Crash and Learn: is TPI's "quartus horribilis" reflective of the sourcing industry at large?

There were a few alarm-bells ringing in the outsourcing industry with TPI's shaky Q2 results.  As our recent buy-side survey data indicates, in addition to the multitude of service providers and consultants, outsourcing interest and uptake is on the rebound, so what should we read into TPI's 38% drop in revenues from Q2 2008? I spoke to leaders of all the key sourcing advisors to get their candid input on how their firms were faring, and whether TPI’s results are reflective of the sourcing industry in general.

Rival Equaterra, which is currently privately held, reports to us that its Q2 results have increased 10% over 2008, expects Q3 to perform well, and is encouraged by strong IT outsourcing activity, with on-plan BPO advisory business. Another rival, Alsbridge, added: “First half revenues are up 40% on a 1st half ‘08 to 1st half ‘09 comparison. Across the board, we see good demand

for the final half of 09. No really new areas. Same old ITO, F&A, multi-process BPO and SSC.”

However, it’s not a rosy picture for everyone. Another competitor volunteered: “We’re seeing some new ITO opportunities, but these are contingent on clients securing the funds to pay us. Many are choosing to go it alone. This has been a terrible year so far.” Another added: “Since March, each month is looking better. July and August are stronger than most summers”.

Other advisors report a soft Q2, but consistently view a much improved pipeline of business for Q3. Some are enjoying a ramp-up of F&A BPO business, while all see strength in IT outsourcing evaluations. While payroll outsourcing is still hot, demand for end-to-end HR Outsourcing appears very weak across the board. In addition, several service providers have stated increased aggression from advisors looking for consulting income from the sell-side, as they seek to fill revenue holes created by the weak market.

So what can we read into all this?

Customers having other priorities during “shellshock spell”. We’ll all look back on the time between Oct 2008 and June 2009 as a period of shell-shock for most commercial organizations. This hasn’t been a usual recession where firms carve out some costs, make a layoff and move on, it’s been a time for deep business reflection and structural change to the way we do business. This recession has proved that many firms took their time before making decisions that result in business upheaval, and most have been extra careful about hiring consulting help until they are sure they know what route to take. Only now are we starting to see a rebound in widespread outsourcing evaluation activity, and this is reflected in the uptick in business from several of the advisors. This has been a tough period for the consulting period in general, and nearly all major consulting firms have endured widespread layoffs. One management consultancy partner confessed (after several martinis), that his firm made such a deep cut, it even managed to sever consultants who were on billable client engagements.

Deals are smaller and hefty consulting fees are hard to justify. This is probably the biggest issue for sourcing advisors – it’s easy to justify spending $1m for engaging an advisor to broker a $50m deal, but it generally requires a similar effort when you’re evaluating a $10m deal. TPI (and others’) traditional consulting model is simply not geared up to the smaller engagements – how can you perform work of the same quality with significantly less resources and expertise? Customers are resorting to using lighter-touch models (i.e. a retainer service), analyst “on-tap” services, or simply muddling their way through themselves and pounding whomever then can for information and advice. What worries me is the influx of some lawyers who are driving clients straight to a contractual negotiation with service providers, and bypassing much of the due diligence necessary to make the right sourcing decisions. They focus far too much on punitive contracts and not nearly enough on supporting smart governance models and outcome-based approaches.

Other players are stealing marketshare. To be fair to TPI, it has been a victim of its own success, and has found itself defending a substantial marketshare lead during a very tough period for sourcing advisory firms. Any market weakness is going to be much more visible for this publicly-held firm. With revenues in the region of $200m, their nearest competition enjoys barely half this amount. To cut to the chase, they’ve been on a hiding-for-nothing of late.

The increasing presence in this space of most of the leading management consultants, lawyers, boutiques, one-man-shows, analysts and other intermediaries, is spreading the business across an increasing number players. Firms such as AT Kearney, Deloitte, KPMG and PwC have no choice but to embrace smart outsourcing advisory, as most of their enterprise clients need help and support – especially those looking to break out of expensive shared service models. Many distressed firms who know little about outsourcing, but are now having a serious look, tend to gravitate to the bigger brands, as they simply are not aware of specialist advisors, such as Alsbridge, Equaterra, Everest, TPI and W Group.

The nature of advice and support customers need it quickly changing. Simply put, buyers are getting smarter at this and many have their own smart PMOs which know how to conduct a lot of the sourcing evaluation work (or at least think they can). Remember all the consultants who made a packet doing ERP evaluations in the ‘90s? Well, commodity outsourcing isn’t a whole lot different when service levels become standardized, and pricing information much more readily available from multiple sources. Today’s advisors need to demonstrate more business consulting acumen and less of the operational process-focused stuff. The next generation of winners in this space will be those with industry-specific expertise, have access to relevant and credible research and benchmarks (either their own, or from credible analysts), and can develop sourcing strategies that are outcome-based, not simply driven from cost-inputs.

What a crazy market, but you can’t say we’re left with a dull moment these days… comments and insights always welcome,

PF.

Comments

[Ratnesh Mathur]

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.

[Rob Andrews]

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.

[vinnie mirchandani]

Phil, my POV - cheers

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

[Mike Withey]

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 ?

[Mark Stelzner]

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.

[Martin Gardocki]

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.

[Martin A Perera, London, England]

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?

[Naomi Bloom]

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.

[Ed Nair]

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.