Q&A: Phil Fersht, Horses for Sources

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SSON; I am speaking with Phil Fersht, founder and author of leading global sourcing blog "Horses for Sources" (www.horsesforsources.com) and Research Director, AMR, at the Shared Services and Outsourcing week in Budapest, Hungary. We’ve just ran a live webstream Phil with you looking at the business value of tomorrow’s sourcing strategies, particularly in today’s economic climate. First of all Phil, how did you find the live webstreaming and were you surprised by anything that came out of the panel session?

Phil Fersht: Well first of all, it is the first time I think that anyone has tried to take something that is in a blog and blast it live to the industry. So we had hundreds of people logged in; in India, China, the UK, Europe and the United States. And we had an opportunity for them to fire questions in particularly around global sourcing and that seemed to work really well.

I think the core questions that came in were very much centred on how to build better partnerships with service providers, how to get a better handle on governance and managing multiple service providers and this whole focus on getting beyond contractual terms and how to get more innovation and more quality from these relationships. So that, I think was a core theme around a lot of the discussion today. The other thing, which came across a lot was the changing role of the senior financial executive – how they were getting more strategic around global sourcing and how they were seeing it as vehicle for driving out some cost and some things slightly differently and doing things more globally. And how companies in this market, - some of them are looking at it in more of a distress fashion and trying to throw a lot of process over the fence to cut some cost , without thinking too much about the consequences.Whereas a lot of other companies have been doing a lot more in-depth process engineering, driving out cost, spending time adopting methodologies like lean and six sigma, for example, and that is actually putting them in a better position to outsource, because they have standardised more and they’ve got more common processes and it makes it easier to look at outsourcing. So these are some of things o come out of this discussion.

SSON: Phil you have recently carried out a survey looking at the drivers and inhibitors behind outsourcing for AMR research and quite a few surprising things came out of that. I know in your blog you speak about protectionism and the rise in protectionism and how this may affect the American outsourcing market – were you surprised about anything that came out of the survey regarding organizations' concerns about outsourcing?

PF: I was a little surprised. Having been based more on the stateside recently, protectionism is the number one issue with outsourcing in general and for example I was talking with one of the heads of the big business schools in the States, and all his students on H-1B visas have had their offers rescinded from any bank that was bailed out by the government. So it is a political hot potato out there. But what surprised me when we ran our survey, is barely 20% of companies saw moving jobs offshore as a major issue towards outsourcing. So I think a lot of the politics and rhetoric around protectionism, when you get down to the reality and when it comes down to driving out costs and companies surviving – that is not an issue for them. So I think while politicians like to talk about it – while it is an important political issue – companies are more concerned with their own performance and their own cost and they won’t make that high on their agenda. We are seeing it in some parts of the public sector and in some healthcare – but once we get outside those industries, it is not a big factor

SSON: In terms of sourcing – what changes are you seeing this year due to the economic downturn?

PF: It is a great question, and I said it in the question and I will say it again. It is one thing analysing how we got to where we are today, but working out where things are going is very tough and there isn’t a person alive today who can claim to know all the answers right now. All we can do is keep discussing the situation, keep analysing it, keep up the dialogue and it will unravel. What is coming out is; we know what works now and what doesn’t work and areas which are maturing; things even like payroll outsourcing and transactional accounting, where providers are doing it well. There are less hic-cups, there’s immediate cost savings. I think those areas, as our survey says as well, are going to be coming back quite quickly. I think we are going to see a lot of payroll, accounting and IT work continuing to be outsourced in the next one to two years. I think other areas like procurement and HR will be a little slower, because they don’t have immediate cost benefits. I think companies are looking at where they can make a quick cost-play to begin with and then thinking more about streamlining. The big driver over the last decade has clearly been on the software side; companies doing application software, ERP maintenance and support outsourcing - that has really driven the whole industry in the last decade and has been 85% of the spend. That will continue to be the case for another year or two. But the more companies get their act together on the IT side, the easier it is for them to look at BPO. And once things are more standardised and once you have things running well on Oracle or on SAP - it is much easier to find a provider to do it at a lower cost. So the more you can drive common processes and standards, the easier it is to save money by moving those out to a third party provider.

SSON: Do you think the same rule applies to the small-to-mid-market organizations? Because, it is easier for the Nestles, Unilevers, BP’s and Shells of this world to do just what you spoke about. But for small-to-mid-market, who may not see that ROI straight away; what advice would you give to them if they are looking to outsource?

PF: That is a very good question and it is a very different ball game from the top tier enterprises to the mid-market. Mid-market companies can get a lot done quickly, if they do it right. A lot of mid-market companies will not have the high level of sophistication and expertise that high-end companies have or resources. And so they need outsourcing more to get to an end-gain. So we have just in the last week five clients who want to implement a Human resources management system and the only way that they could do that was by outsourcing and getting the system delivered from, a service provider who could deliver the technology platform wit the processes around it and that is one thing that has been particularly prevalent with mid-market companies. Another area we are beginning to see more relevant is IT outsourcing, which has been pretty small in the mid-market – it has mainly been for the big boys. We are now seeing companies with maybe 2,000 – 4,000 staff taking on smaller deals with maybe 50, 40 and even 30 FTEs and this is the new trend. We are seeing companies like Infosys, Tata, Wipro and even IBM coming down to the mid-market, because this is the new wave of growth for them as the high end of the market is becoming more saturated and the mid-market is the new play-ground. The difference is when you are smaller; the cost savings are not as significant and it becomes more of skills game. And the other issue is around predictability; so do you want to move onto an outsource model? So you are a mid-market retailer and you don’t even know if you are going to be around in 12 months time, you want to bring staff on more quickly, you want to have a more nimble, flexible business model – does having an outsourced engagement make you do that? And I think people are not just thinking – do we save an extra 15% - 20% here, but does it make us be more global, be more flexible, do things better or is it too much hassle?

The one thing that came out of our survey, was 50% of companies see disruption as one of the big impediments and the service providers need to make outsourcing more easy, less demanding, more incremental and the transition has to be thought through in a lot more methodical way.

SSON: Finally, do you think organizations are realistically looking at backshoring for certain functions?

PF: I think so, not in all functions – it is each to their own, people so what they want to do. We have seen many companies particularly in IT and finance outsource too much too quickly and some things didn’t work too well. I have seen some companies pull back management reporting and some types of application development, because it just didn’t work that well. And it tends to work better where you start off with a few base processes that make sense. So when you outsource today – it is not about what is core and what is non-core, it is more about what is fit and ready. So something might be really core to the business, but actually makes sense to outsource and something else might be – you can’t wait to outsource it, but you can’t find anyone to do it for you. So it is really about finding out what works and what doesn’t work in that environment. Sometimes in BPO, if an engagement is going really badly, it is easier to bring stuff back and maybe look at other providers and do a provider switch. So I think we may get a certain number of clients who are not happy with their providers will look to pull work back and maybe source to another supplier. So that is what I think we will see. And we will see some backsourcing. You saw what the survey said though; in F & A, more companies will increase, rather than pull back, in HR - it is 50/50, so the same amount are putting out and pulling back and in IT, they are pushing out more than pulling back. So it depends on the process and things like that.