Business Transformation Outsourcing Circa 2009 | Article

business transformationNeeraj Bhargava, Group CEO of WNS, sees the next two years “as an exciting growth opportunity” for business transformation outsourcing (BTO). Vijaya Paduvalli, head of BPM consulting for business services for North America and Europe, Wipro, says the supplier expects to grow its BTO business 50-60 percent over the next five years for North America and Europe combined.

BTO redesigns multiple processes to transform the way the buyer conducts business on an enterprise or business-unit level. BTO deals include objectives such as improving the ability to react quickly to market changes, increasing the buyer’s capacity to innovate its products or services, enabling real-time data capture and using business analytics to enhance decision support, or enabling globalization.

“Almost all our deals have some degree level of transformation,” reports Bob Pryor, senior vice president, HP. “One-third of our deals have significant business transformation outsourcing elements. And some of our largest deals are completely transformational.”

BTO was important before Bear Stearns, Lehman Brothers, Freddie and Fannie, and AIG. Those events have underscored its enhanced importance now. “Companies today are interested in transformational outsourcing because they believe it can help them survive the current economic downturn. It is a survival tactic,” observes David Poole, head of Business Process Outsourcing, Americas, for Capgemini.

Adds Wipro’s Paduvalli, “Business innovation themes focus on parameters that impact the bottom line, as sustained profitability is the need of the hour in a world of hyper-competitiveness.”

Bhargava of WNS says the inflationary increase of direct purchases is also “forcing companies to enhance their business performance as well as cut costs. BTO is very appealing in today’s times.”

But BTO’s real value proposition goes far beyond cutting costs or surviving in tough times. BTO helps companies improve their overall fitness as a business, according to Capgemini’s Poole. “Companies have to become better at what they do to grow their top line. You can’t just take away (cut costs); you have to add value too.”

Poole believes transformational outsourcing will have “a busy year” next year for three reasons:

  1. The slowdown in the world economy
  2. The U.S. Presidential election will be over
  3. Buyers are realizing technology-led processes can make a huge difference in profitability. He says outsourcing buyers want to access such technologies and have learned that it’s inefficient to buy them on a stand-alone basis

Why now?

One reason business transformation is so crucial now: the competition is changing, according to Poole. He points out the new iPhone is threatening how the other mobile carriers do business. “Who imagined a new piece of hardware could impact a telco?” he asks rhetorically. “Some markets are radically different today. That’s why companies need BTO now,” Poole continues.

Paduvalli also cites what she calls “externalization of the enterprise.” Geographical boundaries are disappearing as value chains become global. She says “centralized control is an antique concept.” Companies that must adapt to today’s new business world require “a radical transformation” that BTO can bring.

She also notes corporate leadership models are changing; “virtual leadership has become a reality,” she observes.

Today corporate survival plans have the enterprise using the money it saved by outsourcing to fund the transformation, either by developing something new or funding a technology change, according to Poole.

Another key reason why buyers are increasingly adopting BTO now: outsourcing’s maturity. “Buyers have become much savvier. They expect transformation,” says Anirban Dutta, head of Strategic Deals for high tech verticals at Satyam Computer Services. He says today outsourcing buyers “are trying to figure out how they can get a bigger piece of the pie. They want to know how to change their existing options to create a new model. They have a good idea of where they want to go. They want outsourcing suppliers to help them make good decisions at a reasonable cost.”

Jim Way, vice president of Managed Services for Siemens Medical Solutions, says being able to offer transformation has become a differentiator for buyers in the supplier selection process. “Buyers want a supplier that can ensure their business outcomes change. It makes their C-level executives look like heroes,” he says.

In the medical arena, Way says if Siemens can help hospitals reduce medical errors through BTO, the hospital benefits in several ways. Its reputation improves. That helps it become a leader in its marketplace. A better reputation also allows it to recruit better staff and physicians. Way says Siemens has been working on its BTO transformational service offering for almost four years.

Pryor adds software and technology have enabled the industry to virtualize parts of the IT environment. “We have the tools now that enable BTO,” he says.

Finally, Kim Davis, senior vice president of Adecco RPO, posits “organizations outsourcing their recruitment process are getting more comfortable with the concept of business transformation because there have been more successful engagements in the marketplace. I think lack of success in the beginning slowed the acceptance.” He adds that buyers and suppliers are doing a better job of measuring success by capturing baseline data and expectations prior to the start of the transformational exercise.

The rising importance of domain expertise

To make business transformation work, according to Bhargava, suppliers need to use three things:

  1. Technology platforms that make business processes more efficient
  2. Low-cost locations to provide a global delivery model
  3. BPO process expertise

However, he says next year there will be a fourth requirement: domain expertise. He says one of the best ways to improve the top line is to thoroughly understand the buyer’s business. Bhargava adds domain expertise is essential because BTO is more judgment based.

Dutta says it’s “nearly impossible to help a buyer innovate if the supplier doesn’t have workable knowledge of the domain.” Pryor says buyers have said to him, “How can you innovate my business if you don’t know anything about it?”

Last year Satyam hired senior executives from the industry itself to increase its domain knowledge. For example, the supplier hired an executive with a PhD from a manufacturing concern to help its manufacturing offering. “These experts don’t know much about either outsourcing or technology. That’s what we do,” says Dutta.

Since suppliers can’t be good at everything, they are beginning to specialize. Capgemini, for instance, is concentrating on fast-moving consumer goods, (FMCG), media and entertainment, and the beleaguered financial services industry.

WNS is focusing on insurance, travel and leisure, and utilities as well as FMCG and financial services. “Our platforms are industry specific,” reports Bhargava. For example, WNS has an accounts payable platform that sits on top of SAP.

Paduvalli says that while domain expertise is important, it is cross-domain skills that truly enable business innovation. This fuels large-scale business innovation efforts and ensures success and sustenance in BTO deals for mature markets like North America and Europe.

The suppliers

Bob Lucido, HR Strategy consulting practice leader and senior vice president for Fidelity HR Services, says next year suppliers “will be very careful about the deals they make.” He says smart suppliers “will walk away from relationships that don’t make sense.” Suppliers will stick to “what they know well, so they can be profitable,” he says.

Gianni Giacomelli, head of Strategy and Marketing, SAP, agrees. He predicts both buyers and suppliers will “become more selective in the BTO deals they do” next year. “By now there’s a lot of experience about what works and what doesn’t. Now both groups are more guarded about successes.” In the past, the SAP executive says suppliers “were eager to do these complex deals and entered into contracts without a clear risk profile. Today there are no more leaps of faith.”

Poole says Capgemini only wants “to work where we can add value.” One way to add value is through analytics. Capgemini worked with one client that was losing customers to its competition. The supplier helped the company determine when a buyer might be tempted to leave and helped it develop ways to change its offering to stop the switch from happening.

To compete in today’s complicated marketplace, Poole predicts suppliers “will become more acquisitive” in 2009. Acquisitions are necessary “to get a different way of working. We are all looking at our portfolio of capabilities. We want to supplement them with niche providers that have subject expertise, the ability to access the markets we want to enter, or special technological capabilities,” the Capgemini executive explains.

Poole predicts the market will see “the dominance of the same few players: Accenture, Genpact, HP, IBM, and Capgemini.” He says these companies have prior business transformation experience they can share with new buyers. “These companies already have similar companies on their books, so they can provide breadth of experience.”

Giacomelli adds he doesn’t think “there will be a lot of new kids on the block. But the usual suspects will do a better job next year.”

WNS’ Bhargava also believes buyers will gravitate “to the mature players” because they have proven results. “Today’s buyers want to have a rapid impact on their economics,” he reports.

Satyam’s Dutta observes companies actively pursuing BTO typically favor selected multisourcing versus going the single supplier route. “Buyers tend to assemble an ecosystem of suppliers,” he says. This is a risk mitigation move, he continues.

Paduvalli agrees. She says BTO deals of the future will have more than one supplier with onshore, near-shore, and offshore components. “Buyers are open to offshoring their BTO efforts for large scale, volume-based, and analytically intensive efforts,” she observes.

Paduvalli, who is a Fellow on the Wipro Council for Industry Research, says suppliers are setting up captive centers in developing economies to leverage their research and development investments. The Council, made up of both domain and technology experts in collaboration with academia and industry bodies, studies potential market trends and equips organizations with insights that facilitate their IT and business strategies.

The deals

From now on, Giacomelli predicts BTO deals “will be more science than art, thanks to history and experience.” He says today suppliers “know what they really can transform. They understand what the buyer should and shouldn’t do.” One example is implementing a global payroll. Companies that don’t want a standard template will end up with a lot of country-specific legacy systems that can’t compare data. “If you don’t standardize, the benefits won’t materialize,” he notes.

Giacomelli predicts BTO deal size will be smaller; he says some former deals had 150 subprocesses. This size reduction will produce two happy results: more profits for the supplier and greater satisfaction for the buyer, thanks to more standardized offerings. The SAP executive likens this to car manufacturing: the manufacturer recombines different options according to the buyer’s needs but does not reengineer the components. “The buyer gets a better car and the dealer makes money,” he explains.

Going forward, Giacomelli believes BTO deals will be less input (seats) based and more output (results) based. “Today buyers demand performance. We will see pricing based on results,” he says.

Paduvalli agrees. She says buyers will measure the success of their ITO suppliers providing BTO solutions by using “tangible and quantifiable parameters like percentage of user adoption or percentage of latency in achieving promised business service levels.”

Anup Gupta, COO of WNS Global Services, says while speed and flexibility are important in this marketplace, “it is imperative transformation gets the basics right.”

The buyers

When outsourcing a process to transform, Poole says buyers like to compare the “rock solids” with the “out there niche companies” to compare price. “They want to get value for their money,” he says.

Paduvalli says buyers want to work with “global giants” like Wipro and then add niche providers to the mix. “Buyers want us plus the pure plays,” she says.

Dutta says today’s buyers understand they may not save money in the short run. But they sacrifice short-term savings for the financial return BTO can give them in the long run by doing things like speeding up their go-to-market offerings. “One of a company’s biggest challenges is shortening this process once the new product is out of the design stage. Buyers come to us to find ways to optimize their ideation process,” adds the Satyam executive. He reports Satyam buyers are proactively asking the supplier for this transformational capability.

Paduvalli predicts buyers will increase their focus and spending on “customer centricity and empowerment themes.” She says customer retention is a “huge theme” for deregulated energy and utilities companies as well as the telcos. They are all under a huge crunch,” she observes. The answers, she says, require the innovative thinking of BTO.

Giacomelli believes offering standardization will benefit buyers. “The more clients the providers have, the more economies of scale they can achieve. This translates into more quality offerings at a better price,” he explains.

How do you create a successful BTO relationship in 2009?

The front end matters. Giacomelli says the best way for buyers to mitigate BTO risk is to spend more time determining the scope together up front. Determining what can be done well is akin to planting the right seeds in the right soil.

WNS’ Gupta agrees, adding “it is important for buyer and service providers to articulate the business benefits of transformation.” He says “this helps in focusing the two organizations to meet their goals.”

Adecco’s Davis agrees and adds that customer satisfaction is “becoming very critical to transformation exercises.” He says in the past both buyers and suppliers thought that “meeting the desired outcomes meant BTO was working.” Today, he says most BTO suppliers have learned “if you don’t set the right expectations on the front end and have great customer service, it will destroy the agreement on the back end.” He says some of the “smarter firms” hire a third-party firm to audit the account on an annual basis “to make sure we’re meeting all the expectations.”

Bob Lucido, Fidelity’s HR Strategy consulting practice leader and senior vice president, says BTO deals of the future will only be successful if the buyer “really understands” the answers to the critical questions of the engagement like “Why are we moving forward with this change? How do our goals fit into the corporate business strategy? How are we going to measure success?”

Giacomelli suggests buyers staff their teams that will deal with the supplier (before and after signature) with people who understand the process and the related technology. “Get them to share information,” he exclaims.

Suppliers’ sales forces “will have to say to buyers: this is the menu of what we can do today,” adds the SAP executive.

Gupta adds that transformation only succeeds when the buyer and service provider “work as partners committed to a clearly defined goal. It’s like a marriage where you need commitment and trust from both sides.”

Mitigating risk. Davis says, “The best way to mitigate risk is to make the buyer organization part of the solution. It can’t be independent of the process.” He says creating value in a BTO deal “is not about risk-shifting. It’s still about a partnership.” He says companies “get caught up in thinking they can shift the risk to a supplier and then walk away. When that occurs, you typically end up with something worse than you had before. BTO has to be a partnership.”

The future

Way of Siemens believes competition among suppliers that offer transformational services will increase in the outsourcing space now that the capability has become table stakes. “The suppliers who have a proven record will win more deals,” he says.

Lessons from the Outsourcing Journal:

  • BTO will grow over the next two years because of the world economy, proven successes, changing competition, and the availability of new technology.
  • Cross-domain expertise is very critical for business innovation. That is the only way suppliers can effectively partner in business transformation outsourcing for mature markets like North America and Europe.
  • Next year suppliers will need to have domain expertise to be successful at delivering business transformation outsourcing. This requirement is causing suppliers to specialize in certain industries so they can become experts. That is the only way buyers believe they can innovate.
  • Next year suppliers will be choosier about the deals they make to ensure successful outcomes.
  • Radical innovation themes for market leadership and expansion of market share are in demand.

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