The Outsourcing Blog..."Horses for Sources"

Everything you need to know about Supply Management BPO (but never dared to ask)

Folks - we're staging a webinar entitled "Supply Management BPO: Why Business and Technology Transformation is Critical for Long-Term Success". 

It’s time for disruption, not stagnation

2009 is going to be remembered as the year of cost-containment. Most client discussions are not very sexy – it’s largely about cost, as opposed to innovation or revenue generation. McKinsey recently revealed 70% of its current client engagements are cost-reduction focused, only 30%focused on revenue-generation (the opposite of a year ago).

I strongly believe our businesses, while being diligent about cost-containment, must use this opportunity to make fundamental changes to their business operations in order to emerge more profitably in the future. Simply ripping away cost elements and failing to improve access to global corporate data and processes, is a massive wasted opportunity to be more competitive over the long-term.

I wrote recently about how the lay-off culture that has afflicted both the US and UK in recent years, where many firms treat their labor as a variable cost that can be scaled-up or down at will, depending on the next quarterly forecast. I cannot stress enough the damage this can cause to businesses as the economy recovers. One common theme that has dominated discussions with business leaders recently has been their surprise at the amount of visible cost they have been able to take out of their businesses as they move from a revenue-generation to cost-containment strategy.

It’s not solely the cost of labor that is highly visible – it’s the costs of technology, travel, infrastructure, real-estate etc. that can often be easily driven-down in a desperate business climate. Less visible are costs associated with poorly-integrated business processes and procedures, of dated analytical tools, of ERP systems incapable of supporting global process templates, and so on.

Being Frank about Global Sourcing: An interview with Cognizant's CEO (Part I)

Observing the rise of the new wave of service providers over the last few years, the one that has scared the living daylights out of all of the incumbents is Cognizant. 

Now a $3bn company with deep footprints in the world'slargest global financial institutions, consumer businesses, manufacturing and healthcare organizations, Cognizant can no longer be considered an upstart.  It's now part of the industry elite; quietly and cleverly aligning its value proposition to the post-recession era.  As CEO Francisco D'Souza points out,  we're in a time of not only cyclical change, but also secular change.

I've had the pleasure of talking with Frank a few times over the last couple of years and have been impressed by his high-energy, thoughtful and common-sensical approach. I was even more surprised when I received emails from an "FDSouza" on the Horses... took a couple of times for me to realize who this guy was.  To cut to the chase, Frank is one of the youngest IT and BPO industry leaders of the modern age, having risen through the management ranks of Cognizant to assume the role of President and CEO at the beginning of 2007 when the company was announcing its landmark Kimberly-Clark engagement.  And when Frank isn't busy hacking his way around the local golf course, or playing with his kids, he managed to find some time to share some of his views of the global sourcing industry with us...

How to get two whales in a mini...

When I got a call from the Shared Services & Outsourcing Network crew back last Fall (Autumn) to run a session at their European Shared Services Week in Budapest this month, my immediate response was "how the expletives are you going to convince operations executives under severe cost restrictions to show up at a 3-day boonie in Budapest in the midst of the worst recession since Harold got clipped by an arrow in Hastings in 1066?"

One of my favorite jokes (and I do have a rather strange sense of humor), is "How can you get two whales into a Mini"... and the punchline is "Along the M4 Motorway and across the Severn Bridge".   If you don't understand this joke, click here.  I am going to add to that one:

"How do you get 400 senior operations executives, 200 of whom lead shared services operations, to show up in Budapest in the middle of the worst recession in post-biblical times?"

Yes, they managed to defy gravity, common sense and many other undefiable factors

Wipro and Oracle partner to blow-up the BPO delivery model

Folks - I can exclusively reveal to you today that Wipro BPO and Oracle are shortly going to announce a partnership dubbed "simPlify", whereby Wipro will deliver PeopleSoft HR to both mid-market and high-end clients via a hosted utility BPO service, that will cater for 20 major countries.  They will also partner with The Hackett Group as part of the arrangement to provide performance benchmarks for HR processes.

The mid-market play is a true move towards "one-to-many", whereas the enterprise play will be a more customized approach.  Clients will need to invest

The flat of the curve: are we scared of innovation?

Kevin O'Marah, AMR Research's Chief Strategy Officer, blogs a thought-provoking piece that highlights how so many retailers and manufacturers have failed to embrace collaborative supply chain models through fear of "giving more than they'll get".  Kevin argues that consolidation amongst suppliers will accelerate in this environment as major industrials drive cost out of their supply chains by reducing their supplier bases.  He adds,"what we have since seen is that cooperation takes a lot more than just setting up EDI, reverse auctions, or visualization.  It takes trust, which apparently is still in short supply." 

SaaS: Outsourcing out-of-control?

SaaS is effectively the same as outsourcing - you're handing control over business processes to a third-party service provider.  However, while SaaS delivery shares many similarities with outsourcing as a delivery model, there are serious caveats buyers need to consider. Read more over at Think Global.

Think before your retain: is IT impeding many companies' survival in this economy?

I had this private debate with a number of peers in other analyst and consulting organizations recently, and wanted to share some of the discussion points with you all here.

In our recent discussion "Think before you fire: The cost of replacing IT talent", we discussed the issues facing  many companies who were too trigger-happy to scale back their IT wage-costs, and ended up spending a lot more in the long-run when replacing the valuable knowledge of their business systems.  At the same time, we see even more firms held back by IT departments that have failed to move with the times - and none more so than mid-market firms that simply cannot afford to employ the best quality IT staff.   And while we can debate the fine points about business processes moving to offshore or fully outsourced models, you sometimes forget how critical IT is to getting things done. 

Get your finances in order before you outsource?

When I talk with firms about outsourcing, the conversation almost always circles around whether the client should sort out its internal processes before it can consider outsourcing opportunities.  In most cases for large global enterprises, transformation can be carried out concurrently as part on an incremental outsourcing transition.  However, for mid-market firms which may not have the resources, technology or the expertise as larger enterprises, moving too much of its back office too quickly to a third-party can often prove more damaging to the business than any savings generated.  That is not a risk you want to take in a cut-throat economy, where you may not have a chance to recover from poor decisions.

To this end, an old friend of mine, Bill Rieke, shared his experiences with CFOs of mid-market firms trying to drive cost-efficiencies into the financial processes.  Bill is a respected veteran of the BPO industry, having worked on multiple international engagements with Convergys and subsequently Genpact.  He now works independly with firms as an advisor with BPO and process optimization.  Over to you Bill...

In American Heartland, Optimization Finally Brings Hope of Accounting Transformation

Think before you fire: The cost of replacing IT talent

There’s currently a certain sense of déjà-vu within the IT community, as companies look at shaving even more cost out of a function that has been battered since the 2001 dot-com bust. However, when we look at the lessons of the past, you do have to question companies which decide to sharpen their knives once more when they address their IT costs. Companies need to offset the cost of every layoff with the cost of replacing that talent when the economy improves. It is not so much who is left standing, but rather who is in position to grasp the brass ring of prosperity when it returns.

If economic conditions improve in 2010, then the amount of costs saved by releasing an employee may only be $50-100K by the time all the lay-off costs are incurred. How can you put a price on replacing the inherent business knowledge of that staff member when you re-hire a replacement? It may take another year or two to get the replacement up-to-speed, and will not only end up costing you more, but may also impede your executives from accessing critical data in a timely fashion. The overall cost of replacing that staff member could easily be three times the costs saved by laying her off. And these easily-identified direct costs are only the beginning; the costs incurred to your culture and morale can prove even more damaging.

There are lessons to be learned from those who did it right and those who failed to do so during the recession of 2001. The frequently cited observation by George Santayana warrants consideration, “Those who do not remember the past are condemned to repeat it.” Furloughed IT employees in the RIF of 2001 were often reluctant to return to their previous employer. Having been viewed as expendable, the trust and bond between the two may have become a casualty. Often the company belatedly discovered the employee was not at all expendable.

Executing effective HR in 2009: an interview with Jason Geller

We've had the privilege of hearing from a host of industry leaders over the last couple of years (just look under the Outsourcing Heros category), and I'm delighted to present an interview with Deloitte's Jason Geller.  Jason has been instrumental in driving some of the largest and most complex global HR transformation initiatives over the last decade, and has gained a stellar reputation within the industry as one of HR's most prominent thought leaders and consultants.  I also had the privilege of working with Jason, and discovered he's quite a bashful chap who frequently shuns the spotlight in favor of his colleagues, so I thought I'd do something about that...

PF: Jason, in a nutshell, what do you see as the major challenges and opportunities facing HR executives today - and what measures do you recommend to address these?

JG: In these uncertain times, it is more important than ever to focus HR on activities that create business value. That means having a HR Strategy/Business Plan laser-focused on business value drivers:

• Revenue Growth:  Business Transformation, Globalization, M&A, New Markets, Innovation  

• Talent Strategies:  Workforce Planning, Learning & Development, Total Rewards, Mass Career, Customization, Global Mobility

• Operational Effectiveness:  HR Policy, HR Service Delivery, HR Operations & Technology, Change and Culture, HR Analytics, Compliance

HR must deliver the HR services needed to support business strategy, such as revenue growth, talent and operational effectiveness. HR must make sure it is doing the right qqwork at the right level within the organization: By the right person; At the right location; By the right entity; Through the right delivery method; By the right HR role, which will lead to improved alignment with business goals.

How should companies approach outsourcing in this economy?

It’s easy for enterprises to panic in this market and jump at outsourcing opportunities, simply with the goal of shedding some cost from the bottom-line. In too many situations, clients have jumped at the lowest cost option, and now live to regret their decision.

Outsourcing clients have to think more smartly and strategically about creating an experience than can drive new growth, deliver business value to the top-line, and not just take out short-term costs from the bottom. If clients can engage outsourcing to become more competitive, it creates an entirely different paradigm than simply “shipping jobs offshore”.

SAP plays it safe, with some positive signs ahead

With the ever-closing barriers between ERP strategy and BPO - which we discussed at length back in August, it's important to understand enterprises' activities with their ERP maturity in order to get a solid picture of future potential outsourcingactivity.  The performances of both SAP and Oracle are now a sure-bell-weather for the IT and outsourcing industries at large.

Bruce Richardson, AMR's Chief Research Officer, offers some keen insight into SAP adoption in his recently launched blog "First Thing Monday", which is an extension of his popular e-newsletter that hits the wires at the beginning of every week.

Bruce points out some key indicators of what we can expect in the coming months:

• Many SAP customers he is talking to are continuing to expand their footprint at present and are still planning for further upgrades;

• SAP is not planning any labor reductions, despite heavy growth in recent years, and will reduce costs with a hiring freeze and travel restrictions;

• SAP is likely to push new programs in the short-term to encourage mid-size business to move into SAP environments.

While we're clearly moving into a difficult economic climate, it's encouraging that many enterprises are continuing to invest in their ERP backbones.  I anticipate that as we see more companies seeking cost-containment outsourcing avenues, many will be able to benefit from upgraded (or new) ERP platforms as they evaluate their options.  Common ERP standards ultimately support more scalable and lower-cost outsourcing strategies.

Dispatches from DC: What's a mouse son?

Jason Averbrook on HR and technology:  the core theme is about how HR needs to reach outside of the organization to drive performance inside.  And technology and social networking tools arethe enabler to make this happen.  Here are some of the sound-bites:

"What we thought we were getting from technology is not what we have.  We outsourced benefits and payroll, so what are we left with - an address book, and IT tells us it'll cost a million dollars to upgrade!"

So why are people are unhappy with technology?

Bristol Myers double-bundles

Bristol Myres Squibb today joined a rare breed of enterprises which have bundled apps and business process to two suppliers across finance and HR towers, with the announcement today that Accenture has taken on a 10-year $550m engagement to take on the pharma giant's finance and accounting processes and related application development and management services.  This follows on from their recent $324m 10-year deal signed with IBM that covered Human Resources BPO and related applications services.

This strategy builds firmly on our recent discussion on bundling apps, and the related business processes supported by those apps, under a single supplier.  This deal is just the latest in a series of contracts where the buyer is clearly recognizing the synergies of tying together process design, knowledge transfer and governance across IT and operations "boundaries".  Bundled outsourcing is not the answer for everyone, but it can provide a major spur for some companies looking to shake-up their back office functions, provided the vendor can demonstrate the skills and business understanding to drive this agenda.  These "boundaries" shouldn't exist, and bundled BPO is one potential solution that can help eliminate them. (Much) more on this topic to follow...

Why bundling apps and business processes with a single provider can make a lot of sense

The software industry has - for decades - dealt with the whole "best of breed" versus "integrated application suite (ERP)" quagmire, the scenario centered on whether clients are better off trying to manage a whole variety of individual products themselves, via-à-vis having a ready-made integrated suite of applications.  These arguments are surprisingly similar to the debates raging in the outsourcing industry today.

While a best-of-breed (b-o-b) approach can provide the client added quality (or functionality) and control over its suppliers, the prohibitive cost of managing multiple service providers (or applications), combined with the increased need for unique skillsets to integrate them into the business, favor the multisourcing (integrated-suite) route.  And, while many enterprises have persisted with a b-o-b software strategy, both Oracle and SAP have been vacuuming up many of the niche application products, whereby presenting the client with the integrated-suite strategy, whether they initially wanted it or not.  While outsourcing providers are generally not as acquisitive as software providers for a number of reasons, their need to add process depth, industry expertise, technology enablement and scale to their global services offerings naturally narrows down the playing field over time, as outsourcing engagements become more global and complex.

The Future Of HRM Service Delivery

I am honored to welcome one of my earliest - and long-time - mentors in the services and hi-tech advisory business to guest on Horses for Sources. It's taken me over a year to persuade her to showcase her insights here, so I guess now she has submitted me a piece is testament to the power of blogging, and the fact that it is fast-becoming a preferred medium for industry luminaries to opine their views to the industry-at-large. The fact that she felt she could be a little more "edgy" and freer to express her views here makes me feel like I am doing something useful for the outsourcing industry hosting this blog :)

Ladies and gentlemen, please welcome the honorable Naomi Bloom and her take on the future of Human Resources Management service delivery. Naomi has over four-decades of experience in HR delivery and technology in a number of advisory roles and is widely-regarded as the pre-emeninent authority in HR platform delivery. Over to you, Mrs Bloom:

Process Optimization is the key to successful Procurement BPO

I was recently engaged in an excellent conversation witn Gianni Giacommelli, who leads marketing strategy for SAP's BPO division, on the way forward for the Procurement BPO market.  One of the aspects about SAP that has impressed me, is their strong view of BPO as a opportunity, as opposed to a threat, to their business.  Gianni's boss, Christain Baader, has performed an excellent job driving this strategy in recent years, and made his case-in-point last year where he discussed why technology is an important key to BPO-sustainaility.   BPO is all about driving common strandards that can help service providers leverage their service staff and technology applications across multiple clients in a utility model.  So what better opportunity is there to encourage enterprises to standardize on a common ERP archtecture than when they evaluate BPO opportunities for their business?  And it's not solely about BPO, it's also about globalization: the more global enterprises can encourage their country-level businesses to operate within a global process template for functions such as finance, HR, sales and procurement, the quicker they can access critical data to make global business decisions.  Without digressing further, I asked Gianni to summarize our conversation regarding the development of procurement BPO solutions, where many of the leverage points for cost savings are driven through process and platform optimization, and not solely labor arbitrage.  Over to you Gianni:

BPO: It's all about taking ownership to get results

Our last debate about about "Platform BPO" got me thinking more about how outsourcing PMOs can be more successful at delivering these engagments, and reaching a desirable operating state sooner.  While my good friend from SAP's BPO group, Gianni Giacomelli, makes an excellent point that service providers need to leverage economies of scale and process optimization ruthlessly to hit their targets, it also raises the question of how outsourcing PMOs within the buyer need to step up to the plate to take more owenership over their outsourced processes.  (Gianni wrote an excellent piece here last year entitled "Why a good BPO provider is not enough for a successful BPO service delivery" on this topic).

Many BPO engagements are currently a lot more complex than IT outsourcing engagements, where there are many additional challenges from the buyers' standpoint, namely training personnel, mapping new processes, transfering knowledge, establishing realistic service levels, developing workable reporting models and understanding which processes can be offshored successfully, and which of them should remain onshore - on inhouse - with the buyer. 

BPO partnerships are opportunistic, rarely strategic

Having worked closely with both ICG Commerce and Genpact for the last few years, it was a positive step forward for the firms to announce a partnership, but I believe the companies should go a step further and merge.  Partnerships like this are normally opportunistic; they help the firms team up for broader finance/procurement customer bids, as they can be vulnerable when competing with Accenture and IBM, which have broadscale finance & accounting (F&A) and Procurement BPO solutions. 

Are we reaching an inflection point of business globalization?

I can't help feeling we are entering into a critical phase of business globalization, due to a convergence of factors.   We have seen these global dynamics in play for the last 30 years, but we are now in an economy where today's CEOs are aware they need the tools at their disposal to become truly integrated global enterprises.

I was privileged to have a preview of IBM's new study of 1100 CEOs this week at its analyst event in New York, and, while the findings are under embargo until next Tuesday's public release, I can say they reinforced one thing for me:  the vast majority of today's CEOs recognize the need for change, and are more prepared than ever to be bold and adopt measures that can drive rapid change through their organization.   So why is now different from that of 5 years' ago, or 25 years' ago?

HROWorld 2008: An industry re-inventing itself

Braving the annual industry HRO schmooze fest this year, I realized I was emulating Roger Federer’s extraordinary Wimbledon run by making it to my fifth-consecutive show.  Only an elite few have made all six – at least I can’t claim that honor -:)

From the moment I stepped into Naomi Bloom’s Brazen Hussies event on Tuesday night and was ordered to eat a heavily-garlicked vol-au-vent with the instruction “we’ve all had one, and so should you”, I knew something interesting was in the air this year.

For starters, all the industry big-guns were there; the leading HRO providers with all had their head honchos; the sourcing advisors; both SAP's and Oracle's BPO teams espousing the virtues of outsourcing on their ERP platforms; every staffing, benefits, talent management, data-something-or-other firm you’d never heard of; and even a few mercenary analysts dotted around the place.  We even had a new double-act to entertain us – the Elliot and Richard show, moderated by the vivacious and cabalistic Jay Whitehead.  This was one networking event when you just had to be there.

So, in true HROWorld tradition, I slammed myself with 20 back-to-back meetings over the two days, supplemented with a constant supply of stale coffee and a constant stream of sales literature I will cherish for a long time (ahem). 

My overall impression of the state of HRO is one of re-engineering to get this right.  This was the resounding message I got from several discussions with the market-makers in this industry. OK, we’ve had a few non-starters recently, but let’s emphasize these were projects that were cancelled before any implementation work had taken place, and in several cases, the contract had just never quite made it to fruition.  This doesn’t imply that HRO is failing; it implies that some businesses have made strategic decisions that now isn’t the right time to undergo open-heart HR surgery on themselves.  And do you blame some of these firms, when the bottom has fallen out of their industry and they might just have some other urgent priorities to rectify?

I wrote a year ago that the industry crystallized around the Convergys/J&J deal, and I was right.  What I liked about this show was the serious discussion on what works in HRO versus what doesn’t.  There was a refreshing honesty from almost everyone regarding the steps suppliers and buyers need to take to make this work…and so much less hype.  In fact we had so little hype, we could have used some.  Most of the suppliers are seriously focusing on what they are good at, and crafting HRO solutions based on their core strengths.  The need for standards and common service levels was discussed at length, with several ongoing initiatives in the industry currently focused on the joint-development of common HR standards and technologies that enable a more robust, repeatable HR delivery model. 

There was universal recognition that HRO works when solutions are crafted from the bottom-up, with services added incrementally and HR leaders having more time to develop successful governance practices, as opposed to some of these massive end-to-end “big-bang” deployments, that have often resulted in a misalignment of expectations and delivery.  This isn’t failure or disaster; it’s a 9 year-old industry testing the boundaries of what works - and what doesn’t.  I’ve been at pains recently to point-out that 97% of HRO deals have succeeded – and by succeeded, I emphasize that they are plugging away to get this right.

Let’s be brutally honest here, this is business process outsourcing – and this is a tough complex business, where things can only go wrong.  You really cannot judge the “success” of any major outsourcing engagement until it’s at least 3 years’ along and transition has been completed.  The day of the billion-dollar mega-HRO deal may be over for now, but take some time to look at the plethora of these “bottom-up” engagements taking place, where companies like ADP and Ceridian are racking up their HRO clientele at double-digit growth rates; look at Hewitt’s re-focused strategy on centering its core benefits outsourcing business as the kernel of its HRO delivery model; and look at Accenture's and IBM’s continuing efforts to optimize their global HRO engagement models, with HR service-delivery centers employing thousands of service personnel across several global locations. The seeds of this industry have been sewn, and we’ve had our reality check.  Now it’s time to move on and watch some great companies make this thing work.

The worst mistakes companies make when they evaluate BPO - and how to avoid them (Part I)

"Best Practices" are formed through the experiences of firms innovating and trying out new ways of doing things.  So - in reality - that means they'll tell you where they messed up and give advice on how they got it right (or how they would do something differently second-time around).  BPO is no exception... in fact, it's probably a shining example of how to learn from others' mistakes :)

Here, in my experience, are the most common mistakes companies have (and many still are) making when evaluating BPO:

Outsourcing Predictions for 2008... in a nutshell

Let's not beat around the bush...here's what happening next year:

1) Offshoring panic will continue, but will force providers to innovate. Concerns over the appreciating rupee, weakening dollar, wage inflation and employee attrition will continue to have a powerful impact on the global outsourcing industry.  As highlighted here earlier this year, the onus on the leading outsourcing providers is to focus on building constant ongoing efficiency and dynamic working environments for their staff, price their engagements on business services as opposed to offshore staff wages, and expand their delivery centers into other low-cost global locales like Latin America, Philippines and South East Asia to minimize the risk from their offshore delivery models.

2) The standardization of technology platforms within Business Process Outsourcing (BPO) engagements will take center stage.  You have to take your hat off to SAP for recognizing the significant opportunity BPO is providing for the leading ERP vendors.  They invested significantly in implementing programs for the BPO service providers to deliver outsourced services on their platform three years' ago, recognizing that the future success of BPO lies in standardizing processes across business functions and global regions.  And how else can you do that without having common processes underpinned by standardized technology platforms?  Oracle has also followed suit more recently, as it too has realized it must compete for business with firms looking to moved towards an outsourced end-state.  To put it quite simply, when you are moving processes into the hands of a third party, or offshore, it is much easier to train staff to manage these process for you if they are well documented and are underpinned by software that staff can be quickly trained to use.  It is much easier to find staff who are, for example, familiar with running reports from Oracle financials, or SAP R/3, which significantly lowers the risk of staff attrition, and also allows for outsourcing providers to hire fresh graduates and train them on standard tools and processes, many of which they already gained experience with during college, or in their previous employment.

3) Intense competition among the IT Outsourcing vendors will drive the uptake of Remote Infrastructure Management (RIM).   Up until this year, the growth of RIM - the management of a company's databases, desktops, servers, networks, security and applications from a remote location - has been timid.  However, with the majority of IT infrastructure now manageable from a remote location, it is making less sense for firms to engage in outsourcing engagements where the vendors supply all the kit.  Of course, vendors can command higher fees if they are also supplying the hardware and applications, but they are also footing the bill for asset depreciation and renewal.  With so many vendors competing for a piece of the ITO pie, RIM provides an aggressive entry point for the ambitious offshore providers, for example Satyam, HCL, Patni and Cognizant, to compete with the traditional incumbent ITO vendors.  These companies will be prepared to bid for much smaller contracts to gain a foothold in the market and build operational scale (remember the 90's when the US IT services giants unwittingly let Wipro, Infosys and TCS jump into the IT services game...).  What's more, enterprises can explore RIM solutions on a piecemeal basis and do not have to go for a "big-bang" approach;  outsourcing solutions have often proved more successful where firms can try out one or two processes to begin with.

4) Adoption of Business Process Outsourcing will continue to grow, but at a slower - more cautious pace.  The early wave of Human Resources Outsourcing (HRO) deals was centered on multiple processes across multiple geographies being bundled in a single contract, where the HRO provider delivered multi-lingual services and often multiple technology platforms.  2007 pretty much signaled the end of an era, with the J&J / Convergys HRO engagement being the only end-to-end HRO global mega-deal of note.  However, we did see a plethora of smaller-scope engagements which covered payroll, benefits administration and HR-IT areas.  Expect these to continue in 2008 as providers refine their delivery models and include more offshore services to support HR processes, but the day of the large, global, complex HRO engagement is very much fading.

Finance & Accounting Outsourcing (FAO) has enjoyed unprecedented growth over the last three years as firms take advantage of low-cost offshore services.  However, 2008 will see a slowdown in the 30%+ growth spurt as the leading providers ingest a lot of the recent business they have taken on, and look to build efficiencies in their delivery models that take advantage of better technology, more standardized processes, and incorporate new locations - namely Latin America.  Expect more modest growth in 2008, in the region of 10%.

Procurement Outsourcing (PO) will continue to be adopted at a slow, but steady pace, and will be increasingly bundled onto existing FAO engagements as many of the more experienced adopters seek to add more indirect spend management processes into their outsourced portfolio.  Like HRO, the offshore vendors are learning how to service these processes more effectively, and expect this to be a driver for more adoption next year.

5) An economic downturn will accelerate some outsourcing adoption.  As we so colorfully debated here, each outsourcing inflection point has been driven by urgent financial needs of companies to curtail expenditure on general and administrative functions.  The waves of ITO deals in the early '90s, HRO and ITO deals after 9/11, were primarily driven by the need for buyers to experience a "quick fix" with their costs, combined with ambitious provider pricing designed to have immediate financial benefit to clients.  The more recent wave of FAO deals has been driven by manufacturing, automotive and consumer businesses under serious competitive pressures.  However, the relative economic comfort of recent years has allowed many enterprises to take more time over their sourcing decisions, and adopt a more "start-small" exploratory approach to understand what works for them.  When you look at the anatomy of outsourcing expenditure over the last couple of years, we have seen a surge in smaller contracts that do not make the media radar.  Outsourcing is a complex business, so why should a company enter into huge multiple-process outsourcing engagements, when it can afford to take it's time a move out select functions on an incremental basis.  However, as we stare hard at the prospect of an economic downturn in 2008, will we see companies step up their urgency to cut costs?  Is the maturing provider landscape ready to take on a new wave of more complex services?  I believe it is. 

'

One of the toughest years to predict?

Hoovering up the transactional stuff... is NCO becoming the ADP of F&A Outsourcing?

Going pretty much unnoticed last week was the acquisition of receivables management firm Outsourcing Solutions Inc by the global market leader in Collections BPO, NCO Group, to create a combined accounts receivable (AR) BPO giant with revenues of $1.5 billion, and adds nearshore service center capability in Puerto Rico, Canada and Mexico to NCO's current global delivery portfolio, which includes the USA, UK, India, Australia and the Philippines.  NCO has steadily been focusing on developing offerings in reporting, analysis and budgeting areas, and now only needs to acquire a major capability in accounts payable services to boast a pretty impressive full-service F&A offering.  What's impressive about this expanding portfolio is the multiple geographic locations being developed, and the avoidance of over-reliance on India.  The added capabilities in the Philippines and Latin America put the firm in a strong position to compete for global AR contracts, service all the necessary major languages, and jostle service delivery across several low-cost locations to accommodate multiple time zones, combat attrition issues and the appreciation of currencies such as the Rupee.  NCO boasts several high-profile clients, where it delivers outsourced AR services, often as augmented offerings to existing shared services operations.

Nearshoring software development to Mexico

Word on the street at the moment is that several of the leading outsourcing vendors are searching for clients who want to develop resources in Central and South America.  This is especially the case for services that require a higher degree of staff interaction and time overlap, for example software development, HR and finance processes.  I'm not unusually one for commercials, but I was sent this cute clip - for a small software development outsourcing firm called Nearsoft  - which comes up with some very compelling arguments for nearshoring software development work to Mexico for Californian businesses; namely that Mexican nearshoring costs on average 65% of the US costs, compared to 85% for Indian costs for software development services.  The principal reasons are as follows:

• Wages rates are comparable
• Little need to relocate staff into the US
• No need for "bridge teams" which spend their time overlapping development work with both onshore and offshore teams
• Productivity - for every 2 US engineers, 3 Indian engineers are needed to combat staff attrition and less experienced staff
• Staff travel costs are far lower for nearshore
• Staff attrition is lower in Mexico
• IP protection is stronger under the NAFTA laws
• Staff visas are easier and cheaper to acquire under NAFTA visas.

While many of these points make a lot of sense, Nearsoft overlooks the issue of talent availability in Mexico and other central American locales, which is my number one concern.  Moreover, the productivity issue is debatable.  But there is little doubt the LAT-AM nearshore argument is becoming more and more compelling by the day with an ever-weakening dollar and no slowdown with offshore staff attrition rates.

Why a good BPO provider is not enough for a successful BPO service delivery

Too many companies explain away their refusal to explore BPO as a "need to get their IT in order before we can consider this".  BPO actually is creating a great opportunity to transform IT in concurrence with the business process - with the bill footed by cost arbitrage, as opposed to the shareholder.

The earlier BPO deals were largely focused on transitioning the people and processes to work in an outsourced end-state, and the IT people needed to support that outsourced function were brought into the equation late in the game to get the existing systems to support the outsourced end-state.  This often caused issues with data security, systems and application integration, and often resulted in the outsourcing buyer incurring far greater costs to re-configure their IT backbone to support the BPO strategy than they had originally budgeted. 

Both business process and IT change should be driven TOGETHER - and BPO is a change agent that must also incorporate this philosophy - and several of today's recent outsourcing buyers are leveraging BPO to transform their IT backbone at the same time.  Gianni Giacomelli, who leads global marketing strategy for SAP’s BPO group, lives and breathes this issue on a daily basis and works tirelessly to create programs that support the BPO providers with deploying technology and resolving related problems – be them understanding how to better automate processes, finding shortcuts for implementation, sketching what is possible with technology innovation, or simply identifying solutions to operate the technology platform more cheaply. Take it away Gianni…

• Two things explain much of the BPO industry’s uncertainties: one is about breaking bad habits, and the other about eliminating “blind spots”. The bad habits are the ones of the RFP cycle – where all the parties have traditionally played “sell-and-buy-a-product” instead of looking at operational synergies. The blind spot is the scarce use of joint process and technology redesign in unlocking those synergies. Ironing these wrinkles out will require substantial investments and change from all sides – but the stakes are high enough to give it a shot. I will argue that requiring a better alignment of customer, BPO provider and software vendor is a good way to change the game for the better.

• While many early generation BPO deals showed patterns typical of system integration and process reengineering – both disciplines matured in the 90s - success in BPO is more than just process redesign and technology. It is about operational excellence and as such it must leverage both the operational and transformational skills of the provider – and should be driven by the respective stakeholders in both camps (that is, by the COO as well as the CIO). Some BPO providers, often pushed by end-clients and advisors, insufficiently supported by software vendors, and challenged by internal resource-allocation dynamics, have failed to realize this point in the past. Structurally, many BPO providers were either born very good “operators” and excel at operating a given setup, or very good “implementers” who are good at designing and implementing innovation – but rarely both at the same time. The result in quite a few cases was a failure to leverage processes and technology solutions to fully harness the key drivers of BPO value: economies of scale, process optimization, and low cost labor. This explains a number of economically unsustainable deals that left customers and providers dissatisfied. Successful BPO providers make the most out of their technology investments by ensuring that these investments serve their service delivery needs. They integrate process and technology design with operational requirements, thereby creating replicable solutions that enable true scale leverage. The best service providers also seek the systematic and long-term involvement and intimate support of the software vendor they choose for their process/technology platforms to assist them in their quest for ongoing evolution and improvement. Catering for the providers’ needs is not a job a software vendor is typically structured to do – and requires substantial investment on his part, too. Customers looking for a sustainable BPO platform are therefore best advised to systematically verify the solidity of the service provider’ software vendor relationship backing it up, for each of the crucial parts of the service delivery they require.

• It is dangerous to unduly restrict the service provider’s freedom in leveraging and fully harnessing the effectiveness of economies of scale and process optimization (for a more thorough discussion, see the article here). However, it is absolutely critical that the customer (complemented by expert advisors) "kicks the technology tires" of the provider through the RFP process. In the end, the customer and its advisors should check if the technology deployment the provider proposes is indeed going to enable the economies of scale and process optimization required to generate sustainable results. It is essential that the technology vendor heavily supports the BPO provider.

• Gianni Giacomelli is director of global strategy and marketing for SAP’s BPO business unit.

Why Technology is an important key to BPO-sustainability

Folks:  I will be featuring several guest posts from experts in the outsourcing industry who I respect. One gentleman whom I have known and worked closely with over the years is SAP's BPO group leader, Dr Christian Baader.  Christian is now the globally recognized thought leader on how crucial technology strategy becomes when companies take on BPO engagaments.  Take it away Christian...

There is widespread agreement in the BPO-industry by now, that the traditional, labor arbitrage dominated way  of "lift and shift" or “my mess for less” as some pundits call it, is not producing sustainable BPO-situations.   Many deals not living up to expectations and meager provider profitability are warning signs of this.  Sustainability has become one of the key issues of the industry.

Sustainability should be read as “both sides, customer and provider, achieve their business goals over the deal duration, i.e. the customer gets the targeted improvements in cost and quality of service while maintaining a low risk exposure and keeping long-term options open while the provider makes his margin, and the relationship  grows for both sides in value over time.” 

A number of factors need to get played well in order to safeguard sustainability of the deal from the start, one of them being the decisions around the technology foundation of the deal on the provider and customer side. 

Technology’s influence on deal economics
Business decision makers often tend to either leave the technology choice to the provider (an attitude we often see expressed as "we bought a service, now the  technology choices are on the service provider") or treat it as a mere IT-discussion only.  Both attitudes however miss the crucial influence, that technology has on the enterprise value of the deal:

·         Technology’s influence on the economics for the provider:  The design of the processes and choice of technology influences all the fundamental business drivers influencing the providers ability to service the deal efficiently and in a sustainable fashion: Synergizing between different parts within the customer organization as well as between customers for generating economy of scale (“do it cheaper”), ability to automate and optimize processes taking full advantage of future innovation potential (“do it better”), and effectively leverage labor arbitrage (“employ cheaper resources”)

·         Technology’s influence on the economics for the customer (ie, incl. the retained organization):  The technology choice and platform design of the customer and the provider is very often a shared one, or at least a heavily integrated one - and as such the choice on one end impacts the other end (e.g. when the outsourcing/centralization scope does not include all subprocesses or countries. Common problems include data integrity and ability to keep synchronized over time when the two sides of the fence move in slightly different direction – which might express itself in additional process exceptions requiring manual interventions or inconsistencies  in self service implementations or reporting)

All in all, the appropriate deployment of technology as an enabler of outsourced and retained processes is therefore critical to the sustainable delivery of the BPO services (leveraging appropriately automation, analytics, workflow, authorization concepts etc). 

The need for “Design for Manufacturability” of Process solutions
Furthermore, technology deployment cannot be engineered in a silo – it must be considered TOGETHER with the process reengineering, so that the resulting service is not just satisfying the business requirements but is also efficiently manufacturable.  I call this the "Design for Manufacturability "-paradigm of BPO-service manufacturing (and it seems high time, that we learn from the lessons of the physical goods manufacturing for the service manufacturing world).  Process solution “design for manufacturability” includes the choice of the platform itself, and configuration/customization choices for process adaptation and integration.   The advantages of standards-conformant deployment of standard technology (ie, leveraging configuration and avoiding customization) for your process solutions are manifold:

• required levels of process integration can be achieved more cost-effectively
• the solution is easier to maintain over time – which includes higher quality as well
• adoption of innovation is easier
• necessary scope-extensions of the platform (be it additional processes, geographies, businesses) are easier to accommodate
• finally migrating the platform at the end of contract (to another provider or back to inhouse delivery) will be less risky and painful.

In order to leverage those technology aspects most effectively, decision makers should make sure, that the topic is integrated into the sourcing project from the RFP-design stage onwards and that business and IT-teams are working on this in a highly integrated fashion.

Leave the technology choices to somebody else at your own peril!

Dr Christian Baader is VP of SAP's BPO Group, and is based in Waldorf Germany

Beyond Labor Arbitrage: The New F&A BPO Frontier

The value proposition of F&A BPO now encompasses many added business benefits beyond a simple arbitrage of labor to help decrease transactional processing costs.  Companies are focused on both incremental improvement and transformational innovation, and F&A BPO is a lever that can help drive both without the need for significant investments in people and technology. These benefits can be summarized as follows:

·          Access to scarce talent.  Many companies today are struggling to find the finance and accounting talent they need. The U.S.-based talent pool has been shrinking considerably, and many companies are finding that F&A BPO service providers can usually offer skills, like payroll and accounts payable, significantly over-and-above basic transactional tasks – and at significantly lower cost. 

·          Ability to focus retained finance function on mission-critical activities.  The retained finance function can focus its time and resources toward driving ongoing quality into its financial processes and staff development and determine ongoing transfer of experience and skills from their service provider.  Moreover, the finance function’s retained management can focus time and energy on SLA-setting and rolling out governance programs, while working closely with their supplier.  These collaborations are often decade-long “marriages” and require increased energy and focus to achieve effective results with compromise required on both sides on many occasions. 

·          Continual cost reduction and performance enhancement, taking advantage of process methodologies and standards, namely Six Sigma and LEAN.    Companies can often achieve cost reduction initially through labor arbitrage, and then subsequently through increased economies of scale from service providers and increased performance levels from services providers as they continue to mature and further their offshore investment (e.g., China and the
Philippines).  Contracts are frequently structured to demand annual performance improvement and reduced baseline costs, while expecting the service provider to drive process improvement and innovation.. Additionally, today’s companies are quickly realizing that F&A BPO is an opportunity to make rapid, impactful changes to their business and take advantage of the standards service providers are developing.  Many service providers are going to market with differentiated value propositions that are geared to moving companies onto their existing delivery models, with a heavy skew toward offshore delivery.  They have quickly realized that they need to demonstrate industry-specific F&A process excellence to win credibility.  Effective companies are quickly seeing BPO as an opportunity to make substantial structural changes that would be very difficult to achieve if they were not moving into an outsourced end-state. 

·          Ability to increase working capital and directly impact the bottom line.  Experienced suppliers can devote increased resources and generally have more efficient processes for managing cash flow from end-to-end solutions, such as Order-to-Cash and Procure-to-Pay.  Improving the effectiveness and velocity of the cash-flow can help improve management decision-making, not to mention the positive impact on working capital. 

·          Availability of new F&A technologies and bundled solutions.  It’s our experience that many of the leading F&A BPO service providers are continually developing solutions that can work in tandem with the company’s technology, or even replace it in certain cases.  Service providers are focused on F&A BPO solutions that can be standardized on incumbent ERPs, namely SAP and Oracle, with bolt-on tools and application solutions in discrete areas where value can be reaped. Additionally, solution areas like Order-to-Cash have moved beyond the performance of simple account collections using a billing application. They are frequently now bundled process solutions that often cross organizational boundaries, (e.g., dispute management, cash-flow analytics, and reporting capabilities).  The benefits of bundled process outsourcing can include improved opportunities for process redesign and associated cost reduction, synergies from staff working together in the same environment, the ability to create a more leveraged management team, and potentially fewer contact points with external and internal customers. 

·          Potential to integrate multiple disparate financial platforms, applications and middleware into one common global standard.  The cost savings enjoyed through labor arbitrage can offset significant enhancements to financial systems as part of the F&A BPO initiative to achieve a single, unified global chart of accounts.  We have seen many companies in the past delay F&A BPO initiatives to resolve inherent issues with their accounting systems, but there is a clear move within many of today’s initiatives to combine systems integration with the F&A BPO transformation, especially where the same service provider can be deployed to improve the F&A systems as part of the BPO initiative.  BPO provides the opportunity for companies to make rapid changes to their business, especially where there are multiple silos of financial data strewn across geographies and business entities.  Companies have a singular opportunity to address these issues as part of the BPO transition process. 

·          Transferal of risk to the supplier.  Managing offshore resources in today’s business environment can be very difficult.  In particular, offshore captive organizations that are not a Tier 1 global brand in lower-cost geographies (e.g. India) will find it increasingly difficult – and expensive – to hire, train, and retain quality staff resources – not to mention accounting for the geopolitical risks associated with owning offshore assets and employing offshore labor.  Many companies are quickly realizing they are far better off having experienced service providers take on these associated risks, as they have invested heavily in their staff development and governance programs. This can also save companies hefty management costs in running a captive operation. 

·          Preparation for a business slowdown. The desirable time to consider creating more effective and efficient F&A processes is when business is good and there is sufficient time to plan and manage the outsourcing transition. When done properly, engaging an outsourcing service provider takes time and is more effective when not executed hastily. Additionally, service providers are more willing to collaborate and share the benefits when you (and other companies) are not feeling immediate cost-reduction pressures.

·          Preparation for M&A activity. Outsourcing F&A forces the company to move to standard processes across business units.  This can help facilitate future M&A activity by decreasing the effort associated with the integration and by improving the likelihood and accelerating the timeline of realized synergies.  It also allows the company to focus on the core business during integration, leveraging the service provider’s skills and platform for integration of F&A.