Consider the Source

SIG Conference: Day 2 - Procurement, Supply Chain & Day 2 Reflection

By Bill Huber, Director, CPO Services, TPI

 

Procurement Outsourcing:

Here at SIG, Rajeev Menon, VP & head of Procurement Services for Genpact based in Hyderabad, and Judy Burds, VP Business Development, reported that Genpact has seen a significant pick up in procurement outsourcing awards in recent months.  This has included stand-alone purchase transaction processing for a global pharmaceutical company, expansion of addressed spend with existing customers, and significant procurement work as part of several larger F&A engagements.  Genpact is also seeing interest growing in their tail-end spend management services.

New Position Chief Supply Chain Officer (CSCO)

IBM showed its recent research on “The Supply Chain of the Future” which included fascinating data on five critical issues: Cost Containment, Visibility, Risk, Customer Intimacy and Globalization.  According to IBM, the CSCO combines the role of the CPO and the COO.  It was a visionary session which provided much food for thought for all in the room.

Our view

We have rarely seen a higher level of intellectual engagement at a conference, and there has been significant exchange of best practices. The consensus is that despite the current political climate, sourcing decisions are now, more than ever, critically focused on solutions that will provide greater value to the customers for the same or lower price. This suggests an increase in the emphasis of capability in the “3C Framework for Successful Sourcing Strategies” (Capability, Capacity and Cost).  I expect to see many of the approaches discussed at this event increase and become more mainstream during the next year.  The silver lining in all this is likely to be meaningful innovation and improved productivity in sourcing.

SIG Conference: Day 2 – Examining Offshore Measures & Encouraging Tech Advancement

By Bill Huber, Director, CPO Services, TPI 

Captive vs. Outsource:

DuPont’s Frank Conway co-presented with our own Brian Smith  on the considerations between captive and outsourced solutions, which they compared to “seeing in a sandstorm.”  

As Frank pointed out, the decision is often a journey that reflects executives’ mindsets.  Having a captive can have a strong psychological benefit, but when times get tough, executives can often swing from not wanting to outsource to trying to outsource too much.   

• Frank also pointed out that whether outsourcing or managing a captive, you never give up your ultimate accountability.  The buck stops with you.  Whether it is outsourced, internal, onshore or offshore, the CEO expects it to work.
• Brian Smith noted that the most efficient captives and service providers achieve a fairly similar cost level, with the best captives operating at a 2%-4% lower cost than the best service providers.  However, median service provider costs amount to 79% of median captive costs.  Two reasons for this are that captives tend to have a significantly higher percentage of support staff, and a lower span of control (Apparently there are a number of captives that are currently “for sale”).

 

Newt Gingrich:

Former Speaker of the House Newt Gingrich provided the keynote at today’s lunch, covering an encyclopedic range of issues.  Equally critical of both U.S. political parties, he emphasized more changes in technology in the next 25 years than in the previous 125. He pointed out that no bureaucracy could possibly grasp, plan for, or react to this level of change and that only the private sector, reacting to the market, often through trial and error will be able to take our economy through this change. 

His key challenge to the sourcing audiences: 

Define what conditions would be required for the U.S. to be the preferred sourcing destination for more business activities, and become a force to advocate for those changes.  He mentioned taxes, regulation, education, and energy among those key issues.

Newt also pointed out that those countries that become protectionist, ultimately lag in technology, become more expensive and ultimately become backwaters on the global stage.  

The audience appeared to like Gingrich’s messages. Stay tuned for some more from day 2…

  

SIG Conference: Day 2 – eSourcing Insights and BPO Innovations

By Bill Huber, Director, CPO Services, TPI

eSourcing:

SAP and WE Energies provided some excellent, practical insights on how eSourcing auctions have been successfully conducted, and how they were able to diffuse the frequent arguments that reverse auctions destroy value.  As we have noted in the past, reverse auctions and other sourcing technologies are simply tools, and it is always the human element that determines whether tools will help to create or destroy value.  Gail DeVeau’s work at WE Energies is an example of how the tools can work in capable hands. 

The BPO Market:

Phil Fersht from AMR Research provided a broad overview of the direction of BPO. He shared many excellent nuggets with the group.  There were several highlights that stood out:

• There is a new breed of executive emerging that is looking at globalization and outsourcing.  In the 90’s the CIO had to move forward with enterprise resource planning (ERP) or be left behind.  Now, senior finance executives are feeling the need to move forward with globalization or be left behind.
• Healthcare analytics and sourcing from federal funding will be a growth area for sourcing professionals.  The stimulus plan confirms this.
• Many things that AMR Research has been telling clients not to do in outsourcing for years is now happening. Now companies are simply saying, “Take 30-40 % off bottom line. We are willing to take a leap of faith. We just want it done.”  The reality is that it takes 3-4 years to do effectively. 
• In outsourcing, client satisfaction trumps other service level agreements (SLAs).  If clients are satisfied and they feel that they are working with the provider, they will tend to be pleased even if there are problems in other SLAs.
• Procurement outsourcing will increase, partially because of the skill set issues facing procurement organizations, and knowledge process outsourcing (KPO) options available that are executable with relatively small headcounts. 
• Customers are asking procurement software vendors to provide more process support to      drive greater collaboration between procurement software providers and outsourcers.  Currently only about 15% of procurement BPO implementations involve technology transformation, far below other areas of BPO.
• KPO resources are often used to bring high value service to clients with the objective of ultimately growing the business into more scalable BPO. 

More insights from day 2 to follow…

 

SIG Conference: Day 1 Review – First Impressions

By Bill Huber, Director, CPO Services, TPI

The 35th Sourcing Interests Group kicked off its summit yesterday in Baltimore, MD.  There are over 325 attendees this year, up slightly from last fall.  The healthy attendance at a time when discretionary travel has been restricted across the board underscores the critical importance of current sourcing issues. 

I had the opportunity to speak with a number of the delegates during the opening reception and breaks.  Several themes are emerging:

Increased focus on domestic outsourcing:

• A document management outsourcer discussed how the past year has been net neutral in terms of full time employees (FTEs), despite the declining economy and the loss of some customers from industry consolidation.  Most of the work performed is domestic and on site at client locations. 
• A financial services executive was looking for domestic outsourcing providers.  Looking for opportunities to save money that would not get them into political trouble since the strings attached with TARP funding are onerous.
• An Indian based provider outlined recruiting activities around certain U.S. hub cities.

Increased focus on procurement outsourcing:

• One company case example discussed indirect procurement as one of three “towers” outsourced along with IT applications and Finance and Administration.  Of these three towers, procurement has the smallest impact on headcount and the largest business case impact and overall cost savings.

Shortening of outsourcing cycle times:

• Unisys CEO Ed Coleman used the term “sourcing speed dating”  in reference to what he described as a “12 month cycle to make an outsourcing decision.”  Coleman pointed out that many companies simply don’t have time for that when  thriftiness and simplicity are prevailing themes.    If outsourcing can save money, how can companies afford to take 12 months to implement it?  Every month that goes by means savings dollars out the door. Coleman also predicted increased movement to “platform as a service” delivery models where customers can “buy by the drink.”

Innovation:

• During the “Less is More” period, companies must wring additional value from existing capital investments, including outsourcing relationships.  Several providers indicated that their customers are constantly looking for price concessions, but only now are they beginning to act on cost savings opportunities through innovation that were previously ignored.  While customers still expect to see some movement on price, they are appreciative of those providers who can bring meaningful suggestions for improving operations and reducing overall costs. 
• In his keynote presentation, TCS America President Surya Kant identified three techniques to improve innovation in outsourcing:
  1. Contracts with funding budgets specifically set aside for innovation initiatives
  2. Contracts with cost savings guaranteed through innovation provisions
  3. Joint governance metrics on the number of proactive innovation proposals submitted by the service provider, the percentage accepted by the customer, and the benefits realized from implemented innovations

Where will this lead?  Here are my initial predictions:

• Indian and multi-national service providers will increasingly develop approaches to export some of their operational capabilities in employee on-boarding, training, process mapping, technology, and performance measurement to North America to increase delivery of outsourcing within the U.S. to complement their offshore capabilities.  Reduced labor arbitrage benefits will be partially offset by a more favorable political/regulatory climate for domestic approaches, especially within certain industries such as financial services and automotive. 
• Similarly, providers will continue to increase their philanthropic participation in their customers’ communities.   
• Sourcing will increasingly include elements of provider/customer collaboration during the selection process, focusing on innovation and flexible relationships that can mature over time. 
• Companies will shift more of their sourcing energies from the transaction to the governance process to optimize their strategic relationships. Governance will be accomplished at a more strategic level, focusing on capability alignment and innovation as equally important to operational and financial metrics.

More to follow!  Stay tuned…

The Silver Lining: Vertical Integration

By Peter Allen, Partner & Managing Director, TPI

It’s been a few weeks since I’ve posted an entry. I’ve been busy working with several large companies to think through the next source of value from their outsourcing and offshoring initiatives.

My line–of-sight can hardly be deemed a perfect indicator of broader trends, but I thought it worthwhile to share what I’m seeing.

Foremost, companies that have used offshoring as part of their cost-realignment programs over the past few years have driven the unit costs of “commodity” services to a fairly attractive price point. It’s worth noting, however, than one company’s commodity is another’s differentiation, or so they think.

I get great satisfaction from facilitating the debate on just what’s core to a business’s strategy in the context of today’s horrible market economics.  I can tell you that the sacred cows of the recent past are not so sacred today.

But, many companies have a rather healthy attitude toward what can be bought versus what needs to be made/owned internally.  So for them, where’s the next source of value-creation?

That’s the emerging silver lining from the economic morass.  Up until now, very few companies have addressed the hardest, most complicated questions regarding their total cost equations. They haven’t asked why their operating environments are so complex, so burdened with fixed costs, or their front-to-back business processes so inefficient.

Finally, we’re seeing companies take up the age-old issue of vertically-driven costs.  One of the greatest areas of opportunity relates to integration.  Many first-generation adopters of outsourcing learned that driving down unit costs might not result in a reduction in total costs if they did not understand and manage the front-to-back linkage of business operations, applications, and infrastructure.

In 2009, I’m finally seeing some meaningful emphasis on vertical integration and associated sourcing.  Maybe there’s a benefit from this economic mess?

 

High Oil Prices, Rising Competitive Pressure and Increasing Globalisation Bring New Challenges to the Automotive Industry

Today’s guest commentary is by Klaus Felser, Senior Advisor TPI Germany.

The prospects for the automotive industry are many and varied – and in Germany, in particular, a vital economic factor. No other country has such a density of established automotive companies. Despite this, BMW, Volkswagen, Porsche, Audi and Daimler all have to hold their own on today’s world market. At stake is the development of markets with high growth potential, such as China (car production rose by 38% there in 2006 while the United States registered a decline of 6%) and India. At the same time, in more established markets it is necessary to contend with rising crude oil prices and deploy mitigating strategies to remain competitive.

Checking Outsourcing

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

If you want to know what’s next in the outsourcing industry look at deviations away from historical norms, typically exhibited by change in market volumes.

To wit:  The popularity of credit card payments means that fewer and fewer American consumers write checks nowadays.  To the outsourcing industry, trends like these create opportunity for more leveraged service models.

Around 49.5 billion checks were paid in the U.S. during 1995, with that number slumping to 36.6 billion checks in 2003, according to data from the Federal Reserve. Meanwhile, credit card transactions leapt from 15.6 billion in 2000 to 19 billion in 2003, while debit card transactions surged from 8.3 billion to 15.6 billion over that time period.

Changing the Game in HRO

Today's blog on the need for HRO comes from Peter Allen, Partner and Managing Director, TPI.

The outsourcing roadside is littered with HRO deals that have hit the ditch.  Why then would some of the top India-heritage providers be trying to catch this falling knife?  As one executive told me, “Because there’s market need and we can do this work.”

Uncertainty is driving outsourcing demand, and fast-growing India-heritage service providers are making considerable investments to play in the HRO game. They are not intimidated by the failings of their predecessors and they blame focus on process over service as the reason for the early stumbles. 

Rather than asserting theoretical best practices for the HR functions of recruiting, learning, workforce administration, and payroll, this new breed of providers are turning their operational practices into marketable services.

IT’s Headed for the Clouds

Today's blog on cloud computing comes from Peter Allen, Partner and Managing Director, TPI.

For a natural skeptic, writing about “cloud computing” (go ahead, look it up) comes as a surprise, but the frequent chatter cannot be ignored.

More and more CIOs and CTOs talk about their contracting strategies for IT services in terms foreign to the sourcing industry. Cloud computing is just one example. 

It’s generating buzz because it is the next iteration of distributed/utility computing that might take root. The notion that companies need not provision computing and communication resources in advance, but merely plug into the ubiquitous ‘virtual grid’ to run their business processes is a familiar paradigm, but one that is generally met with skepticism.

Signs of Things to Come … on the Provider Side

I recently shared a snapshot of the trends and topics we see influencing the client tendencies affecting outsourcing and offshoring. These are the high level directions we believe will play out during the next three years. 

So, what about the provider side of the balance sheet?

It’s actually much easier to gauge the changing areas of emphasis on the part of the companies that are applying outsourcing and offshoring than it is to get beneath the covers of the industry service providers. This is because, to a fair degree, one must make judgment of the level of perceptivity and management acumen that exists within the service provider firms to react to the changing buying habits. 

So, what the following list points to are the characteristics we feel will epitomize the winners in the growing outsourcing and offshoring market. In essence, if I were directing a service provider today, I’d … 

1. Adopt outcome-oriented and industry-aligned service models; depth matters. The time is right and the demand is there. Focus on services that are recognized by industry-oriented buyers (the folks chartered with winning in their specific segments) and commit to achieving meaningful results. That’s not to say that there isn’t still a market for lowest-cost commodity services, but during the next three years we’ll be seeing much more demand for differentiation around industry specialties. 

2. Ensuring comprehensive infrastructure, Enterprise Resource Planning (ERP)/applications, and operations proficiency; maximum value potential. The era of integration is returning. Unify as much of the technology and operations scope as possible. Give clients the option of buying a turnkey solution. Sell this on the basis of … 

3. Building resilience into all facets of the global delivery network; risk is real. Remove the concerns relating to access to capacity, business continuity, workforce unrest, and all of the other dirty issues that affect the ability of a business leader to rest at night. Notably … 

4. Stepping up to the challenge of data privacy. This is the biggest paradox facing the industry. Is it a risk to the continued adoption of outsourcing and offshoring, or is it the reason to do so? The answer is yes. Today, it’s a radioactive topic that is increasing in concentration. The winning service providers will manage a solution. It’s the demarcation between … 

5. Choosing between a narrow component orientation and business value creation proposition. It takes focus to win. The choices being made now are the ones that will define the landscape for 2010 and beyond. There will be those who compete on the basis of lowest unit costs, and they will be relegated to chasing talent in the farthest corners of the globe. Then, there will be the value-oriented providers – the ones we call the 3C Providers. They will balance cost/capability/capacity to create new value for their clients. The survivors will know which market they’re in – and will be focused. As for the dance card … 

6. Consider strategic combinations or acquisition of captive operations to fill out the portfolio. Fortune favors the bold. We’ll see some remarkable deals in the coming years – deals that will create new and ambitious offerings. The venture funding is in position and the inherent belief is strong: standardization and automation of people-intensive work is common sense, and outsourcing and offshoring is the way to achieve this.

 Providers will be positioned to win the deals of the future if they:

• Invest, organically and through acquisitions, in deep domain expertise for attractive market segments; most likely people-intensive work processes that leverage the benefits of automation, standardization and scale, or …
• Elect to be the lowest-cost provider of "componentized" services.

 Winners will:

• Be focused – avoiding the temptation to be all things to all people
• Place profitability far ahead of revenue growth
• Create deal structures that reward these behaviors – choosing expertise over abundance of staff

Ultimately, we think that sourcing becomes mainstream during this period. We’ll see the inclusion of sourcing and the management of sourcing in the academic curriculum. It will be an accepted management discipline worthy of a seat high in the corporate ladder. This heightened appreciation for the science of sourcing will fuel the provider community to think much differently about their offerings.

More on these observations to come …