Consider the Source

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 …

2008 – And Beyond

Happy New Year. I’m adding my voice to the year-ahead punditry – but taking a different approach by looking further out. The views are based on a look through the end of 2010 and represent my own thinking as well as the input of several of my colleagues. I’ll be concentrating primarily on demand trends today, with more thoughts on provider trends in a later post.

With those parameters in mind, here are the top six issues to watch in services sourcing in the months ahead. We know these are already on the minds of many corporate executives.

1.   A desire to address the global dimension of the business strategy – i.e, the land of tomorrow’s customer:  More companies are talking about outsourcing and offshoring -- almost interchangeably -- as part of an overall globalization agenda.  Cost savings still matter, of course, but the desire to participate in emerging new economies is also gaining import.  This, in turn, is affecting the time horizon of the initiatives.

2.   A growing preference for selecting sourcing alternatives within the context of a multi-year strategic agenda. We’re already seeing fewer acts of desperation in the sourcing initiatives being launched. To many of us, this implies that the low-hanging fruit of labor-based sourcing has been harvested.  Companies are now looking for more partnership-minded relationships. (Yeah, many of the words are the same, but the contracting tactics differ).

3.   A push to evaluate sourcing options through the 3C paradigm; total value orientation. I’ll write more about the “3C Framework for Sourcing” in a coming post, but suffice to say it’s the balanced consideration of costs/capability/capacity.  The prior overemphasis on near-term cost reduction is giving way to a new equilibrium.  Providers that won under the former rules may not be positioned for the future orientation toward total value.

4.   Assessment of existing service delivery relationships for alignment with strategic direction – i.e., not a tactical move. Many of our clients tell us that they have awoken to find a veritable nest of service provider contracts existing within their companies. It seems that each business unit and corporate function has two to three different providers doing work for them. A serious rationalization is in the offing for the coming quarters, with a weeding out of the cost-only providers for those that align with the strategic direction of the client. This, of course, gives rise to …

5.   Considering outsourcing options for all technology-enabled, people-intensive work processes i.e, go big and fast. Looking hard at work and asking whether activities couldn’t benefit from scale and automation. We’re seeing wall-to-wall reviews of work processes and serious scrutiny of the efficiency of the delivery models. There is no slowdown in the consideration of sourcing alternatives.

6.  Looking at the role and value of captive offshore operations. Captive centers are showing great value, and we see expansion plans being deployed for those operations in the coming quarters.  While the make-versus-buy decision is complex, we’re sensing a continued desire to move knowledge-based work to locations that offer lower costs and greater capacity, with equal or better capability.  Look for a continued desire of some larger conglomerates to monetize their captive operations, but those will be a handful, at best.