Consider the Source

Outsourcer Heal Thyself

While traveling in India recently I didn't get a chance to respond to a post by Phil Fersht, who was writing in response to my own blog of January 10 making some predictions about 2007.

By our estimates, about one in five ITO deals worth more than $50 million rely on an advisor (a look at Advisor IT Marketshare). As the ITO marketplace has become mature – with established providers, experienced buyers, lessened employee transfers and capital asset components, and better-defined services – many corporate procurement organizations undertake their ITO endeavors without calling upon experts. What might change that percentage in 2007?  Certainly the increased use of offshore delivery models, and complex multi-sourcing arrangements, are providing reasons to call upon specialized expertise.

From our own experience in the recent year, I can tell Phil that we’re seeing almost as much activity in the under-$50M segment as we are in the over $50M segment.  Size doesn’t matter as much as complexity.

Musings from Mumbai: India Provider's Revenue Focus

With the experience of 10 days in Bangalore and Mumbai fresh on my mind, I want to share an observation from the recently held NASSCOM 2007 conference.  NASSCOM is the Information Technology, Engineering Services and Business Process Outsourcing trade association in India.  Its annual conference attracts virtually every significant corporate, educational and governmental participant in the industries in India.

My colleague Paul Schmidt and I presented at the conference, carrying a message we have been hearing from our clients. The topic: maturing an offshore operation. Our message, in a nutshell: Bigger is not necessarily better when it comes to offshoring.

Many of our clients are concerned that India-based offshore providers place so much emphasis on revenue growth (or "headcount growth," in the language of the prevailing business model.) It’s as if their worthiness was measured by no other metric. Ask any of the leading outsourcing providers that operate in India, and they'll provide some astounding figures related to their hiring record and plans.  If probed, they'll share similarly striking figures relating to attrition rates. (Two colleagues from our Bangalore office recently published a really insightful paper on this topic.  It's found at http://www.tpi.net/pdf/papers/TPI_whitepaper_India.pdf.)

To deal with this immense inflow and outflow of human capital, most of the service providers are investing in extensive educational programs. This is another point of immense pride.

So we felt that our message of “find ways to measure your contribution to your clients other than through incremental headcount” was appropriately framed. We offered some examples and suggestions, largely aimed at deepening the caliber of services with the same vigor that they are broadening their headcount. Put another way: Do more for your clients with less effort.

Again, because we advocated the concerns we hear from clients, we were happy to hear a parallel issue mentioned prominently by leading government and industry officials, who urged the service-provider community to divert its focus away from the top-tier cities that serve as the foundation for the industry today. Indeed, there was almost a plea for the providers to expand their workforces into “tier 2” cities, those of smaller size. The reasons? There are many, it turns out.

The most commonly heard motive is to relax the burden on the already stressed infrastructure of India’s popular destinations – Dehli, Mumbai and Bangalore, among them.  Airports, roadways, utilities, public services - they're all stressed by the huge number of people participating in the offshoring boom.  And there's a desire to allow the rising tide of relatively well-paying jobs to flow across the expanse of India's population of educated young workers.

I’m not sure that the move to smaller metropolises will actually address the concern that Paul and I raised – greater focus on productivity – but it helps to shine a light on the fact that bigger isn’t necessarily better, no matter what slice you take.

Industrial Strength Services

One aspect of my job that I really enjoy is the amount of time I spend with the Service Providers in the global outsourcing industry. There’s a growing universe of exceptional companies that are winning, delivering, and growing relationships with some very demanding clients.

In the spirit of being the most informed source of objective advice for clients, everyone at TPI is encouraged to remain connected with the ever-changing developments in our industry. That’s a task easier said than done.

One of the more common themes we’re hearing these days relates to “industrializing services” or “services productization.” What this means, at least to me, is a focus on establishing defined service offerings, brought to market with defined terms.

Now, most people might ask “what’s so novel about that?” Well, the outsourcing industry has long been growing through a model called “lift and shift” – essentially having the Service Providers assume responsibility for a client’s existing operations. That includes its systems, processes, and people.

With the acceleration of offshore delivery models, and the challenges experienced in achieving leverage through adopting so many disparate client environments, some of the leading Service Providers have concluded that the time has come to change the game.

I am especially intrigued by how receptive clients – within IT, HR, and other business process functions – have been to engage in Provider-defined solutions. Most experienced buyers of outsourcing, and especially those who have endured a first-generation “lift and shift” relationship, know that the outsourcing business model is predicated on the achievement of leverage. That means taking the resources devoted to a business operation from a 1-to-1 equation to 1-to-more.

I think that 2007 is the year that we will see several leading Service Providers win some sizable outsourcing deals based upon their conviction around solutions that THEY define, not operations that they inherit.

Making Choices

The art of business relies heavily on making choices. The people who are entrusted with leadership positions in companies are generally those who have shown to be skillful in their evaluation of alternatives and demonstrate the ability to select the right people, markets, and offerings to succeed.

One of my early bosses gave me some great advice as I was assuming greater management responsibility. He said, “You may think that every decision you make is essential to get right but the fact of the matter is that you’ll make only two or three truly critical decisions each year. The key to success is knowing which decisions are essential to get right.”

Outsourcing is also about choice. It is the choice to position a company to grow or contract, to get to market quicker or to slow down and stabilize operations.

Rarely are there any “right” answers, but merely choices that determine a direction and a re-sourcing model to achieve an objective.

It’s about people, paying for performance, updating skills quickly and cost effectively, and about turning your largest fixed cost into one that is largely variable. It’s about the choice of connecting technology to the service of internal and external customers.

Outsourcing evaluations force dialog and a committed effort from both clients and service providers to get it right. It forces both parties to recognize the business costs related to making change. If done properly, it creates new and innovative sources of capabilities to help achieve change.

Having a choice means that there are alternatives.  The decision regarding outsourcing is one that warrants taking the time to get right - whether you do it, or not.

A Solid Contract is the Foundation for a Strong Relationship

A strong relationship between a buyer and a service provider is the key to successful outsourcing. However, contractual agreements must also be factored into the equation in order to ensure that both parties will thrive in their new business agreement.

While relationships are a necessity for generating mutual satisfaction, how do we effectively encapsulate the fact that people (after all, services are the product of the humans that deliver them) need to operate within specific operating guidelines that delineate responsibilities and boundaries?

Our industry can sometimes get caught up in the mechanics of a contract – long and often complex documents that attempt to anticipate every possible eventuality.

Recently, a couple of my colleagues at TPI documented the industry’s new “center ground” for certain contract terms. These reflect the prevailing positions among the contracts being negotiated, and we’re publishing them to educate the buyers and service providers in anticipation of their next negotiation.

About the same time, the International Association for Contract and Commercial Management (IACCM) published data from more than 500 international companies and organizations, representing several thousand contract negotiators. The results describe the terms and conditions that they negotiate most frequently. The data tells us where time is spent and it reflects changing issues and concerns. It also reveals much about the ways companies behave and the value they place on their trading relationships. Check out the IACCM report at:  http://www.iaccm.com/articles/toptenterms.php

The common theme here is that the shaping of outsourcing relationships can be more successful through a balanced and educated appreciation for the role of the contract.  As the IACCM report summarizes, most corporations “declare a strategic intent to differentiate, to partner, to add value. But at the same time, they send internal messages about control, cost reduction, standardization and risk avoidance. They highlight the need to be flexible, adaptive and agile, yet they introduce … systems that enforce compliance and inhibit change. And in their trading relationships, they offer the promise of a match made in heaven - until they introduce the pre-nuptial agreement and its administrators.”