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Aug 12, 2009

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The 4 factors you list & the 2 Ed Nair highlights, are a good summary of the current sourcing industry scenario. The new outsourcing industry has lead to the birth of some really large corporations in the form of BPO/ITO solution providers, over the past decade. There are a number of reasons for this but let us not forget that the consulting industry scenario of the late-90s/ Post-Internet era phase ( when Arthur Anderson & other mega strat-consulting firms saw huge exits) also played a key role in the creation of the BPO solution providers. See the organization structure of any BPO provider & you’re sure to find lots of smart-talking ex-consultants & a sprinkling of investment banking experienced folks, housed in project management/transition/sales-support roles. These folks played a pivotal role in large BPO deal-structuring & in creating new jargon (Eg. - “lift & shift”) however most of them consciously avoided the vast majority of solution provider jobs – the operations (read – grind – in consulting slang) roles, with all the client & people management tasks. Consequently, these project/transition/sales-support folks have negligible hands-on operations experience. The new “Sourcing Consulting ” industry attracted a lot of such ex-BPO solution provider project management skill, over the past 5 years boom phase. As large deals & RFP support requirements reduce, such skills (as employee headcount) don’t create a good foothold for sourcing consultancy growth.

In a credit squeeze scenario, financing and M&A skills become the order of the day. Operating partners have become de-rigueur in PE firms - they add strategic value , traditionally filled-in by consultants, without charging a consulting fee. This trend will eventually impact sourcing consultants too. Collaborative working through social networks and free industry reports on the web, will continue to cut into consulting industry’s research revenue. ( See Clay Shirky’s talk explaining this -
http://www.ted.com/talks/lang/eng/clay_shirky_on_institutions_versus_collaboration.html ).

BPO industry ( & to a lesser extent, ITO) has undoubtedly seen the end of the boom days, despite a minor opportunity created by a recessionary environment.Sourcing advisory will see a lagged effect of this too. Nett-nett, I feel sourcing advisory firms should look at expanding their service offerings.

As a headhunter specialising in the outsourcing services industry, I have to concur with Mike’s comment that the BPO market is strong (based on the number of BPO executive search assignments coming into the office). I’m also seeing a trend developing where the BPO suppliers are beefing up their own consulting/advisory experience to engage with clients to provide sourcing advice, particularly where there is an established relationship between client & supplier. Where the trusted relationship exists, the client seems willing to give up ‘independent advice’, especially when some of the advisory costs may be swallowed within the supplier’s pre-sales budget.

Phil, my POV - cheers

http://dealarchitect.typepad.com/deal_architect/2009/08/rumors-of-demise-of-sourcing-advice-are-premature.html

The BPO market is currently the strongest I've seen for many years. However, the trend developing and consequently impacting TPI I feel is firstly, more thrifty customers who generally face more difficult internal challenge to justify advisory fees in the current climate (hence on-tap services being requested usually in pricing and contract stages)and secondly, customers are describing the TPI approach as too over-engineered and rather inflexible compared to other advisors.The market has changed - adapt or wait for the pending upturn ?

Terrific and timely post Phil. My sense is that a number of advisory firms are having to face the reality that holistic deals are breaking down into single-process outsourcing, and thus (as you suggest) the financials don't support a traditionalist advisory approach. Those consulting firms who are already sought for advice and guidance on transformational issues are likely to be in the catbird seat should sourcing be an approach deemed worthy of client consideration. Thus, the "generalists" of advisory firms must continue to bolster their subdomain expertise to maintain parity in the specialist market. As TPI's results suggest, this may be quite difficult for them to successfully execute.

Ed's post is right on target. I would add one additional factor:
3. Many of the new customers in the market are smaller buyers. By that I mean smaller firms getting into the market in response to increased market pressure on cost reduction, some for the first time. I'm not sure how well the larger advisory services can scale their offerings. With big firms and big deals the cost of advise is a small percentage of the total benefit of the deal. With smaller firms, that may require significant hand holding, the cost can erode a significant part of year one savings, forcing the client to go it alone or making the advisory service accept smaller margins to get the work.

When the leader in any market takes such a big hit the rest should shiver. Spending on any form of consulting in these times is a last resort, high profile and risky for the decision maker concerned. Who wants to ask their CEO for approval when all budgets are cut back to the bone?

Clients are using the knowledge transferred to them from earlier rounds of outsourcing to drive the deal making process themselves - a great deal of the process is a commodity after all. Finally, the advisory business that is available is being spread around. Outsourcing revenues continue in growth mode which implies more business is being done by clients not less. It is therefore the structure and make-up of the advisory market that is changing. That's not to say that margins for the Providers are immune from cost containment pressure - WNS Global Services reported $1m of profit on $138m of quarterly revenue this week and their major shareholder Warberg Pincus has put its 30% stake up for sale. A separate issue yes and a case perhaps of a savvy investor cashing in whilst the going is good?

I think one way to build a sustainable consulting business, versus a commoditized contractor business, is to invest heavily during the boom times in hard to copy and easy to leverage intellectual property that puts your very best thinkers/consultants "in the box." We're able to do much more in far fewer billable hours because of having "starter kits" for every task in our strategic HRM delivery systems planning methodology, and I'm sure the best of the sourcing advisors have done likewise. Anyone who hasn't made those investments is at a tremendous disadvantage.

Timely post. I feel that the other corollary factors are:
1. Many of the large buyers who had engaged sourcing advisors in the past are now putting to use some of the knowledge that got transferred to them. Combined with deals sizes getting smaller, many of the traditional sourcing advisors would increasingly get elbowed out of the large spaces they used to traditionally play in.
2. This is the time for sourcing advisors to relook a their own businesses both from a structural as well as capabilities point of view. In an interview (yet to be published) with Lee Coulter, Kraft Foods, he clearly spelt out the importance of focusing more on the behavioral aspects of partnership and that this would be the next frontier in sourcing advisory. He also lamented about the utter lack of standards-- for example, lack of agreement amongst advisors on something like top 5 SLAs for a particular process--- leading to sourcing advisors building some sort of ‘mystique’ around these areas. But very soon, these kind of opportunities will start vanishing. ITIL has already done that in the area of IT service management.

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