Nonlinear Thinking

The Only Constant is Change

"To improve is to change.  To be perfect is to change often." - Winston Churchill

Forrester has a new report out discussing the dynamic evolution that traditional IT services providers are going to experience over the next several years.  This analysis is very timely and it addresses a combination of external drivers that I have been writing and speaking about for the past several years.  The authors, John C. McCarthy and Pascal Matzke have done a masterful job in codifying the thinking around these externalities and their impact to the existing IT service provider business model. This excerpt from the executive summary delivers the high-level on the emerging metamorphosis.  

“The tech services market is about to undergo a massive transformation that will call traditional provider business models into question. Four factors will combine to dramatically change the dynamics, economics, and competitive landscape of IT services over the next three to four years: 1) the “restructuring economy”; 2) innovation moving to the edge of the enterprise; 3) the redefining of buying and governance dynamics in accounts; and 4) “as-a-service” becoming the norm.”

For those that have been engaged in surveying the technology market landscape over the past decade, the conclusions McCarthy/Matzke draw from their analysis is no surprise.  Unfortunately, few of those individuals appear to actually work for the major players in global tech services because those firms have made few, if any, alterations to the business model they have employed for the past 15 years.  As innovation in IT moved from the data center to the business units, on-demand/as-a-service and other cloud-based solutions gained traction, and social/mobile activity emerged as integral parts of the technology platform, Nero fiddled.

And the hits just keep coming.  The Forrester report offers a forecast of why and how the IT services model of today will cease to exist by 2020.  

• Forrester sees at least nine new services entering the market as cloud/SaaS redefine the services business.
• Selective sourcing and utility pricing models broaden their footprints.
• Digital natives and the advance of business (unit) buyers push traditional IT into the background.
• Standardization in cloud/SaaS solutions create pricing transparency and profound pricing pressure on traditional service models.
• Cloud/SaaS drive increasing standardization and process industrialization of services leading to delivery models based on solution partner ecosystems.

From my perspective, the most provocative item in the report is the following table that contrasts the top ten service providers in 2010 with a forecast of what the top 10 will look like in 2020.

 

Looks like a whole lotta growth, death and consolidation in the sector.  Ten years may seem like a lot of time for the current top ten to embrace and adapt to this new environment, but the truth is that this evolution has been ongoing for at least five years.  Too many of the incumbents lack the cultural and operational survival instincts to revolutionize their business models.  Some of the logos we have come to recognize in the global tech services space have already vanished.  It will be interesting to watch how this all plays out over the next decade.

BPO: Bitter with the Sweet

A new InformationWeek survey takes a look at enterprise use of business process outsourcing and reveals a mixed report card.  While the market for BPO globally continues to grow at a healthy pace, we are beginning to see some of the growing pains associated with such rapid expansion.

More than seven out of 10 companies surveyed are forging ahead with BPO initiatives, even as a sizeable minority expresses dissatisfaction with results.

This dissatisfaction emerges particularly in the area of staffing quality

When it comes to performance declines, it's people issues that keep readers awake at night. Underscoring the difficulty of retaining staff and management in BPO operations, especially in specialized areas, the difficulty of assigning and retaining quality staff for projects was cited by 32% of respondents, with retention of key people assigned to accounts coming in a close second, at 28%.

Clearly, a relentless focus on lowering costs combined with currency effects and high demand for labor in certain sectors is running up against the desire for companies to have the best staff assigned to their projects. The cliché "you get what you pay for" comes to mind ... simply put, BPO isn't as much of a bargain as it once was.

The survey also highlights one of the continuing areas of concern for BPO providers.  As the mainstream BPO lines of business drive towards a market of commoditization, with pressured margins, how do service providers differentiate their service/solution in meaningful and recognizable ways?  An approach that some providers are taking is to promote the transformational or value-adding capabilities of BPO.

Perhaps even more interesting is that another small cadre of companies surveyed sees BPO not only as a cost-cutting tool, but as a way to push strategic agendas, such as transforming processes or increasing revenue.

Nevertheless, companies continue to pursue BPO first and foremost as a cost-saving endeavor.

Perhaps the most interesting data point from a BPO vendor perspective centers on meeting agreed-on metrics, cited by 38% as the biggest area of improvement respondents would like to see from their BPO providers. Vendors may get a leg up on rivals if they can consistently deliver on their service-level agreements.

The survey also looked at the challenges to broader adoption of BPO. With outsourcing becoming an increasingly mature solution, any meaningful increase in the amount of outsourcing has to move beyond the self-imposed limits and barriers with which companies have become comfortable.  Areas where the opportunity for growth exist include:

• Outsourcing larger task

• Outsourcing front-end tasks

• Outsourcing core competencies

• Migrating work from offshore captive sites to offshore outsourcing

• Blended outsourcing wherein the vendor takes over an entire discrete process, from IT systems and execution to driving future innovations and improvements.

• Outsourcing knowledge-based work

As the mainstream BPO solutions, such as F & A, financial operations, and customer care, become subject to more of the dynamics that a commodity market creates, it will be increasingly important for service providers to stake out ground in some of the higher value add arenas to maintain the margins to which they have become accustomed to.

Services Commoditization

A nice article in the latest FAO Today by David I. Sheinfeld on The Commoditization of F&A Outsourcing. His observations obviously apply to all the traditional service lines in both ITO and horizontal BPO.

As clients show more inclination to break up the contract scope and use more than one provider, there are fewer margin dollars and less opportunity to recoup any start-up losses that occur during the term of the contract. Furthermore, with smaller contracts in place, there is a greater emphasis by the outsourcing company to avoid transition and start-up costs, as the ability to recoup those costs becomes that much more difficult. The new contracts may also require more services or other value-added solutions that increase not only the requirements under the terms of the agreement but also the risk to perform. Thus, the provider needs to be prepared to give more for less.

The critical dynamic here is going to be how quickly the outsourcing elephants learn to dance by embracing emerging BPO solutions, utility ITO solutions and vertical solution platforms. Low cost is still a driver for customers, but, increasingly, it is not THE driver. There are far too many quick and nimble niche/boutique players in global OS that want to get big, fast and are willing to reduce margins (because they can) to achieve market penetration.