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 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.

Turning the Worm

By all measures, the pace of new outsourcing contract awards has slowed in 2007. The third quarter reports are out any day now.

The paradox here is the continued strength in the flow of work to India-led providers. You can see that from the providers’ earnings reports. My firm thinks clients are opting for effort-based contracts – paying per worker per hour -- rather than traditional outsourcing relationships that specify the scope and quality of services.

Watch the news in the coming weeks, and I’ll bet you start to see a renewed emphasis on productivity-based and outcome-oriented contracting.  The provider community has the expertise and the tools to deliver great value to clients through real outsourcing, but they must surrender the old ways of selling effort. They have to paint houses like pros.

That said, potential purchasers of sourcing will likely be cynical about such quick cycles in business models. Just as they were getting comfortable contracting for people in low-cost destinations, the business model will change to reflect the rising tide of labor costs influenced by currency exchange rates, taxation policies and rising wages. The prospect of higher labor costs for effort-based contracting won’t be very appealing.

I expect outsourcing demand to suffer from these shifts for a while, at least until we converge on a sustainable business model that blends cost, capacity, and capability. That’s the model that will create long-term value.

 

Crowdsourcing

Mix equal parts outsourcing, Web and open innovation, garnish with “The Wisdom of Crowds” and you get “Crowdsourcing.” Just don’t expect to see it in the upper echelons of Corporate America just yet.

Author Jeff Howe (http://www.wired.com/wired/archive/14.06/crowds.html) characterizes this phenom as distributed labor networks using the Internet to exploit the spare processing power of millions of human brains, much the same way that dispersed computing projects harness the processing might of millions of chips.

MySpace, eBay, Wikipedia, and the vast universe of Linux developers further illustrate the power of crowds properly organized. Howe’s article makes the point that these Web initiatives – previously taboo with old-line businesses – now realize that technological advances are allowing them to source to anyone connected to the proverbial network.

At the same time, such advances are dissolving the cost barriers that once separated amateurs from professionals. Now all the diverse folks who make up the crowd can connect with companies in everything from pharmaceuticals to television. Hobbyists, part-timers, and dabblers have a new source of income, and businesses have a new, cheaper, and often more inventive source of solutions.

I get asked whether this Web 2.0 model is taking root at larger companies with serious business processes. Answer: Not yet, anyway.

“The Wisdom of Crowds,” a deservedly popular collection of work by New Yorker writer James Surowiecki explains that for the crowd to be wise, four conditions must exist: diversity of opinion, independence of members from one another, a specific kind of decentralization, and a good method for aggregating opinions.

Similarly, Howe highlights what he sees as the “Five Rules of the New Labor Pool”: The crowd is dispersed. It has a short attention span. It is full of specialists. The crowd produces mostly crap – but also finds the best stuff.

I believe most serious corporate executives aren’t yet ready to let the crowd sort the good from the crap. But I still think it’s worth watching the crowd.

Mad Deskillings

Hip-hop performers are sometimes said to have “mad skills,” and this is a good thing. I’m hearing about what might be called “mad deskilling.”

It is not a good thing.

More often in global outsourcing these days the rather artless (literally) words deskill and deskilling are being bandied about. The dictionary defines deskilling as “the elimination of the need for skilled labor in an industry, especially by the introduction of high technology.” It also refers to the downgrade of a job or occupation from a skilled to a semiskilled or unskilled position.

You can guess how I feel about this. I neither like nor agree with the assertion that jobs can be dumbed down to the point that they can be performed in a piecemeal manner. Performed more efficiently? Sure. But done without any design, master plan or measurement? Absolutely not.

Collaborative work is work done as part of a group. And that means there’s a shared goal or at least a common purpose. As with almost any group activity there is some element of social interaction to the work in addition to the task fulfillment. Trust comes into it.

Again, there are absolutely some work processes that are candidates for simplification and streamlining – to the point that they can be performed by lesser-skilled people. Automation helps.

But if the outsourcing and offshoring industry insists on deskilling work processes as a core strategy for making work portable, how will the aggregate value of process transformation ever come about? And where’s the much ballyhooed value “beyond the scope of work” going to come from in such an environment?

The No. 1 concern we hear today from clients is employee turnover. They view the churn at their service providers as a significant business risk. They’re right. And emphasizing deskilling is part of what’s creating this risk.I believe the workers who make up the global sourcing industry are looking for challenges, not rote tasks. They want to be part of an industry that adds value, not just acts as worker bees optimizing a task to the point of marginal cost.

Beware of the mad deskillings!

So Your Job is in the Outsourcing Cross Hairs

No question: If your job is “in scope” for an outsourcing endeavor, you will experience change, which can be disconcerting to say the least.

Knowing that knowledge often brings comfort, I thought it might be useful to share some of the tactics that companies use when trying to decide how/if to transfer employees to an outside service provider.

They frequently ask these questions or ones much like them:

• How would you describe the culture and demography of your organization? What's your staff turnover rate?

• How will you handle the sensitivities and concerns of transitioned staff?

• How do you typically integrate and develop new employees?

• Describe the process you use to harmonize conditions between a client's staff and your own in line with "generally comparable (contractual) terms and conditions."

Transparency and providing people with as much lead-time as possible are key principles of well-designed sourcing programs, and the good news is that most companies genuinely are committed to ensuring consistent and fair treatment of employees in the event of outsourcing.

At the same time, most of the industry’s service providers are looking to add talent to their ranks.

Farewell to a Quiet Leader

The global outsourcing industry lost a truly special compatriot this week. David Coward, a colleague at TPI, passed away suddenly.

Memorial tributes are often smarmy and trite, and I know that David wouldn’t care very much for any fawning over his contributions as a human being. Simply, he didn’t think of himself as being very special. He wasn’t wrong about much, but on this point he was simply mistaken.

It’s ironic how special he was to so many others. I can’t speak much for David’s family and friends, except to say that he adored his two children and greatly valued his personal relationships. He always made the time – which is a challenge in our business – to focus on the life side of the work-life balance.

I know that he often struggled with the demands on his time, and sought assurance that it was OK to have a personal life outside of our workplace. He set a great example of having priorities, and living them.

While I could go on about all of the great client work David led, and the many industry players he encountered, all that really tells us is how many lives he touched.

David was an expert in his field, but he was the most unpretentious individual you’d ever meet. Humility was his middle name.

So …

•  Whether you’re in the ITO or HRO side of our industry …

•  Whether you’re part of ACS, EDS, IBM, Accenture, Hewitt, Fidelity, Convergys, or other service provider colleagues …
  

•  Whether you’re a client such as General Motors, Cardinal Health, Dana, JPMorganChase, Metromedia Restaurant Group, Wyeth, GMAC, Delphi, Towers Perrin, Aetna, or countless others …  

•  Whether you’re part of the TPI family, an alumni or competitor …

… if you ever met David, you’ll remember the experience forever.

The sun will rise tomorrow, but one thing is for certain – we will miss our gentle giant with the Texas twang. Rest in peace, J. David Coward. You are already missed.

The "I" Word

The word innovation gets thrown around in the sourcing business as much as it does in seemingly every other industry. And, in keeping with usage elsewhere, we often hear the word without any clear definition of exactly what kind of new stuff is being done or how precisely it's supposed to make our lives better.

So just what does innovation in sourcing look like? A little over a year ago my firm reached out to clients, practitioners and providers with what we called an Innovation Agenda to suss out the answer to that question. We came up with four planks:

  --Refreshing contract terms: Sourcing has a long way to go, but it's already seen a lot of change, and the old ways of establishing a relationship often don't cut it.

  --Rethinking benchmarks: If the only reason you measure the price of a service against what everyone else is paying is to get your costs down, you aren't doing yourself or your company any good.

  --Gainsharing: Both sides of a relationship ought to be able to expand their risks and rewards as sourcing relationships grow more solid and sophisticated.

  --Change management: Not just another jargon phrase. Sourcing has to develop systems to better align the roles of client and provider.

And here's some good news: The first two of these have already gotten a lot of good buzz in the industry and even some actual application. Progressive minds are moving together. The last two are well on their way to seeing the light of day, and I'm pleased (and should disclose) that my firm has offerings for both gainsharing and change management.

OK, so I've told you about near-term innovation. What's next? I see a couple of possible trends.

The first entails better comparisons between what an organization says it wants and what it's actually buying. The "lift and shift" model of reassigning jobs to a lower-cost environment is just that. If it's being talked about – and measured and criticized – as a more robust sourcing solution that should produce ever-more benefits for the organization, then we're talking about apples and oranges.

Another thing I think we'll see is contracts that are better able to manage the increasing number of multi-sourcing relationships.

I want to keep the Innovation Agenda going. If you're interested in suggesting new planks, please drop me a note or see: http://www.tpi.net/knowledgecenter/innovationagenda.

KPO: The VSOP of Outsourcing

More companies in all industries are looking into Knowledge Process Outsourcing – that is, outsourcing highly-skilled jobs. And they’re finding out that KPO is quite different from “traditional” outsourcing.

When buying outsourced services, organizations frequently hear about the benefits of scale and standardization. The idea is that a resource serving only a single client can’t be as efficient as one that is used by multiple clients. Supply and demand play a role in this value proposition, of course, but that preceding pitch is the essence of outsourcing’s business promise.

In KPO, the motives frequently transcend those of scale. What we’re seeing, instead, is the tendency to pursue KPO for purposes of capacity.  It’s all about gaining more capability – at favorable prices, sure, but the access to skilled professionals is the driver of these deals.

When companies have a hard time attracting and retaining skilled technicians to perform analytics, research, engineering, legal or marketing tasks, KPO can be the answer.

And more often than not, the pursuit of a KPO solution leads to captive offshore operations, which tend to start small and grow over time. Why captives? Because these models better protect the competitive advantage of a KPO and help to build institutional knowledge for future expansion.

My colleagues, Indy Banerjee, Jui Narendran and Rukmini Priyadarshini just published a great piece of research on the offshoring component of this topic, Knowledge Process Offshoring (KPO): A Balanced View of an Emerging Market.  It’s worth a read.