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

Heed the Role of Dev/Ops - Another Proxy for Industry Revolution

My postings are centered on the shifting sands of the outsourcing and shared services industries.  So, why is the title of this one promoting a little-known role in the bathwater of corporate organizations?

It’s a matter of symptom and significance.

Two weeks ago I wrote about The Outsourcing Industry’s Need for Renewed Relevance.  Last week the topic that motivated me was Overcoming Inertia.

I try, to the best of my ability, to share observations that are grounded in reality.  Not wishes and hopes, but facts of substance and significance.

There’s a thesis at the center of my “world view” that says companies are moving to “spot buying” of services, and unifying these service providers through platforms that provide the framework for scalable business.  I’ve seen a few progressive companies run ahead of the pack with this strategy, and more than a few innovators bring essential components of this strategy to the market.

Amazon Web Services Elastic Beanstalk is a utility perfectly suited to enabling applications being provisioned “as a service” at the whim of a savvy enterprise architect.

Companies like Gravitant are positioned to enable the brokerage of the provisioning process.

I spent time last week with a progressive CIO of a major US energy utility.  His top three issues:

1)     Engineering a services integration framework to allow for modular provisioning of business services;

2)     Enabling acquisitions and divestitures much more efficiently, predictably, and cost-effectively; and

3)     Helping to devise new sources of revenue through monetizing the “big data” that is the exhaust from his core business.

I shared with him my observation of ROIC as a key proxy for efficiency and a lever for driving the restructure of legacy business models – beyond the back-office.  He was intrigued and readily agreed that executives remain focused on ROIC as a measure of strategic performance.  He also validated that the cost-cutting which occurred during the recession has emasculated any capacity for innovation or even organic growth.

As the tides turn, companies will need to support growth by finding new ways to provision the basic operating capacity that sustains day-to-day business.

Hence, the emergence of the Dev/Ops role in the enterprise.  I view this to be just as significant an indicator of the shifting sands in our industry.

If you haven’t yet encountered a Dev/Ops persona, you may be bewildered.  A great description of the role is found here.

Companies that are committed to breaking through the status quo, determined to behave with a sense of energy and urgency, and embracing the “as a service” mantra … those are the companies that are empowering the Dev/Ops community.

Agility, speed to capability, surviving chaos … those are the attributes of a business model attuned to operating in the “as a service” economy.  Does your outsourcing or shared services operation feel like a Dev/Ops environment?  Heed the role of the connector-of-dots.

Peter

Overcoming Inertia / ROIC As a Proxy for Innovation in Business Models

It’s the greatest power in the universe.  Inertia.  Resistance to change.

Applied in the context of today’s business world, it can seal the fate of any company.

Look at the life of Blockbuster – a market leader in retail rental of movies.  Tell me that the executives couldn’t see the threat from nimble competitors on their horizon.  Surely they could.  Yet, the change in Blockbuster’s business model was too little, too late.

There exists an abundance of pundits who can write more eloquently than me about how difficult change is to deploy, and how important it is to survive.  My point-of-view is informed by working with those who are either so desperate, or so ambitious, to do something to control their own destiny.

Change in business models – the very nature of what a company sells, to whom, and with what form of delivery – is at the heart of the revolution in the outsourcing and shared services industry.  My post of last week outlined the need for renewed relevance among both outsourcing service providers, and enterprise shared services practitioners.

The conception and deployment of new business models frame the penultimate opportunity for the “as a service” ecosystem.  Let me outline how I see this playing out.

·       By driving commoditization of the lower-end of the business process stack, we release investment that was previously dedicated to inefficiently-deployed capital;

·       That investment allows for the rationalization of the applications layer to retire bespoke services and migrate to as-a-service solutions for common business services;

·       It also motivates the adoption of a common platform for services integration and services brokerage/orchestration;

·       Making the shift to a focused portfolio of applications enables streamlining of the operations staff;

·       These efficiencies, in turn, serve as the funding source for applying the same modernization techniques for business-oriented applications and operations.

The journey towards reinvention of business processes is self-funded through driving from commodity upwards to business-facing operations.  I also believe that a fair measure of a company’s execution on a strategy of business model reinvention is the trend in Return on Invested Capital.  ROIC portrays efficiency and effectiveness in achieving results from the investment in the business.  It’s a great proxy for leverage.

In my view, this roadmap for enterprise transformation relies on the collaboration of three executive roles to serve as the nucleus for change.  The CIO, the head of Shared Services, and the head of Supply Chain must come together to form the central point of enablement for transforming the business operations.  These are the roles with the resources, and functional responsibility, to materially adjust the operating cadence of the business through policy, partners, and funding.  Together, they can engage the business around a roadmap for transformation.  They are the stewards of ROIC and innovation.

Progressive outsourcing service providers and enterprise shared services organizations will see themselves in this roadmap for transformation.  Most, I fear, do not. 

Ultimately, fortune favors the bold, and control of one’s destiny demands courage to change the status quo.  Creativity in the restructure of a legacy business model (comprising the people/process/technology) demands new ways of thinking – beyond the back-office.

Peter

The Outsourcing Industry's Need for Renewed Relevance

I spent today at the Horses for Sources (@horses4sources) Blueprint 3.0 event.  Thanks to Phil Fersht (@philfersht) for the gracious invitation.  This was my return to an outsourcing-oriented industry forum and I enjoyed seeing so many old friends.

The experience motivates me to re-start my blog postings on the trends and dynamics of the outsourcing and shared services industry.  So, here we go.

My thoughts are numerous ... and pivot around a central theme of how the service providers in the global outsourcing industry seem to be stuck in an antiquated view of their relevance to their Clients.

I sat on a panel session comprising leading Advisors and my parting comment was about the fact that most larger companies (buyers of outsourcing) appear to have abandoned hope for innovation through these relationships and are moving towards a strategy of self-determination.

From my own dialogues with many Clients, I sense an accelerating strategy for platform-based services integration strategies.  These strategies allocate service responsibility to those service partners which are world-class in their particular function.

Some might call this "multi-sourcing," but I think it's an entirely new paradigm for the industry.  I am wondering how many of the "traditional" service providers have internalized this. 

Former models of staff augmentation, governance, contracting processes, benchmarking, service level management, and the like ... these are all shifting.  (Go ahead, try to apply traditional outsourcing contracting processes and terms to Amazon Web Services.)

I cited the fact that SAP, Oracle, salesforce.com, and VMware, among many others, are positioning themselves as the integrators of services.

This calls to question the strategy of the traditionalists ... are they intending to offer their own platforms as an alternative to the ERP narcotic that has cascaded across so many companies?  Or, are they advocates of PaaS integration strategies that place the burden of integration and interoperability on the backs of the Client?

For many of the well-established service providers, I think there's an awakening happening - or should be happening.  The definition of relevance is changing dramatically.  Clients aren't looking for "partnerships" as much as they are wanting best-in-class functions knitted together through nimble integration technologies.

The implications to the service provider community are extensive.  Further, the implications to Clients is even more extensive - to the CIO, Shared Services, and Supply Chain leaders. 

I have much more to say on this, and will post over time.  The pages in the outsourcing industry are turning, and the move towards Client-driven enterprise services integration (including "spot buying") are moving the cheese of many companies on the buy and sell side of the "as a service" ecosystem.

Peter