deal architect

Insourcing – more than a political slogan

Insourcing is on US TV every day thanks to back and forth between the Obama and the Romney campaigns.  Outsourcers may chuckle, smirk and discount the term as it is used in an opportunistic, nationalistic way. But they should be wary as Randy Mott, now CIO of GM, has announced his own version of insourcing. He wants to move from 90% outsourced to 90% internally staffed in 3 years. Now many will even discount what Randy says – I have already heard he came with an “agenda” from his last job as CIO at HP and GM’s largest outsourcer is EDS, now part of HP. Or there is ServiceMaster and its insourcing from IBM.  You could argue those are exceptions,  but I started hearing from several CIOs 3-4 years ago they felt they had “outsourced too much”. That led me to write in The New Polymath

…most enterprises spend 80 percent to 90 percent of their IT and telecom budget with outside vendors. That is a dangerously high dependence on a supply chain. ..Even in automobile and aerospace, which have much more mature supply chain management, companies such as Ford and Boeing get around 70 percent of components from suppliers. In those industries, supplier consolidation and tiering makes sense because Ford and Boeing are dominant customers and can dictate design standards and justifiable economics.In technology, by contrast, buyers have little leverage — even companies as big as Ford and Boeing make up less than 0.5 percent of an IBM ’ s or Oracle ’ s revenue.

Many outsourcers are sowing their own seeds of discontent. As I wrote last week, many of them seem bored with their current work assignments. Still others have eyes bigger than their stomachs. I was talking to a salesman at a Tier 2 offshore firm and he told me he is getting invited to deals at many big brand customers. “They are being neglected by their incumbent providers. The Wipros and the Infosyses want IBM and Accenture size commitments from their customers”.

And there are new competitors. In infrastructure services, players like Amazon and Oracle. On customer/revenue opportunities, digital agencies.

So, chuckle if you want when Joe Biden talks insourcing.  But when a CIO mentions it, while he may not bring it all back in, he is likely looking around.

And it will not end in November. 

What happened to NASSCOM?

For a while, the annual Leadership Forum in Mumbai was the IT equivalent of a pilgrimage to Mecca – you had to go at least once in your career. But, last week’s event came and went without a whimper.

It has been evolving in the vendors who show up. Used to mostly be Indian vendors – this year the sponsors had names like Accenture, Atos, CSC and Steria. The audience is global – Chinese, Irish, New Zealanders networking with customers accustomed to global delivery. Mercifully, there are many more non-stops to India from most places in the world.

What has not evolved much is the content at the event. Each year, the underlying theme is how great outsourcing is, how innovative, without acknowledging that real innovation is happening at places like Amazon and GE and salesforce.com, not in the outsourcing world. Indian politicians pitch how wonderful the country is, but avoiding substantive discussion on infrastructure or inflationary issues.  In that sense, the gathering is incestuous, and risks losing its stature in industry events.

Nasscom could learn from two of its leading members, Cognizant and HCL . Both run events,  Community and Unstructure  that are unafraid to drift in innovative directions. More importantly, they allow customers plenty to time to mingle and relax, without being bombarded by constant selling. It’s tough to stay awake in an outsourcing pitch even when Larry Ellison is coming up next – it certainly is when you are jetlagged and have had a couple of Kingfishers!  

Business Model Disruption

In the wake of Oracle’s missed quarter I have seen the words ‘business model” bandied a few times. My reaction: we ain’t seen nothing yet.  As Don Tapscott summarizes succinctly  “There are two kinds of business models: those that have been disrupted by technology, and those that have yet to be”

One of my elite attributes in the next book is being “Malleable” – with business model innovation (BMI). So many technology enabled models like “freemium”,”as a service” “from bottom of pyramid” are being tried in many industries.

The story of Apple becomes even more fascinating when you look from a BMI perspective. It popularized music by the MP3 unit and is evolving us into Music by Matching with iCloud at $ 25 a year. It has moved eBooks to an agency pricing model, away from the $ 9.99 standard Amazon had established (personal opinion as an author: Variable pricing adds complexity to a consumer’s decision. Would like to see pricing settle but you have to admire Apple for challenging the Amazon stronghold around books).  It positioned Smartphones away from the planned device obsolescence model carriers like because they can lock consumers into one long term contract after another with a small subsidy on a cheap new device.

Don’t extrapolate Apple to the rest of the tech industry, though. Enterprise tech vendors are BMI laggards for the most part. Amortize software maintenance over number of calls to their contact center and it may easily be $ 20,000 a call. A roaming call from staff visiting E. Europe may be at $ 4 a minute. Your storage may be fully costed at $ 2.50 a gb a month. A deskside PC visit by your outsourcer may cost you $ 500. Your printer likely needs ink which costs over $ 5,000 a gallon. 

Pick any SAP, IBM, HP, EMC, ACCN, VZ, any BPO shop at random and see how many of those scenarios apply. They are ripe for BMI. Actually BMD as in Disruption.

Like I said, we ain’t seen nothing yet.

Outsourcing: Gulliver’s Travels

I was struck by two lists I saw this past week. One was in an advertising section in the back of the Fortune 500 issue from the International Association of Outsourcing Professionals (IAOP) with its list of 100 outsourcing leaders (appears primarily sized based though IBM, TCS the largest Indian firm, Cognizant and others were missing). ISS, the firm ranked second on the list, which does facilities management, catering, security services etc had an ad which thanked its 522,835 employees. Yes, 522,835!

In contrast, I saw the Thiel Foundation (related to Peter Thiel the investor in PayPal, Facebook, LinkedIn and a few other not-too shabby companies) list of 20 under 20 – young entrepreneurs who qualified for fellowships of $100,000 each (the list added 4 more after the initial 20 were announced). Peruse the list - amazing what these young folks have already accomplished so early in life. What’s interesting, even controversial, about the fellowship is it requires winners to drop out of school for 2 years. Indeed, the mother of one of the winners who will leave Harvard is quoted as saying  “This is a different paradigm from what I grew up with”

Two weeks ago, at Sapphire Jim Hagemann Snabe, co-CEO of SAP hosted a group of bloggers and unsolicited, made the comment he wanted to meet with us because in the last few months he had become even more impressed with the power of individuals (as the Arab spring has shown forcefully).

The Sapphire expo floor was full of large, gargantuan booths of many of the firms in the IAOP list above. Yet, over and over again I heard questions about whether SAP would stick with its traditional larger partner firms as it rolls out its mobile ecosystem or whether it would emulate more of the Apple/Google model of entrepreneur created apps.

Outsourcing in many ways is at the crossroads. While some firms like Cognizant have been innovating and growing nicely (and this year cracked the Fortune 500 list), way too many have just become enamored with size in a world where individuals do seem to matter – and frankly have plenty of choices beyond becoming the 522,836th employee of a firm.

Welcome to a different paradigm than we all grew up with.

Reengineering Work: Obliterate AND Automate

I have been invited to moderate a customer panel on next-gen BPO at the Cognizant Community event next week. The theme of the conference is “The Future of Work”. When I look at the wide range of industries represented on the panel, the economic models behind today’s BPO, the technologies which are influencing every business process, it is a good time to revisit Dr.Michael Hammer’s seminal 1990 Harvard Business Review article .

The article spawned a wave of process reengineering, process benchmarking, shared service consolidations and first wave BPO in the 90s. Unfortunately, way too many companies ignored the “don’t automate” part of his message and there was also plenty of wasted dollars around ERP, Y2K, ebiz projects which they are paying for even today. (To be fair, he sent mixed messages by aligning with SAP and Deloitte – their “do automate” messages were fairly loud).

Twenty years later, we find every company under pressure to redo technology and older forms of outsourcing. The consumerization decade is exposing how poorly in contrast enterprise technology has performed. As Cognizant executives like to say “After Sunday night with home based technologies, it is quite a let down to go in to work technologies on Monday morning.”

The challenging economy and rapidly shifting industry lines are forcing companies to evaluate what is “core” and what is “context” (to use Geoffrey Moore’s terms) – shows in the panel that vertical process BPO is growing much faster than traditional horizontal BPO. Clouds and SaaS business models are allowing companies to look for BPO and other outsourcing which is much more variable and results based.

And technology is allowing us to rethink just about every process. RFID and other tags are redefining asset management processes. Social networks are reshaping CRM processes. QR codes are redefining expense tracking. As companies introduce “smart products” for their industries they are having to factor support for embedded technology in their R&D, customer support and product management processes.

I dare say if Dr. Hammer was still alive today, he would agree the time is right for plenty of process obliteration and plenty of process automation.

BPO and clouds

My friend Phil Fersht says:

“Cloud BPO” is, simply put, really a load of nonsense in today’s environment.  The core fulcrum processes of BPO are the toughest to move into the Cloud, and only the small-to-medium business sector is going to enjoy any modicum of success of moving genuine “BPO” processes, such as finance and HR, into the Cloud in the near-term.  And this is mainly with very standardized and straightforward Internet-hosted apps (i.e. simple interface, no integration requirements), as opposed to genuine Cloud-enabled ERP apps that leverage IaaS/PaaS/SaaS architecture.”

It’s not Phil’s intention, but basically he just wrote a brochure for incumbent on-premise apps software vendors, hosting firms, systems integrators who focus on release upgrade projects and offshore apps management. Those four categories of spend cost most companies upwards of $ 1,000 a user a month. If that cannot be lowered to the sub-$ 100 benchmark using cloud solutions, any labor arbitrage from BPO tasks is trivial.

As I wrote last year:

“My view is BPO, particularly horizontal process BPO (finance, HR, procurement etc) is due for a major upheaval. The vision for BPO has always been to optimize the transactional metric end point – price per check, price per invoice etc. Somewhere along the way the industry accepted the albatross called “and do it with my existing system”.  When I go to a restaurant, I don’t take my Weber grill along and insist the restaurant use that. I go there expecting industrial scale food equipment, economies of scale in their food and other procurement and for the finished product to be as advertised - wholesome, well priced, well served etc. But we have burdened BPO with existing Oracle or SAP’s annual maintenance, and all the associated hosting, application management, upgrade cost.”

So, if not clouds, BPO providers need to propose other cheaper on-premise solutions – even their own. For too long they have told customers “we can work with what you have” and hurt their own value proposition.

Nasscom and outsourcing innovation

The Nasscom Leadership Forum, an annual fixture in Mumbai is on this week. It exudes a bullish tone after a subdued one the last couple of years. But while there is plenty of talk of innovation at the event, the reality is an “old faithful” benefactor through the two decades the event has been held, the financial services industry is back spending again.

Barry Wiegler, who used to run the Sourcing Interest Group and is now Managing Director of Outsourcing Angels recently interviewed me about outsourcing innovation and a couple of comments I made to him are particularly relevant as Nasscom looks ahead to the next two decades

“The big challenge for a number of outsourcers (and their investors) is they keep wanting to sell services that were innovative a decade ago. Many are centered around ERP vendors, Cold-war era data centers and waterfall implementation methodologies in a world increasingly moving to social CRM, cloud computing and agile methods.”

“…newer players like Salesforce.com and Amazon. They are not “traditional outsourcers” but they are giving customers alternatives as they look at application management and IT infrastructure services. They emphasize automation more than labor in their services, and represent a major threat to the current outsourcing model which is pretty labor intensive.”

““If you look at the last couple of decades, most outsourcing has focused on infotech – software, data centers etc. There are similar new opportunities opening up as companies implement cleantech, nanotech etc.”

The New Polymaths – Leo and Ray at HP

Couple of years ago I would have been shocked at the announcements of today, today it merely deserved a tweet of a “wow” but little additional surprise.

You see I already profiled Ray Lane in my book for having made the transition from infotech at Oracle to cleantech at Kleiner Perkins

“The discovery process has made Lane a walking encyclopedia on fuels. He can rattle off ethanol yield from sugarcane versus that from corn and other biofuels. He can compare fuel technology innovations in Germany, Brazil, and Israel. It’s a far cry from the cash flow metrics and global operations he managed at Oracle.”

With his software and services history (Booz, EDS, decent sized Oracle Consulting) he also brings some of that perspective to HP. And if you buy into the trends I profile in my book on how GE, BASF and so many others are marrying infotech, cleantech, biotech, healthtech etc, HP could use his guidance well beyond its own current infotech focus.

Leo – let me start by complimenting him by saying that if he had been there a month ago I would not have dared used the word wimp anywhere near HP :)  We had a couple of throat clearing meetings while he was at SAP. 

While Leo does not have the diverse technology background Ray does, he makes up for it in his global reach. Last time we exchanged notes on countries visited he had me beat by 40 countries and I have been to a few myself. A definite Polymath in the geographic dimension.

So, HP is getting a  nice two-fer package.

Of course, the gossip columns will get plenty of sideline stories (Leo will try to acquire SAP, Ray would love to tangle with Oracle etc, whatever). I think more of customers and I hope Leo learned from the last few years at SAP. I think he focused too much on Oracle and his bigger SI friends, and not enough on cannibalizing them with BYD and other disruptive technologies. He will be tempted to similarly focus on IBM, Apple, Oracle, Cisco, CA, Accenture and TCS at HP when the disruptions are coming from Cartridge World, salesforce.com, Cognizant and amazon among others. In many ways HP’s core ink , software and services products are far more vulnerable than SAP’s software products were. I always thought Mark Hurd was given way more credit than he deserved for leaving HP vulnerable in those markets.

Enough analysis – here’s a cordial congratulations. Look forward to some more throat clearing sessions down the road!

NetSuite and Scenario 3 Outsourcing

Last year I wrote about the BPO market:

1. If Oracle/Accenture BPO is a cost factor of 100
2. Oracle/Wipro would likely be a factor of 75
3. Wipro/SaaS vendor like Workday would likely be a factor of 50
4. SaaS vendor/Cloud Outsourcer/Nextgen SI like appirio would likely be a factor of 25

At its partner meeting this week, NetSuite announced a BPO relationship with Genpact and a systems integration/application management relationship with Wipro

This move to Scenario 3 is great news for the market. Of course, SAP, Oracle and other on-premise ERP customers looking at BPO will have to objectively evaluate the NetSuite solution, not just insist Genpact take over the current environment. Given a fair chance for most customers it should be a no-brainer even after transition costs to justify the move to NetSuite.

Both Genpact and Wipro will need to watch their larger SAP/Oracle/other on-premise ERP practices from stalling this new initiative. It’s their version of the “innovator’s dilemma” – incumbent cash cows invariably feel threatened by new initiatives.

The two service providers will also need to keep optimizing their own practices – and evolving their own delivery to Scenario 4 before a set of hungry new SIs does.

Next-gen BPO

I was part of a panel at the Shared Services and Outsourcing Network (SSON) conference in Orlando this week, moderated by Prof. Anthony Hesketh from Lancaster University Management School.

Tiger Tyagarajan, COO of Genpact, George A. Price Jr. sell-side analyst covering services at Stifel Nicolaus and I had a lively debate which brought out the tension someone like Tiger feels between delivering to “value” expectations of a financial analyst like George and the “value” clients expect based on advice from buyer advocates like me.

My view is BPO, particularly horizontal process BPO (finance, HR, procurement etc) is due for a major upheaval. The vision for BPO has always been to optimize the transactional metric end point – price per check, price per invoice etc. Somewhere along the way the industry accepted the albatross called “and do it with my existing system”.  When I go to a restaurant, I don’t take my Weber grill along and insist the restaurant use that. I go there expecting industrial scale food equipment, economies of scale in their food and other procurement and for the finished product to be as advertised - wholesome, well priced, well served etc. But we have burdened BPO with existing Oracle or SAP’s annual maintenance, and all the associated hosting, application management, upgrade cost.

Does it matter how my payroll check or AP invoice gets processed so long as the cost, quality etc are attractive? To twist Larry Ellison’s words does the check have to smell of Chanel's latest or be in its shade of  fuchsia or puce?

I talked to a few BPO providers after the session and the questions were what would you do? I would leverage the data center processing and storage efficiencies coming out of clouds. I would learn to leverage massively shared application management services and 5 minute upgrades coming out of SaaS world. Either partner with them or build your own. If the client insists on bringing their Weber grill in show them your industrial scale grill. Easier said than done – many customers are unwilling to write off their massive ERP investment and pay early termination fees to get out of bad hosting and AM contracts. Others will use their auditors as the reason – they have already validated our existing system.

Well, show them the financial analysis. In most cases you should be able to reduce the cost of the technology by 5X, if not 10X. Most reasonable business people will find that attractive. But you have to step up and show you can do it, not just keep supporting the status quo path.

And if the client still insists on continuing with the legacy technology, please don’t call it BPO. Call it what it is - Business Task Outsourcing. You are touching a very small part of the business process – and frankly opening the door for someone disruptive to come along and optimize the entire process at the fraction of the cost.

BTW – Alan Alper at Cognizant recorded some more emerging BPO trends in this video with Ramesh Ramani, who leads Cognizant’s BPO efforts for the bank and financial services vertical and me.