Have some outsourcing vendors already thrown in the innovation towel?

I've recently had two rather disturbing conversations with friends interviewing for client management positions with outsourcing vendors.  In both cases, they were only being asked to bring in new logos from selling low-cost IT/BPO services, as opposed to working with existing clients to up-sell more consultative, higher business-value offerings. 

Both these chaps are senior-level execs who are highly experienced, well networked, and can engage in C-level conversation.  You would have thought several of the offshore-centric vendors would be clamoring for people of this caliber to raise their level of conversation within their existing accounts, rather than utilize them to go after a handful of remaining logos.  Most of the top-tier vendors have relationships with most of the major enterprise buyers these days, so you would have thought their strategy should be centered on developing deeper footprints with them, as opposed to simply increasing the number of low-end operational engagements (or at least a combination of the two).

While some vendors are talking a big game regarding how they intend to broaden their outsourcing services and consulting work with clients, a lot of their current management clearly don't have a lot of confidence to bring on the talent to help them do just that.  As several vendors seek to raise the bar and become more innovative service partners, they have to be brave and look to bring on the talent that can engage in the right dialog with clients, at senior levels, in order to get there.  While it's important to remain loyal to the client managers who scaled the business, vendors need to find ways to empower them to bring in new talent to deepen their client relationships.  It seems the politics of client protectionism is still rife within outsourcing vendors and could seriously impede their ability to broaden their relationships over the long-term.

2010 will really see the men separating from the boys in this business, and it's those vendors which have the appetite to bring in the talent to raise the bar, and become more innovative with their clients, who will forge ahead.  It seems some vendors are content to stay right where they are and pick off low-value work.  Our next research series will ask customers to rate the caliber of their vendor executives, and whether they are bringing the right level of business acumen to the table to raise performance.

Comments

[Phil Fersht]

@Michael:

Innovation is finding new and creative ways to source new avenues of productivity or sources of revenue. Definitely not "standardization". Not sure where you get that from.

Read this peace for more on my views here:

http://www.equaterra.com/_filelib/FileCabinet/Research/EquaTerra_Position_The_Innovation_Dearth_in_BPO_6030_Feb2010.pdf?FileName=EquaTerra_Position_The_Innovation_Dearth_in_BPO_6030_Feb2010.pdf

PF

[Michael steer]

Can someone please define what "innovation" is.
Phil seems to suggest it is process standardisation.
For me this is not innovation.
Also seems to be a fair amount of self promotion on here.
There is nothing wrong with selling a standard solution to a standard issue.
Too much is made of demand for innovation when the basic process stays the same.
Paying an invoice is paying an invoice.
Preparing a management report is preparing management report.
For me innovation is the domain of the customer in how it goes to Market and what it goes to Market with.
If a provider is able to make a change in this space we are talking innovation.
Else is just cheap talk.

[S. Kishore Kumar]

Phil,

What took you so long?

The very concept of offshoring of IT and back-office services was the lone (but high-impact) innovation that came out of the offshore-centric vendors.

Now offshoring is no longer innovative but mainstream. So what next?

You talk of moving to consultative, higher business value offerings, but that is like asking a local blacksmith to build a space shuttle. Right goal but wrong person.

Can offshore-centric vendors innovate on behalf of their customers' business? Certainly not. While they serve banks, retailers, telecom, manufacturer etc., these vendors themselves are neither a bank nor a retailer nor a telco. Customers should not be expecting business innovation to come from their service offshoring vendors!

Can offshore-centric vendors innovate on technology? Surely they can. There is no technical reason why a Facebook / Twitter / Google / Amazon cannot be birthed by TCS or Infosys. There is only a business reason - why move away from a successful, labor-arbitrage model which has not yet run its course? Remember, this model is barely a decade old. Every global downturn adds to the offshore impetus. Europe is under-served. Margins are great. Stock is doing good. Why bother?

Not that I am happpy with this state of affairs, but it makes perfect business sense.

[Narayan Bharadwaj]

Phil - Some great comments here but Shekar Panchapakesan hit the nail on its head, so to speak.

It's not about making a compelling sales pitch or having a "one-time" intelligent conversation! You can get a top-notch relationship manager with deep knowledge of the client's business to pitch how a service provider can transform the client's business. But unless the delivery mechanism is fully geared to support and deliver on the "transformation" pitch being made, all promises will fall flat and the entire "transformation" pitch becomes a mockery! However, I don't agree with the broadbrush comment that when an "Indian" service provider makes that pitch, it's particularly hard to believe. There are "experts" who have done "transformation" in the Indian Service Provider arena. That's true of a vendor in any geography!

Having said that, since there are two sides to any story, even if a service provider had the "real and credible" transformation capability to the boot - strong relationship managers, outstanding domain experts, great transition team and knowledgeable operations team (not merely warm-bodies) - the question remains whether the clients are ready to embrace a different commercial and operating model in return for a "transformation" oriented offering/delivery. I've seen some of the most mature outsourcers claim that they have implemented some truly innovative outsourcing contracts and how they've matured in their outsourcing journey yada yada, when all they have done is to move to a "widget-based" pricing model for IT help desk. Many of the outsourcers are not keen to go down the path of measuring the performance of such "transformation" engagements outside of the traditional SLAs. Insisting on a traditional commercial model i.e., FTE-based, ticket-based or fixed price models, while expecting the service provider to offer high-value services does not quite sit well!

At the same time, service providers claim they have done some innovative delivery models, when all they have done is to have cross-trained a developer in multiple development platforms!!

So it takes maturity on both ends!

[Laura Stone]

We have seen a similar mentality and attribute it to the industry staying in a comfort zone. Few want to take the risk, which isn't one, of suggesting to take a step back and wonder with client what are they trying to achieve in the big picture as well as better understanding the needs and goals of the executive you are sitting with.

Some companies are making this work. The leaders are open to, understand and willing to invest in the strategic work. This alone has opened the door wide for far greater upsell by the service provider.

We all need to think about this work both strategically and tactically, the short and the long term. It's these combinations that will move things to a more productive place.

[Aaron Dunn]

Phil,

Interesting topic and appreciate the front-line experience that backs it up. Personally I think innovation is far too broad a term when applied to these kinds of relationships. In engagements where firms are simply providing staff to fill a procurement officer's reqs for example, then the opportunity to innovate are slim. And in fact the process of the engagement is often so low-value that there is little incentive for either party to do anything but manage to speed, or cost, or whatever the operative metric is that was put in place. In these cases, both sides are at fault.

However, it is in relationships where there is a true spirit of collaboration (not necessarily partnership as that is a topic for an entirely different day!) where real value is created. Sometimes this is called innovation for lack of a better term, sometimes it’s called "outcomes," sometimes business value. No matter your buzzword du jour, both sides recognize that each party contributed to a greater outcome that likely benefited both sides.

The challenge is that it’s risky for the client to allow their vendors to become collaborators, and its risky for vendors to eschew traditional opportunities only for ones where collaboration can exist comfortably.

The first step is to recognize the environments that make this possible. The second is to take the *initiative* to make them happen. The last step is to reward them when they do occur so that people will be incented to take this initiative again. In my view, it is only then will we realize true innovation or true partnership.

Aaron

[Jeff]

Great comments on this thread. I'd add that since we appear to be in the midst of a wave of provider consolidation, some second-tier providers are more focused on maintaining their margins and expanding their client roster in anticipation of acquisition and eventual cross-selling from their new parent. With the cash-out mindset in play at top levels, the reluctance to invest in innovation projects with nebulous ROI is understandable.

[Mike Atwood]

Innovation is something that outsourcing customers have been complaining about since the 1970's. I believe the system is inherently stacked against the outsourcer. Clients have negotiated agreements that require adherence to an ever growing list of SLA's. The lead executive for a client will spend a year of his/her life transitioning the work.Once a provider has achieved stability, the last thing they want to do is to make a major change.
Add to that that most providers utilize a leveraged organization that has become quite expert on the current way of doing things and you have a strong advocate for the status quo. Further the provider has occasionally taken on the investment requirements and has some financial write off if a change is made.
I believe the smart client is looking for this innovation themselves, and understanding the financial and operational issues of the provider when they propose it to them

[Jerry E Durant]

As I have said before, price/service flexibility becomes difficult at the Tier1 level. This especially true when to be competitive you sometime have to dig into reserves which are carefully watched by investors. Also pointed out is the concept of innovation. For many years business was easy, but as demand has reduced and supply increased the inbalance creates a ripple effect across all tiers. What is being seen is the effect from proactive M&A that should have taken place 6 to 8 months ago.

[Esteban Herrera]

I've said it before and will say it again: innovation costs money and has value. If a client determines there is value, they should fund some or all of the innovation costs.

So there is a catch 22, I think, in Innovation in outsourcing. All clients want it as long as its free. All vendors would like to deliver it as long as they get paid for it. We need a new model for the innovation money. But we also need to recognize that you cannot command innovation to take place. You can foster it, encourage it, pay bonuses for it, make it a part of your cultural DNA, but you can't expect to innovate on demand.

So if it costs money, is high risk, unpredictable, and a bit elusive, I am not surprised that companies (both buyers and sellers) are reluctant to put their money where their mouth is. Its unfortunate, because great things could be achieved, but I am afraid it is also reality...for now.

[Michael Filak]

Phil,

Having worked with several offshore-centric firms in a variety of ways, I have my own theory. It seems to me that it’s a case of patience and resolve. The companies I have worked with have not approached this with an investment mentality. It takes time and effort to upsell to the higher-value consultative services. You can’t expect to have a single meeting with a CFO, for instance, immediately turn into a qualified opportunity. It takes time. You can’t walk in and say “let me fix what ever problem you have”. It just doesn’t work that way.

It is important to remember that many of these companies are coming to the market from a straight call-center, labor-arbitrage perspective. Selling “seats” is their focus. Low hanging fruit deals can be done quickly. I actually had a COO at one of these companies state that no deal should take longer than a month close. So even when a company does go out and bring in the type of talent that you mention, it doesn’t work. The expectations are too high. For example, another company I know brought in someone to help on strategic high-end deals. His “quota”, in turns out, was 10 times higher than any of the business developers. You can imagine how that worked out!

That’s my perspective.

Michael Filak

[Shekar Panchapakesan]

I hope there is room for a contrarian viewpoint here.

I think that offshore vendors that aspire to 'moving up the value chain' should first focus on providing the real value in the part of the chain that they are at now.

A previous commenter (Simar) noted that 'Vendors don't get paid for eliminating repetitive tasks, but for doing them'. Extending that line of thought- one major reason we employ vendors (especially offshore vendors) is to have somebody to do the jobs that are 'lower' in the value chain, so that our associates can upskill themselves to perform those functions that are 'higher' in the value chain.

This is not a jingoistic, 'preserve our jobs' view - but a practical one. It could be argued that the precise reason why most manufacturing is done in China, but the design of those products done here is this - the Chinese manufacturers know how to efficiently, and at a low cost, turn out large volumes - while those who design the products live in the markets where their consumers live, and are in the best place to know what they want.

In the IT services and BPO world - I would argue that a similar logic holds. The nuts and bolts activities of programming and testing have to be performed, and it is entirely appropriate that they be performed by companies based in India and elsewhere. It is exactly the 'horses for courses' approach that the name of this website refers to!

I sometimes find it a bit hard to swallow the pitch from an Indian service provider that their 'experts' can 'transform' the financial services, asset management, or mortgage businesses of the companies I have worked for, which have been in these businesses for decades with accumulated experience that comes with it. Usually, there is a large gap in terms of experience, knowledge and skills between the person who makes the initial presentation – these may very well be persons similar to those mentioned in the original post – the senior client-managers – and the people who are available to do the actual work – relatively inexperienced consultants with little real world experience in the business domains that they are attempting to transform.

I don't think any particular part of the value chain should be considered 'lower' or 'higher'. There are skills, resources and their associated costs in different places - and the market determines what gets used for what. I would much rather that the offshore-centric vendors concentrate on innovation that delivers the complete value of whatever is outsourced to them – how to more efficiently deliver on their SLAs, improve their quality and consistency of output.

[Simar Deep Singh]

Phil,

What you are raising is very pertinent for the industry, and there are a few players at least “Talking” about really partnering with the clients and moving up the value chain. Traditionally, however the words like Transformation, Innovation, Re-engineering and a 3rd Party contract don’t go together.

Vendors don’t get paid for eliminating repetitive tasks, but for doing them. Hence, any innovation directly hits their topline.

There are vendors, who are clearly focussing on ‘Low Value– ‘High Volume’… clearly trying to replicate a Wall*mart!

Simar

[Phil Fersht]

@Al: I hope you're right! Everyone's talking a big "I" game right now. My job is to keep a close eye on them to see who follows through with the chest-pumping :)

PF

[Al Crew]

As evidence that it is not every vendor and/or consultancy that is shying away from innovation, I have been fortunate to interview with two firms in recent weeks that are seriously planning to move up the value chain into new service offerings - away from cost-cutting and toward greater business process-impacting services.

Hope this gives some of you a glimmer of hope...

[Phil Fersht]

@Matt: Indeed :)

Just for clarity, it's not every vendor which is guilty here...

PF

[Matthew E. Sullivan]

Phil -

Thanks for your insights. Your highlighting of issues in the BPO market helps those of us in the fledging Legal Process Outsourcing (LPO) market anticipate potential problems. Recognizing that LPO is not as mature as BPO, the recent hiring of Rio Tinto's Leah Cooper by LPO vendor CPA Global to lead "strategy and development of legal services" suggests that at least one leading LPO vendor doesn't yet have the problem you describe here.

Matt

[Phil Fersht]

@Peter: my concern with this standardization of services is it brings a mentality of "dumb it down" rather than "raise the bar".

While I agree that you don't need to hire top-notch consultants to sell basic application support work, or invoice processing, this push to selling end-to-end business process solutions is a completely different ball game. Vendors needs client-side executives who understand the transformation their clients need to go through to get from "existing-state" to "standard-state".

Now, some vendors will clearly be happy always pushing relatively basic, standard, rate-card-based work, but those seeking to push end-to-end standarized process solutions in areas that require a lot of transformation at the client end (i.e. "innovation"), will need to invest in client-side expertise that can help them do just that,

PF

[Peter Allen]

Phil;

I sense that there's a fair amount of polarization in terms of business strategies evident here. Many of the providers have concluded that we've entered a market phase in which standardized offerings can be "pushed" into the client community. I think you might be seeing signs of the behavior associated with this strategy.

I've always said that outsourcing is bought, not sold. But that's clearly a view informed by a different sense of how value accrues to the buy-side and sell-side of the industry.

Peter

[Eric]

"John" is right on the money here. Most vendors made a lot of money selling low-cost technical services, but they need a whole new caliber of client executive to manage their delivery teams and client interactions, if they are going to raise their game. Selling "cost savings" is easy, however, selling "business value" is a completely different ball game.

Phil - this will definitely see the men separating from the boys!

Eric