Consider the Source

Sourcing Strategy Drivers: Incentive to Automate?

By Peter Allen, Partner & Managing Director, TPI

In May, I posed Three Big Questions with regard to sourcing strategy. The last question is one of the more common concerning the alignment of incentives, specifically around the topic of automation and process improvement. The argument goes along the lines of: If you’re being paid for effort, what’s the motive to become more efficient?

Lest you think this is one more negative artifact of wage-based contracting, I’d remind you that this is a topic linked to the lingering issue of “innovation” (or lack thereof) through traditional outsourcing, too. 

And, while it’s more acute for considering the outsourcing option, I also hear it in the context of moving a process to a captive offshore location. 

At the risk of stating the obvious, service-based relationships tend to work when the objectives of the parties are made to align.  In the outsourcing industry, I’ve long felt that there is an inherent conflict for many relationships that lack an overt design around motivations for improvement. That is, most service providers tend to gear their client support organizations around an objective for revenue expansion/growth.  This is commonly diametrically opposed to the priority for the client, which is to spend less money.

We guide our clients to focus on enabling the providers with the ability to enhance their profit margins over time.  This means that they need to be remunerated for output, not for effort.  Conversely, our guidance for the provider community is to elevate the significance of profitability over revenue growth.

Doing this will motivate the parties to reduce errors (reduces cost from rework and rectification) and to commoditize/standardize services so that they can be undertaken by less skilled and lower paid staff.

Without a strategic sourcing design in place, it’s quite common for the “same mess for less” to result.  That said, I can tell you that the benefits of automation, process improvement, and leveraged investments are absolutely possible if the relationship is designed with that end in mind.

Top 5 Actions to Heighten the Strategic Impact of Your Procurement Organization

By Bill Huber, Director, CPO Services, TPI

During tough economic times, procurement is often called upon to “win” price and payment term concessions from suppliers and service providers in order to boost the bottom line. While there is no question that part of procurement’s role is to ensure that a company is paying the best price, the “blunt instrument” approach tends to simply focus on supplier profit margins without doing anything to improve quality or drive innovation that ultimately, permanently removes real costs from the supply chain. 

                                                                                              

Here are five actions that you can take to raise the strategic impact of your procurement organization.

1. Define the target role for your procurement organization. Review your department objectives and formalize the role and results that you would like procurement to achieve for your company during tough economic times. Set strategic objectives in terms of innovation, quality, cost savings and customer service that the procurement organization will embrace as a response to recessionary times, and measure your progress toward those goals.

2. Segment your supply base. A formal tiering of your supply base, with best-practice supplier management processes for the top tier, can have a dramatic effect on the value that you derive from your most important suppliers. Set frequencies for reporting, monitoring, collaboration and financial reviews with each, and require that your most strategic suppliers bring a certain number of innovation suggestions to the table each period. Set a formal process whereby these suggestions will be vetted, with the best ideas submitted for review by an executive-level procurement governance team.

3. Realign your resources. Identify underutilized or misaligned resources, and shift roles to focus talent on your greatest areas of opportunity. Often individuals who have been focused on a particular commodity because of their expertise could bring a fresh perspective to other categories. People who make the greatest impact in their current areas can have an even greater effect on an entirely different category.   

4. Review processes and technology to identify roadblocks and underutilized capabilities. Processes can be slower and more cumbersome than they need to be. Stay on the lookout for procurement processes that were designed to address a past problem that is no longer relevant today. Also, organizations often have only partially deployed procurement technology solutions for lack of resources to support a more ambitious rollout. A second look can reveal underutilized technology that could be leveraged with a different support model to drive faster cost savings or improve visibility or user satisfaction.

5. Evaluate governance structures, and change if necessary. Good procurement governance should enable transparency and balanced decision making. In order for it to be effective, procurement governance must be designed to ensure that important decisions are made at the right level to balance risks with rewards, and to ensure a timely flow of information to the right levels of the organization.  

Implementation of these five actions could ultimately improve the effectiveness of your procurement organization by 3 to 5 percent or more, increasing your impact on the bottom line and transforming the role that procurement plays within your company.

TPI’s CPO Services experts can collaborate with you to assess your current procurement processes, then help you identify and implement strategies to improve quality, drive innovation and permanently remove real costs from the supply chain.

Contact us today to begin the dialogue.

Sourcing Strategy Drivers: Fix Before Ship?

By Peter Allen, Partner & Managing Director, TPI

Previously, I brought up some common questions that arise in sourcing strategy (see: Sourcing Strategy Drivers: Three Big Questions). The first of which was, “Should you fix and ship or ship and fix?” This question related to the adequacy of a business process’ operation and whether that process should be remediated prior to altering its delivery model is important for many companies considering offshoring or outsourcing and has been frowned upon lately (see: Fix and Mix Approach to Outsourcing, Network World and 7 Sins of Offshore Outsourcing, Baseline).

In days past, I was a strong advocate for fix before ship.  It made little sense to hand a broken business process – whether it was a BPO function such as invoice processing, or an IT process such as server administration – over to a different service delivery model until it was running at an adequate level of performance.


Why?

The prevailing arguments were twofold.  First, in the era of “lift-and-shift” sourcing there was a tendency to merely sustain that broken process into the future.  One client coined the phrase “same mess for less.”  The means of contracting for transformation of a business process were inadequate and the industry simply working on the basis of achieving cost benefits by sustaining the status quo at a lower price of operation.

The second argument said that the client should harvest the “low hanging fruit” of benefits prior to giving  the opportunity to a third party. 

While both of these examples depict an outsourcing scenario, the same issues existed in moving processes to captive offshore operations.  Only mature/stable processes were candidates.

I must say that my thinking has evolved on this point.  I think that the abilities of the outsourcing service providers to tackle difficult transformation processes have matured incredibly.  In fact, most of the providers I speak with are not very excited about lift-and-shift opportunities.  Intuitively, they know that the expectations of their clients, over time, will be for process improvement.

Now, it’s dangerous to generalize and there are certainly cases where fix-and-ship should prevail, but I am guiding the executives I speak with to think seriously about their own abilities to do the fix work themselves.  Maybe their captive center has a better idea?  Maybe their outsourcing provider is making its own investments in new approaches.

One of the cornerstone questions on sourcing strategies is this one, and the answer is increasingly coming down on the side of ship-then-fix.

 

Desktop Support While Outsourcing

By Lynn Alley, Director, TPI

Thanks to TPI Top 5 reader Ryan H. for suggesting our latest topic.

One of the most frequently outsourced business support functions is the desktop environment. Companies commonly combine desktop sourcing  with their infrastructure services and service desk(s). Generally, the main cost drivers for outsourcing desktop support services revolve around the locations where people require support and receive services — whether it’s at the service desk, remote support or onsite. In a pure desktop environment, these five components tend to represent the highest costs on a per-seat, per-month basis:

1. Asset life cycle management. The loss of assets and improper accounting of purchased and leased assets is one of the most significant costs associated with an enterprise’s desktop environment. Asset life cycle management runs from acquisition to disposal, and companies continually struggle to implement solutions that properly track and manage their technology assets. This is particularly important today as businesses consider refreshing their hardware and software assets.

2. Image management. Maintaining standard desktop configurations in a global enterprise model — with its inherent trade compliance issues — has become a great challenge for most corporations. Improper management means greater support and maintenance costs. Implementing offshore software build, engineering, and testing centers has created compelling cost reductions for this component of desktop support. Remote software distribution solutions successfully reduce costs further, though cost and technical challenges remain for deployment to some remote, non-networked devices. 

3. Break/fix support outside the warranty envelope. Break/fix support will retain its relevance even as most organizations are attempting to move support away from the expensive desk-side and to a level 0/self-help solution. A variety of solutions exist for providing break/fix support worldwide, even in very remote locations. Coupled with diagnostic technologies and leveraged resources, monthly costs can be greatly reduced.

4. Installs, moves, adds and changes (IMACs). Many organizations cannot adequately quantify and forecast their IMACs for hardware and software at the desktop — particularly for hardware. It’s no surprise that, in turn, it is also a difficult cost to predict in a sourcing arrangement. Contract language and definition in this area can eliminate significant contractual disputes once IMACs are sourced.

5. Creating and managing a scalable “follow the sun” software support model. Remote management for global enterprises with multiple language requirements (both verbal and written communications) is a significant part of monthly desktop support costs. A “best-shore” approach to providing this 24x7 support has yielded cost reductions and improved service for many enterprises.

One of the most frequent concerns associated with outsourcing desktop services is whether a company is paying a fair price for the services it receives. Industry cost comparisons are difficult to ascertain at a glance since the scope is highly variable. TPI’s End User Computing Competency Center advisors assists companies in identifying answers to ensure that substantial and sustainable improvements in business operations are realized.

Have any desktop sourcing best practices to share? I would like to hear about how your organization has mastered this function and improved operations.

Sourcing Strategy Drivers: Three Big Questions

By Peter Allen, Partner & Managing Director, TPI

I tend to spend a good amount of my time helping organizations think through whether or not to offshore or outsource some of their business processes. It’s always an invigorating experience to help dig into the opportunities and risks associated with such significant changes to how business functions are organized and delivered. 
Some of the more common questions that arise with regard to sourcing strategy include:

• Should we fix and ship or ship and fix?  This question relates to the adequacy of a process’ operation and whether or not that process should be remediated prior to altering its delivery model.
• Is there significant value in IT-BPO synergy?  This topic is especially sensitive as companies look to gain benefits beyond wage arbitrage. The answer will steer the consideration of internal/external sourcing options and the candidacy of the providers. 
• What is the incentive for a service provider to automate/improve?  This is linked to the lingering issue of “innovation” (or lack thereof) in outsourcing.  It’s more acute for considering the outsourcing option, but I also hear it in the context of moving a process to a captive offshore location.

I’ll be sharing my views on these three strategy-driving questions in coming blog postings, but would welcome your thoughts.  Are there other drivers of strategy that you see of equal emphasis?  Let me know!

New Mecca of Outsourcing – Middle Eastern Region

By Dinesh Goel, Partner, TPI

As the outsourcing industry globalizes, new regions and countries are joining the bandwagon both as markets of demand for outsourced services as well as to supply talent for servicing the demand.

With the onset of 2009, TPI has targeted a few countries/regions as new geographies for offering sourcing advisory services. The selection criteria, apart from other factors, obviously included the current volume of outsourcing activity and the medium term potential of these markets. The mid-east region is one example.

In discussions with prospects, service providers and market influencers, we find that this is an interesting and encouraging market for multiple reasons.

• Firstly, we find that in places such as Dubai, businesses are going through a severe downturn due to current economic pressures – a phenomenon that is fueling interest and potential demand for outsourced, or even off shored, services.
• Secondly, in general the consulting industry is well established for important initiatives which are complex, transformational, unprecedented or potentially risky. That seems to be the trend with both the public and private sectors.
• Thirdly, there is considerable demand for implementing contemporary IT solutions and infrastructure with large spends as organizations want to become more competitive and prepare for growth in countries such as Saudi Arabia.

An important indicator of the growing interest in outsourcing: Arab Outsourcing Conference is being held for the first time ever this year in Dubai. The organizers are bullish about senior level participation in this conference.

However, outsourcing of services – other than AMC or break fix support contracts – is not an established and mature model for the most part across the region. Hence all interested market participants should expect, as in any other such market, to spend cycles educating the buyers of these services on the benefits and risks involved.

I am very interested in learning from your experiences and thoughts on this region.

 

Globalization of Outsourced Services Industry

By Dinesh Goel, Partner, TPI

The outsourced services industry is morphing into a truly globalized industry – and sooner than later. This acceleration is fueled by the current recessionary conditions in the traditional markets of demand for outsourced services. I believe this is a desirable by-product of the current downturn.

Large service providers – both of multinational and Indian heritage – are challenged to achieve growth and profitability in their current large markets. However, if you carefully review the results of Accenture and IBM vs other (read: Indian heritage) providers, you will find that there is a much higher degree of resilience reflected in their results despite the current gloom and doom environment. What is that attributable to – clearly the good old principle of diversification of their books of business. Not all economies are reeling under the same degree of pressure, and on top of that, the emerging economies are highly under-penetrated (read: immature) in their services outsourcing. All in, it makes perfect sense for providers to look elsewhere when faced with challenges in the more developed markets hence their focus on markets such as India, Brazil, the Middle East, Central Europe, China etc.

Additional flavor of this globalization trend is that it is bringing home the point – one size doesn’t fit all – very emphatically to the providers. Each market has different nuances, and it’s not just a cost arbitrage (off-shoring) play. Markets are at different points of maturity in their trajectory of services outsourcing, not to mention very different economic growth rates, cultural and linguistic factors, regulatory scenario etc., thus requiring differing winning themes in creating healthy outsourcing demand. The value propositions range from variable capacity on demand, investments from providers for supporting high business growth needs, specific service delivery capabilities to increase speed to market or service delivery performance, innovative solutions, commitments to allow predictability of cost and performance over time, releasing management bandwidth to focus on core business, transferring the headache to service provider for delivering competitive services on a contemporary infrastructure, multi tenancy platform based solutions, etc or any combination of the above.

I believe this trend will compel the service providers to enhance the maturity of their service offerings and capabilities, thereby contributing to the overall higher level of industry maturity and globalization. Who said everything related to the current business environment is gloomy?

Outsourcing in Q1: Back to the Future?

Today's blog comes from Peter Allen, Partner and Managing Director, TPI

When our January TPI Index summarized 2008, I wrote that “the stable and nimble ships will ride out the storm and move further up the value chain as a result.” Well, with Q1 in the books, we can report that the storm looks a lot like what we saw around the recession of 2001, and prior to the EMEA-driven surge of 15 months ago. See our TPI Index report at:  http://www.tpi.net/pdf/index/1Q09_TPI_Index_Presentation.pdf

With 141 contracts awarded in Q1, valued at about $19B in Total Contract Value (TCV), and nearly $4B in Annualized Contract Value (ACV) the quarter was down 21% Q/Q and 22% Y/Y. The ACV awarded in the quarter decreased 18% Q/Q and 27% Y/Y.  In fact, among first quarters the TCV was the lowest since 1Q01 and the ACV awarded was the lowest since 1Q03.  This weaker award profile has been apparent since 3Q08.

That’s not a surprise to the followers of the booking reports of the major service providers. There were 48 different service providers winning at least one contract award in Q1.

So where will the market go from here? Looking forward, we expect this quarter’s pace to continue into next quarter. Although outsourcing service providers tell us that their pipelines are robust, recent experience suggests that it is taking longer to convert the pipeline into contract awards. There’s conservatism evident in the decision-making and the scale of the outsourcing deals being brought to market.

I still think that 2009 will be a defining year for outsourcing.  We’ve weathered the Satyam disruption, and the underlying flow of smaller outsourcing contracts appears to be healthy.  What’s missing is the volume of big, transformational deals that excites the industry.  Discounting the impact of mega relationships, we observe a noteworthy sequential increase in ACV for the most recent three-quarter periods. Without mega relationships, the past three quarters represent an all-time high in ACV for any three-quarter period, at $8.5B.

When we looked closely at industry activity, we found that some sectors were adopting outsourcing at a more robust pace than they have in the past, especially during the recent economic downturn. We found four industries that met the criteria on a global basis: Media, Retail, Utilities and Telecom. Together, the four represent about one-third of recently awarded contracts. Each sector accelerated the number of outsourcing contracts it awarded by at least 20% over historical levels during the past 12 months. We discovered that each of the four industry segments presented a unique set of circumstances.  More details are available here: http://www.tpi.net/resources/service_providers/TPIMomentum.html

THE ROLE OF PROCUREMENT IN A RECESSIONARY ECONOMY – HOW TO ATTAIN SAVINGS QUICKLY – Part 2

By Bill Huber, Director, CPO Services, TPI and Shahid Bhatty, Senior Advisor

In our previous post, we commented on the recent IACCM (International Association for Contract and Commercial Management) survey of procurement professionals, across a broad spectrum of industry verticals, on the most pressing issues facing them in the current recessionary environment.  Similar to other business functions, effective procurement leaders will prepare and secure executive support for a business plan annually, and update it as required through the year.
 
However, in order to create and implement a procurement business plan (planned strategic sourcing activities), organizations need resources and tools to gain visibility to spend, change management skills to implement procurement policies and procedures, and their key resources focused on the core activity of generating savings.  Many organizations have attempted to take on these challenges and have had varying degrees of success, as attested by the results of the IACCM survey. As a consequence, some procurement organizations have lost credibility.  In fact, in the IACCM survey, when asked how procurement is viewed by internal stakeholders, only 20 percent viewed procurement as a trusted advisor!

This is not surprising, since it is uncommon to see organizations or individuals perceived to be in a compliance role treated as trusted advisors.  We believe that in procurement, governance needs to be clearly differentiated from compliance. Enterprise governance must rely on an effective compliance approach to provide real time business intelligence to executive decision makers and reinforce the objectives of procurement policies, but the two activities need not be performed by the same set of individuals.  In fact, it is usually more effective to separate the two, since governance requires leadership and influencing skills and compliance requires transactional and auditing skills.

One way to raise the effectiveness of procurement governance is to engage outside service providers to perform many of the activities that will improve compliance.  Based on an organization’s maturity profile, these service providers can be engaged selectively to:

• Perform transactional activities and a few non-core functions/categories so that retained resources can concentrate on the core activities of managing critical relationships and driving savings strategies
• Conduct strategic sourcing activities for certain commodities where they bring the category expertise and necessary tools to achieve rapid time to savings; the scope can range from a few categories to almost all non-unique indirect spend categories
• Provide or support tools and technology that procurement can leverage to offer greater spend visibility
• Provide change management expertise to help procurement implement the new programs and create greater visibility across the stakeholder/user community
• Support governance structures with participation from key executives within the company that outline defined/structured programs to generate savings create operational efficiencies and manage the associated change, thus helping raise the profile of procurement within the company

This approach optimizes the strengths and economic advantages of internal and external resources. In today’s recessionary environment where procurement is under tremendous pressure to achieve greater savings, working with outside service providers may be the quickest and most cost effective way to meet objectives. 

THE ROLE OF PROCUREMENT IN A RECESSIONARY ECONOMY – HOW TO ATTAIN SAVINGS QUICKLY

By Bill Huber, Director, CPO Services, TPI and Shahid Bhatty, Senior Advisor

IACCM (International Association for Contract and Commercial Management) recently commissioned a global study of procurement professionals, across a broad spectrum of industry verticals, on the most pressing issues facing them in the current recessionary environment.  Almost 80 percent of the respondents indicated that the most pressing challenge facing them in 2009 was generating cost savings for their organizations.  The other challenges outlined were risk management (resiliency of supply/service chain, managing of legal terms and risk) followed by an ability to procure goods/services.

The survey respondents were also asked to identify which areas had the greatest impact on their ability to achieve their stated goals. The results are listed below:

 

So, the question is – how can procurement organizations overcome the barriers listed above? What can a procurement organization do to raise its profile within the company and be seen as the primary vehicle in setting up supplier relationships and performance? How can it overcome the lack of resources or the lack of visibility into spend patterns? How can it ensure that procurement policies and procedures are implemented? 

One obvious solution is to grow from within and raise the stature of the procurement organization with the C-suite.  But in order to do this, a procurement organization has to know how to relate to the C-suite. This includes abstract skills such as managing perceptions, framing procurement in the context of the big picture (not single mindedly framing the big picture in the context of procurement), and managing provider relationships judiciously and collaboratively (not autocratically).  It also includes the financial savvy to articulate the business case, risks and operational requirements for real benefits. For example, the procurement group of a major IT services company created a procurement business plan every year outlining:

• Savings to be generated by the group, typically via planned strategic sourcing activities
• Planned investments by the group in order to attain the savings
• Participation level required from internal stakeholders/users to participate in sourcing activities
• Operational services levels that will be established with internal stakeholders/users of the procurement group

The plan, presented to C-suite annually co-signed by business unit leads, ensured that the group received a higher profile within the company and that changes implemented for savings were used to monitor the group’s performance in a similar manner to any other business unit.