deal architect

Genpact on the block?

Good friend Phil Fersht, now at AMR speculates either EDS or CSC will try to acquire Genpact to beef up their BPO business.

Genpact would be a great acquisition. Blue chip client base (diversified from its GE roots), diversified beyond India (one of the early India-centric firms to have decent sized E. Europe operations), diversified from IT revenues (some infrastructure outsourcing).

But I do not see why it should sell. It has a pole position when it comes to the BPO market. And the 70% institutional holding will likely want a decent premium over a recent valuation of  $ 2.7 billion.

About EDS and CSC as suitors? EDS only has $ 3 billion or so in cash, CSC less than a billion. EDS is also trading at a 52 week low - and both are at a shockingly low .4X revenues when the sector averages over 2.5X, and Genpact is at 3.2X. At those valuations both EDS and CSC could themselves become acquisition targets this year.

Besides the financial engineering, it would take a plenty of executive time to consummate. EDS's last major acquisition. MphasiS, an Indian IT firm, was much smaller and took a while to complete.

Personally, I think Genpact should keep making small acquisitions of its own and just keep on its current trajectory. 

Forrester on SAP Services firms

A reader shared with me this Forrester analysis of 16 firms with large SAP practices.

Not many major surprises in the choice of vendors they evaluated ((In SAP services evaluations I have been involved with over the last few years, I have seen proposals from all the firms in the survey other than Neoris) , though I would have included EDS and an East European player like EPAM. I would also have evaluated SAP's own (and fragmented) consulting resources since they play a role in just about every project. But, not surprised to see Accenture and IBM lead globally, and Satyam and Wipro from the Indian firms.

Four things I would have weighted more heavily in my ratings:

a) More of a focus on support and maintenance, and by extension BPO. This is a mature market and most deals I see now are post-implementation, SLA based deals which have an upgrade or implementation project component. From that lifecycle perspective firms like TCS, and the specialist Intelligroup would do stronger.

b) More of a focus on verticals. The survey focus is much more on functional components - ERP, HCM etc, whereas most implementations I see have a significant vertical emphasis, and often implementation of SAP's unique industry extensions. From that perspective, Infosys and Cognizant would do better in selected verticals.

c) Focus on upgrades. The hottest "project" in the SAP ecosystem in moving customers to ERP 6.0. It has been a slow slog for SAP to convince its customer base to move, and many are doing lateral upgrades taking minimal advantage of the services oriented features SAP offers in the version. But if that is what the market wants, SAP and its partners should be offering lots more vanilla upgrades at fixed price offerings. Many of the firms in the survey turn their noses on such small projects, but is the most immediate need in the customer base.

d) Lot more overall emphasis on economics. The 16 firms claim to have 80,000 SAP consultants and have done over 4,000 projects in just the last year (and in my estimation over 50,000 projects in the last decade). Most also have significant offshore capabilities.

This is one mature market and yet SAP and its partners still want to attach a "premium" label to these services as I wrote in The SAP Egosystem. With the report aimed at "Sourcing and Vendor Management professionals", I feel Forrester should be debunking that myth and probing rate cards, inflation rates, implementation productivity (shocking how little productivity firms are willing to share even while bragging of thousands of SAP projects in their bag) and continuous improvement on multi-year deals a lot more.

Take advantage of the bounty!

I was reading Brown-Wilson's list of 50 Leading Outsourcing vendors and it hit me how much choice buyers do have when it comes to IT and BP Outsourcing. A quick tally of outsourcing transactions I have been involved in the last 3 years showed my clients had in their "long lists" 26 of the vendors in the Brown-Wilson list, and probably another 50 which do not show there.

If you are a CIO looking for IT infrastructure services, if you are a CFO looking for F&A BPO services, if you are a ISV CTO looking for product engineering services in India, or in E. Europe - each vertical, geography, service line has so many large and boutique providers.

Of course, you can have analysis paralysis. I presented to one client a long list and analysis on 30 vendors and someone in the audience asked "who else should we looking at?"

I cannot wait for similar market fragmentation as we move to SaaS in the software market and disruptive players in telecoms and hardware services in the cloud. As I wrote - often players from out of left field.

Vive le difference!

The ITILity Delivery Model

It's been a long time coming. IBM had yellow books for data center operations decades ago. The world got much more complex as we moved to laptops, mobile devices, IP infrastructures. And now back to SaaS and other centralized models.

So it is good to see ITIL gather momentum across a wide range of IT disciplines:

Service Level Management
Security Management
Financial Management
Incident Management
Availability Management
Problem Management
Capacity Management
Change Management
Continuity Management
Release Management
Service Desk
Configuration Management

These standards homogenize expectations around processes and service levels and form a fundamental building block for utility computing. Now if outsourcing vendors - including IBM - would just resist temptation to customize rather than deliver the scale from their plants and grids, the real payback from ITIL will really come through.

Booz Allen on "How to be an Outsourcing Virtuoso"

Three conversations with clients in the past few days:

a) When will offerings like amazon's new Compute Cloud be viable for corporate versus free- agent developer usage?
b) So SaaS pricing includes hosting, bug fixes, tuning, upgrades - and the application licensing? Can we terminate our current  infrastructure and application maintenance outsourcing and move to a SaaS vendor?
c) Can you find us an alternative vendor which does away with time zone, travel and communication issues with our current one?

Against this background, I see Brian Sommer recommend the article How to be an Outsourcing Virtuoso by 2 Booz Allen consultants.

It is well written, but I cannot help but think it presents such a placid, even dated, view of the outsourcing market.

Just under the surface there are so many other evolutions going on:

Cannibalized application hosting and maintenance a la SaaS vendors
Hardware as a service by vendors like Sun and amazon
Beyond single country delivery to multi-country - truly "Global" delivery models
Emergence of near shore and rural delivery centers as alternatives to long distance delivery from India, China, Philippines.
Understanding of how to leverage developer "communities" - amazon, SAP's SDN
The short putt from SaaS to BPO
Re-engineering of the outsourcing supply chain

The "best practices" the Booz Allen article describes are a helpful catalog.  But the outsourcing "virtuosos" I know are looking way beyond them.

The King is Dead. Long Live the King.

Barring a major IBM acquisition, HP is on track to soon become the world's largest technology vendor.

So, will the new King do unto others what it is mandating internally and help customers slash IT budgets in half? Is it willing to price printer ink far less per ounce than Chanel or Dom Perignon? Will it embrace or fight utility computing, open source, SaaS, and global delivery/systems automation as these trends target its hardware, software and services revenue streams?

Or will it continue the present leader's trend of bulking up through acquisitions and spending less and less on R&D and innovation?

The King of the masses or the classes? HP has a couple of quarters to ponder the palace coup....

More on BPO in Finance and Accounting

Phil Fersht (who wrote a Real Deal guest column on the topic) and his team at Everest are hosting a webinar on July 25.   Check out details here.

The Long Tail of IT Services

You would not be able to tell from the behavior of some of the partners and salespeople in the industry, but the tech services business has been and continues to stay incredibly fragmented. David Margulius points out in InfoWorld a Gartner survey which shows the top 6 services companies (Accenture, CSC, EDS, Fijutsu,  HP and IBM) combined have only - 21% - market share. The "long-tail" includes brands like Deloitte to SAP Consulting to Unisys to every Indian provider to much smaller systems integrators, VARs etc.

It is safe for services firms to gravitate towards large and "safe" market niches like SAP implementations, compliance  or SOA work - but the barrier to entry in most of these markets is pretty low.

A small group of buyers still do not take advantage of this fragmentation and continue to pay premium rates. Vendors who do not narrowly dominate niches in the broad market will continue to try and find the shrinking number of buyers who still buy on a relationship basis. Not your dad's sell-on-the golf-course services market.

The Real Deal: Phil Fersht on Finance and Accounting BPO

This continues a series of guest columns from practitioners and bloggers I respect. The category - The Real Deal describes them well.

I thought it was interesting that the term "shared services" made it back in to IBM lingo a couple of weeks ago. When I was at PwC (now IBM) in London in 1989 we were already looking at hairy, cross-border issues around employment and record keeping laws for potential shared services for clients like BP. Things have evolved so much since that we now have "super shared services" run externally by BPO providers.

Phil Fersht is VP, Research at the Everest Research Institute, where he follows BPO Markets. Everest is an Outsourcing focused advisory firm. Before Everest, Phil held various analyst positions at Yankee Group, NelsonHall and IDC. Here's his take on BPO around Finance and Accounting:   

"The outsourcing of multiple Finance and Accounting (F&A) processes to a third party supplier, has been going on for 15 years, ever since BP divested the running of its North Sea oil F&A transactional process to Accenture. Since that time, we have witnessed close to 150 Global 2000 organizations sign contracts with outsourcing providers that have all involved multiple core accounting processes being managed under a single contract which is greater than three years’ in length. Half of these contracts have been signed in the last 18 months, with over 30% growth in F&A Outsourcing this year, and even stronger growth expected over the next year and beyond.

The industry’s early years began slowly, with many senior finance leaders nervous about placing their day-to-day processes (mainly the accounts payable and accounts receivable functions) under the management of a separate provider. As a result, well over half of large-scale financial services, telecom and utilities/energy firms implemented their own “shared services” or captive F&A support operations, where they took advantages of low-cost near-shore and offshore resources, and the synergies of having a centralized provision of services across the organization. The emotional closeness of F&A processes to these organizations (for example billing to telecoms firms, and the order-to-cash cycle for banks) has caused many of them to retain control over their F&A services. This is now changing, with the development of mature F&A offerings from global business and IT services providers such as Accenture, IBM, Genpact, HP, ACS and Cap Gemini, who have the capability to deploy the operational, consulting and technology expertise and services necessary to offer cost savings well in excess of 50% of administrative F&A costs. Moreover, we are also witnessing the emergence of specialist F&A outsourcing suppliers, such as the emerging Indian suppliers Progeon (Infosys), WNS and Intelenet, who are aggressively targeting firms looking to take quick advantage of significant cost savings offered by offshore labor arbitrage. The consumer goods and retail sectors are fast emerging as the hottest industries to adopt full-scope F&A Outsourcing, with P&G, Unilever and Colgate-Palmolive as major pioneers moving quickly towards a fully-outsourced model for their transactional F&A services, while focusing existing finance personnel on more strategic processes, namely budgeting, risk management and management reporting.

Many companies which initially went down this shared services path are now looking to move onto a fully-outsourced model, where all the transactional F&A services are delivered from the outsourcing suppliers’ staff and facilities. With issues like Sarbox compliance no longer a barrier and permission to offshore becoming widely accepted, there seems little point in persisting in a shared services strategy when global outsourcers can take on the headaches of labor attrition and IT maintenance, and deliver the identical services back to the customer at much lower cost due to their economies of scale.

The next phase will see the bundling of F&A technology services with the F&A processes to reduce costs even further and create efficiencies of scale and data access that can impact to the top-line for the outsourcing buyer, not just the bottom-line."

Phil can be emailed at pfersht@everestgrp.com

IBM in India

I recently met a gentleman who worked for IBM in India in 1977. He confirmed the political environment written up in this Software Magazine article which forced IBM (and Coca Cola) to leave India that year. He added color - apparently someone IBM had treated arrogantly years before was now powerful enough in government to push them out. But IBM's departure left about 1,200 employees many of whom seeded India's now well known software services industry.

30 years later IBM is back in full force.  NY Times reports this Tuesday Sam Palmisano, CEO will address 10,000 local employees at "the  Bangalore Palace, a colonial-era mansion once inhabited by a maharajah. He will share the stage with A. P. J. Abdul Kalam, India's president, and Sunil Mittal, chairman of the country's largest cellular services provider, Bharti Tele-Ventures" (which as Sukumar wrote outsources much to IBM).

"An additional 6,500 employees will look in on the town hall-style meeting by satellite from other Indian cities."

"On the same day, Mr. Palmisano and other top executives will meet here with investment analysts and local customers to showcase I.B.M.'s global integration capabilities in a briefing customarily held in New York. During the week, the company will lead the 50 analysts on a tour of its Indian operations."

One of the reasons IBM was not popular in India in the 70s was it charged too much for dated US equipment. With India such an important node in the IBM network now, its US customers today have reason to ask if they are being charged too much for its global mix of services.

Update: In the mid-70s, Steve Jobs of Apple was finding harmony in India while IBM had heartburn. In reverse, today I just read Apple cannot make a go in India while IBM makes plans for a $ 6 billion investment there.