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Predictions: Marketplace Turmoil and Change in How Outsourcing Relationships Work Over the Next Five Years

Outsourcing Center, Kathleen Goolsby, Senior Writer

Getting from A to Z (from the current state of outsourcing relationships to the future state of how relationships will need to work in order to bring about the outcomes that buyers demand) is not an easy path, and some providers will fall away during that journey. In addition, cloud computing changes the entire picture. To better understand today’s outsourcing relationships from the lens of the client as well as understand how to drive change that will result in more successful relationships, CompuCom conducted a number of roundtable discussions with buyers of outsourced services. What clearly came through in buyers’ comments is that they are not happy, states Ed Anderson, Chief Strategy Officer at CompuCom. “They’re not happy with current contracting methodology, the way SLAs stifle innovation, what happens to the value proposition in the way things get implemented and, frankly, they’re not happy with the partnering aspect in how the two sides work together.” Based on this roundtable feedback — and from similar comments that other outsourcing providers shared with CompuCom — Anderson sums up the situation: “The current way of doing things is not working very well.” Yet, in complete contrast to this expressed dissatisfaction, the other industry experts we interviewed about how outsourcing will function during the next five years described future relationships as follows: “BPO deals of the future will become more relationship oriented, more long-term, and more strategic,” states Abid Ali, Vice President and Global Head, BPO Services for Tata Consultancy Services (TCS). RamPrasad Kan, Chief Technologist at Wipro Technologies, says, “There will be a fundamental change in the relationships because the service providers will be getting more and more into the core business processes of the customers.” Les Mara, HP’s head of Enterprise Services BPO in EMEA, says in the next five years, buyers in the provider-selection phase will look for providers that can prove more than their capability to deliver the services day-in and day-out. “They will need to demonstrate how they can take an enterprise to a new technology-enabled paradigm where there are fewer transactions and greater working capital performance.” “Relationships over the next five years will be far more joint-ownership based, with both companies becoming intimately involved in a true partnership through effective governance and a combined approach to achieving strategic objectives,” says Don Schulman, General Manager, Finance and Administration at IBM. “Relationships will be more like a virtual captive, where the culture and values are similar, buyers are involved in selecting key people delivering the services, and the provider is a true partner and has the strategic role of trusted advisor,” says Mohammed Haque, Vice President and Head of Enterprise Solutions Service practice at Genpact. Obviously, they predicate these predictions on an assumption that relationships over the next five years will work much more successfully than the dissatisfaction that currently exists among buyers. Cross-purposes versus trusted advisor As CompuCom’s roundtable feedback revealed about many relationships today, the trusted advisor role and partnering feelings often fly out the window as soon as the relationship begins. “Buyers are happy on the day they sign the contract, but the day after, they feel like they’re working at cross-purposes with their service provider because the provider seems to be trying to catch them in a request that isn’t part of the statement of work and then bill them on a separate item,” explains Anderson. The providers’ trusted advisor role will become even more crucial to successful outsourcing in the future because the impact of opportunities from cloud-delivered services will create a lot of innovations and start-ups in the industry, says Ken Stephens, senior vice president, Strategy and Transformation at ACS. “If I were a CIO during the next five years, I would expect my provider to be knowledgeable and help me make intelligent decisions about how to run my company’s business — even if that’s moving some services away from my current provider or restructuring my existing agreement so I can get the benefits of cloud-like services immediately.” Unfortunately, that type of partnering relationship and trusted advisor role does not exist in many outsourcing arrangements today. “The trusted advisor role will take on more importance as the cloud becomes more and more prevalent,” says Stephens. “CIOs really need a provider that understands what can and cannot happen — otherwise, they put their companies at risk by moving it to a public or a private cloud environment that is potentially not a long-term, sustainable solution.” So how will the industry move from its current relationship state to its near-future state? Overhauling contracting methodology CompuCom predicts that the process of changing the way relationships work will start with changing the contracting methodology. Anderson says that in the next few years “buyers and providers will overhaul the contracting process and replace it with something that will give more value and freedom to innovate and thereby also improve the quality of the relationship.” Even though today’s complicated contracts spell out the scope of services, performance requirements, prices, and what to do if something goes awry, they aren’t adequate. As a buyer in a roundtable discussion pointed out, “We can’t anticipate how our business needs will change over the term of a contract, whether that’s due to a merger or divestiture or even changing the quality of service that we’re delivering to our end users. The contract is where it all begins to break down, because we’re locked into contractual specifications that work against our changing needs.” As CompuCom’s CIO, John Douglas, points out, both parties in an outsourcing relationship start out operating in the “partnering spirit of the agreement. But very often the contract locks both sides into a position where it’s difficult to be flexible in working through the mechanics of change and difficult to maintain that partnering spirit.” A buyer at one of CompuCom’s roundtable forums believes a covenant approach is a better way to structure an outsourcing relationship. Similar to a marriage where the man and woman actually have a legal contract that changes …

Changes in BPO: How Technology Is Changing the Landscape

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

In its day, offshoring created a tectonic change in outsourcing. Today, new trends are bubbling to the surface that will also create a sea change, especially for BPO. Today’s way of doing things may be destined for a dusty museum five years from now. Let’s take a look at the impact of technology on the BPO landscape.  The impact of technology on the BPO landscape Suppliers we interviewed predicted the following will alter BPO during the next five years: The fusion of IT and BPO into one seamless, end-to-end solution Buyer demand for analytics The process as a service Standardization Global service delivery Verticalization Change in process ownership The new ways of doing things will alter how buyers and suppliers interact. It will certainly change how buyers select their suppliers. And it will change how buyers own their outsourced processes. Andrew Pery, Chief Marketing Officer for Kofax, predicts the BPO market “will likely outgrow all segments of the IT industry. There is increased competition and increased choice.” Why is the BPO industry now on the cusp of change? The impact of technology on the BPO landscape cannot be overstated. Don Schulman, General Manager, Finance and Administration for IBM, gives two reasons. First, he says “the economy has triggered a broader group of buyers to reconsider BPO as a viable option and has heightened their need for flexible delivery models that can support them during market fluctuations. In an era where companies are challenged to do more with less, buyers are seeking strategic partnerships that enable them to accelerate transformation.” Second, he says the industry has matured. “It’s no longer about price, cost, and labor arbitrage.” The future will be about enterprise business outcomes, process optimization, and cloud computing. He says these things “have come together and created a significant opportunity for buyers and the industry.” The emergence of end-to-end solutions The impact of technology on the BPO landscape begins with end-to-end solutions. Abid Ali, Vice President and Global Head, BPO Services for Tata Consultancy Services (TCS), says buyers “are looking for IT/BPO synergy.” Instead of the lift-and-shift models offered by pure-play BPO players, he says buyers will want a supplier that can “look at the processes end-to-end and then work hand-in-hand with them through process transformation.” “Buyers are seeing they can get a single supplier to do both their process and ERP processing in a single platform,” says Mohammed Haque, Vice President & Head of Enterprise Solutions Service practice at Genpact. “We are seeing a lot of convergence.” He says there are two main advantages: a single team manages both IT and BPO and the convergence produces synergies. For example, today buyers are interested in taking cost out. That could generate savings of 1X. But in the future, “the convergence of process, technology, and analytics may produce savings of 2-3X,” says Navanit Samaiyar, Senior Vice President, Procurement and Supply Chain Services for Genpact. Why? Because of continuous process improvement. He uses procurement outsourcing as an example. Currently, buyers want the outsourcer to negotiate with their existing vendors to get better prices. But shifting from today’s category sourcing to a source-to-pay cycle with an end-to-end view can drive out additional cost. “The buyer will see more benefits because of the end-to-end optimization. Because the impact will be higher, they will see significantly higher savings. I think the total savings will far exceed the labor arbitrage the buyers are seeing right now,” says Samaiyar. Samaiyar predicts the overall cost of running an end-to-end BPO operation “may increase” because the supplier will be able to charge buyers a premium for the domain expertise. Even so, the Genpact executive says the numbers add up for the buyer. “I think the total savings will far exceed the labor arbitrage buyers are achieving now,” he says. V. K. Raman, Head, Domain BPO Services for Tata Consultancy Services, says the increasing cost of governance “will drive buyers to seek providers that reduce the number of process hand-offs through providing end-to-end services.” End-to-end BPO will change how buyers outsource. Samaiyar says technology decisions today tend to be “a separate, stand-alone CIO discussion” with BPO another separate decision. “In the days to come, as solutions for end-to-end process become more significant than point solutions, technology has to start talking to the process.” He says analytics will be “the single biggest tool to generate ideas of what actions buyers and suppliers need to take to make the process more effective.” Use of analytics Advanced analytics offer buyers the opportunity to unlock the value that resides within mountains of data and turn it into actionable information and insight. IBM’s Schulman says that embedded, advanced analytics in specific processes enables buyers “to leverage insights into their suppliers and customers that they’ve never had before, allowing them to better align business decisions to their overall strategies at a much faster pace.” He says that suppliers that embed analytics across all F&A processes and provide actionable insight across multiple clients and industries “can provide visibility and drive to best practices in a way that buyers never could on their own.” Analytics are currently popular with the financial services industry’s FAO buyers, according to Schulman. He notes that “advanced analytics is rapidly working its way through the marketplace as a whole.” Platform/process as a service Ritesh Idnani, Vice President and Head, Global Sales and Marketing for Infosys BPO, says buyers’ expectations of transformation “have gone up quite a lot. Since transformation will become an important element of supplier delivery, it will accelerate the pace of looking at more utility-like platforms in the BPO space.” Idnani says the transformation will require suppliers to “work harder on delivering utility models because technology of the platform plays a big role for suppliers wanting to deliver utility models on a large scale. You can’t do it just finessing the process.” TCS’s Abid says that process as a service “meets the customer’s need to upscale processes to industry best-in-class norms in preparation for growth. In the current macro-economic environment, …

Areas Where Outsourcing Will Grow in the Next Five Years

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

Our experts predict several areas of the industry will experience significant growth over the next five years. Predicted growth areas for outsourcing will include reverse outsourcing, verticalization, emerging markets, business analytics, healthcare, transportation, and ERP, among others. Industry trends Andrew Pery, Chief Marketing Officer, Kofax, says one of the predicted growth areas for outsourcing will include reverse outsourcing. This trend has two facets. First, he says the economic downturn and the weakening U.S. dollar have inspired some companies to move their outsourced work back to the domestic arena. “Today there is a preference to relocate customer-centric functions back to the United States,” he says. This trend will “accelerate” over the next five years. Because the economics now work, Pery predicts American suppliers “will invest more aggressively in offering capabilities domestically.” He says the foreign exchange rate combined with the availability of large levels of highly-skilled American labor bring U.S. labor rates “more in line with offshore rates.” For example, suppliers can set up shop in rural areas where labor costs are lower. Pery also points out the federal government may provide incentives to keep work at home. That possibility has inspired outsourcing firms outside the United States to open facilities there. “We envision the stimulus package will provide incentives for companies to utilize outsourcing suppliers that have facilities in the United States, including offshore firms that have set up U.S. offices to take advantage of the anticipated incentives,” he says. Infosys’s acquisition of Atlanta, Georgia-based BPO provider McCamish in November is one example. The second major industry trend is verticalization, made possible by the strength of the second-tier suppliers. Pery says buyers of the future want specific, vertically oriented skills and domain knowledge. For example, Cerner and Capgemini are two tier-two specialty suppliers in the healthcare space. “They will grow their business at a rate higher than some of the more established firms,” Pery predicts. The Kofax executive also points out the major firms are increasing their investment in vertical solutions as well. He sees the one-size-fits-all outsourcing model will lose popularity over the next five years. In the past, Pery points out buyers “were somewhat reluctant to outsource their mission-critical applications. But that dynamic is changing dramatically because of the economic volatility in the downturn.” Now companies need to shed costs, so economic pressures are driving them “to outsource their mission-critical vertical applications to firms that have demonstrated experience in that area.” In the financial services market. Paul Diegelman, Practice Manager, Finance and Accounting Optimization for BancTec, predicts commercial banks will be exiting the check and payment processing outsourcing business and strong, non-bank technology and processing providers will take up the slack and dominate the market. “The economics of check and payment processing requires high capital expenditures and onshore head count yet generates lower returns. That’s why commercial banks no longer favor it,” he says. He predicts the continued outsourcing of this process, which large corporations rely on for their working capital, will accelerate. Don Schulman, General Manager, Finance and Administration for IBM, believes the industry, which is already consolidating, “will continue to do so in an accelerated manner.” He predicts buyers “will start to circle around a few of the big players who have the funding to make the necessary investments and drive to best practice standards.” Ravi Kapoor, Practice Manager, Supply Chain Management for Wipro, says another area of growth for suppliers is helping buyers “embark on green initiatives throughout the enterprise.” Specifically, suppliers can advise buyers on how to make their data centers more cost-effective by going green. Offshore Karthik H., Research Director, Everest Research Institute, says outsourcing companies will need a delivery network of multiple locations to compete in the marketplace of the future. That means suppliers “that have a global presence and access to skills in different markets will have a greater chance to succeed,” he says. Karthik says it’s common for Fortune 500 companies to have as many as 20 centers across the world. “They want to access the unique skills and benefits of each location,” he explains. While he believes India will continue to retain its dominance as a global sourcing location, he feels companies “will consciously think about diversifying into other multiple locations.” Access to skills is the most important driver, in his experience. But diversifying risk is also important; the terror attacks in Mumbai last year “got people to think about diversifying some types of work.” A third driver is time zones. Suppliers have to do some types of work, like IT infrastructure maintenance, in real time. As for locations, Karthik predicts the Philippines will record “similar or faster growth than India” because of its large talent pool and cultural affinity with the United States. Many of the other countries in Asia “will record moderate growth,” he notes. He says China is growing — focusing on its domestic market and Japan. “Africa will be of increasing interest” in the next five years, the Everest executive predicts. The reason: the new Seacom cable has slashed telecom costs up to 80 percent. For the first time, African locations will offer a “robust infrastructure.” In Eastern Europe, Karthik believes growth will shift from tier-one to tier-two cities. Similarly, he predicts the smaller locations in Latin America “will become increasingly significant.” Emerging markets Everyone interviewed agreed emerging markets will be an area of growth – whether it’s an emerging market for new outsourcing buyers, new process domains, new capabilities such as analytics, or new geographies for service-delivery locations. IBM’s Schulman says the supplier’s “emerging markets business is explosive.” He says IBM has made “significant investments” in China, Eastern Europe, India, Latin America, and other parts of Asia. He says the growth in those emerging markets started with mature corporations trying to enter into commerce in those locales. But today and five years out, he says the real growth will reside in home-grown companies in those markets. “The financial crisis has caused a lot of fast-growing emerging markets to look inward and create a …

Outsourcing Allows Back-up Services Provider to Retain Market Leadership

Outsourcing Center, Bruce McCracken, Business Writer

Web 2.0 created a dilemma for Intronis, a provider of online data back-up systems. Its customers needed the software to back up their burgeoning data faster. Its proprietary software was increasingly unable to accommodate their needs and it didn’t have specs for a fix. Outsourcing to Exigen saved the day.

Why Shell Created an ‘Ecosystem’ of Three Suppliers When It Outsourced its IT Infrastructure

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

Instead of outsourcing its IT infrastructure to just one supplier that takes care of everything, Shell chose to outsource to best-of-breed suppliers. It created an IT ecosystem designed to encourage three suppliers to work together. Read how they made multi-sourcing a success.

How Hot Spot Teams Innovate

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

Lynda Gratton at the London Business School has studied teams for the last five years. She explains how to encourage hot spots, a business environment where ideas and excitement ignite teams, who then solve problems and innovate.

How Outsourcing Helped a Utilities Company Save $16 Million While Lowering Security Risk, Improving Client Satisfaction, and Flexibly Working through an Extremely Challenging Acquisition

Outsourcing Center, Kathleen Goolsby, Senior Writer

PSEG wanted to increase value on IT spend and tasked CompuCom with providing end-user support services to more than 11,000 users across 85 locations. They’ve worked flexibly together to ensure their interests remain aligned in developing solutions that increase productivity and decrease down time. Within three years, PSEG realized $16 million in IT services cost savings.

How Outsourced IT Provided Wireless for the Citizens, Cut the Crime Rate, and Helped Minneapolis During a Crisis

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

This relationship captured the best in show award because it demonstrated excellence in partnering while revamping the city’s IT infrastructure, including installing a city-wide Wi-Fi network. This new infrastructure played a crucial role in the city’s swift response to the I-35 bridge collapse and the success of the Republican National Convention when the entire nation was watching.

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