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Nov 07, 2009

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Phil,

From a client's perspective though they might have immediate cost take out objectives, they do continue to evaluate the SPs business transformation abilities at the time of making a decision. The might chose to implement it later, though some start asking more gains, more business impacts as soon as Year 2 onwards. So from that perspective, SPs would have to continue to invest on their transformation abilities more and more. SPs lacking in these areas would find it difficult to win even plain labor-arbitrage opportunities. I think the problem is that client references where this impact has been achieved across the industry are few and far between. SPs do understand this and thats the reason you can see a lot of focus on outcome based/transaction based models in the current times from SPs. This is going to be the ONLY differentiator as the industry matures. Providers who are able to achieve and demonstrate this, would be winners.

Regards,
Prakash

Outsourcing has always really been about initally swapping our high cost, for low cost, and this is driving the market more aggressively than ever.

Exactly. Thank you for the fantastic summary of where IT sourcing is in 2009. I agree that cost-savings will continue to be the driver across the board, even in areas that we consider higher up the value chain.

However, I feel that differentiation, particularly with smaller sourcing vendors, is taking on a different flavor than in the past. True, it is tougher to claim Oracle DB expertise or Ruby on Rails programming skills as a unique factor. But, a unique combination of platforms, solutions, and delivery models is becoming more and more of a differentiator.

We find that when customers look for references today, they are looking for proof that you have managed their specific project twist. References remain key, but with the maturation of the industry, you better have references that are applicable to the client's needs.

All good points. I have yet to see any provider deliver on the promise of business transformation or even delivering consistent best practices and process improvements to the clients. I think the service providers and clients have finally come to terms with what outsourcing can really deliver consistently. That is cost savings, transparency and a reason to clean up those processes that so sorely need it. Value will be a differentiator in the future but the industry has a way to go and buyers have to be ready to for the price tag.

@Tushar: "Business Transformation" is essentially where a service provider goes beyond labor arbitrage to re-configure a set of business processes to improve efficiency / productivity, by removing unnecessary sub-tasks, or introducing a new technology platform to enable that to happen. In several cases, service providers will sell a "technology wrapper overlay" which can help them pull together dataflows across disparate systems, business units or geographies. More of a "bandaid" approach, but has its purpose, in a messy transition, to tie together some form of process workflow uniformity. I see these wrappers as interim steps that go some way towards a more unified global process further down the road.

In most cases today, "BT" is really consulting expenditure over-and-above the outsource costs, but as the markket consolidates, these services are increasingly being baked into contracts to provide differentiation for the providers.

Are customers really buying? Not at first - tends to be baked in after labor arbitrage to find the next level of business efficiency (or any level of business efficiency, in some cases)

Hope this helps

PF

Phil...yes, customer references are critical.

In a market where so many service providers deliver similar solutions and sound alike , trust and being perceived as being on the client's side of the table can be keys to winning. This is understandable because "People Buy People" . But to validate their value proposition and establish a comfort level with their clients, service providers need to have a sophisticated reference management program . A reference program which is in sync with the sales process to reinforce each of the key differentiators supporting the service provider's value proposition . Moreover, key references need to be brought to life with detailed case studies that further validate the benefits delivered. Its a powerful one -two punch. Unfortunately, for most service providers the reference process is not fully integrated with the sales process.. so sales teams often have to rely on references that are overused , not timely, or not tailored to the needs of the client. This further reinforces why why so many buyers say that service providers sound alike ... why buyers turn in frustration to directly contacting their peers for service provider evaluations... and in this environment , price becomes even more important as a differentiator

Phil,
What is your take on the term "Business Transformation( BT) ". Everybody in our business, seems to be in the game of BT. Are customers buying it? Would you be able to provide a few concrete examples of BT in the IT Services global sourcing business?

@Ed: Good point re this "continuum between commodity buckets at one end and super-specialization pockets on the other".

The "new normal", essentially, is what was considered "specialized" in pre-ressionary days, is now a mainstream commodity today, for example SAP and Oracle programming skills. Hence, the old-guard need to up their game if they are going to compete effectively with the lower-cost up-and-coming providers. So do they try and compete on price, or do they focus on more specialized services that require scarce skills that warrant a higher price-tag?

Outsourcing has always really been about initally swapping our high cost, for low cost, and this is driving the market more aggressively than ever. The next level of "outsourcing" really is business transformation. Hence we have two types of future client opportunities for service providers:

1) Clients which have already swapped-out as much cost as they can without transforming business processes.

2) Clients which have more arbitrage opporutnities of which to take advantage.

Currently 2 dominates, but 1 will become increasingly relevant as the industry matures,

Let's use our new survey to flesh this out some more,

PF.

The question to ask is : what are the permanent changes to the global sourcing model that the economic crisis has brought about? This is the new normal.
From the buy-side, I can identify :
a) Focus on outcome, rather than a effort-driven approach (impacting the pricing model)
b) Building on trust, the expectation that service providers will go beyond the script to deliver additional value (in reality or in articulation)
c) Expectation that the service provider is smart enough to use whatever combination that works best for delivering ‘a’ and ‘b’ above: onsite+offshore, onsite+multiple offshore, pure labor, process optimization and leadership, using solution accelerators based on industry frameworks built by the company. Also include governance, vendor management, benchmarking and other best practices here.

Service providers who don’t deliver on the above three will ship out, unless they shape up.

As always, there is the continuum between commodity buckets at one end and super-specialization pockets on the other. Service providers who are farther right will also get to handle stuff on the left. Especially, as we try to cover up lost ground (pent-up demand) in reaction to the economic recovery. There is no one point on the continuum where a service provider can stay and choose to build leadership at one point.

Phil,

True staff augmentation can be taken only so far. There is a sharper focus what skills should be retained in house.Mostly shifting towards business facing "high touch" roles such as Business analysis or architects (Apps infra, systems).

For other area the engagement is moving away from staff aug to outcome based managed services.

Phil,

Outsourcing is increasingly moving to a combined onshore/offshore model. The onshore outsourcing partner offshores the resource-heavy bulk of the work but retains the high value specialist element - as well as the client relationship.

Companies who outsource get the best of both worlds - a local partner but the advantage of offshore costs. The advantage of this model is that it facilitates outsourcing for small and medium sized businesses and even for start-ups. The real challenge for the local (onshore) outsourcing firm is finding quality and process driven offshore partner. Mistakes are frequent and costly unless the offshore partner is both known, trusted and capable of sustained best-in-class delivery.

Expect to see more onshore presence by offshore outsourcing companies over the coming years. In Asia the locations to wath are Vietnam and Sri Lanka. China will continue to compete with India for the big value contracts. India is increasingly loosing it's cost driven competitive edge. China's technology cities and offshoring centres competing with each other to the extent that a 'national' approach to developing the industry will continue to prove impossible.

Viatnam sits outside the Indo-China arena and is well placed to grow the big value outsourcing opportunity.

Sri Lanka is geared to the small to mid-sized outsourcing space and is primed for rapid growth. It's strength is a coherent national strategy for growing their outsourcing brand internationally coupled with exceptional focus on quality and process/delivery and yet maintaining a cost advantage.

Pol

The news from this side of the pond is that there is an increasing pay-per-use component in outsourcing arrangements offered by large Indian companies.

Profit margins have revived after a year-long slump, since in these frugal times clients are outsourcing more functions. The trend is to request additional services from providers with whom the client is already doing business.

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