation is when you start, you can make a conscious decision that you will only initially tackle a manageable set of problems. It is likely that to find value improvements you will need to make organizational or goal changes on your side of the fence. Bear in mind that these efforts can feel like witch hunts to your own team and can cause them to be demoralized or resistant—or both. Give everyone room to work on the problems at a reasonable pace, but identify metrics that are to be reported monthly to measure your progress.

Be conscious about what you are looking at. Studies such as a value assessment, depending on how they are performed, can sometimes veer close to being enhanced customer satisfaction surveys. This may not necessarily be bad, but be sure that you understand the distinction and how to drive value from the results (as opposed to merely recording dissatisfaction).

Create a positive goal. Service provider bashing is not the way to ensure or sustain value attainment, and an approach that puts a negative focus on your service provider will create a negative attitude in your entire stakeholder environment from which it can be hard to recover. You need their cooperation to make positive changes. Make the goal a win for both parties. This approach will require you to think carefully about what your service provider executive and team stand to gain, and it will help ensure their engagement in the positive goals.

By looking closely at the value achievement in your outsourced services relationship, you can find ways to increase value and relationship quality across the board—by viewing a value assessment in context, making a plan, and being realistic about outcomes. You may be surprised at the positive results of having a well-considered value plan.