Q&A: Julio Ramirez, The Hackett Group
SSON: Julio, what trends in outsourcing do you expect to see over the next two to three years?
Julio Ramirez: Well there are a number of exciting things going on. We have got a number of studies; in fact we have just completed a study that showed a significant increase in the use of outsourcing than has been in the historical rate. So for example, let’s take finance, only about 10% of finance is currently offshored, that’s including both offshore captives and BPO and what our current study said was that in the next two years we expect that to go to 21.6%, so more than double. And the projected increases across the next two years were again a little bit less than doubling, but pretty significant across HR, IT and even procurement. So overall, the economic recession is motivating and driving companies to look at offshoring and moving to work from high cost to low cost geographies.
SSON: What about outsourcing trends?
JR: The prevailing model for offshoring today has been the captive. In fact we did an analysis that said 69% of companies use a combination of captive and BPO. Like take HR for example, most companies are outsourcing functions like benefits and administration, so usually not one or the other, but a combination. However, companies that predominately use BPO are only about 29%; those that are using primarily a captive model are 69% or actually over 70%. So the prevailing model has been the captive. And now we believe that is about to change. Over the last 24 months, most offshore deals have been BPO based and we see a number of factors that indicate that the providers are really picking up speed in terms of penetrating the market.
SSON: What about unbundling? Can you explain what you mean by that term?
JR: You know before 2005, in most functions there was always the thought that ‘hey we could really leverage one provider across a few functions.’ It seemed to make more sense; we would negotiate a better deal, so there would be synergy from a billing standpoint and also from a managing and governance standpoint. It appeared easier to deal with one provider than with multiple providers and in fact some companies took that across the entire G & A space. Today, we find that across the
G & A space that very few mutli-tower deals have been actually been affected.
In HR, there was an attempt to go with one provider, but what we found is that no one HR provider can do everything well. What we see now is that most of those pre-2005 deals are being unbundled and we are going essentially with the best of breed.
One provider to do for example the Human Resource Information Systems (HRIS) and the employee data management side and then multiple providers to do things like benefits administration and comp administration. Then using the deep-pocket HR experts to do things in talent management; recruiting, benefits planning, learning and development and everything across the talent management categories.
SSON: How much does a company’s scale or size affect their ability to unbundle?
JR: Remember in the talent management area, it is not about FTEs. It’s about access to knowledge. First and foremost it’s about access to systems and then knowledge. So unlike the FTE barrier; the critical mass barrier that exists in finance. For example, you know in finance that unless you have north of 200 FTEs, none of the tier one providers are going to be interested. It is different in HR. If you are talking about talent management the numbers are less significant than access to the people and the knowledge and especially the geographic footprint for which to acquire that service.
SSON: On the F & A side, what kind of the innovative BPO deals do you see going on in an attempt to encourage your BPO partner to scale down the number of FTEs you’ve got. What kind of deals do you see happening or could be happening?
JR: Interestingly, we have got a couple of clients where the providers have secured licensing agreements from the key ERP providers, primarily from SAP and Oracle. So now I’ve got a client who was struggling with an SAP implementation for years. They were looking at the rate they were going and it was taking 10 years to implement SAP. So undoubtedly, what tends to happen is that every business unit ends up customising it and you end up with a mess. BPO providers are now coming in and saying, ‘not only will we take your F & A, but we will implement SAP for you and package the two together so that you can get FICO on SAP6.0 implemented globally, and we will do that essentially for no money upfront.’ So they will take that huge capital, which otherwise would have been a huge capital expenditure, and build that as part of the deal, using the labour arbitrage savings to offset the implementation cost. Now clients that were struggling with getting SAP are now getting access to the system and ending up with a very variable structure avoiding the capital outline. So, altogether, they are very creative transactions.