New Age Architects of "As a Service"

My two prior posts dealt with the reasons that yesterday’s models of outsourcing aren’t particularly well-suited for the rapidly-accelerating trend towards “As a Service” ecosystems.  To recap, I summarized my views around:

1. Capabilities Aren’t Services
2. Platforms of Platforms Emerging

Before I continue with the theme of how traditional outsourcing is challenged to be relevant in the markets ahead, I thought it prudent to share a conversation that occurred this week.

I was privileged to be invited to speak to a group of G-200 Shared Services leaders. I remain convinced that the role of Enterprise/Global Shared Services executive is one of the more influential and instrumental to the transformation of businesses.  The quality of executives in this group certainly reinforced my opinion.

The topic of the discussion was “what’s next for shared services?” and, specifically, the effects of technological innovations in driving the next wave of value.

I made the case for Shared Services organizations being pivotal for driving innovation in “As a Service” business operations – from the front-office through to the back-office.  Historically, Shared Services has been thought of as a back-office organizational model.

We spoke at length about “platforms of platforms” and the intractability of traditional ERP.  I offered my opinion that the three essential assets that every company should own and control going forward are:

• Platform Strategy, including APIs
• Data Strategy and Stewardship
• Security Strategy and Controls

I made the case that these are the essential “core components” around which modern “As a Service” operations will be engineered.

One of the executives asked a particularly poignant question.  She asked me, “What are the critical leadership roles to achieve transformation of business operations towards the “As a Service” vision?”  Thankfully, I’ve been asked this before.

From what I am seeing in successful and progressive programs of business transformation, there are three roles that must engage and align on the shift of the business model.  This is true whether the company is addressing internal operations or new go-to-market opportunities.

First, the functional leadership must be an advocate for the new vision.  Companies that organize with Shared Services are in a better position for functional vision.  They already possess line-of-sight to process adequacy, standards, and interfaces.  For new market-facing offerings, the functional leadership is a business executive.

Secondly, the CIO must be a leader in opening consideration for new tools and utilities.  S/He must help with the ROI business case for retiring legacy assets in favor of new accelerators.

Finally (and this elicited the most conversation), Supply Chain leadership must be in the game.  In my experience, the executives responsible for managing the spend must appreciate that what they are buying, from whom, and under what terms … are all changing in the “As a Service” world.

We discussed this last point at length.  In fact, I was asked how Supply Chain can/should be educated around the implications of the new, agile, modular, operating structures that will be brought to these companies.  I promised to give that more thought, and to structure some ideas on ways to best enlighten the executives leading this critical function around the massive changes that “As a Service” brings to their world.

From what I am seeing, the companies making the most traction in adopting the essential principles of “As a Service” business models – internally and for their markets – are those with the greatest alignment among these three leadership roles.

Peter

Gartner Sees the Same Light

I've met with Garter's Peter Sondergaard a few times and have been struck by his ability to sift through data and conversations to uncover nuggets of relevance.  I think he's done it again.

See:  http://blogs.wsj.com/cio/2014/02/04/gartners-sondergaard-companies-overdue-for-tech-reality-check/

"More and more companies, he says, are questioning the foundation of their technology architecture, and are increasingly moving away from a world dominated by SAP and Oracle to one filled with a variety of cloud service providers. He says this is driven by “maturity,” as more organizations acquire experience with cloud technologies, as well as the overwhelming pressure to be more nimble and quick."

Platform of Platforms

Last week’s post about how “Capabilities Aren’t Services” earned over 1,400 reads and some nice re-postings.  I think I may have touched a nerve.

So, let’s move onto observation #2 around how the Outsourcing Industry is rebooting – at least in the eyes of the buyer community.

It wasn’t too long ago that the dominant enterprise strategy for business process enablement centered on a holistic Enterprise Resource Planning (ERP) platform.  Hordes of consultants were called upon to lay down these ubiquitous services to enable the workflows of a wide range of (generally) back-office functions.

I won’t name names.  You know the players.  Their numbers have whittled to a very few, both of which remain acquisitive towards any new bright and shiny capability to enter the enterprise market.

·        The ITO industry made hay by offering “hosting” services for these behemoths.  

·       The SI and Consulting industry ran circles around “instance consolidation” as companies tried to reign in the multitude of parallel islands of autonomy across their global operations. 

·        And, the Applications Services segment trained up armies of programmers and support staff to care and feed the permutations, databases, unique configurations, interfaces, and bolt-ons that dangled from the “common platform” that ran the back-office of the business. 

·        Finally, let’s not forget the many BPO providers who took flight by being expert at the design and operation of transactional business processes – often merely providing the lower-cost labor to do the work with the Client’s systems and proprietary processes.

Today, most major corporations run their back-office operations on an “ERP Platform” that was cobbled together over the past two decades and which are supported by legions of internal and external staff to maintain harmony and run reports.

The significance of ERP to the ITO/BPO industry is considerable.  This is because, to a great degree, ERP merely automated the processes and procedures that required almost the same number of people to perform as was required pre-ERP.  Ask any CFO or Shared Services leader how much labor was saved as a result of and ERP adoption.  The cost may be lower – owing to the ability to offshore the work – but the effort held largely at the same levels.

Alas, that was yesteryear.  Fast-forward to the enterprise strategy for business processes today.

Thanks in no small part to the wild success of Salesforce.com, the enterprise strategy has been enlightened. ERP need not be monolithic.  Heterogeneity is celebrated.  Cloud-hosted functionality is proven.  Rapid deployment is expected.  Configurability is cherished.

While these lessons could be seen as merely the next generation of ERP, there’s an even more substantial significance to what has happened.  Beneath the application layer exists the “dial tone of business process connectivity” – the platform layer that was portrayed as the secret sauce for yesterday’s ERP platforms.  Today, platforms are the common language of enterprise operations.

No longer is the standardization and automation of business processes relegated to the back-office.  No, we’re seeing new innovations in front-, mid-, and back-office services.  CIOs and business architects aren’t looking to buy point solution applications, but rather subscribe to business process platforms.  And, these new platforms are about the business of the business – sales and services to customers.

The platforms are being united within the enterprise in ways that allow for modularity, regional and business unit customization, but also integrity in data, security, and operational performance.  There’s a fair amount of added complexity – a call to action for the Supply Chain community – and a reinvention of many roles in the company.

There’s much more written on this topic in our industry, but my point of emphasis centers on the impact to the ITO/BPO industry.  What’s to become of the companies whose models exist only for the care/feeding of yesterday’s ERP-laden business operations?

Some progressive providers will be the pathway for the modernization of the Clients’ operations.  For most, I fear, this context shift is too great.

One needn’t wonder why there aren’t large-value outsourcing contracts being awarded.  The answer lies in the strategy to subscribe to best-in-class services platforms, united through a services integration platform. 

Peter

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.

Peter

The Good Outsourcing Client

I’ve promised (in a prior post) to share my thoughts on why the outsourcing industry has proven to be such a serial under-achiever in terms of innovation and value to the Clients who trusted in the promises of leverage and focused expertise.  While I don’t want to “tease” the reader on this topic, I thought that I’d preface my comments with another/related topic.

What does it take to be a good Client in an outsourcing relationship?

I developed my views as I was leading the sales organization for a large outsourcing service provider.  And, I colored those views through my decade of experience on the Advisory side of the industry.  Ironically, that’s where I am today – advising companies on their strategies for whether/how to “buy” services as an alternative to building/running themselves.

You may have noticed from prior postings that I am promoting a view that the sell-side of outsourcing is flipping in dramatic fashions as Clients change their buying strategies.  Some service providers will make it through the inflection; others will fall away.  Of more interest, new entrants will be taking flight.  But, I digress.

Here are my top ten ways that an outsourcing Client can/should behave to get the most value from their contracted services agreements:

1. Economic Game Planning – transparent sharing of expectations, assumptions, and tactics; open book “Account Planning”
2. Respect the Boundaries – defined services at defined prices; not “anything goes”
3. Governance in Good Times and Bad – cadence is essential; tiered points of interface; informal forums
4. Zero-Tolerance for Ethical Lapses – mistakes happen / deceit cannot
5. Bi-Directional Management System – balanced energy on internal stakeholders and external providers
6. Find the Provider’s “Nexus of Influence” – where are resources controlled and decisions taken?  It may be in surprising layers of the organization.
7. Become a Storyteller – celebrate hard by recognizing excellence, and enabling contextual awareness
8. Don’t Fish for Tuna in a Lake – recognize limitations in scope and scale
9. Know if You’re a Lighthouse – early adoption of new services carries a different risk profile
10. Always Serve as a Reference – the most valued lever, when happy and not

As I’ve said to everyone who will listen on this topic, success pivots around people. Even for highly-automated processes, it’s a people industry.  All service-based relationships rely on passionate, engaged people who are committed to success – on both sides of the buyer-supplier relationship.

As we segue to the “As A Service” economy, many Clients of outsourcing will be looking at their provider relationships with the question: are you part of my past, or an enabler of my future?  Living by these ten principles will provide a solid foundation for making that decision as an informed buyer.

Peter

New Age Services Providers – Not Your Father’s Manufacturer

All businesses generate revenue through the sale and delivery of either products (tangible assets) or services (the experiential outcome of the application of products).  Some operate in both spheres.

I tried to locate research to represent the relative percentage of GDP that comes from products versus services, but I failed.  If anyone can locate that fact set for me, I’d be most appreciative.

My instincts tell me that there is a non-trivial shift underway from product-oriented commerce to service-oriented.  Further, I think this shift is accelerating.

Companies that previously thought of themselves as being firmly planted in the product side of the economic community are being compelled to operate as Services Providers.

Now, in the realm of IT Services and Business Process Services, the Service Provider universe has been a well-defined market segment.  It’s easy to identify those companies whose reason to exist is through taking the products of others and integrating those products into operating services.  These IT/BP Service Providers serve as intermediaries between the product manufacturers and the end consumer of the ultimate Service.  I’ll post in the future about why this model has failed to achieve its promises over the past decades; there’s plenty of other sources of opinion on that topic published in the blogsphere in the interim.   (Among the best:  Horses for Sources.)

The really interesting aspect of what’s happening today is the risk that the traditional IT/BP Services Providers will be disintermediated.

This is because the product manufacturers are seeing an ever-increasing percentage of their business shift to “as a service” delivery expectations.  Further, those expectations take the form of delivery models that are far removed from the “outsourcing” model that the IT/BP Services Providers have used for so many years.  End customers are looking to avoid capital expense associated with buying discrete products, and also avoid the many distasteful nuances of outsourcing.

As interesting a topic as that may be … the tipping point, in my opinion, comes through the fact that the “As A Service” business model is being applied far beyond the realms of traditional IT Services and Business Process Services.

Let’s say that you’re a company in the manufacturing or distribution industries.  Your business model is tried and true – pivoting on the production, shipping, and installation of tangible products such as refrigerators, or air conditioning units, or roofing shingles.

The value chain that you operate within ends with a customer taking delivery of your products.  Perhaps you provided installation services, and perhaps you offered repair/maintenance services.  But, the point of revenue-generation for your business rests with the customer taking title to your products.

Your customer, on the other hand, was burdened with the application of your products.  That is, the end result that your product is meant to achieve – preserving food items, cooling a building, protecting a home from weather – is left to the customer. 

But, along comes a clever competitor that sees a way to disrupt your industry.  The competitor elects to leverage some of the many new technologies available (such as social media, big data analytics, geolocation, biometric authentication, etc.) to change the paradigm. 

Perhaps that competitor redefines your industry by converting a traditional product business to one focused on services.  The end customer is attracted by a few fundamental truth regarding services business models:

Ø  Shift from a capital expenditure to an operating expenditure

Ø  Assurance of achieving the ended application

Ø  Access to derivative, or meta, data/analytics regarding the products employment

Ø  Avoidance of costs associated with operating the product

Ø  Improved efficiency through greater leverage and attention to detail

Ø  Potential to lower costs, or even generate revenues, from the adoption of a service

There are more of these virtues specific to particular situations.

The point is … now your product business (and, perhaps more to the point, the distribution industry with which you’ve traditionally partnered for service to customers) is being upended.

In order to remain competitive, a highly scalable, flexible, and on-demand business model is critical. And, expertise is required in the emerging technologies that are dramatically transforming the market, shaking up traditional industries by spurring increased competition and igniting a fresh wave of innovative business models.  As a market leader, with a deep legacy, you know that these technologies have lowered the barrier to entry for new competitors, and increased the expectations of your customers.

“As a Service” offers a compelling alternative for organizations who would like to focus their energy on building a differentiated service offering as opposed to building, operating and maintaining traditional product-based infrastructure. While this may be self-evident for the IT Services and Business Process Services segments, I see it happening across many, many product-based industries.

Take heed:  manufacturers and their distribution partners need to learn from the experience of the IT and Business Process Services industry.

Every company is a participant in the “As a Service” economy, either as a customer, subscriber, service provider, or service partner.  I think we will see many more traditional product companies shift to being Services Providers through transformation of their business models and technology-enablement of their products.  The winners will be those that can turn their legacies into assets/accelerators, and avoid the risk of perpetual drag through inertia.

This means that the sands we thought were stable are shifting for buyers and providers of everything.  Internet of Everything?  Certainly.  Delivered “As A Service.”  Fun times in the “As A Service” Economy.

Peter

 

'Tis the Season for Growth

At the risk of stating the obvious, most companies – across all industries – have followed a common priority since 2008:  find a way to survive the recessionary markets that have ensued from the financial crisis.  For most, this has led to a sustained period of cost-cutting, constrained investments, reduced capacities, and general contraction mentality. 

Anything that appeared to be discretionary, or speculative, or prospective … these were the assets that were jettisoned in favor of a leaner operating cadence.  In my mind, these lost assets are the necessary ingredients for growth, and they have been mortgaged in favor of the imperative of weathering the storm.

Now, I am no economist and don’t pretend to offer informed perspectives on causes and effects of recessionary markets, but a few impacts are evident to me as I meet with executives about their agenda for 2014.

To frame their mindset, it’s important to note that US average annual GDP growth (including the Great Recession and an estimate for 2013) has been just 0.9% compared to 2.4% in the years before 2007 and way below the average real growth of the 1980s and 1990s.

Across the major economies, the hope is that central bank policy will convince corporations that interest rates will stay low and so they can be confident of investing more.  Most pundits attribute central bank interest rate cuts, asset purchases (quantitative easing) and ‘guidance’ for boosting stock markets up to today’s record heights. 

Yet, these actions have had little effect in getting banks in most countries to start lending to corporations or for those corporations to borrow to invest. Banks have still a lot of toxic assets from the credit boom on their books and prefer to improve their balance sheets rather than lend. And, large corporations flush with cash don’t need to borrow to invest. 

Bolstered, in part, by the exceptional performance of equity markets I sense that optimism is returning and companies are willing to place a few strategic bets on new sources of revenue and profit expansion.

Goldman Sachs is also showing optimism about an investment boom in 2014.  “The growth rate of nonresidential fixed investment (also known as capital spending) has slowed from a cycle peak of around 10% in late 2011/early 2012 to just 3% in 2013, and we expect a reacceleration to about 8% over the next year.”

But, investment depends on the level and growth in business profits and profits ultimately depend on the profitability of the existing stock of capital. Yet, companies are cautious about ramping up the spend on capital assets, thus burdening their balance sheets at a time when great energy was spent to diminish the intensity of capital employment.

So … what does all of this mean to the outsourcing and shared services industry?  I sense an accelerating appetite for “As A Service” offerings as a strategy to avoid capital expense.  Companies are looking to fund their growth through their P&L statements, rather than their balance sheets.  This means that they will contract for capacity with a variable provisioning model – pay-as-you-go – as opposed to making a fixed cost commitment.

Driving to a higher Return on Invested Capital is a top priority for most companies, and “As A Service” market offerings will be a key strategy in 2014.  Growth, enabled by a business model that is flexible, agile, and variable.

Peter