Consider the Source

Next Generation BPO: Portend of Trends

by Dinesh Goel, Partner, ISG

The business process outsourcing (BPO) industry continues to evolve, propelled by developments in technology; in some circles, its name is changing to IT-enabled services industry. The genesis of the industry, in terms of its global service delivery (or offshoring) model, was tightly bound to its promise of up to 40% cost arbitrage, which created a “life and shift” or “same mess for less” type of activity in the marketplace but, nevertheless, resulted in growth of the industry as buyers slowly embraced the model.

Of course, the cost arbitrage wasn’t a sustainable proposition, so providers started building propositions around what more they could offer to customers: process re-engineering, innovation, process transformation, committed productivity, gained ground and traction in the industry. Under-delivered promises and a high degree of ambiguity resulted in buyers who were circumspect of the provider pitches and proposals.

As the next stage evolved, providers began emphasizing the need to manage end-to-end processes rather than rule-based fractional activities. This constrained their ability to drive productivity and process improvements, and their limited knowledge and ownership of the process reduced them to the role of “order takers.”

Now, the next wave has come along, driven by the new IT delivery platforms and models. The buzz is “process as a service” with the entire solution on the provider’s nickel and invoicing on a “pay-per-use” basis. We are just seeing the early stages of development and adoption here, save point solutions such as payroll, recruiting, accounts payable, etc.

So, what’s next? How will the industry mature over the next few years?

In my view, the industry will offer end-to-end process solutions to clients that could take a variety of delivery model forms:

1. A solution on the client’s infrastructure/platform
2. A solution that includes the provider’s platform and/or infrastructure
3. A solution hosted in the private/public cloud

The growth and maturity of the industry will be propelled by a market offering compelling value that encompasses full process service, contemporary point or full IT solution, and domain knowledge and capability that adds value on an ongoing basis. The commercial structure will save clients from a huge fixed cost so they are equipped to thrive in a fluctuating business environment.

Insourcing: When Does it Make Sense to Bring Services Back Home?

by Kyle Spencer, Director, ISG

While outsourcing continues to grow at a solid pace each year, a number of companies have needed to insource a part of their formerly outsourced services portfolio. The drivers behind these decisions include: a CEO-mandate to change corporate sourcing strategy, a way to remediate a troubled outsourcing relationship, or a healthy look at an old sourcing decision to find the right mix of in-house and outsourced services based on current business goals.

Mergers and acquisitions can also drive insourcing decisions. A sound post-acquisition integration plan should include a common sourcing strategy between the two companies, which may require the outsourcing of service functions that are in-house at one company and the insourcing of a service function that was previously outsourced at the other.

While successfully executing an insourcing project is very achievable, it’s important to keep in mind that it can be more difficult to insource a service than it was to originally outsource it. The complexities of making this transition may require rebuilding services and leveraging capabilities from the ground up that were once fully owned by the service provider. If business events have led you to consider insourcing, here are the Top 5 things to keep in mind:

1. Ensure you have an accurate business case. Compile a fully documented base case, target operating model, and costs to achieve the transition. Be sure to document the goals and objectives of the project and clearly identify risks and impacts. Before undertaking the project, test and validate the business case to ensure that the objectives are attainable and the cost, benefits, risks and impacts are fully understood. Then you can take your case to upper management for approval and buy-in.
   
   
2. Have a clear end state defined. Insourcing is like building an office campus; it requires a very clear picture of the end state in order to build or re-claim the services. This “blue print” is your target operating model and should include all eight operational aspects of service delivery with an end state cost model. Ambiguity or missing detail will cause confusion and introduces significant risks to the project’s success. 
   
   
3. Engage with your service provider. The service provider will need to be very active in your project.  Negotiate a transition and “wind down” agreement with consideration for a reverse transition of staff, asset repurchases, transition costs and incentives and penalties to drive service stabilization during the project. Keep in mind that the service provider is the “home” organization and in-house will be the receiver.
   
   
4. Design a comprehensive service impact plan. To avoid service disruptions and level or service degradation, be sure your service impact mitigation plan focuses on anticipating and mitigating the known issues that cause service degradation. Build in communications and escalation triggers as well as considerations and costs for post-cutover stabilization efforts.
   
   
5. Use it as an opportunity to improve the services. An insourcing project can represent an opportunity to build a new operation or capability from the ground up. Realize this “green field” environment to improve the services, their underlying processes and enabling service delivery tools. 

While navigating the risks and complexities of insourcing can be challenging, ISG can help you with the proven experience, objective advice, knowledge and data to achieve success. Contact Kyle Spencer to learn more.

Without Cost Arbitrage, Will the BPO Industry Grow in the India Domestic Market?

by Dinesh Goel, Partner, ISG

The fact that cost arbitrage almost single handedly led to the growth of the global BPO service delivery (a.k.a offshoring) industry is the least of the reasons for embracing outsourcing within the domestic market of India. Prima facie, cost arbitrage appears infeasible as most service providers have a dominant presence in large cities with steel glass buildings and a well-compensated workforce.

Recently, I had the privilege to participate in a panel discussion about the India domestic market at a BPO conference in Delhi and Mumbai. The topic of discussion was “What will lead to the growth of the BPO industry in India, if anything?”

The short answer is that growth will be propelled by all the reasons for outsourcing except for cost: outsourcing for improved operational efficiency, outsourcing for running lean and mean processes, for driving continual productivity in the processes, for creating accountability with demanding service levels, for handing off a non-core function to a third party for whom it is core, and so on.

So, why is the industry not already growing at a scorching pace?

This is primarily for two reasons: 1) For the industry to grow, we need a healthy and competitive supply market that did not exist 2-3 years ago (save for call center-oriented work), and 2) we have yet to see the bandwagon effect from the experiences of early adopters.

It is not a question of “if” but rather “when” the market will witness the bandwagon effect resulting in BPO industry growth for all good reasons other than cost. Most leading service providers are focused on serving the local market in India with their best solutions, and some early movers have bought into signing up with them. Based on my experience advising in the India market so far, cost arbitrage is also available if we evaluate the business case on a total cost of ownership basis over the life of the contract. This is in view of all the drivers of sourcing (which do not offer sitting cost arbitrage) that will manifest themselves in overall improved cost-value proposition over time for the buyer.

Taking the argument even farther, I also suggest that this growth will be true for most emerging markets, not just India. Buyer maturity and delivery value propositions will drive the growth of the BPO industry in these markets as most of the delivery will be localized and will spread out to the hinterland with a lower or comparable cost structure. The BPO industry is here to stay. The undercurrent of market forces is resulting in a more competitive and end-customer friendly business ecosystem.

Implications of SAP’s Ariba Acquisition on BPO – Details are Still Cloudy

by Bill Huber, Partner, ISG

When SAP, the enterprise application software company, announced yesterday that it agreed to acquire Ariba, the procurement and supply chain world took note. Ariba is the leading procurement and e-commerce solution in the marketplace, with an enviable install base. As the giant in the ERP market, SAP has competitive transactional procurement capabilities.

Six years ago, almost to the day, SAP acquired privately-held Frictionless Commerce for its supplier relationship management (SRM) suite of software to create “targeted, fill-in acquisitions that add superior functionality to its broad solution portfolio.” In particular, SAP was interested in moving into “on-demand” e-sourcing applications. In the subsequent years, SAP has continued to invest in its procurement and supplier management solutions and offers a high degree of functionality in many of the same areas that are currently provided by Ariba. SAP valued Ariba at approximately 20% above Ariba’s then-current trading value, with a purchase price of over $4 billion. Since Ariba is the second largest cloud provider, the move positions SAP to better compete with Oracle in the cloud market.

SAP has announced that it plans to combine Ariba’s open global trading network and SAP’s solutions and analytics to drive “a new era of business-to-business collaboration.” SAP will also consolidate all of its cloud-related supplier assets under Ariba. Regardless of the final disposition of redundant tools in the Ariba and SAP suites, it is clear that the Ariba Supplier Network (ASN) is a key jewel in this transaction.

The ASN allows buyers and sellers to transact on the same platform, provides increased transparency on purchases, and streamlines the purchasing, billing and payables processes. In effect, the ASN has the potential to eliminate the need for much of a company’s billing and payables staff, a traditional sweet spot for companies that use finance and accounting BPO. SAP’s reserves of cash and global customer base should accelerate the enhancement and adoption of the ASN, with a corresponding reduction in demand for the aforementioned F&A BPO services. Of course, while the Ariba acquisition is big news, the broader trend is something that service providers have fully understood and have factored into their strategic planning for a number of years.

It is also worth noting that many service providers offering source-to-pay services have already developed platform-based procurement offerings based on the SAP SRM platform improved with service provider “bolt-on” enhancements. These providers have strong relationships with SAP, including a long history underlying application implementation and support services in addition to BPO.  Most of the same providers also have extensive experience with Ariba.

So what does all of this mean? Here’s our view:

1. Service providers have already been pursuing strategies to move BPO activities upstream, beyond “horizontal” transactional processes. This trend will continue, especially in the vertical space, which will more than offset the entry-level invoicing and payables process work that will decline with improved automation.
2. Providers will review their platform-based strategies as more information becomes available regarding the SAP/Ariba product roadmap. In-process source-to-pay implementations will continue to fulfill current project commitments on existing platforms, but longer-term investments will clearly evolve as SAP provides greater clarity.
3. Source-to-pay BPO offerings will become more sophisticated, leveraging the cloud-based capabilities of the new SAP/Ariba combination, offering deeper analytical and collaborative services as part of an enhanced value proposition.

Stay tuned for more on this and other BPO news. What do you think about this development? Weigh in by posting a comment below.

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New Tools Available through Cloud Security Alliance Membership

by Thomas Kenyon, Director, ISG

Earlier this month, ISG joined the Cloud Security Alliance (CSA) as a corporate member. Here’s a description of this organization:

“The Cloud Security Alliance (CSA) is a not-for-profit organization with a mission to promote the use of best practices for providing security assurance within Cloud Computing, and to provide education on the uses of Cloud Computing to help secure all other forms of computing. The Cloud Security Alliance is led by a broad coalition of industry practitioners, corporations, associations and other key stakeholders.”

According to many industry analysts and multiple cloud surveys, security of cloud services is the No. 1 concern of clients related to adoption of cloud services. To help our clients, ISG has developed a cloud security assessment based on a toolkit available from the CSA that’s called the “GRC Stack.”

According to the CSA, “Achieving Governance, Risk Management and Compliance (GRC) goals requires appropriate assessment criteria, relevant control objectives and timely access to necessary supporting data. Whether implementing private, public or hybrid clouds, the shift to compute as a service presents new challenges across the spectrum of GRC requirements. The Cloud Security Alliance GRC Stack provides a toolkit for enterprises, cloud providers, security solution providers, IT auditors and other key stakeholders to instrument and assess both private and public clouds against industry established best practices, standards and critical compliance requirements.”

We are excited to be able to combine the CSA’s best industry thinking around cloud security and GRC issues with our industry-leading assessment methodologies. Not only have we developed a unique mechanism to help our clients define what cloud GRC components are important to them, but we’ve done so using a standard language and scoring mechanism, captured in our priority tool, that is used to assess how well a cloud provider meets a client’s GRC needs.

Working with the CSA is a two-way street. Not only are we benefiting from CSA membership through access to the GRC Stack, we also are contributing to the CSA by providing unique intellectual property we have developed related to the CSA GRC Stack. Further, we are contributing the talents of the ISG cloud team, in part through my involvement as co-chair of the CSA’s Cloud Controls Matrix (CCM) subgroup. The CCM is specifically designed to:

“... provide fundamental security principles to guide cloud vendors and to assist prospective cloud customers in assessing the overall security risk of a cloud provider. The Cloud Controls Matrix provides a controls framework that gives detailed understanding of security concepts and principles … The foundations of the Cloud Security Alliance Cloud Controls Matrix rest on its customized relationship to other industry-accepted security standards, regulations, and controls frameworks such as the HITRUST CSF, ISO 27001/27002, ISACA COBIT, PCI, HIPAA and NIST, and will augment or provide internal control direction for SAS 70 attestations provided by cloud providers.”

ISG is pleased to be part of the CSA and actively contribute to the work of that organization. Let us know how you think we may be of greatest service to you through our association with this esteemed industry association.

Avoid “The Big Mistake” in Building your Outsourcing Business Case

by Sven Geissler, Senior Consultant, ISG

While an outsourcing transaction can be a powerful tool to improve business operations and financial performance, it can prove counterproductive without a sound business case. This is especially true if a company lacks effective governance. The process of preparing and negotiating an RFP is already complex and stressful. Add time pressure, lack of transparency and poor planning, and you may end up making “The Big Mistake”—a business case that looks good on paper but, in reality, leads to higher costs.

Consider the following Top 5 tips to avoid making “The Big Mistake”:

1. Build a solid financial base case. For a solid case, consider multiple sources, evaluate recent trends and assess the accuracy of your budgeting and forecasting. Use next year’s budget to approximate the actual outsourcing contract term. Ensure a broad perspective that includes retained costs and allocations held at group or corporate level. Throughout the process, document key assumptions so you can evaluate and articulate the level of transparency and confidence you have in the numbers. If your organization requires an analysis per business unit, geography or service area, build in those views from the start.

2. Define financial responsibilities. Services are typically based on products, such as a set of assets, applications or facilities. Transferring the operational responsibility for a service does not necessarily change the legal and financial ownership. Allocate all current and future components involved in the delivery of services to either the service provider or your retained organization to avoid additional cost or a change order once the agreement is signed. Know the current inventories of equipment, licenses, leases and third-party contracts, and define the process of transferring them in the context of local laws. Get authorization from involved third parties to share relevant information, including contractual terms and relevant pricing.

3. Improve transparency by documenting resource baselines. When moving to more flexible cost structures and consumption-based pricing models, volume consumption becomes the key. The “Q” of the P x Q pricing mechanism represents a measurable device, unit of consumption, staffing level or other resource associated with the services. To avoid the risk of contract change based on inaccurate volumes, get to know current volume consumption including those resources that are not yet measured. Make sure the measurement is repeatable and that it provides consistent results so you can hand it over to the service provider during transition. A sign-off process, which also involves your demand organization, will help you to avoid issues when charging back cost to your business.

4.  Plan the total cost of sourcing. Comparing service provider pricing to the in-scope base case does not provide a sufficient view of the impact of outsourcing. Significant one-time costs, such as the creation of the RFP and support of transition and transformation, can add up to millions, and retained costs, including the governance organization, has significant impact. Consider normalization of proposals during the evaluation process, and build scenarios including risk contingencies – and conduct a sensitivity analysis – to test the validity and integrity of the business case across various permutations. Take time to ensure understanding of the business case and alignment across key stakeholders even if the objectives are driven from the top of the organization.

5. Ensure viability of your business case. Once the agreement has been signed, prioritize the management and tracking of the business case, including assumptions made early in the project. Proactively mitigate risk and other potential cost-drivers such as the consumption of services. Establish key performance indicators to monitor and measure the business case objectives over the course of the contract. Assessing progress toward the original business objectives is a powerful tool to use with owners of the business and a strong platform for governance discussions with the service provider.

Contact the author to learn more.

Traditional Analyst Research vs. the Tip of the Spear

Are you looking for insights on vendors and products within a defined market, or are you trying to solve a business problem specific to your unique requirements?

Stanton Jones, Analyst, Emerging Technology

If you’re looking for insights into vendors or products, analyst research like Gartner’s Magic Quadrant and Forrester’s Wave can be extremely valuable resources. However, if you’re looking to solve a complex business operations problem specific to your unique requirements, you’re going to need a broader and deeper set of tools.

In early March of this year, Gartner released its Magic Quadrant for Managed Hosting. As usual, this Magic Quadrant (MQ) is thorough and well thought out. It clearly lays out the potential use cases for managed hosting, as well as the key players in the space. It also includes important disclaimers to make sure consumers don’t use it as their only source of information for buying decisions, like this one: “It is crucial to look beyond Magic Quadrant Leaders when selecting a vendor, especially if you have an unusual need. The vendor that is perfect for your needs may be a Niche Player.”

However, even with these disclaimers, many IT procurement decisions still hinge on one question: “Is the vendor in the leader’s quadrant”?

While this question may suffice in some IT procurement circumstances, it is nowhere near nuanced enough if you’re looking to solve a broader, more complex business problem. Here’s why: analyst research is not at the tip of the spear, where buying and selling is actually occurring. While extremely valuable, analyst research tends to provide a broad perspective — a macro view of a very specific domain. Alternatively, the transaction and the subsequent delivery of services is the tip of the spear — what clients really want, and what suppliers can actually deliver.

Case in point: Did you know that of the companies listed on the Managed Hosting Magic Quadrant referenced above, less than half would be capable of supporting a transformational infrastructure sourcing initiative with a multinational company, or that only 10 percent could support the same for a global company?

ISG is comfortable (and confident) in making this statement because we’re on the ground every day with both buyers and sellers of IT services. This unique position gives us unprecedented insight into what suppliers are really capable of delivering to clients — clients that trust us to help them vet providers in a fair, transparent way to make sure the vendor will help them solve their ultimate business problem.

ISG knows that both transaction experience and vendor insights are critical for solving complex business support challenges. That’s why we have a vibrant, growing research capability within ISG, based on our deep client experience, in addition to our proven advisory and benchmarking capabilities.

I encourage you to learn more about how we can help you solve your most complex operational challenges.

You can reach me via email or on Twitter. 

 

Managed Payroll: Is It Managing You?

by David M. Wall, Director, ISG

USA Today recently reported that more American workers are suing employers for overtime pay under federal and state wage-and-hour laws. This should come as no surprise since the "Great Recession" squeezed employers’ bottom lines, meaning fewer employees do more work. However, overtime, compliance and other payroll issues are usually not rooted in malcontent by the employer. In fact, for most employers, payroll sits in the middle of a tangled web of HR and financial systems and the management routines that drive them. Many companies struggle just to post payroll to the general ledger each pay period. The result: payroll “leakage” and the countless hours needed to reconcile current payroll and resolve past payroll runs.

What is payroll leakage?

ISG defines payroll leakage as (hard or soft) dollars that are unnecessarily paid out by a company due to inefficient processes that do not align with company policies and procedures and/or compliance with federal and state laws. Leakage can take the form of settling class action lawsuits brought on by employees or as “death by a thousand cuts” in which employees reap untold additional dollars in their paychecks or get additional soft benefits for which they’re not entitled. ISG estimates that poorly designed payroll processes that lack the proper technology and management routines can cost a company between .5% and 1.5% of total payroll dollars each year. When you consider that a typical Fortune 500 company pumps anywhere from $1 billion to $2 billion into payroll each year, this leakage can rob as much as $30 million from cash flow annually.

How do I regain control of payroll?

Many companies view payroll as a “gross to net” process. The fact is most issues are caused in the “source to gross” build-up with the “source” being all the inputs that have an impact on pay – employee data (job code, job status, transfers, location), time and attendance, compensation, onboarding, etc. The best way to gain control is to:

•    Analyze the big picture of all the inputs that make up the “source"
•    Evaluate the processes and management routines of the key “source inputs"
•    Align key policies and procedures to key source inputs
•    Determine which processes and management routines cannot change due to critical links to the core business
•    Evaluate the enabling technology (or lack thereof) that facilitates getting the “source to gross”
•    Determine the right mix of insourced and outsourced solutions
•    Establish a governance model that drives continuous improvement into the fiber of the culture

These steps will help make dramatic reductions in payroll leakage and more effectively manage what is often the largest expense item on the financial statements.

ISG has performed many payroll assessments for Fortune 1000 companies and has deep knowledge on payroll process design, the enabling technology available in the marketplace and the circumstances that benefit from outsourcing. Please let us know how we can help you to establish and deploy a more effective payroll process.

Capturing Real Value from Your Captive Operation

by Atul Dogra, Senior Consultant, ISG

In the prevailing economic uncertainty, organizations continue to scrutinize their service delivery models to find opportunities for improvement. Captive operations have been integral to the service delivery models of a number of large global organizations, delivering services from basic back-office data management to specialized knowledge services like R&D and engineering.

Consider the following Top 5 key tactics to ensure ongoing operational success and long-term viability of your captive operation:

1. Design and deploy effective and efficient processes. The processes that support service delivery at the captive operation must be flexible and enable continuous improvement and process standardization. They need to bridge multiple geographies and time zones. Processes can be standardized with a few simple measures – ongoing review, automation of manual tasks and deployment of checklists – each of which can have a significant positive impact on productivity.

2. Stem staff attrition and wage inflation. Attracting and retaining trained staff is a challenge that faces captives operating in rapidly expanding economies. While location of the operation is critical to ensuring a steady supply of talent, robust people-management frameworks also need to be in place to guard against wage inflation and high staff attrition. Captives that offer market-recognized specialist services internally are attractive to potential employees and can improve retention.

3. Dial in scale and value creation. The scale of a captive can drive efficiency and set a strong foundation for growth. Many organizations operate a captive and receive services from third-party service providers. A framework that allocates work between the captive and the existing third-party service providers will ensure optimum scale for the captive to deliver value. Creating appropriate scale also offers an opportunity to specialize and differentiate in a marketplace where captives compete to attract talent.

4. Ensure stakeholder engagement. The very nature of captive management means stakeholders across multiple geographies and team members from a variety of cultural backgrounds will need to interact. Define an appropriate governance structure to ensure proactive stakeholder engagement, align expectations, reduce conflicting priorities between stakeholders and ensure operational visibility of the captive’s value.

5. Manage costs. Ascertaining a detailed understanding of the captive’s cost drivers will help to control cost variables that could render it uncompetitive. Plan periodic location analyses to mitigate the risks of rising costs and to assess potential emerging locations for captives to take advantage of labor arbitrage and infrastructure cost benefits. While operating an efficient captive is challenging, the ability to successfully address these challenges can have a positive impact on the quality, efficiency and risk equation for the entire enterprise.

To learn more about optimizing value from your captive operation, contact Atul Dogra, Senior Consultant, ISG..

IT Financial Management: the More Things Change...

by Tim Langley-Hawthorne, Director

Last week’s IT Financial Management Association (ITFMA) conference in San Francisco marked the 25th anniversary of the association dedicated to professionals involved with the financial management of IT.  Conference attendees came from a variety of industries and government organizations with some attendees travelling from as far afield as Africa.

After the conference, I reflected on the fact that, despite monumental shifts in technology over the last 25 years, the fundamental issues facing IT financial management professionals haven’t really changed.  We may be talking now about Cloud instead of CICS, and Tablet PCs rather than Time Sharing, but the financial challenges of today’s CIO are similar to those faced by the Data Processing Manager 20+ years ago.

Indeed, the time-honored and still relevant themes of the conference were:

• Chargeback and Activity Based Cost Management
• Performance Management and Benchmarking
• Financial Planning, Budgeting and Reporting
• Telecommunications Financial Management

One of the most interesting (and heart-warming!) presentations was a case study on sustainability that was brilliant in its simplicity. The J Paul Getty Trust has turned a PC and laptop asset management disposal problem into an annual revenue source of approximately $100K and a fantastic benefit for Getty staff.  The program involves semi-annual employee “shopping” days when Getty staff can pick up end-of-life end-user computing devices, flat panels and printers for less than what they would pay on eBay, and Getty receives cash for equipment they were previously paying salvage dealers to haul away.

I spoke on the topic of “Benchmarking with Your Service Provider to Drive Transformational Change Initiatives.”  My presentation explored how mature clients and service providers are using contractual benchmarking language to enable the transition to standard outsourced or managed services delivery – a transition that generates  both client savings and improved service provider margins.

Traditional benchmarks set a target price for service providers.  In justifying an aggressive number, clients will argue that top performance should be the goal and standard that service providers aim for.  Service providers, meanwhile, typically counter that top-performance targets defined by the benchmark are arbitrary, inaccurate or based on cherry-picked numbers from myriad environments, and not necessarily reflective of the unique, customized and often constraining reality of the individual client.   

In this context, the process often becomes contentious, and the benchmark’s role is limited to that of a club to wield during the negotiation process. The task of finding efficiencies and savings rests, moreover, largely with the service provider. As a result, the lower the price target, the lower the vendor’s profit margin.
The traditional rules of the game are fundamentally changing, as ISG increasingly sees benchmarks being used to define and implement broader transformational change programs characterized by demand management, standard service delivery and usage-based “pay by the drink” utility computing models.  In this context, benchmarking is the first step in a mutually agreed program of client and service provider transformative change.

For additional information, check out ISG white papers on benchmarking. If you have comments or questions or would like a copy of my presentation, please contact me. 

And, ITFMA is planning an August conference which promises to be another comprehensive and informative gathering for IT finance professionals.