Consider the Source

Now Entering the Ring...

Last week, the founder and chairman of Affiliated Computer Services (ACS) teamed up with private-equity firm Cerebus to make a buyout offer for the business process firm (ACS's Announcement ). Some observed that private-equity was again looking to cash in on the growth of global outsourcing (Cerebus and others last year bid for firms such as CSC). But the offer was also proof the vast capital of the various public and private markets are circling the same dream – to create formidable competition for the juggernauts of IBM and Accenture in the business process outsourcing universe.

It's not surprising, from our perspective, that the hungry private-equity firms have set their sights on ACS: If they really want to own an outsourcing player, ACS’ size, footprint, trajectory, and top-tier clients provide a solid foundation for an owner that has a vision of global expansion. After all, ACS is one of the earliest leaders in business process outsourcing, serving clients with some of the strongest brands in the world. It is a company founded on the principle of managed services, meaning it avoids the temptations of consulting and systems integration. It also is one of the earliest leaders of offshoring, having considerable operations in lower-cost delivery locations.

Keane’s pending acquisition by an astute management team, backed by Citicorp, is yet another beat on this same drum. Genpact, the darling entrant of the BPO provider dance card, is rumored to be planning a public offering in the near future, taking its story to the public markets in order to raise capital. Another version of the same strategy? Probably?

It’s worth the price of admission to watch these forms take shape and see what impact they will have on business process outsourcing.

How To Succeed In Sourcing By Really Trying

I’m sure many of you have seen the recent posting on CIOInsight.com, IT Outsourcing: Expect the Unexpected, about whether cost savings really materialize through outsourcing.

Both the CIOInsight.com survey and recent TPI research support the same theory: Nothing of value comes without effort.  Results, notably cost savings, come from diligent management.  (To read our study, see: Restructuring Outsourcing Agreements: An Indication of Failure, or a Tool to Increase Value?.)

However, one of the unspoken realities in the CIOInsight.com report is the urgency to avoid entering an outsourcing relationship that is doomed from the outset.  Our experience reveals that about 35% of aspiring outsourcing clients are guided to take another path – shared services, internal transformation or captive offshoring.

The principle reasons for avoiding an outsourcing agreement?  1) lack of readiness to change the management models employed across the enterprise; and 2) lack of resources to effectively manage outsourcing relationships.

The CIOInsight.com report focused on whether money is saved.  That’s certainly one perspective, albeit arriving at an answer requires a complex computation for most firms.  A true analysis means asking, “What  would I have spent had I not outsourced?” compared with a view of “What have I actually spent for the same quality and volume of services?”   Again, those are difficult computations.

Informed research on the topic reveals that outsourcing, if done right, is always a money saver. The key is to know when to do it, how to do it right, and the best way to manage results.

The Great Divide?

When the topic of offshoring comes up in most settings, the conversation invariably turns to culture. The frequency of mention reminds me of my days working at a Wall Street investment bank: Culture was mentioned so often that one felt that the bank was in the yogurt business!

Recently, however, I’ve begun to detect some bristling among client executives who deploy and manage offshore operations when they are presented with the roster of “cultural challenges” related to offshore operations.

Many would like to see the industry solve the culture problem once and for all, but it isn't going away anytime soon.

In the words of one senior IT executive, “The industry needs to move beyond the excuses of cultural differences if it wants to add maximum value to my business.”  Implicit here is a bit of impatience with the challenges related to blending the business models of Western-based clients and emerging economies. The executive was referring to India in this case, but it could have been Brazil,  China, Poland...

I recently came a cross a great article, Five Challenges India Offshore Teams Face in Working with Americans, authored by Dr. Karine Schomer that explores these cultural differences. It includes a nice summation of the bridges that need to be built.

Although most of the concerns about offshoring have been directed to the developed countries in which jobs and wages appear threatened, I’m sensing a growing anxiety with the cultural complexities being experienced.  Western executives are asking, “As the client, shouldn’t MY culture matter as much as that of the offshore destination?”

With an industry that is trying to demonstrate its maturity across a range of technical, political, economic, and managerial spectrums, many clients are expecting that the cultural gaps will abate.

Personally, I find this to be a critical measure of maturity for the offshore business model and proposition. It’s only when the services are seen to be seamless that will we move beyond the first-generation of offshore solutions. To be clear, this isn’t about accents on the telephone. Diversity is a great thing, but inefficiencies driven by lingering cultural differences are a drag on the industry.

Letter from Bangalore: Bosses Abroad

A recent article in The Economist titled "Manager, offshore thyself" caught my attention because the subject -- top executives (CEOs, CFOs, et al) relocating to far corners of the world away from their headquarters in order to meet the changing needs of their business -- resonated with what we have been seeing in the market. So I asked my colleague Thomas Sebastian, based in TPI's Bangalore office, to share his perspective on this trend.  His dispatch follows.

"Corporations are indeed going places: They’re going where they can find markets, capital, talent and sources of goods and services. And they’re taking their most trusted executives along for the trip.

For example, Wim Elfrink, chief globalization officer (a real title), has just moved to Bangalore, where he will oversee the execution of Cisco's globalization strategy.  Cisco believes that India, with its educated workforce, market opportunities, rich history and supportive culture, is a great location from which to execute its globalization strategy. In an unprecedented move, Cisco will move one-fifth of its top brass to India over the next three to five years!

The following points are anecdotal but illustrative:

>     There are a whole cluster of global professionals of Indian origin who have decided to head back “home” and seek opportunities similar to those they went in search of when they first left India. Depending on whom you talk to or what sort of magazines you read, the estimates of RNRI (Returned Non Resident Indian) professionals vary between 25,000 to 50,000. My own colleagues Siddharth Pai (managing director of TPI in India) and Guruprasad Krishnamurthy (a recent addition to TPI's advisory team in India) are both Americans of Indian origin.

>     Last year I spent 40 weeks on four continents advising several global clients across a host of industries on their global sourcing strategy. Many of my colleagues had similar work schedules.

>     I also happened to work on a client engagement in India in which TPI, a Texas-based firm, was retained to advise on a multi-tower sourcing transaction for the Indian branch of an Australian subsidiary of a Scottish company. That company had an Irish CEO, a Canadian COO, an English CFO, a Dutch head of engineering, a Scottish HR chief and an Indian IT boss, all of them physically located in southern India. The company sources services from an Indian company, has full-scale business operations in Bangladesh and India and just recently raised equity financing from the Indian capital markets."

As the Cisco globalization chief, Wim Elfrink -- a Dutch polyglot from Silicon Valley -- gets settled in Bangalore with his wife, two daughters and the family dog, it’s time for me to catch my next intercontinental flight out to support yet another one of my valuable clients who also has global ambitions.

As Thomas' insights and experience shows, in an increasingly virtual world, leaders still like to feel the pulse of opportunity up close.

 

 

 

Arise, Verticals

Alrighty … The “horizontal” BPO of outsourcing SG&A (sales, general, and administrative) functions such as HR, finance and accounting, call centers and procurement hasn’t reached the take-off velocity many -- including yours truly -- had expected. What’s up with that?

We recently reported on 2006’s full-year contract award metrics. We counted more BPO contracts awarded than ever before. But 2006 was the second consecutive year of double-digit percentage decline in the total contract value of the BPO contracts awarded.

We’re in the middle of a tremendous number of BPO evaluations, with clients of all sizes and industries. This visibility tells us that the core outsourcing business model isn’t the issue affecting slow growth of BPO adoption. Rather, it’s client concern over the service provider landscape.

With so many providers swimming in the outsourcing waters, some clients feel there is no critical mass or expertise. Even the largest and most successful BPO providers are struggling to deliver on the promise of standardized processes, world-class automation, seamless global delivery and end-to-end integration.

The net effect is that many clients chose to do BPO tactically. They contract for discrete processes rather than a broad scope of functions. And they get the benefits of BPO largely through labor arbitrage rather than through real transformation of the business functions.

Those dynamics aren’t the sort of motivators to prompt service providers to continue to invest in their BPO offerings. What to do? Well, we’re seeing a fair degree of bet-hedging, with providers electing to go down the path of “vertical industry BPO.” A vertical BPO focuses on providing various functional services in a limited number of industry domains. Healthcare, financial services, manufacturing and retail are examples of vertical BPO domains. The providers focus on processes that are specific to those industries.

Will that confuse and diffuse the outsourcing market? Or is vertical BPO the answer to the needs of today’s discriminating corporate buyer? We shall see.