Monday, February 3, 2014

An Industry Reboots - Capabilities Aren't Services

Let me begin to fulfill the promise that I made a few weeks back to share my opinion of how buyers are driving transformation of the outsourcing industry.  I’ll do this in several iterations … and I will frame every criticism of past practices with an explanation of the causes, and a view for when and how remedy will come to market.
For those who don’t know, I know this space through practical experience in roles that spanned services delivery, deal advisory, and services sales and marketing.  I will even admit to having been part of the problem, but more on that another time.

Assessments like these carry risk for two real reasons:  I am making generalizations and I am expressing opinion.  I acknowledge these as true.  Exceptions to my observations will clearly prevail.  Alas, I think that my views are fair and true in the round.
Today’s opinion: the industry has largely failed to deliver on the central promise of an outsourced service - leverage.  That is, the provider of the service brings to market a collection of assets (comprising intellectual insight, proven processes, scaleable delivery capacity, trained staff, multi-tenant automation, and the like) that perform a function for the benefit of customers.  One of the principle customer benefits is the avoidance of the complexity and risks of assembling all of these assets themselves.  The cost to the customer is also less than that which would be paid if the customer were to build/operate the function themselves.

Over the past 20+ years, hundreds of outsourcing contracts have been launched – for IT and business process scope – and virtually all of those contracts carried the promise of benefits through leverage.  Customers awarded these contracts because they believed that they were buying a Service. 
Now, the fact that a provider has the wherewithal to assemble some smart people and solve a problem in a repeatable way is important.  That’s an essential capability.  But, a capability isn’t a Service.

A Service is a function that is delivered to multiple customers with high degrees of consistency.  It is the product of artful design and implementation, with recognition that every costumer experience must fulfill the promise of a defined outcome.
For many providers, the eagerness to please provided for wide variations in solutions that were meant to be “standard.”  And, for many demanding customers, insistence on applying constraints (often artifacts of a legacy operating model) limited the ability of the supplier to reap the benefits that formed the basis of the commercial relationship in the first place.

A few years ago I had the opportunity to discuss this issue with the CEO of a major ITO/BPO provider.  I asked two questions: 

1)     In bidding a new outsourcing opportunity, how much of the Service scope is generally assumed to be leveraged (e.g., not dedicated to one particular Client)?
      2)     In the course of delivery, what has been the experience in achieving that bid model?

The answers:  most deals are bid assuming 60-70% of the scope is leveraged.  In actuality, only 30-40% is delivered as such. 
That gap is a very real problem.  It must be bridged by up-selling, change orders, and service quality actions that generally cause the Client to pay more and be less than fully satisfied.  The worst outcome, however, is the immediate erosion of any potential for innovation.  After all, one cannot justify the investment in innovation if the returns on that investment aren’t leveraged.  Bespoke solutions don’ have a future worthy of innovation investment.

It’s a self-fulfilling and self-perpetuating prophesy.

Just because a company is in the services industry, doesn’t mean that they are delivering Services.  They might be providing capabilities.  Those aren’t the same things.  Witness the large staff augmentation subsegment of the outsourcing industry.  Effort is a capability, not a Service. 

This lesson has been a hard one.  Next Generation services contracting won’t repeat the mistakes of yesterday’s ITO/BPO arrangements.