Consider the Source

Sustaining Innovation

When you're so busy DOING, it's often easy to lay aside THINKING.

Many of us who participate in the ecosystem called the global outsourcing industry have enjoyed a long period of unbelievable activity. It all began in the mid-1990s in earnest, and it hasn't really let up.

That's not to say that the world hasn't changed in the intervening years. The fact of the matter is that today's outsourcing industry is a far cry from that of a decade ago. We have a strong and growing offshore community of participants, educated and experienced clients, service providers that have figured out that profitability is more important than revenue (market share), and lawyers that are opening their eyes to value-creation balanced with risk-mitigation.

A few months ago, several of us at TPI compared notes after one of our client conferences and came to the realization that the world was changing so much and so fast that we needed to help keep the players on the same field. The worry we held was that the promise of outsourcing - defined services delivered with varying volumes at defined prices - was being challenged by certain legacy attributes of the commercial marketplace.

I can't tell you how often I am asked about analyst commentary about "failed" outsourcing relationships. It's frequent! The empirical data is clear - abject failures are quite rare. But this doesn't mean that those relationships aren't seriously challenged in practice.

So we compared our thoughts with some of the best and brightest law firms and many of the industry's most committed service providers. Then, we revisited with a broad cross-section of experienced clients across the globe - and they told us that we were on to something.

It was clear that we needed to educate the buy-side and the sell-side participants on the realities of the new world. Less "same mess for less" outsourcing and more accelerated transformation. So we created the Innovation Agenda for the global outsourcing industry.

Working through this set of four seminal topics - Refreshed Terms & Conditions, Benchmarking, Gainsharing, and Change Management - with colleagues who are truly remarkable for their expertise has been one of the more exciting experiences of my career. We've considered some of the "sacred principles" of the industry in the new light of a flattening world and experienced participants.

I just spoke about one of the four Innovation items - Gainsharing - at a conference in the UK that was very engaging on the possibilities. While that item is still in refinement, we're beginning to publish some real results.

Better yet, we're seeing the results of a better-informed ecosystem as we help develop the relationships between clients and service providers that share a renewed definition of win-win.

Thinking can make the doing more relevant.

Stranded Asset or Jewel?

A few years ago, in a conference discussion on the topic of building captive service centers in India, several of us offered the view that a captive center would be "stranded assets" in a few years' time. To be clear, a captive service center is a company-owned offshore operation. The activities are performed offshore, but they are not outsourced to another company.

My rationale seemed sound. Why would a company want to invest in the building of a captive center when there was no obvious pathway for continuous value-creation? Wouldn't a captive service center simply run its course and be left with no place to go?

Wouldn't outsourcing be a better path for gaining the advantages of lower-cost, higher-capacity destinations?

Well, time has passed and while I still believe that the time/cost/effort to create a captive operation today is ill-placed, it is clear that our sentiments of a few years ago were largely wrong. Today, organizations are looking to move fast through either outsourcing or ventures of some flavor that leverage an existing offshore operation. The investment thesis for a greenfield captive center here in 2006 just isn't strong.

As my colleague Chaz Foster points out in a recent article on CFO.com (Back Office for Sale), there's quite a hot market for dispensing with captive service centers today. If an investment had been made back when we were down-playing the logic, a company might very well be in a position to monetize that operation through a transaction here in 2006.

Why is that?

Well, simply said, many of the industry's leading service providers have been slow to make their own investments in India, China, and Eastern Europe. As global service models increase in popularity, the service provider community is eager to accelerate its capabilities. If they acquire a corporation's offshore operations, they get not only a service center from which to service multiple clients, but they also get a new cornerstone client.

And the around-the-world game of musical chairs continues.

Introduction to Change

Welcome to my inaugural blog entry, which is designed to promote discussion about the challenges we all face in introducing change to organizations in order to enhance competitiveness.

The aim of this blog is to be a bit edgy and share with you the perceptions and perspectives that I've formed through the privilege of working with some of the brightest people in the consulting business and with some of the most ambitious companies in the world, across virtually all industries. This experience has cumulated in my position with TPI for the last 5+ years.

I hope that you'll engage in a hearty discussion of the factors you are experiencing in a world of changes to business support functions.

So, let's get started!

I was speaking at a conference recently in California on the topic of outsourcing contract structures and how they're changing as a result of lessons from first-generation agreements that are coming to term. I hadn't planned to take the approach that I did, but the audience led me to offer an observation that elicited quite a reaction. The audience was made up largely of corporate purchasing managers who were clearly sent to the conference by senior managers to learn about success in contract negotiations.

We went around the room and gathered topics that were top-of-mind, and it was clear that these folks were approaching their fact-finding with a view that outsourcing evaluations are largely formulaic processes. The attendees were looking to build their formulas.

I felt compelled to snap them out of this misconceived notion.

"Outsourcing is a political tool," I said. "It's used by senior management to introduce change to an organization when confidence is lost in other tools for change."

I worry that the rhetoric in many companies is focused on cost reduction, when the challenges that prompt outsourcing evaluations (all flavors of service delivery changes) are largely driven by the need for a disruptive event to shake up the status quo.

Examples include gaining access to new talent pools or new markets, reconfiguring cost models, or preparing for acquisitions, or divestitures.

Senior management most often looks outside for new service delivery models when they conclude that the internal organization isn't capable of delivering the necessary value related to the business strategy.

It's not about squeezing the working class, it's about competing in a global economy.

To the group in California, this got their attention. They thought we were going to dig into service provider evaluation models... instead we talked about categories of change that are driving senior executives to look for new delivery models.

I'd love to hear your views on this.