Consider the Source

The Sourcing Chicken Game

Today's blog on negotiations for sourcing transactions comes from Peter Allen, Director & Managing Partner, TPI.

Businesses play the game of chicken for many sourcing transactions, and that is not good for either party.

A recent survey by the well respected International Association for Contract & Commercial Management (IACCM) indicates that negotiations are dominated by quarrels over short-term considerations. Battles revolve around short-term costs, risk allocation and self-protection, driven by the continued perception of adversarial roles between buyers and providers of outsourced services.

Recently, IACCM published an excellent and timely compendium of contractual terms commonly encountered as points of contention in trading relationships. It includes those specific to sourcing contracts and is a good starting point for examining unfulfilled expectations.

A Rising Tide Lifts All Boats?

Today’s guest blog on European outsourcing comes from Duncan Aitchison, Partner and President, EMEA, TPI.

The outsourcing market has seen a near seismic shift over the last two years in the geographic profile of market demand. No one is standing still.

For the majority of the past three decades the United States has been the leading buyer of outsourced services. In fact, just five years ago it comprised 66 percent of the outsourcing contract value. By the end of 2007, this picture changed dramatically. The United States accounted for less than 30 percent of the global contract value while Europe led by 50 percent in the same period.

So how has this change impacted the service provider community and the European heritage providers in particular?

Firefighter Quits, Takes Job as Innovator

The pundits are everywhere espousing evidence of the failure of outsourcing. Look at all the “failed” relationships, they say.

These same commentators don’t seem to have the numbers to back up their pronouncements, but let’s agree that much smoke has been created around this topic. There’s even some fire. Except it doesn’t always – or even frequently – start where you might think. And it doesn’t have to burn down the house.

Conversations with many experienced client executives – the people who manage active outsourcing arrangements – do reveal some ongoing “fire fighting” in their relationships. The causes and severity vary, but one theme typically emerges: Most clients just aren’t equipped to manage all the dimensions of commercial outsourcing arrangements.

In fact, the skill sets and nuances required go well beyond what you need for standard contract management. And even if a client has the DNA for the job, he or she may not have the tools to stay on top of the relation and make it produce results beyond the basic service being provided.

Service providers heartily agree. They document how clients and providers enter into a relationship whose complexity may not be understood up front. That builds up stress over time as expectations don’t match and the stuff that really matters – and that may not be in the contract – gets ignored.

We recently were asked to measure several client governance teams to see how well they performed the essential activities that contribute to a healthy buyer-provider relationship. Participants were able to benchmark their organizations with those of their peers. At the risk of fanning flames, here are some results: 

• Only 19% of clients feel they provide enough training for members of their governance organization
• Only 25% of clients did a formal assessment of the skills and capabilities of their original governance team members against a defined job description for the new role
• Only 10% of clients have intra-company best-practice forums for outsourcing management (suggesting that most activities are "stove piped" and re-created multiple times across a company)    
• 60% of clients believe their internal organization is as much to blame or more so for root causes of outsourcing dissatisfaction (versus dissatisfaction caused by the service provider)
  
  

What this tells us is that the time has come for the science of governance over outsourcing relationships to become more prominent. We all know that service providers sometimes don’t measure up. But we also are learning that clients need to be accountable in managing their relationships if they want to move from the role of fire douser to a position of leadership supporting innovation.

TPI’s Governance Excellence Program, including the benchmarking facet, is described here [http://www.tpi.net/knowledgecenter/governanceexcellence/] for anyone interested in learning more.

New Breed: Today’s CIO Must Manage Sourcing Portfolio Too

An insightful post  by John Sloat on Information Week’s Web site uses the example of Australian airline Qantas (disclosure: a TPI client) to make the point that today’s information leaders need to be able to juggle their own homegrown projects with managing multiple, even overlapping, sourcing relations with outside vendors. 

Gone are the days when CIOs were judged solely on their ability to deliver and maintain new systems. Now the performance review measures whether the CIO can balance a technology strategy with a comprehensive “resourcing” plan to deliver the Three Cs: topflight Capabilities, desired Capacity and best Cost.

Few companies believe they can get all three without turning to outside providers, which is how CIOs took on the extra responsibility of managing a portfolio of external resources.

From my vantage, the progressive CIOs are dedicating significant time to their resourcing strategies, trying to get everything in line with the overall business plan.

Any astute CIO knows that outsourcing has to be considered as a service-delivery option. It certainly is the appropriate choice when an external firm can do a job better than you can. But the hard work only begins at this point. Managing the seams between outsourced service and internal function is more art than science.

Look for the stock of the most artful CIOs to keep climbing.

 

Processes or Services?

For nearly a year, I’ve been carrying around an article that was sent to me by a colleague. I seem to pull it out on every trip, reading and re-reading on planes and trying to assess whether it has anything to say about any of our clients.

Thomas Davenport's article, “The Coming Commoditization of PROCESS,” was published a couple of years ago in the Harvard Business Review. I've read it enough times that you don't have to, but should you be so inclined, it's here: http://harvardbusinessonline.hbsp.harvard.edu/hbsp/hbr/articles/article.jsp?articleID=R0506F&ml_action=get-article&print=true

Davenport's premise is that a broad set of process standards soon will make it easy to figure out whether a business capability can be improved by outsourcing it. Such standards allegedly also will make it easier to compare service providers and evaluate the costs/benefits of outsourcing. Eventually these costs and benefits will be so transparent to buyers that outsourced processes will become a commodity, and prices will fall dramatically.

Davenport writes that the low costs and low risk of outsourcing will then accelerate the flow of jobs offshore. He concludes that these changes are already happening with some business processes and eventually will spread across all commonly performed processes.

Hmm.

Despite the convenience that is implied by Davenport, that’s not what I hear clients are looking for. In fact, many have tired of the endless droning on about “best practice processes,” or “process reengineering,” or even “process portability.” One client recently told me, “Peter, your industry seems to be in love with its processes when what your clients want to buy are services.”

It's a notable distinction.

Let's put a real-world example under the microscope. For instance: Has the use of the Software Engineering Institute’s Capability Maturity Model really leveled the software development playing field? Granted, it’s been instrumental in improving the quality of software processes, and it’s a fine measure of legitimacy as a development organization, but do clients really select providers based on their CMM level? Not that I’ve seen.

Process standards are supposed to create confidence in the effectiveness of the end result. They aren't there as the sole criteria for selecting a service provider. It’s the services that really matter, and those services are distinct by virtue of the way in which they are delivered.

As we like to tell our clients, the how is just as important as the what in successful outsourcing.

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.

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.

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.