Consider the Source

Catching Up or Staying Ahead?

Today's blog on the HP/EDS deal comes from Peter Allen, Partner and Managing Director, TPI.

The marriage of EDS and HP is not about catching IBM, as has been commonly reported, but about staying ahead of Google, Amazon and Dell, while emphasizing services over effort.

Look at the bigger picture: there are only two clear leaders covering the broadest spectrum of outsourcing services.  IBM and Accenture cover the gamut of IT and business process services, including many industry-specific processes for airlines, retail, pharmaceuticals, and banking. The nearest pursuers are in India: Infosys, TCS and Wipro.

The combination of EDS and HP is one step short of having the sort of coverage enjoyed by IBM and Accenture, but three steps ahead of everyone else.

Listening to the Buy-Side

Today's blog on TPI's Americas Sourcing Leadership Exchange (SLE) comes from Peter Allen, Partner and Managing Director, TPI.

Falling quickly on the heels of our Americas Sourcing Industry Conference (SIC) held for service providers, we conducted our latest Americas Sourcing Leadership Exchange (SLE) for buy-side participants last week in Chicago.

What can one learn from spending a couple of days with almost 200 executives who are actively involved in the outsourcing business proposition and battling the recessionary markets of 2008?  Plenty.

Despite some of the popular conjecture about a slowdown in the adoption of outsourcing, this was our largest SLE ever, and the attendees generally expressed a desire to become ever MORE active in using outsourcing to achieve greater variability in their corporate cost profiles.

Many of the attendees, whether in the planning stages or actively managing existing arrangements, were keen on achieving even greater flexibility in their costs.  The discussions around captive operations, shared services and internal optimization received considerable air time when considered in contrast to outsourcing.

Identifying the 3C Provider

Today's blog on the future of outsourcing comes from Peter Allen, Partner and Managing Director, TPI.

A new breed of service providers will emerge to service outsourcing demands in the coming years. Called the “3C sourcing framework,” we expect a relative equilibrium with emphasis on cost, capacity and capability.

We see the characteristics of the 3C framework applied with equal emphasis to internal service delivery organizations as well as the selection of external providers. In fact, the criteria may be the ultimate determinant of service delivery strategy for a broad range of technology-enabled business functions. Here are some of the characteristics clients look for in their prospective service providers:

The Elusive World of Transaction-Based Pricing

Today’s guest blog on the transaction-based pricing comes from Dinesh Goel, Project Director, TPI.

Incentive compatibility drives value maximization, and a transaction-pricing based outsourcing model better aligns the client and provider incentives. With symbiotic gains, the marketplace will see higher traction in such pricing arrangements, and the shift is only a question of time.

Effort-based pricing has been the popular sourcing choice thus far. In principle, the client pays the service provider on the basis of the full time equivalent (FTE) employee (time and material), location(offshore or onshore), skill and level.

The Precision of Terms – The Service Delivery Family

In a prior blog, I outlined a few of the phrases and terms that people use to refer to outsourcing and offshoring from a strategic context. Today, I want to dig into the more specific words that are used to discuss outsourcing and offshoring.

Here we go …

The Precision of Terms – The Strategic Domain

Have you noticed just how diverse the set of phrases and terms are that people use to refer to outsourcing and offshoring? Well, a few colleagues and I decided it was time to convey the commonly-accepted meanings for many of the more popular phrases we encounter in our work. 

End (to End) Game: Managing the Multi-Provider Service Chain

Sometimes best of breed can be a headache.

In today’s “multi-sourcing” marketplace, organizations seeking the best service often break into parts what had been a harmonious business operation, particularly in the IT space. They do this in order to achieve focus and efficiency in the management of various elements of technology services.  The challenge for the executive overseeing the sourcing relations: How to maintain a high level of service across the process now that you’ve got myriad providers – including both internal and external teams – doing the job?

Said differently, the benefits of cost efficiency can erode quickly if the result is increased risk of disintegration.

I tend to agree that fracturing a business operation (such as claims processing, order management, settlement reconciliation, or even accounts receivable management) across many different service providers invites some real risks. Indeed, we tell our clients that job No. 1 is maintaining integrity across the service chain. 

This demands that the architects of the sourcing strategy think both horizontally (that is, within a service category like servers, or help desk, or networks) and vertically (e.g., a business process such as claims administration, order management, and the like).

Companies often ask us about using contractual mechanisms to manage and mitigate the risks of divvying up responsibilities among multiple providers. We tell them from the beginning that service providers generally aren’t keen to sign “end-to-end” service-level agreements (SLAs), because the providers are rarely responsible for each and every service element in the chain. 

That said, a well-designed sourcing strategy can help achieve the desired results. The goal is not to push providers to be responsible for service elements outside their direct control but rather insist that they are at least responsible for managing those service elements on the client’s behalf. They need to play as good citizens and have skin in the game.

You need structure. That means baselining the service levels expected so that providers can measure and manage them. It also entails applying certain rules of the road for being a provider within the corporate family.  There are ways to achieve integrity and responsiveness without prescribing each situation via contractual terms.

It’s less about gaining confidence because of an elegant contractual framework than it is about setting the tone and tempo of operational cooperation within the governance mantra of the participating organizations.

The Whole is More than the Parts

Guest blog by David Howie, Ph.D., Senior Advisor, Global Financial Services Advisory Services Practice, TPI 

A few weeks ago Shawn McCray wrote in this space about what he called “Frankenstein Sourcing,” in which a number of separate sourcing models are used within the same company or even the same business unit without any attempt at alignment.

Unfortunately, this monster is all too prevalent. The danger is not so much that it leads to immediate disaster. If that were true such sourcing would not be so common. On the contrary, each of these sourcing relationships can appear to be quite successful, particularly within the short horizon that is too often the concern of managers (and the timeframe for incentive schemes).

The problem is rather that by focusing on discrete chunks of sourcing, the greater benefits of a more coordinated approach are squandered. Further, while often initially delivering results, this approach easily leads to a dysfunctional operating model that locks in existing inefficiencies without addressing the root causes of poor performance or the future needs of the business. Five years down the line the company can end up with such a complex and inflexible operating model that it is effectively unable to respond to changes in the market or threats from newer or more nimble competitors.

The solution? A strategic approach to sourcing that connects a company’s operational base to its business aspirations. This is easier said than done, of course. Sourcing decisions are often made narrowly, in response to local conditions or as a quick-fix reaction to the next set of business targets. So coordination across the business is critical, as is the freedom to take a longer-term view and to focus on future flexibility as well as, rather than solely, on immediate cost savings. Ultimate success – as with so many large projects – depends on building a genuine mandate for change among senior executives.

My colleague Tony Rawlinson and I offer our 10 Gold Rules for the right kind of sourcing here: http://www.tpi.net/pdf/papers/Strategic%20Sourcing%20for%20FS%20White%20Paper.pdf .

Frost's Conundrum

Almost a year ago we saw the first evidence that the outsourcing industry was changing, as our clients and other organizations seemed to be feeling less positive about the promises of outsourcing.

Sure, the outsourcing business model had proven its value time and again – and continues to do so: By our count, there are over 1,900 active commercial outsourcing agreements of at least $50 million each in place today. These agreements rarely get terminated. They usually get renewed.

But along the way came offshoring – or, to be more precise, the ability to contract for effort rather than outcome. The outsourcing industry was built on the promise of “defined services at defined prices.” That's another way of saying that outsourcing is focused on the quality of results rather than just getting the job done.

As I mentioned in a recent blog, many clients tell us that their managers are really not comfortable operating in an outcome-oriented setting. They’d much prefer to manage a given business process or function in terms of the resources devoted to it. So they opt to offshore rather than outsource.

As indicated in the results of TPI's 2Q Index, with the rising tide of labor-based contracting through offshoring, many organizations have come to the conclusion that the fastest, easiest way to get the promised benefits of outsourcing is in fact to NOT to outsource, but rather just buy people at lower prices through offshoring.

So we've arrived at a crucial inflection point for this industry, just as the poet Frost was confronted by the choice between the two roads. Does a company jump on the lower-cost bandwagon? Or does it demand a more holistic solution through outsourcing, one in which it can seek to control a variety of outcome variables – be they productivity, quality, or whatever? And, might the first route actually be a journey to second?

The service providers almost all show their hands in this game. They need to play in the labor-arbitrage game because it has taken flight so quickly.  But many also are trying to offer transformational services.

Can both strategies survive?  How much time will our industry spend in the realm of cheaper labor?  What are the catalysts that will move the industry and its clients definitively toward progressive and value-creating outsourcing? 

We think the industry must innovate to survive. Now.