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OUTSOURCING WILL SHINE OR FAIL AS WE COMBAT THIS GLOBAL ASSAULT ON OUR STABILITY
November 24, 2022 | Phil Fersht
The assault on everything we once knew as stable is now in full throttle,
choking the very life out of businesses whose leaders are struggling to find
immediate answers to many emerging problems. There has never been a time when
third-party help has been so needed to help businesses drowning in spiraling
inflation, wages and energy costs, crippled by attrition, tormented by cyber
criminals and new compliance regulations, and under massive pressure to drive
down operating costs. Net-net, enterprises are desperately in need of access to
skills and capabilities just to keep their business operations viable as they
fight this global assault on their survival.
OUTSOURCING IS GOING THROUGH ITS MOST SIGNIFICANT PIVOT-POINT TO HELP
ENTERPRISES WITH THIS PLETHORA OF CRISES
The whole focus on pricing and scoping outsourcing engagements is being
completely rethought, as are the strategies of the leading service providers to
support them. The IT and BPO services industry is reaching its most defining
moment since Jack Welch doubled down on India in the 1990s.
The challenge facing outsourcers is three-fold:
1. The Great Resignation is over… keeping hold of key client-facing and
delivery staff is now under extreme client scrutiny. Every organization has
suffered from attrition since the post-Covid economic boom, with employees
jumping jobs for large pay hikes or pursuing their “dreams” in start-ups,
where most got hired from the comfort of their living rooms. Most providers
got a free “attrition pass” for a little while, but the Great Resignation is
now behind us (we will reveal data on this very soon). If you can’t keep
hold of your talent now, you’re in real trouble as a services firm.
Enterprise customers are walking away from providers whose delivery quality
is falling apart from staff turnover.
2. Smaller deals and price competition are forcing innovative engagement
models. Enterprise clients are demanding engagements at similar pricing
levels from pre-inflation days. The sheer number of competitive service
providers is piling pressure on them to stay price competitive to win
engagements while maintaining their profit margins. In addition, most
enterprise customers are demanding smaller-sized engagements to deal with
focused areas in immediate need of support, such as cyber, app
modernization, cloud migration, customer and sales support, data management,
etc. While smaller deals make it even harder for providers to benefit from
scaling people on the engagement, it also opens the door for
performance-level pricing that involves more automation, SaaS delivery, and
better data integration. Hence, providers that have a strong capability to
deliver services with less need for people-effort are in a position to offer
creative pricing that rewards performance, not merely effort (you must read
our earlier piece on this). The key is to convince enterprise customers to
de-link pricing from simply provision of effort and align it with the
delivery of services, provision of data, and (where appropriate) provision
of innovation that creates new value for the client over and above the
existing baseline of services.
3. Big “consolidation deals” are back on the table, but select them carefully,
as bad client moves could cripple you. For larger multitower multi-year
areas, we are seeing an increased appetite for larger deals that take
advantage of economies of scale, vendor consolidation, and commitment to
pre-inflationary pricing. UK firms, for example, are especially concerned
about inflationary pressures and how this impacts services pricing, with
many trying to get IT services contracts locked in quickly at pre-inflation
rates. In short, we are actually seeing interest from enterprise customers
in longer-term deals to protect themselves from the unpredictable economy.
We are also seeing a similar appetite for large ‘consolidation’ deals in
industries struggling in the current economy, such as financial services,
mortgage brokering, consumer packaged goods, real estate, etc. Any services
provider worth its salt has a bulging pipeline and selecting the enterprises
to build long-term partnerships with has never been as crucial. The
consolidation deals come with real margin pressures and can suck up precious
resources from the onset, so investing in the right clients is critical for
future growth and development.
SO WHAT MUST OUTSOURCERS DO TO THRIVE (NOT FADE AWAY) IN TODAY’S MARKET?
Invest in technology but sell services. Many services firms have been talking
about Business Process as a Service (BPaaS) for years, while others have made
software investments and attempted to resell licenses to customers and bundle
their services on top. The stark reality is that enterprise customers do not
want to buy technology products from services firms – and services firms are not
good at selling technology products either (requires a completely different
channel and capability set).
The answer actually lies in services firms building technology-enabled service
delivery themselves but only exposing and charging their customer for the
services they consume or data/outcomes they need. For example, if a services
firm wants to provide customer support services to smaller-scale enterprises, it
could build its own CX platform that utilizes digital assistants, automates
workflows, runs smart analytics etc., which all contribute to the enterprise
client receiving efficient, low-cost services and the data they need to make
decisions. If the provider has to partner with an expensive CRM platform, it is
stuck with only making revenues from providing the people-effort, and has little
incentive to automate to drive down costs and improve workflows. Hence the
service provider can differentiate themselves by selling cost-effective services
and providing the data its clients need. Why should their clients care about
the people-effort being provided if they get exactly what they want at a price
they are happy to pay? This is why we have been defining the emerging market
for Business Data Services as the new generation of BPM, where enterprises pay
for outcomes and data.
Control attrition, which is critical to stay in the game. If service providers
can’t keep their workers and have them deliver more value to their clients, they
will end up in a zero-sum race to the bottom, and many are already losing
business because their clients are not tolerating the attrition and the impact
on delivery quality. Net-net, we are in a war to retain people to keep our
businesses functioning, and this is likely to be the case for several years to
come as people reject employers who fail to develop them, pay them well, and
offer them career expansion. This is especially the case for staff working in
operational roles, whether it’s part of a shared services organization or a
professional services firm. Smart service providers are getting ahead of this
with increased investments in their talent development efforts, wage increases
across the board, and announcements of plans to open new service delivery
centers in locations with pools of concentrated talent that can be fast-tracked
into their model. We are also seeing several service providers target talent
from community colleges and high schools, where they can offer them their own
development experience that is highly relevant to their clients’ needs. Most
importantly, service providers must invest in training their managers to develop
their staff effectively in today’s hybrid work environment. The old style of
“check the box” management that may have worked in the old factory model is
failing.
“Taking the people” with the deal is becoming more attractive. We can go back
to my very first blog (here) on BPO value in 2007, and we were droning on about
moving to standard processes and new technologies back then to make outsourcing
add value beyond labor savings. Fast-forward 15 years, throw in a two-year
pandemic, spiraling inflation, chronic attrition, a military conflict in Europe,
and a desperate need from enterprises to hurry into functioning virtual models
and supply chains, and enterprises need more help than ever from third-party
outsourcers and their armies of millions of staff to keep their businesses
moving forward. Outsourcing deals that involve talent moving to the service
provider, many of whom may actually welcome their new employer, are looking a
lot more appealing to many service providers in today’s environment. While most
engagements are fairly small ($5m-$20m TCV), there are a few major consolidation
deals under discussion where a lot of people transition is in play. Expect
these to increase as recessionary pressures bite in the coming months,
especially in Europe.
The Bottom-line: We’ve reached a make-or-break time in outsourcing history…
those that invest in the right relationships, the right tech, and inspire their
talent will win
Enterprise customers are quickly evaluating what talent is core to their
differentiation and then determining whether they have the ability to attract,
retain and develop it themselves or whether they are better placed (and the risk
lower) to partner with a service provider. The latter option is becoming
increasingly attractive in this recessionary economy and shortage of available
talent.
Conversely, service providers are more hungry than ever to take on people they
can integrate into their model to mitigate their own attrition risks and cement
deeper and far more strategic relationships with their key clients. The main
question now is whether the right firms are engaging with the right service
providers to achieve mutual medium and long-term success. Those that get these
new relationship decisions right to stay in the game will emerge as the leaders
in their business ecosystems.
Posted in : Analytics and Big Data, Automation, Business Data Services, Business
Process Outsourcing (BPO), IT Outsourcing / IT Services, Talent and Workforce
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1. Vinod Sekharankutty says:
November 24, 2022 at 9:52 am
A very sharp call to action and sobering thoughts, Phil.. Few reflections:
Committing to outcomes is going to be the game changer and that, as you call
out will involve bundling in the right tech and analytical capabilities..
Service providers have to convince in some cases that they can be trusted to
bring the right tech but equally clients still don’t believe that
integration with rest of the org stack is an easy one and nor is driving
change with client orgs.. Hence they pivot to many relationships with
providers as tactical especially in the mid sized deals range. Clients lead
and expect providers to support a.k.a staff aug, especially in financial
services. I wonder when that equation will likely tilt. Personally I believe
services providers can deliver lot more with accountability if the right
governance and deal principles are set in motion at the top of the house..
Interesting times and one thing is for certain that the pandemic has simply
compressed the need to digitise, modernise and the attrition, desire for
hybrid work all means a radical need to strip out FTE dependencies to a
considerable extent.. There is no looking back on this one..
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