Consider the Source

The Productivity Paradox

I'm really interested in the questions being asked about productivity in outsourcing deals these days. I've noticed a pronounced cyclicality in the productivity-related queries from senior executives. 

To be candid, most of the time when we get asked how to measure the effectiveness and efficiency of an organization, it's because someone wants to ward off "the man” who is looking for cost-cutting ammunition.

Then we seem to enter periods when executives (often, in the same companies) come looking for data on the productivity and performance of their internal-services departments for entirely different reasons – including to help them make the case for greater investments or for changed operating models.   

The question we hear framed is, “Are our support operations contributing maximum value to our strategy?”  As much as all of us would like there to be a readily available measure of productivity or efficiency, this is a complex topic that demands a fair degree of management judgment.

Most of our clients look to structure their support operations to meet a future target. They don’t want to organize for yesterday. That’s why measurement requires executives to be involved and vocal through the various possibilities of asset deployment, cost avoidance, return-on-asset strategies, changing workforce demographics, and the like.

We always give providers this advice: Don’t try to solve yesterday’s problems. Help clients achieve a new vision, because that's where you will break through and create real value. That means, among other things, evaluating current and projected volumes of work as well as degrees of automation, standardization and rework. It also includes quantifying AND qualifying the potential benefits of scale, transportation of work to lower-cost centers and the availability of specialized marketplace providers.

Net: Productivity ratios and metrics exist, but they alone won’t provide what the client really wants, which is the answer to the question of how their sourcing relationships can directly contribute to their organization's strategic agenda.

Bulls vs. Bears

Our most recent TPI Index quarterly report caught the attention of some outsourcing heavyweights, including executives at certain service providers who are not happy with our outlook for 2007. One even told me, “Your last report is really hurting the outsourcing industry.”

What we reported was largely retrospective, and no one has offered any facts to disprove our tally. To recap: We said that the first quarter saw a dramatic decline in the number and value of larger commercial outsourcing signings, compared sequentially and year-over-year. We offered the view that 2007 was stacking up to be a relatively soft year for new contract awards, continuing the trend begun in 2006. 

Our forward projection is based on our own pipeline of transactions underway, and what we know to be happening in the marketplace. We don’t claim exact precision, but it’s been proven over the past handful of years that we’ve got a pretty good sense of the industry.

Nevertheless, more than a few service providers have responded to me with word that their new business pipelines are stronger than ever. They tell me that they are counting a huge slate of opportunities and are struggling to put enough salespeople out there to cover all those deals-in-waiting.

Why the gap?

From our vantage, many of the “opportunities” for which the provider community is marshalling their sales forces are really early-stage strategy situations – cases where clients are trying to figure out whether there’s a pony worth riding in the outsourcing ring. 

What is clear is that the marketplace needs more education, and clients don't appear ready to cut outsourcing deals as often as they did in the recent past.I'd appreciate hearing your thoughts on the demand scenario.

The New Service Providers: 'Lift and Shift' Becomes 'Support and Drive Change'

The outsourcing industry took root and grew its first branches on the idea of transferring people, processes and assets from a company or other organization to a service provider. Sure enough, some in our industry still use the phrase “lift and shift” to describe the essence of the business model.

Yet there are many factors coming together to shift the industry away from the “lift and shift” approach.  Offshoring and service provider defined services (those that offer more or different services than the client currently has, or an “orange” to the existing client “apple”) are just a couple of many examples of how the industry has elevated its game.

If you're among those who buy the notion that we’re experiencing a new form of sourcing – less “out” and more “pure” sourcing based on long-term business goals – then I’d like to draw your attention to a very interesting requirement some sourcing clients have begun using.

Essentially, these companies are looking to select service delivery partners that are committed to doing more than just managing the scope of services under contract. They’re looking, instead, to select partners that will help the client accrue benefits “around the deal” by being agents of change to the business operations that are still retained by the client.This makes evaluating and selecting a service provider a whole different ball game: It’s considerably more subjective, with a focus on the degree to which the client has confidence in the conviction and ability of the candidate providers to make a real difference within the operations of the client.

Do the lowest-priced providers win these games? Rarely.It takes a courageous and visionary client executive to take up this sort of transformation, but we’re seeing it more than ever before.

Offshoring: Better Work, Not Fewer Jobs

We recently held a conference where over 100 of our clients shared their outsourcing and offshoring experiences. The event brimmed with great lessons and examples.

Being a measurement guy, I couldn’t resist comparing this year's event with the one we held last year at which a CIO expressed some anxiety about what he deemed the increasing tendency to “take offshore our American jobs.”

At this year's gathering, that anxiety was still on display. But attendees arrived at larger conclusions about what offshoring truly means in a global economy – who benefits and why.

One attendee called my attention to a survey by the German Marshall Fund, the American policy group that promotes cooperation between the U.S. and Europe. That survey showed around 75% of Europeans and 71% of Americans welcome international trade. (Germany, a major exporter, had the highest acceptance rate at 83%). Yet even though many people generally welcome the free flow of goods and services around the globe, they still fear that such liberalization will, on balance, mean job losses. That's particularly true in the U.S., where the looming presidential election is only turning up the volume on the rhetoric around the issue. 

This is why I'm pleased to report that most of the discussion at the conference this year was about moving work, not jobs. Attendees were focused on how organizations can gain access to new sources of expertise to help meet business goals and grow. For these professionals, it isn't about cutting or transferring headcount. It's about improving operations.

Perhaps this is proof of a fundamentally sounder global economy – one in which demands for capacity and skills prompt executives to look for new sources of capability. It feels that way to me.

The Next Big (Vision) Thing

I’ve spent quite a bit of time in recent weeks with clients who are looking to outsourcing to accomplish some mighty big things.

Our industry has long spoken about “transformation” to mean a sourcing solution that goes beyond a simple fix to pervade an entire enterprise and accomplish something on a bigger scale. Most often the term has been bandied about to talk about overhauling IT, a call center or financial-reporting activities. All those transformations are still occurring and are still relevant.

But what I'm seeing and hearing about is an even more ambitious flavor of change – one that has captured the fancy of some very progressive executives. These leaders share a vision of fundamentally reorienting and resizing their organizations – with outsourced services as the tool for doing so. Among other things, they’re targeting operations that could become more productive by having a more responsive and flexible infrastructure delivered through expert outsourcing.

This reminds me of my days running infrastructure services for a global investment bank that I'd like to think was quite progressive. Indeed, while our scope of responsibility was limited to the basic computing and communications services, the leaders of the bank created forums to directly align technology and operations – essentially to find ways that the outsourced infrastructure services might accrue benefits in productivity or efficiency to the teams that actually used the technology to do their jobs.

Now it's happening everywhere: Executives see outsourcing as a means to a much broader end state, and the transformations they are considering go well beyond the domain limits of individual functions.

Isn’t this just business process outsourcing I'm talking about?  Maybe, but it has a distinct vertical orientation to it – meaning it’s often BPO for companies that are looking to effect the broadest definition of people-intensive work processes.

Conceptually, the idea has been around for a while, but the appetite for change through outsourcing is just now starting to ramp up. It's exciting to be part of.