Consider the Source

October Surprise: Deal Surge, and India Goes Large

The past year has brought a striking slowdown in new outsourcing contracts, but October appeared to break the trend. I offer some commentary on that month here, doing so in the context of the entire year.

Providers got over $15 billion of total contract value (TCV) in October, the highest TCV tally for a single month in the past two years and almost twice the TCV as the next highest month. Three mega deals accounted for almost $8 billion of the TCV, and one -- IBM and AT&T – accounted for $5 billion. Business-process deals figured prominently in the month.

November doesn’t look nearly as good, but more about that month in a moment.

India-based service providers inked several mega relationships in October, in keeping with a recent trend: While many consider 2005’s ABN Amro/TCS/Infosys deal as the high-water mark for Indian providers, since then we’ve seen these providers expand their client list to other large customers. And, in some cases they have done so without employing the relatively slower “penetrate and radiate” method that involves getting a foot in the door then selling the client more services over time. Rather, the India-based providers are showing their ability to win some truly big deals.

While the Indian providers may still be buying market shares (think deals like TCS-Pearl, Genpact-Citigroup and Philips-Infosys) or winning business with a long-time captive client (BT-Tech Mahindra), they also are starting to compete and sometimes win on very large deals that don’t involve clients they’re already working with.

The next trend to surface may find smaller India-based service providers (EXLService, FirstSource, WNS, HCL) starting to look outside their captive client base for a big deal.

Now the cautionary kicker: We have not seen many deals in November, and if this month and December revert to the pattern of the rest of 2007, October could prove to be a blip.

Look for lots more detail when TPI hosts its next Index call in January.

The Buck Stops There?

Today’s guest blog on the impact of foreign-currency fluctuation and inflation on outsourcing contracts comes from Chris Kalnik, a TPI partner who leads the Financial-Analysis practice.

The sourcing industry is pushing service providers to act more like partners than labor-cost savers. That fact, coupled with some undeniable global macroeconomics, suggests we shouldn’t be surprised that the providers are seeking more equitable treatment when it comes to shouldering currency and related risks.Lately we’ve been noticing that outsourcing clients and providers are having a hard time reaching agreement on the acceptable impact of foreign-currency fluctuation and inflation. The U.S. dollar’s continual drop over the last year, coupled with wage inflation in India, has exacerbated this situation. The result: Service providers want clients to assume more of the risks associated with these elements.

 The common practice has been not to allow for price adjustments for foreign-exchange fluctuations in outsourcing contracts – the rationale being that service providers can hedge currency exposure. But as the dollar continues to weaken against India's rupee and other currencies, Indian and other providers are pushing back. For example, the head of pricing for a large multinational provider recently told me that the company has begun explicitly building the risk of further dollar deterioration into prices, and unless the client is willing to share this risk (both upside and downside), the prices it pays will be higher.

For inflation, the commonly accepted practice has been to allow for price adjustments based upon fluctuations in the receiving country (usually the U.S. or in Europe). This is done by measuring inflation via the consumer price index or other, similar, broad-based, government-published indices.

But with most of the offshore delivery centers located in developing countries with relatively high labor cost inflation, service providers are pushing for contract rates to be adjusted for inflation based on the state of play in the countries from which services are being delivered. While high turnover rates in these same delivery countries helps to ameliorate some of the net labor cost increase, the providers are still experiencing higher cost pressures than they are able to recover from the traditional inflation.

I predict that we will continue to experience more negotiation pressure on these fronts, and we may well see contract terms and conditions whose final negotiated outcome is different from what it has been in the past.

Managing Global Development Risk

I couldn’t be happier to announce on Consider the Source that two of my colleagues and friends at TPI, Jim Hussey and Steve Hall, now have their labor of love in bookstores: Managing Global Development Risk.

There are tons of books on offshoring and global services delivery. Some address up-and-coming offshoring countries that have the education, labor arbitrage and political stability to move your organization to the next level. Some help you define your service delivery framework, others tell you how to conduct an RFP process, and yet others guide you in managing your sourcing relationships. However, this is the first book that I’ve seen that is a resource and reference tool to apply project management to an offshore component.

Overseeing a project management team in which some members are offshore is much different than traditional project management. This book is a practical “how to,” offering sound project management principles to help the software development managers to best execute development when its people are all over the globe. I’d recommend Managing Global Development Risk to anyone in the sourcing community that wants the tools, techniques, and knowledge necessary to achieve project success with offshore resources.

Congratulations Jim and Steve on a job well done!

The F&A Paradox

A number of Finance and Accounting (F&A) functions are similar from company to company, as are the goals: Most companies want to tackle costs, improve performance, efficiently spend money and manage revenue cycles, in addition to undertaking the required accounting and reporting.

The relatively standard processes imply that technology can lend a big hand as long as the people who perform those F&A functions have a fair degree of functional expertise and conform to common processes.  That said, tax complexities, revenue-recognition policies, industry specific requirements among other factors present challenges, but these issues are almost always under the watchful eye of an executive who is highly motivated to achieve the desired accuracy and compliance.

Now contrast this situation with what you see in most Human Resources departments of organizations where it’s not uncommon to find many nuances relating to the geography, business-unit operating models, and various employee programs. One might think that achieving common ways of doing things in HR would be more problematic.

The difference between the two functions raises the question: Why is it that the predominant sourcing model for F&A is labor arbitrage? We see much more standardization and “managed services” orientation in HR outsourcing than we do for F&A functions. Whether companies are using a captive operation or outsourcing, F&A has become the poster child for effort-based sourcing.

So far, the promise of a vibrant market for F&A outsourcing is unfulfilled. The contracts are labor-oriented and the investments made by many of the leading service providers to standardize offerings aren’t being employed. Which leads one to ask: What will it take to change this? Why aren’t CFOs more receptive to a managed service around accounts payable? Might this be a situation whereby service providers are not providing comprehensive solutions to F&A executives? Perhaps it a case where finance managers cannot relate to “managed services” offerings? Or maybe it’s a relatively higher degree of integration among and between finance processes that is making standardization so elusive?

Whatever the cause, today’s outsourcing landscape offers a much higher degree of maturity for HR services than F&A services. Is the lure of cheap labor so compelling that the promise of a managed service for F&A is just not worth the effort?

Reaching Out to Touch

If outsourcing is supposed to capture the benefits of global reach in an increasingly connected world, how come so many companies that are using outsourcing services still insist on micromanaging precisely where their work is being performed?

Set aside for the moment those companies that have legitimate concerns about regulatory requirements preventing them from doing work in certain locales. These clients need to review and approve where the job is getting done.

For the vast majority, however, is it really relevant whether their invoices are scanned in Guatemala or China? Shouldn’t the focus be on the quality of the output?

Service providers are becoming more anxious about clients demanding ever more detail on locations used for processing their work. Sure, the Mattel lead-paint ramifications are alarming, but this blog and our discussion is mostly about services, not product manufacturing.

Balancing geopolitical risks is a worthy goal, but it can be achieved by agreeing on a list of processing locations rather than insisting on detailed review and approval of all work flows. In other words: Don’t want work done on your company’s behalf in Myanmar? Say so in an upfront agreement.

The benefits of outsourcing come through giving the industry’s service providers the ability to achieve economies of scale, scope and quality. That means that they must balance supply and demand, flowing work to the most appropriate resource with a fair degree of flexibility.

Focusing obsessively on where the work is getting done is a great example of managing the effort rather than managing the outcome. The benefits of resiliency and cost efficiency come through a truly global delivery model.