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.
Interview with Malcolm Frank of Cognizant: Davos and Digital
Malcolm, "Digital" is a hot theme with every outsourcer these days. Seems like you have been talking Digital for 5-6 years. Now that every one else is talking Digital, how is your thinking evolving?
When it comes to the "Digital" buzzword, I have a bit of a giggle about this. We're all going to look back a few years from now and say collectively, "Oh, that was so 2015." If you view it from the CXO perspective the term is still too ephemeral. Rarely do clients roll out of bed and say, "I have to solve a digital problem today."
You can see also see how the SMAC (social, mobile, analytical, cloud) stack has evolved in the market zeitgeist year over year. Around 2010 cloud was the rage, as it seemed everybody was marketing solutions around the “cloud” to the point where the term became meaningless. I think clients in particular got a bit annoyed by it.
Then around 2012 it was about building the social enterprise. I remember Salesforce.com focused on the concept and then a year later they pulled the plug on that and did not use the term again. Then in 2014 the market conversation seemed to focus on Analytics and Big Data.
Maybe I'm showing my age but I also struggle with the "Digital" term because I keep having visions of Robert Palmer and the demise of Digital Equipment Corporation.
All of that said, I think we're moving in the right direction. In the next couple of years you will likely see more digital solutions become crystallized and clients understand them better and how to procure them. For example, a bank will likely talk about to vendors about robo-advisory automation solutions as opposed to something “digital.”
Malcolm, I think you are being modest. For years now, you have helped guide Cognizant through its "Three horizons" strategy and you wrote the Code Halos book couple of years ago. Surely, that counts for some competitive advantage?
We think it's served us well in a couple of fronts. One is certainly in terms of establishing mind share and thought leadership because this is important to us. We're thoughtful about it as a company. We had our Center for the Future of Work. We've been at that now for 5 or 6 years. We have some very talented people as you know. That's certainly has gone well for us. It allows to see what's real in the markets and what's just talk.
Around the Code Halos book, I think the key nugget people picked up was that any person, place, or thing is going to have a virtual life as well as a physical life. It has its digital twin. We have seen a number of our clients pick up on that. It resonates with them. That clearly has been a very helpful construct.
I think a third construct that has worked well for us are both internally at Cognizant and for clients is our 3-horizon model. We hear a lot of talk today about two-speed and dual-track IT, and the 3-horizon model certainly applies to IT. Horizon 1, at least the way we have structured it applies to your core operations. These are things that are old to you and they're old to the market. The mandate there is run those better, faster, cheaper. Find ways to increase quality and reduce the cost.
Horizon 2 applies to things that may be new to that company but they are understood in the marketplace. We saw that in the automotive business with SUVs; firms like Chrysler had been making Jeeps forever. You had new entrants like a Volvo, BMW, Mercedes, Lexus, that came in about 15 years ago and said, "Hey, great category. It's understood in the market. It's just new to us."
There is a lot of activity there in digital. We see clients looking at use cases for their businesses which mirror the FANG (Facebook, Apple, Netflix, Google) vendors. That's a Horizon 2 model.
Then Horizon 3 is invention that is something that's new to you as a company and also new to the market. That's where we see a lot of our clients in banking, healthcare, insurance, and retail who are looking to reinvent their sectors. How can we think out of the box and apply digital and create completely new offers?
It's been a very good model to help clients to manage the change around them. Once you see an activity fits into one of the 3 Horizons, then you can get the appropriate model, staffing, budgets and goals to go against it. I think those are some constructs that have helped us in the marketplace to get more credibility in "digital".
Malcolm, if you think back to the 90s, "digital" back then spawned a variety of new consulting firms like Scient and Viant. In the Horizon 3 projects are you seeing a new category of competitors like digital agencies or design firms?
Yes and no. You do see some new entrants, but it all depends on how the client frames the problem. If they define it as a design issue, you start to see some of the design firms showing up. If the client is truly just trying to figure things out, they may say, "Hey, I don't want to talk to the usual suspects. Why don't I go talk to one of these new strategy houses that is focusing on digital?" Others may define it as a data problem and go "Hey, that's big data. We need to get our arms around on this data exhaust and turn it into a business value." They may go to a shop that the focuses on that.
That said, as a general trend we see the market moving back to the usual suspects, meaning larger players like ourselves who sit at the intersection of business and technology. When clients get serious about digital – in moving the needle in their companies – they go beyond issues like planning, design and understanding the new technology stack. They say things like: "I need to figure out the business process change, I need to have somebody that has a vertical industry expertise to understand the regulatory issues, I need to have somebody who understands where the bones are buried in my internal IT. At the end of the day, I may have systems of engagement or systems of intelligence that are on the digital side, but they all have to tie back to the systems of record. I need somebody who knows that." and "If I want to do it on a global scale or at least on a broad scale, I need somebody who can do that heavy lifting". We’re finding that’s increasingly how clients are framing the problem.
More in Part 2 next week
April 03, 2016 in Industry Commentary, Outsourcing Negotiations/Best Practices | Permalink | Comments (0)