Tuesday, September 2, 2014

Reality Check

Will today’s outsourcing service providers successfully make the leap in the “As a Service” economy?
Recently, the CIO and CFO of a mid-sized manufacturer asked me about the likelihood that their incumbent outsourcing services providers would be considered “top quartile” in the “as a service” marketplace. 

With a few years remaining on their existing contracts, these executives were wondering about the instructions to give to the Supply Chain organization for the future of these relationships.  Clearly, the market is moving to new levels of performance and different forms of contracting.  Conversations with the existing Services Providers all sounded good – commitments to “outcome based pricing” and to greater innovation through collaborative forums.
I suggested that there are five core questions that all Clients of today’s ITO/BPO service providers should be asking if they truly want to understand the degree of Services commitment those providers are positioning to offer.

1)     What is the Services Roadmap?  Like traditional product companies have ingrained in their DNA, the “As a Service” providers will have a committed roadmap of Services features and functionality, with a defined process for Client input and priorities. 

2)     Is Investment Committed?  While the actual funding levels may not be disclosed, your Services Provider should share the nature of the investment being made to enable the roadmap.  Investment is not pricing.  Investment is the “bet” being made by the Provider that it can serve enough of a market with its offerings to make a decent profit.

3)     What’s My Community?  If your company is the sole customer of a specific Service, it isn’t really a Service.  It’s a project.  Or, an experiment.  Or, a “best intentions” level of effort.  It isn’t a Service if there isn’t a market that is readily identifiable that are subscribers to the same utility.  Don’t expect innovation if you’re the only customer of such an offering – a market of one won’t justify the investment. 

4)     What will be Different?   It’s never too early to engage in the conversation about how the nature of the obligations will change as a relationship evolves to be more Services-based.  I’d expect the responsibilities around capital investment to shift.  I’d also expect to see “configurability” be used to describe the service relationship, not “customized”.  The Service Provider ought to be able to describe a new form of Services relationship that feels much more agile to the Client. 

5)     What’s the Transition Look Like?  It would be a disappointment if the conversation about the shift to a Services-based operating model was predicated by a contractual renewal.  In fact, if the discussions about the topics above aren’t happening now … it’s probably time to look at alternative Services options. 

These criteria apply to all forms of “As a Service” market offerings – from infrastructure (communications, computing, storage, etc.) through to Business Processes.  They form a good litmus test for use in your next Quarterly Review of the health of your outsourcing contract. 
A Provider that is excited for the “As a Service” market will readily engage in this conversation.  A Provider that thinks that outsourcing is the answer might only talk about “transactional pricing” and hope that the Client is satisfied.  Reality checks are happening with great regularity.


Monday, August 18, 2014

Time to Plan

A recent conversation with the EVP for Global Shared Services of a major CPG company went down an interesting line of reasoning that I thought worthy of sharing.  It’s all about the increased cycle-time for planning.
Like many large global companies, this one operates a Shared Services entity that comprises all of the common back-office functions.  Further, there is a fair amount of outsourcing being managed as part of the service strategy.  A sign of maturity, there are global process owners in place who carry responsibility for demand management and services architecture, through to service performance management. 

The outsourcing arrangements were constructed using then-current industry best practices and are yielding favorable cost performance.

With that backdrop, here are the top planning-related concerns that the EVP for Shared Services outlined for me:

1)     The original economic equation that supported outsourcing comprised broad scope of services to a small number of providers under long-term contracts; does this strategy still apply in a world of service-level arbitrage?  In other words, would we be better served by contracting with several providers for essentially identical functionality, and select between them on a much more frequent cycle?

2)     How early in advance of the expiration of my ERP license agreements should I develop the tradeoffs between renewal and migration to best-of-function SaaS platforms?  Are BPaaS options available as internally- or externally-sourced alternatives?  What sort of services integration strategy works best in this situation? 

3)     C-suite executives are looking for agility as the highest-priority commitment.  They need confidence in our ability to scale up and scale down in response to both marketplace trends and changes to our corporate structure (e.g., acquisitions and divestitures).  How do I gauge the agility of our shared services functions, and what form of planning model is considered best practice to accommodate such shifts?
4)     Should the shared services scope of operation reach forward to the middle- and front-office functions of the company by applying the lessons of back-office optimization? 

As we discussed each of those situations, one reality became increasingly obvious.  The planning cycle for the shared services organization needed to change dramatically.  As is common, this organization utilized an annual process for assessing business demands and service performance.  The EVP concluded that she needed a persistent tempo of service planning … a capability and a symbol of the shift towards a utility-oriented model of operation.
The implications of this form of planning – with forward-looking indicators driving decisions around such things as capital investments, services contracting, integration architectures, and so much more – were far-reaching.  In fact, one of the first steps to be taken was to engage Supply Chain leadership around the fact that “What we buy, from whom we buy, and how we buy all must change.”

That fact frames the opportunity and threat of the shift to an “As A Service” economy.


Thursday, July 31, 2014

Correlating “As A Service” with ROIC and Shareholder Value

My thesis for some time has been that the value from adopting progressive “As A Service” operating models – through next-generation outsourcing, subscription-based contracting, and shared services – can be measured through enhanced shareholder value.  But, it’s been an elusive metric to prove.

Does the reduction of capital spend on dedicated assets by partnering with service providers, subscribing to SaaS or BPaaS offerings, and acceleration of Shared Services lead to definitive improvement in the value to shareholders?
I know from conversations with corporate executives that it is a high priority for companies to improve their ROIC.  This is a very tangible metric of strategy and execution.  Furthermore, the Private Equity world grasps this concept intimately – carve-outs are often built to run on SaaS platforms, and new products are almost always designed to be offered on a subscription basis.

To help Alvarez & Marsal be better informed and better positioned to offer clients actionable strategies for ROIC improvement, I commissioned research into the ROIC performance of market leaders in several key industries to identify today’s most promising strategies.
I am sharing a summary of the findings of one industry – US-based Restaurants – to generate further conversation on this topic and gain new insights on what other companies are doing to improve their ROIC. I’d love to hear your feedback.

Here’s what our research told us:
       Companies with high ROIC outperform those with low ROIC across virtually every financial measure

       Companies that improve ROIC the fastest post stronger revenue growth, higher margins and greater capital efficiency than competitors

       High ROIC growth companies can command superior valuations, with investors willing to pay higher prices per share

       ROIC is gaining more management and Board attention and becoming a greater factor in executive comp

Are unconventional levers – techniques borne through the adoption of “As A Service” principles – driving ROIC improvement?
Our findings led us to a hypothesis that several emerging techniques are helping leading companies improve their ROIC. These unconventional levers represent new and innovative thinking that fundamentally reframes business models, supplier relationships and enabling technology to help companies create substantial advantages. The levers include:

       Business process as-a-service
       Leveraged partner and provider networks and partner-based business models 
       Subscription-based procurement and contracting for services vs. products
       Expanded enterprise shared services
       Cloud computing for IT capacity
       Monetized data incidental to the core business
       Leveraged social platforms  
       Enhanced self-service business operations
Why are these strategies working over conventional approaches?  I think that conventional ROIC strategies carry limitations and risks. Most companies try to improve ROIC by improving net operating profit after taxes (NOPAT) through revenue enhancement, tax planning and cost-cutting, or by capital reduction, through divestiture or limiting working capital.  But attempts to increase NOPAT may decrease business agility and management flexibility, while reduction in invested capital may disrupt a company’s normal operations.

The emerging ROIC strategies have one thing in common: they use capital redeployment thereby decreasing invested capital by shifting it to outside parties or using new business models with lower capital intensity. As invested capital becomes more efficient, ROIC improves. Capital redeployment strategies are often more effective than conventional strategies in improving NOPAT because management has greater flexibility to manage invested capital and limit the effects of changes on the core business.

We’ve also observed that industries will benefit differently from ROIC improvement. Several industry sectors show an unusually strong correlation between ROIC improvement and strength in other performance indicators. Across the industries we analyzed, this relationship was more pronounced in Restaurants, Apparel, Food Retail, Personal Products and Construction & Farm Equipment. Many other industries, particularly those that are not highly capital-intensive, feature similarly promising opportunities to improve ROIC. I’ve attached a summary of our findings in the Restaurant sector.  
The influencers of ROIC improvement are of great interest to me and our A&M clients and I view this initial research as the start of many important management conversations on what is driving ROIC. I welcome your thoughts and opinions and will use this forum to update you as we expand our research.  



Wednesday, July 16, 2014

IBM-Apple: All About the Services

All About the Services

I was all set to write a piece this week that was fueled by some of the email that I received after last week’s post (Pretenders Beware) about what it really means to be in the Services business.  Many Clients and service providers reacted to my assertion that a singular focus on transactional pricing was perfume on a pig.  That’s not exactly what I wrote, but you get the picture.
This week, I was going to comment on the practical feasibility of established ITO/BPO providers shifting their business model from being Client-focused to being Services-focused.  I’ll save that for next week because it’s still a worthy topic.  And, it’s one for which I anticipate a fair amount of discussion.

So, what preempted me? 
Yikes!  This IBM-Apple venture has the potential to be a world-changing event for the Services industry.  Talk about a poster child for how Social, Mobile, Analytics & Cloud are brought to reality for businesses, this initiative has the potential to accelerate the shift to subscription-based business operations like few others.

This isn’t about Facebook and Farmville.  This is about industrial-class business functionality provisioned on the most agile of mobile devices and backed by the analytics engine of the world’s most prolific developer of information-based services.  I like the ZDnet summary of the deal.
To me, this is a major disruptive move to the ITO/BPO industry.  Look at what the introduction of WorkDay did to the HRO market.  This new venture has the potential to shift corporate applications strategies overnight.  I’ve already spoken with several CIOs who tell me that they are launching studies to understand how this new industry capability might alter their roadmaps.

If there’s a hitch in this venture, it might very well be the capacity of the partners to keep up with demand.  Reports have stated that IBM and Apple have been working for months on the initiative and that more than a hundred industry-focused enterprise apps are on the horizon.  That should prime the pump for adoption.
I am eager to hear more about the commercial model around this offering.  Most of the people I speak with are expecting an experience analogous to iTunes or the Apple AppStore.  If so, the job of the CIO just hit an inflection bump as their business users look to subscribe to business services that take a wildly different form than the legacy models deployed today.

Who would have thought that Big Blue would have the moxie to lead this charge?  The implications to IBM are far-reaching – from sales and marketing, to client relationship management, to market coverage, to commercial models, to channel strategies, etc.
Even more exciting will be the responses that will follow … what new ventures will emerge to compete in the market that is reformed by the gravitational pull of this entrant?  That is the question worth watching be answered.

Personally, I applaud this move as being rocket fuel for the transition to subscription-based business services. 



Tuesday, July 8, 2014

Pretenders Beware

There’s a new warning flag flying in the ITO/BPO industry.  If you’re a Client of one of the prominent services providers, I bet you’re hearing the term “transactional pricing” a bit more often than you have in the past.  Let me help to decode this term for you.
Starting with our “point of departure”, it’s quite common for companies to define their outsourcing arrangements as being “staff augmentation” or “offshore labor”.  Both of these terms refer to the convention of “paying for effort” or some similar means of contracting with a third-party to perform a well-defined task using less-expensive resources.

Effort-based contracting isn’t the only type of outsourced arrangement, but it’s more common that most people know.  In fact, for many functional executives in HR, IT, Finance, or Customer Care roles, this is the only form of outsourcing they know.  And, they love it.  It provides the ability to reap the benefits of less-expensive labor without the burden of actually industrializing the work processes. 
If any of this is news to you, there’s a nice description of what you get through out-tasking here.  You can look at your existing “outsourcing” contracts through the lens offered by that definition and determine whether your service provider is truly delivering an outsourced service.

Effort-based contacts often operate through Service Level Agreements (SLAs), so don’t let that fact obscure whether or not the contract is yielding a defined service.  Out-tasking SLAs often relate to time required to fill positions or process transactions that are Client-defined.
With that as context, there seems to be an ever-increasing hum around the shift to outcome-based arrangements as the “point of arrival”.  Sounds good, right?  Outcomes are things that we can measure in terms of value, as opposed to effort-based costs. 

Well, here are a few observations from the real world that might surprise you:

1)     The push for outcome-based contracting comes almost exclusively from the service providers.  Clients who are using out-tasking tend not to initiate the shift to a different form of buying.  Providers, on the other hand, see this as a way to improve their profitability and cement their relationships.  When I ask why Clients aren’t biting on the shift, I am told of two reasons:

a.     Lack of confidence that the incumbent provider can/will bring anything different than the same services under a different packaging; and

b.    Lack of Client management comfort with buying Services that would be implied by contracting for transactional Services.

2)     Transactional Pricing is NOT the end game that Clients are seeking.  Those companies that can see their way towards adopting true subscription-based services (see below), aren’t falling for the offer to convert effort-based work merely through pricing changes.

3)     Subscription-based Services are defining the expectations of progressive buyers.  There are a few straight-forward questions being asked of ITO/BPO service providers who are asking for the opportunity to be paid for outcomes:

a.     How many “subscribers” do you have for this Service?  (This implies that the Service is serving a market, and is not a bespoke solution)

b.    Can I subscribe/unsubscribe to the Service without undue penalty?

c.     Are all aspects of the Service delivery on the provider’s balance sheet (e.g., systems, software, etc.)?

d.    Are there well-defined interfaces between this Service and other enterprise functions/processes?

e.     What is the business case for converting from my legacy mode of operation?

f.     What is the volume-sensitive pricing schedule for this Service?
The sophistication of enterprise buyers – through functional leadership and Supply Chain professionals – to contract via subscription-based models is accelerating dramatically.  Questions like the ones I’ve outlined above are being asked of incumbent providers of effort-based work.  And, they don’t think foremost of their incumbent out-tasking providers for this sort of relationship.
It’s not acceptable for an incumbent service provider to merely offer “transactional pricing” in response to these new expectations. 

So, beware of the term “transactional pricing” as this is hardly sufficient to win in the “as a service” economy.

Tuesday, July 1, 2014

The CFO Mandate

A recent article in Information Week struck a nerve with me.  It touches upon the common disconnect between the IT organization and the CFO around business requirements, the tendency to sustain addiction to heavy-handed ERP platforms, and the frustration at the time/cost to drive change through legacy processes and the systems that enable those processes.

The article was written by a reputable BPO services provider and promotes the virtuous claim that “process-based design and transformation can harness the newest technology for what matters, thoroughly utilizing process analytics and focusing on how business process (and the related human factor) drives the desired business outcomes”.
Well, I’ve had the privilege of being in a fair number of conversations with CFOs recently on this topic.  I am encouraged by the awareness that most bring to the table – they know that there are better mouse traps being invented with great pace.

The impact that WorkDay has brought to the HR function is an easy example.  Similarly, there are analytics tools and process engines for the Finance, Supply Chain, Procurement, and Planning functions that yield great promise.
The questions that I hear most often don’t relate to the availability of clever new applications to automate work.  Instead, they relate to the implications around leadership.  How is the CFO meant to provide the guardrails and ambition to enable the organization to break from the comfort zone of legacy ways of doing things?

I’ve been answering these questions with a playbook for the Finance function. 

1)     Don’t Assume.  The frame of thinking that worked in the past may not be suited to the new market dynamics of subscription-based business support functions.

2)     Think Subscribe.  No longer is it acceptable to build/operate a proprietary solution.  There’s almost always a market option to consider.

3)     No Victims.  The transformation implied here takes time … and deliberation.  Delaying only perpetuates the risk of being held hostage to the legacy.

4)     ROIC Rules.  Yes, cash is important, but the ultimate measure of leadership is the return delivered to shareholders from prudent investments.  Run the business through the P&L, not the balance sheet.

5)     New Friends. Finance leaders need to enlist many different competencies to conceive and enable new operating models.

6)     Time to Results.  It’s self-evident, but we live in times of immediate gratification.  The competition is moving fast, so urgency is the name of the game.
The mantra of Capital Utilization, Operating Agility, and Growth now dominates the halls of Finance.  Pretty nice contrast to the past 5+ years of cost-cutting to survive.


Monday, June 2, 2014

A Poster Child for Platforms – Amazon in the Enterprise

A Poster Child for Platforms – Amazon in the Enterprise

I received a good amount of feedback on my last post about how platforms make the world go round – more than usual.  Thanks for the comments.

That post prominently applauded the impact felt by the success of Salesforce.com in paving the way for enterprises to recognize the opportunity to rethink and redesign how business processes are served.  I also gave a nod to the fact that the business principle that underlies platform-based operations is cascading across many other front-office, mid-office, and back-office disciplines.

Well, it’s appropriate for me to tip my hat to another of the trailblazers in this transformation from legacy-laden to platform-nimble:  Amazon.com. 
Most of us might think foremost of books and online retailing when we hear the name Amazon.  Increasingly, businesses are recognizing Amazon for Amazon Web Services (AWS) as a leader in provisioning compute/storage infrastructure services – the platform for computing capacity.

Yet, Amazon has embraced and promoted the notion of platforms so thoroughly that it prevails in virtually everything that they do.  It’s how the leadership think about the consumer, the access to the consumer, and the ongoing relationship with the consumer.  Ditto for the enterprise. 
My colleague John Rossman just published a fascinating book called The Amazon Way. 

John’s perspectives are also published via his blog at  http://on-amzn.com/
A Business Week interview with John is also fascinating.

John and I frequently compare notes on the profound changes we see in businesses of all sizes and forms.  John is fond of telling the story of FBA – Fulfillment by Amazon – as one of the more successful distribution “as a service” platforms that is helping to drive efficiencies for so many businesses.

In a recent meeting with a CIO, just after AWS had made one of its recent dramatic price adjustments for its IaaS services, I was asked: "What are we supposed to do with our existing ITO agreements when the market for those services is so highly variable?"  Indeed ... platforms deliver agility at an entirely new scale and pace.
If you think that Amazon has revolutionized retailing, just wait to see what it is planning for the enterprise.  John’s insights give a sense to the genuine conviction that Amazon’s leaders hold for platform-based business models.