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