Over the last month, as we get ready to welcome the 20s, I have been reviewing blog posts and books I have written and the notes from advisory work helping clients pick vendors, negotiate contracts, review vendor performance from the last decade.
I wrote about enterprise software last week, here is one on the services/outsourcing market.
It is the enduring power of brands, but I chuckle when I hear executives still talk about the "Big 6" - the accounting firms from the 1990s. I started my career at one, and have seen them and their competition transform dramatically. Or that placement offices at most business schools still mostly target a handful of consulting firms for their MBA students. Today's outsourcing market is remarkably fragmented - just in the Business Process Outsourcing (BPO) category, the analyst firm, Everest Group estimates there are over 200 firms with annual revenues in excess of $ 50 million.
The previous decade had seen the fragmentation caused by the maturing of Indian and other global talent pools. By the end of that decade, however, I had written "And looked at from the lens of new price points in SaaS and cloud computing models, the (Indian) vendors I coined as SWITCH have become the new expensive "Big 6" "
The stage was set for this decade which saw even more dramatic changes. First, lets look at how service categories morphed, then we will look at macro trends that affected the outsourcing market.
IaaS
I wrote in 2012 about the evolution in data centers
"As a result in my last two books, I have profiled the Microsoft Azure data center infrastructure and more recently the Facebook Prineville data center and Google’s massive wind and other alternate fuel commitments for its data center and other operations. They are the modern data center innovators and when you talk to them they don’t talk admiringly about IBM or HP. They talk about Amazon’s data center network, Apple’s iCloud, the Switch NAP – interestingly, mostly about other consumer tech companies."
Well, it dramatically affected infrastructure outsourcing. We don't hear much about EDS or Sun or telcos. Its about AWS, Azure, Google and Alibaba. More shock waves are likely as customers settle on hybrid clouds and start to roll out 5G.
Packaged applications
As I wrote in SAP Nation (2014), services around SAP, Oracle, Infor and other enterprise applications had become a massive revenue stream for most outsourcers. SaaS vendors like Salesforce, Workday and NetSuite which bundled upgrades, hosting and application management into their contracts threatened to dent this market. Deloitte, Wipro and others managed to do well even with these vendors. Over a million SAP and other customers are still on the previous on-premise products, and the AMS opportunity persists there. Third party maintenance vendors like Rimini are starting to expand their focus and also get into the legacy AMS market. As products like S/4HANA get largely implemented on-premise or in private cloud mode, the outsourcing opportunities appear to have increased. The pushback is coming more from buyers who realize that project failure rates in the last wave of projects were too high for the large fees and consultant travel that they paid for.
"Glo-ver"
Cloud application vendors did not globalize or verticalize sufficiently during the decade - it was what I called the "Glo-ver" miss for software companies. This has opened up major opportunities for firms like Accenture, IBM, DXC, TCS and Cognizant which have impressive industry practices. And for most large outsourcers to help customers with two or three tier globalization strategies. This showed in opportunities for firms to market their own IP, help software vendors (especially startups) develop contemporary functionality and to help customers custom build industry or geography specific operational functionality.
BPO
Call center, payroll and other back office services continued to be the bread and butter in this category, and India and Philippines continued to lead in global delivery locations. While many firms tried to bring automation to low level tasks in these processes, most continued to take over legacy processes around expensive applications. Their value proposition would have been far more compelling if they could have also moved clients to "lighter" platforms.
Digital Advertising
While every outsourcing firm chased after CRM projects, many of them missed out on the mega trend - digital advertising was outpacing TV, print, billboard and other traditional advertising. Google, Facebook, and more recently Amazon have been the big winners. Accenture Interactive, through a series of acquisitions, has became the biggest digital agency in the world. IBM with iX, PwC and Deloitte have also done pretty well.
Smart products
My 2012 book, The New Technology Elite had looked at how every industry was making their products and services "smarter" with software and sensors. While some firms like HCL did ok in market to help redesign products and services, the big winners were Foxconn, Flex and other contract manufacturers and design shops like IDEO and frog.
Digital transformations
This was a segment with a lot of hype. Like they did in the "reengineering" boom of the 1990s, if you check references of many outsourcing firms, their definition of digital transformation has mostly been about migrating clients to new, but undifferentiated, packaged software. The Digital Enterprise (2014), written for Karl-Heinz Streibich, looked at how some of the biggest brands in the world were rethinking their logistics, business models, channels and shop floors with new technologies; if you read the case studies in the book, you will see very few of them highlight substantive roles for outsourcers. Even later in the decade, if you look at many of the impressive transformations they were led by customer executives with limited contributions from outsourcers.
Automation
My 2016 book Silicon Collar looked at how automation - drones, robotics, machine learning, kiosks, wearables etc were reshaping every business process and job description. For the most part, outsourcers have focused on RPA and Machine learning as opportunities and there in white collar jobs. There are plenty of blue collar and trade jobs - on the shop floor, in fulfillment centers, in the operating room, in agriculture that outsourcers have not done much with.
Strategy practices
After decades of promise, technology is finally showing it can provide competitive advantage. So, it was not surprising to see strategy firms like McKinsey, Bain and BCG have built strong technology practices. Many of the larger outsourcing firms have, in reverse, built strategy groups. Many are, however, hired only in operational areas. For many clients they are also conflicted - the strategy groups reflect only about 10% of the revenues and their interest is in getting the far larger implementation and maintenance contracts. Analysts firms like Gartner have missed out on an opportunity to play a meaningful role around tech strategy consulting. They tend to be siloed across technology spend, and prefer to deliver their services in analyst mode.
Big, macro trends that impacted the outsourcing market:
Global politics
As we started the decade, it was common to evaluate economies and policies in outsourcing destinations - will India's wage inflation continue, how will China's IP policies affect, is Ukraine or the Philippines stable enough? Now, it has become as important to also factor the source - How will US trade and visa policy affect outsourcing? How will Brexit affect outsourcing in the UK and EU? Global politics used to be the elephant in the room, now they are front and center for the outsourcing sector.
The Alt-Job economy
With so much fragmentation in the outsourcing market, it is easy to ignore what I have called the Alt-Job economy. This includes developers on Apple and other platforms, SMEs on eBay and Amazon Fulfillment, franchisees in every sector. This is "work" that outsourcing firms have missed out on - also these formats are now competing for their own talent.
Focus on operational excellence
When you are given a multi-year contract, customers expect to see productivity improvements after the initial transition period. I used to constantly hear about CMM Level 5 and Six Sigma performance metrics, though mostly from Indian outsourcers. In the past decade, I have heard much less so. Same with shared services across clients and remote delivery to reduce travel cost and consultant burnout. While many outsourcing vendors have adopted PSA functionality to better track their staff and administer their time and billing, a source of friction with many buyers is around automation of outsourcing delivery. Since large chunks of many practices involve repeatable tasks codified in methodologies the logical next step is applying machine learning, RPA and other technologies to outsourcing labor. This will be a major battleground for the coming decade.
Service Procurement and Management
Buyer procurement and management of contract labor has significantly improved with tools like Fieldglass and Ariba. That around projects did not improve much - too many projects fail on metrics of economics and deliverables, and very few projects have outcome based economics. Those disciplines around long term contracts continue to be weak - little focus on continuous improvement, very basic SLAs etc. Ecosystem management by technology vendors similarly did not evolve much. Most vendors treat outsourcers and systems integrators like resellers and measure success as impact on their revenues, not as much on success in the field and customer satisfaction. Many outsourcers think weak buyer or partner oversight is good for them. It is at times, but it actually hurts them - buyers continue to depend on relationships, more than qualifications, shoddy delivery affects the entire sector's reputation etc.
Takeaways from the decade
There are plenty of lessons for outsourcing vendors from this decade. Constantly keep expanding your definition of addressable market; keep refreshing your competitive intelligence database; stay on top of global trends and keep evaluating your delivery locations; get serious about automating your own operations and prepare for more sophisticated buyer and partner management disciplines.
And for buyers, the biggest aha was that their service procurement and management disciplines need to get much stronger. In 2005, I wrote about putting "Strategic back in Strategic Technology Sourcing". I said "The average technology sourcing department is outgunned in most negotiations". Read it again and 15 years later that statement is even truer today. The number of services keep on growing, so does the choice in vendors. It's easy to blame the service providers, but buyers need to quit making the same mistakes. And adding new ones to that long list.
It was a fascinating decade and portends an even more exciting next decade with newer services, new entrants, more sophisticated buyers and way more machines as part of the delivery mix.