Despite the current confusion surrounding the evolving business transformational outsourcing (BTO) market (see Part 1 of series), leading service providers are achieving dramatic strategic outcomes for their clients -- highly visible results that catch the eyes of boardroom execs, shareholders, and competitors.
Unlike IT or business process outsourcing (BPO) deals, BTO outcomes are not due solely to a provider's expertise or resources. Success depends on relationship and contractual nuances that are crucial in achieving desired results.
The True Shape of BTO
BTO is ill-defined in the marketplace (see Part 2 of the series) as to how it differs from BPO. Business transformational outsourcing relationships bring about outcomes that can be more accurately understood as a "conversion," with enterprise-wide, strategic outcomes. BPO outcomes can be more accurately understood as a "transformation." Transformation makes a business function (or associated set of functions) better through tuning and pruning the process and replacing aging IT infrastructure. Conversion results in a different value proposition that dramatically and strategically changes the buyer's basis of competition.
Dr. David Andrew Scott, president of DASCO, a business advisory firm, agrees and explains the differences. "An individual might claim to have achieved transformation through a haircut, a complete makeover, or a more extreme method, such as liposuction. Predictably, the appearance will be different, but that individual won't have changed on the inside. The makeover won't result in enlightenment or anything that makes that individual fundamentally different than before the makeover or other 'transformation' maneuver. A company's conversion, on the other hand, changes its value proposition -- what it does and how it does that or, sometimes, even who it is."
Conversion is an enormous task fraught with high risk and deep complexities.
Essential BTO Relationship Components
Buyer enterprises seeking to convert through BTO initiatives must go beyond selecting the appropriate outsourcing partner; it is the buyer's responsibility to ensure the relationship has the following crucial components.
1. Buyer's Mindset.
Innovation is a key component in BTO outcomes. But it's a high-stakes game for service providers. They must invest enormous amounts of capital and other resources up-front on behalf of a client's specific goals. Buyers must establish a win-win approach that is hinged on sharing risks and rewards. Providers must be given the financial freedom to effect transformation and then be rewarded when they achieve it. The bigger-piece-of-pie incentive makes it worthwhile to the provider to take the huge risks. Achieving the benefits of BTO depends on collaborative efforts and true partnership approaches from both parties.
2. Managing the Relationship.
BTO relationships are focused on ever-changing goals; nothing is static. IBM Global Services' Cynthia Erdman, global strategy leader, Business Transformation Outsourcing, BCS, says a BTO relationship requires an in-depth governance process. "It includes clear understanding of ongoing roles and responsibilities as well as structured and informal communication processes to make sure that, along the way, the client is both pleased with the results and understands what's coming in the future."
Due to its ever-changing nature and complexities of developing and delivering end-to-end solutions across an enterprise, Joseph W. McGrath, corporate executive vice president and president, Enterprise Transformation Services at Unisys, believes a BTO relationship requires two people components: (1) a broader and stronger executive skill set, and (2) an executive champion.
"In a BPO deal, a business unit or process manager might direct the project and relationship. But in a BTO initiative, you will have multiple leaders (from both organizations) involved, depending on the phase of the transformation," explains McGrath. "All of these people must operate as one seamless team." Many organizations have not yet managed to achieve this phenomenon with their in-house business unit leaders, let alone with an external partner organization. But the changes necessary to effect transformational objectives cannot be accomplished without a seamless, hand-in-hand approach.
Because BTO arrangements are dynamic, they must be based on a higher level of relationship. "The transformational activities keep evolving all the time," comments McGrath, so they require an executive (CEO, CIO, CFO) to champion the cause and own responsibility for keeping the relationship on its strategic track. That includes facilitating adherence to change.
3. Contractual Aspects.
BTO agreements are long-term -- often seven to 10 or even 13 years. Flexible contract structures are necessary to ensure agility for the unpredictability of business threats and opportunities over the long run. Like the goals themselves, BTO contracts are large-scale endeavors. They require attorneys with in-depth experience in structuring long-term, ever-changing relationships; but the true partnership approach of a BTO agreement requires the attorney to also understand the perspectives of both parties and how to shape the contract so that it is mutually beneficial while protecting each party's objectives and risks.
IBM's Erdman agrees that contractual structure is very important in BTO. She points out that it should include a pricing structure that allows a client to finance the transformation through the overall business results delivered. "That requires a very clear view -- both in the finance years and the out years -- of where a client wants to be," explains Erdman. "At IBM, we build our contracts around those expected outcomes."
Because BTO relationships are based on effecting a dramatic change in business strategy, Michael Whitacre, senior client executive with Acxiom Corporation, says the parties need to "measure the extent to which the provider enables and contributes to the transforming change. The success of a BTO relationship must be gauged not on IT or process service levels, but on business-outcome metrics."
Mike Jones, CEO of (i)Structure, Inc., adds that BTO pricing structures require "a lot more variability than BPO or ITO contracts."
Jones also advocates using a master services agreement structure so that, as scope for services is added or eliminated from the mix, or changes become necessary from unanticipated business challenges, the parties only need to add or change a particular Statement/Scope of Work, rather than having to re-negotiate the entire overall contractual agreement.
Advice for Buyers Considering Embarking on the BTO Path
Suppose you're a CEO of a company that is considering outsourcing as a solution for business transformational objectives. What should you be doing now to ensure your eventual success? That depends on which of the following two scenarios best fits your company.
Scenario One: BTO is on your radar screen but your company is not ready to tackle this challenge for another year or so.
You need to become knowledgeable around BTO now. Outsourcing Journal and Outsourcing Center, for example, are leading sources for objective, third-party thought leadership and information on BTO agreements and providers' solutions.
Another source of BTO education, says Joe Vales, senior partner with Vales Consulting Group, LLC, a business development advisory firm, is to "reach out to your peers. Most are very generous in sharing what they're learning from working with outsourcing and how they are taking it to the next level."
The second step is to ensure a point person brings together BTO knowledge and your company's strategic direction(s). "That person must be empowered," advises Vales, "to work very closely with the business units' leaders to see where they are strategically moving." If those business unit directions include such objectives as doubling in size, investing, entering new markets, adding new services or products, or forming different kinds of alliances, your company will probably need an architecture and processes well beyond your current capabilities. You must have the capability to continually evolve strategically, he warns.
Next, engage a third-party advisory firm with marketplace insight to assist you in differentiating the service providers' value propositions and determining who really has the capability to deliver on BTO promises.
Finally, advice from (i)Structure's Jones is to make sure there is not a conflict for the people evaluating and deciding on transformational outsourcing opportunities. "We continue to see situations where people are struggling to 'sell' the strategy within their company. Time is not on your side," he comments. Jones advises buyers to anticipate potential stakeholder obstacles, then create incentives for people to make the decisions that reflect the company's best interests and facilitate completing the transaction on time.
Scenario Two: Your company has already outsourced at least one, or several, functions to multiple ITO and BPO providers. Now you realize that BTO is the direction you need to head. What should you do now?
Establish an office or point person for your future outsourcing strategies. Someone should be thinking in terms of connectivity and understanding how all the outsourced processes should work together in the future. "It may mean ultimately moving to one service provider or moving to a scenario where one provider brings that top layer of skills to integrate the various functions and manage the multiple providers," Vales advises.
The more processes you can bring together, the more you can transform your organization.
Next month, we'll look at more of the realities of BTO relationships, especially in view of where this market is ultimately headed.
Lessons from the Outsourcing Journal:
- BTO success requires a true partnership approach to risks, including a structure for both parties to share the financial rewards of taking the risks.
- Due to its ever-changing nature and the complexities of developing and delivering end-to-end enterprise solutions, BTO relationships require that both parties have a broader and stronger executive skill set and require the buyer to have an executive champion for ongoing change.
- A BTO initiative will have multiple leaders (from both organizations) involved, depending on the phase of the transformation. All of these people must operate as one seamless team to achieve the transformational objectives.
- If outsourcing is on your company's radar screen to begin tackling in a year or so, begin educating yourselves now on the nuances of BTO relationship and contracts. Select a point person to coordinate that knowledge with your strategic directions.