Why Buyers Should Be Concerned About What’s Happening with Business Transformational Outsourcing
In the noisy commercial world, there was a lot of dialogue and media attention in 2003 focused on business transformational outsourcing (BTO). The phenomenon is notable for the rallying of service providers seeking to invigorate their outsourcing value propositions, the recent mushrooming of entirely new or reorganized BTO business units within established provider organizations, and the providers’ efforts at increasing their value propositions. Most significantly, the noise testifies to apparent growing buyer interest.
IBM Global Services, the Armonk, New York-based global provider of IT and business transformational services, formed its BTO business unit (BCS) in late 2002. “It was clearly client-needs driven,” states Cynthia Erdman, global strategy leader, Business Transformation Outsourcing, BCS. IBM’s solutions for its transformational client base focus on expressed needs including cost reduction, the ability to adapt quickly to market changes, the ability to innovate around process areas, the ability to gain the benefits around process improvements faster, and improving real-time decision support to impact the overall enterprise.
Although there are a lot of numbers floating around, Erdman says IBM sizes the BTO market as somewhere between 9%-12% year-to-year growth over the next five years.
Acxiom Corporation, a data management services company based in Little Rock, Arkansas, is also focusing on innovating around process areas for its transformation services. Its clients, who are consumer-focused companies, are challenged to differentiate themselves by providing customers with a superior experience at all touchpoints, says Michael Cameron, responsible for strategic initiatives at Acxiom. Success here is dependent on transforming the underlying IT infrastructure and business processes to better understand the customer and use this knowledge to build successful customer relationships.
Global outsourcing provider EDS, headquartered in Plano, Texas, recently restructured; it now has five business transformational practices and provides consulting services to support those. Sally Herbert, global executive head of the Enterprise Resource Transformation Practice at EDS, says there is definitely a shift in the demands in the market. She reports their pipeline of demand for BTO relationships in 2004 includes the Global 2000 and is heavy in the manufacturing space (particularly automotive), financial services, and the US government. EDS is currently involved in transformational work for the UK Ministry of Defence–the largest HR transformational project in the world.
Mike Jones, CEO of (i)Structure, Inc., a leading IT infrastructure outsourcer and subsidiary of Level 3 Communications headquartered in Broomfield, Colorado, believes the BTO opportunity has gained the attention of mid-size companies trying to figure out how to stay lean and yet grow. “They’ve been cost-cutting for the last two to three years to get their costs in line with their revenue projections,” he explains. “Now that they’ve stabilized, they’re looking to move forward — but without having to make any big bets. These companies have not invested in their infrastructure for the last few years and now face the need to upgrade; but they want to preserve their capital and also need to focus their resources on more strategic initiatives. Others have sun-setting legacy infrastructure that pull valuable resources into maintenance, rather than focusing on growth and innovation.”
“Phenomenon” is, perhaps, the best way to describe it. “To some degree,” says Allie Young, research vice president at Gartner, Inc., “the market has not critically questioned what BTO really is, how a transformational outsourcing relationship is structured, or how to measure the outcomes.”
Indeed, the use of BTO as a marketing term can cloud a buyer’s view of what it is really buying. As providers talk about BTO and their solutions, some buyers are jumping on the bandwagon without a clear understanding of what it is. Like a check bounced for insufficient funds, this behavior can cause problems down the road.
“As they peel back the layers, some will find themselves in a utility relationship,” predicts Lorrie Scardino, research director at Gartner, the Stamford, Connecticut-headquartered research and advisory firm. “We’re seeing deals now where the provider selection has been made based on price and service levels and there’s a utility framework in place for the contract and relationship. But the providers are talking about the deals as transformational relationships.”
The problem comes when the buyer wants some of the transformation it thinks it bought and doesn’t understand why it’s not getting it. For its part, the service provider may be properly delivering a utility-kind of service, just as the contract specifies; and it is at a loss to address the relationship issues because it is managing the deal like a utility relationship. Unfortunately, buyers and service providers are not always speaking the same language.
So…What is BTO?
It’s not a discrete offering or service that can be isolated, like ITO or BPO. It’s not just a strategy of offloading non-core functions or leveraging economies of scale. “BTO theoretically introduces thinking about transformation as a value-added, higher-level outsourcing engagement focused not only on efficiencies or cost-effectiveness but measurable strategic business outcomes,” explains Young.
Essentially, it’s a type of relationship. While it involves outsourcing of infrastructure and applications (ITO) or processes (BPO), business transformational outsourcing’s distinguishing characteristic is the buyer’s objective of gaining some strategic competitive advantage on an enterprise-wide basis. “That objective makes the buyer enterprise willing to embark on a relationship with a trusted service provider, where they both take risks in innovating to do things differently,” says Scardino. There is a partnering mentality to achieve goals and a strong commitment to mutually impact business objectives.
Where is BTO Headed?
Look for three trends in BTO during 2004 and 2005.
1. Buyer demand will increase.
It’s a worldwide phenomenon already. The majority of demand is currently in the Americas and EMEA (Europe, Middle East and Africa region); it’s just beginning in Asia Pacific. At IBM and EDS, human resources, finance and accounting, customer relationship management, and procurement lead the way in demand for process transformation.
According to Joe McGrath, corporate executive vice president and president of Enterprise Transformation Services at Unisys Corporation, the Blue Bell, Pennsylvania-based outsourcer is finding high demand in four main sectors: financial services (payment processing, life and pension administration, mortgage administration); communications (remittance processing, voice messaging); transportation (airline cargo management and passenger reservations processing); and government operations (health and human services, justice, public safety, tax and revenue).
As buyers’ needs become better delineated, leading providers are innovating and investing in solutions that enable transformation strategies.
Acxiom, for example, has invested in grid computing, an environment where thousands of networked PCs running open source software all work in concert. “A grid computing environment can process huge data integration jobs in a fraction of the time it takes today’s standard technologies to do the same work, making better intelligence available more quickly,” explains Michael Whitacre, Acxiom’s senior client executive. Grid computing, while powerful, is currently an emerging technology; and minimizing risks while the technology evolves is an excellent reason to outsource.
2. First and second-tier service providers will be differentiating their offerings and honing their BTO value propositions.
For instance, IBM will be leveraging learnings from its experience with innovation in its own business and applying those to BTO arrangements. “We have a lot of research going on inside of IBM on products and services that we are preparing for BTO,” states Erdman. EDS is focusing on getting optimal alignment across its transformational capabilities with its core outsourcing expertise.
Mary Hepler, senior vice president, Worldwide Professional Services at Compuware Corporation, says the focus on BTO has driven Detroit, Michigan-headquartered Compuware to “a more partnered solution,” managing application portfolios by using sourcing alternatives that maximize competitive advantage. Moving away from the traditional outsourcing offering, Compuware’s partnering approach is providing clients with “flexible resource options, based on their needs and selective risk to facilitate their transformational goals.”
(i)Structure will increase its value proposition to companies trying to overcome technical infrastructure problems. The IT provider will launch a managed messaging service focusing initially on Exchange 2003. This service will allow clients to eliminate their investment in Exchange 2003 server infrastructure, freeing capital for growth and transformation in their core businesses. Also in 2004, the company will launch a Voice Over IP (VOIP) platform, providing all infrastructure, long distance, and support as a service.
3. Increase in provider alliances.
(i)Structure’s CEO believes a lot of BPO providers will be moving into the IT infrastructure piece. His company is already in front of them in buy vs. build decisions to quickly acquire scale and resources for BTO clients. Several of the industry’s well-known consulting and systems integration firms are now taking advantage of the scale (i)Structure already has in place to address the business transformation needs of those companies’ clients.
Building Your BTO Knowledge Base
Where it’s successful, transformational outsourcing relationships achieve jaw-dropping business outcomes. A North American financial services company that was barely surviving three years ago is now the fastest growing company in its marketplace, thanks to a BTO strategy. A leading global manufacturing firm competing on product innovation had been unable to spend more than 10% of its budget on new strategic initiatives because it was spending 90% of its budget on infrastructure maintenance. Through a BTO relationship, it reversed the trend and now spends 10% on maintenance.
But we predict some problems will arise in the BTO arena, as many buyers currently do not understand the criteria nor have the skills to structure a successful transformational relationship.
In the next three articles in this four-part series on business transformational outsourcing, we’ll examine what buyers need to know about structuring and managing these types of relationships in order to be safe in the “eye” of the BTO hurricane. We’ll also take an in-depth look at successful BTO case studies as well as the BTO offerings of several first and second-tier providers.
Trends and Forecasts for 2004:
- Because some buyers are jumping on the bandwagon without a clear understanding of what BTO really is and the criteria for successful relationships, some relationships will encounter problems when the parties find themselves at cross purposes from misunderstanding the intent of the relationship.
- Buyer demand for BTO arrangements will increase worldwide, causing first and second-tier providers to focus on differentiating themselves and increasing their value propositions.
- The edges on segments of the provider marketplace will become fuzzy, as BPO providers move into the IT infrastructure piece with strategic alliances that will enable them to provide enterprise-wide transformational capabilities.
About the Author: Ben Trowbridge is an accomplished Outsourcing Consultant with extensive experience in outsourcing and managed services. As a former EY Partner and CEO of Alsbridge, he built successful practices in Transformational Outsourcing, Managed services provider, strategic sourcing, BPO, Cybersecurity Managed Services, and IT Outsourcing. Throughout his career, Ben has advised a broad range of clients on outsourcing and global business services strategy and transactions. As the current CEO of the Outsourcing Center, he provides invaluable insights and guidance to buyers and managed services executives. Contact him at [email protected].