Roundtable: Sourcing in the Face of a Financial Crisis
As the financial crisis continues to grip markets and businesses worldwide, is there any clarity as to the consequences for the sourcing sector? The Shared Services & Outsourcing Network hosted a roundtable debate looking at the short- and long-term impact of the turmoil on the sourcing space; online editor Jamie Liddell was joined by some of the keenest minds in sourcing to analyse the possible repercussions, the potential winners and losers – and steps industry players can take to minimise the impact on their businesses.
Senior Managing Director of Outsourcing/Shared Services & Offshoring
Research Director, BPO, Offshoring & IT Services
VP Research & Advisory Services
Managing Director, Financial Services
Brian D Smith
Partner & Managing Director, Financial Services
Dr. Thomas Tunstall
SSON: Let’s kick off with the immediate future: how do you see the short-term impact of the financial crisis playing out across the outsourcing sector?
Brian Smith: I think we’ve seen we’ve seen some impact here already; people are starting to think carefully about discretionary projects, particularly in the application development space. But we’ve seen less impact on day-to-day BPO-type activity which is outsourced and offshored, I think largely because the financial crisis has had more of an impact on credit and the capital structure of organizations, and less impact at this point on operating volumes.
I think what we’re seeing is a slowdown in discretionary activity - but that will pick up again at some point as people get back to realizing their projects to execute against - and then the string of mergers that are taking place particularly here in the US as well as in Europe is obviously going to spawn a degree of activity in restructuring. I think that will impact the captive side of life; I think we’ll see more activity there. So my thought would be that we’re going to see a lull followed by a large amount of activity.
SSON: To what extent do you think the mergers that have taken place have been driven directly by the crisis rather than having already been in the works?
Brian Smith: I would say most of the big mergers that have taken place here are directly related to the financial crisis. I suspect very few, if any, were even on the cards three months ago.
Tony Rawlinson: Picking up on that, I think we see the economics at the moment both disrupting and driving outsourcing. On the one hand there’s certainly a disruption in the short term, an impact on project budgets, a deferral of capital expenditure, a deferral of all but mission-critical projects especially in financial services. Conversely our view is that the credit crunch and economic downturn mean that structurally outsourcing and offshoring are even more useful strategic tools going forward.
I’d share Brian’s view that there’s going to be a short pause before the true implications of the market crystallise, and then a forceful push for cost-reduction – but also a recognition that the winners now in recessionary times are going to turn their service delivery model into something that’s a lot more flexible. I think the winners in recessionary times will already be thinking about their sourcing strategy for what comes after the recession; the flipside of flexibility in a downturn is a need to switch on as the upcurve starts again.
SSON: You said a short pause: how long do you think that short pause is going to be?
Tony Rawlinson: I think it’s going to be market-specific; my sense is that the US is further through that process than the UK and continental Europe. Some institutions are still, frankly, focused on survival - I’m going to meetings with institutions that are clearly worried about their continued existence – but over the next month or so we should have a lot more clarity. The other interesting flavour of course in the US, the UK and increasingly in continental Europe is the impact of the virtual nationalization or semi-nationalization of some institutions; we see that potentially impacting the political attitude to offshoring at a time when offshoring is clearly going to help address the short-term cost objectives of some of these players. So there are some interesting forces at work here, some of them pulling in different directions, and I think all will become a lot clearer over the next few weeks.
Phil Fersht: There are some interesting discussion points here and I’m inclined to agree with them. We went out of our way to speak with 44 of the major US financial institutions over the last two or three weeks to really gauge what their short- and medium-term plans are with regards to embracing outsourcing, and naturally the short-term focus is very much on stability and understanding how the hell this is going to play out for them. Taking 20 or 30 per cent off the bottom line is a nice-to-have, but at this moment just knowing you’re going to be around is taking precedence. However, the way things seem to be moving, I think people are going to have a pretty strong idea in the next month about stability, about M&A - I think we’ll see a lot of the M&A start to happen in the next few weeks as this thing starts to settle down a bit – and then the process is going to move on towards further optimization in the back office, further means to find cost-containment and broader–scale strategies.
In addition to that, there’s definitely a change in mindset amongst the finance operations leaders in terms of embracing outsourcing as a strategic vehicle for longer-term plans to cut costs - and being perceived to do so. When we spoke to these institutions, 40 per cent of them said they were going to increase their spend and their impetus towards outsourcing in the next 6 months and only 15 per cent said they were going to decrease that. And when we break that down further, it’s the banking sector that has the strongest impetus to increase outsourcing; nearly half the banks – all the usual suspects going through this meltdown right now – said they were increasing their impetus towards outsourcing, and only 10 per cent were decreasing. When we get into other areas like insurance it’s a much more neutral effect; it’s definitely the banking sector that’s driving this.
When we get a bit deeper into the actual specific areas they’re looking to get quick hits from, it’s the bread-and-butter areas of outsourcing which don’t require massive amounts of upfront transformation, where they’ve already done some educational exploration and some evaluation, and it’s areas like banking BPO, application outsourcing, and F&A BPO that are clearly those that are going to offer the lower-hanging fruit opportunities. Taking the areas like core financials, core HR, bringing them out into third-party models quickly and effectively, is where we see a lot of activity in probably the middle of Q1, Q2, Q3 next year; we’re expecting to see a big spike in contracts being signed, but we don’t think they’re going to be very large contracts, we’re expecting to see a lot of small-to-medium-size contracts as companies try and move quickly into engagements that are more workable.
The short-term areas that we’re seeing a drop-off include areas like IT infrastructure. Any IT staff augmentation projects seem to be a negative right now; anything discretionary is definitely being put on the back burner; things like HR outsourcing are definitely being put on the back burner in the near-term as companies look to have quicker, more impacting areas to move into. Then when we look at the sort of 6-to-12-month timeframe, we see a much stronger bend towards things like mortgage BPO, or even HRO coming back, and areas like staff augmentation have to come into play. When you think about Wells Fargo and Wachovia merging, that’s a ton of systems integration that has to go on. Wachovia had a very broad, well-documented BPO and ITO strategy, Wells Fargo is not traditionally a big adopter of broad outsourcing, so how are these companies going to align? Which road are they going to go down? We think outsourcing is going to be one of them.
SSON: Charles, is this reflected in how your clients are approaching the crisis at the moment?
Charles Aird: I would say yes and no. I think for the traditional back office that everybody’s been talking about, the answer is yes, short-term; there’s definitely a pause, people are trying to figure out what their existence is going to be and it’s taking longer for them to make decisions. However, having said that, we do a lot of work around sourcing with clients in manufacturing, R&D, and other areas both for captive and outsourcing - and we’re not seeing a significant change for those organizations, because, as you’ll find, research shows that the US just isn’t turning out science and technology people anymore – well, I shouldn’t say that, universities are, but people are going back to India and China, to their home countries - and so we don’t have the skills in the US to do a lot of the work that needs to be done for the US economy. So outsourcing’s now embedded in organizations.
Plus we see a lot of organizations that we work with are using outsourcing as a means to penetrate markets that they haven’t been in before, particularly in developing countries; we see those things continuing. But definitely in the BPO, ITO environments – particularly over the last month or six weeks – organizations are loath to spend, so they’re looking for ways – creative ways, which I think probably helps the outsourcing service providers – to finance some of these deals, particularly the upfront part of them that deals with transition costs and may be involved with severance, consulting fees, legal fees, whatever it may be. And interestingly enough we’re seeing some private equity firms with interest in providing some of the finance for doing this transformational kind of thing. So it’s becoming a much more interesting – remembering the Chinese proverb "may you live in interesting times" – environment to work in and it probably is going to stretch a number of organizations like ours in the consultancy and advisory markets in helping our clients get over the issues that they may be having.
Tom Tunstall: I would agree with that. One thing I do want to comment on, with regard to when we would see things getting clearer, and settling out, I think a month may be too optimistic – particularly considering the fairly massive government interventions taking place right now. I think it’s more likely it’ll be a full quarter before we see clients deciding upon, or being able to strategise around, increased use of outsourcing. The analogy I’ve heard used recently is the deer in the headlights – a lot of companies, particularly financial service firms have been caught off-guard by the depth of the financial turmoil.
I think it’s likely that’s the first-order effect. The second-order effect, we’re starting to see apart from banking is a cascade into insurance as well as other types of organizations. Automotive manufacturers are under stress, and other industries are likely to be affected as well. Probably consumer non-discretionary items are going to be least impacted, and if they are it’ll take the longest to occur. Unfortunately, financial services are probably just the first-order effect. As all of you know this often creates opportunities for outsourcing suppliers.
SSON: So at least a quarter of uncertainty?
Tom Tunstall: I think so. If the markets had been allowed to correct, and to assign prices to the assets, then I think we might have had a sharper downturn but it would have occurred more quickly and we would have started to see some clarity. The government involvement creates more uncertainty and will stretch the timeline out for any sort of recovery.
Charles Aird: Until the credit crisis sorts itself out a lot of clients just aren’t able to get financing for operating capital, so we see clients just hanging onto their cash because of that kind of issue.
Phil Fersht: I think the election plays into this a little as well, in terms of who gets in; are there going to be any immediate strategies on bringing work back onshore? I think that’s another factor.
Katherine Kawamoto: I think what we’re seeing is that some decisions are starting to stall, particularly in areas related to outsourcing, and if companies are going to go forward with an outsourcing operation they’re proceeding very cautiously and are really waiting for the dust to settle. We’re hearing that budgets are starting to be looked at with more scrutiny and are starting to be reduced for the coming year, so some of the projects that people had anticipated rolling out in the first quarter are now on hold; that could be problematic for a number of the companies that we work with.
SSON: Looking a bit further ahead, what do you think will be the impact on the sourcing industry over the next few years? Do we think this is going to lead to a general reorganization of sourcing providers?
Phil Fersht: I think for some of the up-and-coming Indian providers I think this might have come a little bit sooner than they’d wished. Yes, it’s creating a ton of opportunity, but the bigger question is: when the world’s in crisis, and companies are looking to find relationships that can take them to the next level – or that can get them out of this mess – are they willing to take a risk on a provider that doesn’t have a lot of experience. So I think that this might have come a little sooner than some of the providers may have wanted, whereas it may create an opportunity for some of the incumbents to cement their positions so they can ride out the storm and consolidate further. I think we’ll see some really step up and be successful; I think others will drop away quite quickly.
We’ll also see a move towards the ability to augment application development work with BPO, for example. Providers who can really prove that they’ve got their act together bringing together systems architects, business process analysts and application development people to work across broader business goals are really going to be more successful in the long term; those providers that are pure-play process or pure-play IT need to think very seriously about how they’re going to develop their solutions in the coming years.
Tony Rawlinson: I think it’s going to be quite situational. On the one hand firms like TCS - who’ve recently done what I take to be a very attractive deal to buy Citi’s BPO banking operations in India – clearly have a strategy to acquire service lines and scale up, and I think they’ll be successful. There’re clearly signs at the moment that it’s a buyer’s market, and some of the activity we will see will be more selective sales of captive operations - or if not that, certainly selective outsourcing of captive back office processes. I think conversely what we’ll also see emerging will be providers that continue to specialize. Some of the big Indian KPO players will not want to scale up. They won’t want to be reliant on having to make large capital investments. They’ll stick to their knitting. I think service providers with a clear strategy will be those that are successful.
To pick up on the point a minute ago, I think I’d agree too that actually it’s not so much the new deal activity that’s pivotal for a lot of these providers: it’s going to be extending, restructuring, realigning their existing outsourcing relationships with clients, in order to grow revenue for them but also to address client needs. We see a continuation – certainly in financial services – of center-led strategies to outsourcing being successful but conversely there are still a lot of institutions out there that are behaving quite dysfunctionally, at business-unit level or geography level, and those sort of buyers are still a real headache for providers to deal with.
Brian Smith: One observation I would make is that we’ve seen a lot of people looking at moving away from India over the last few months, and starting to look at different locations, and I suspect that this will cause some reconsideration of that because there will be – at least in the sort term – some capability in India that may not have been there previously as things slow down a bit, and this may cause people to stop looking elsewhere. In that sense, for the Indian provider community, this may not be as bad a thing as maybe could be construed.
Charles Aird: I agree with that. I think that the Indian market is not as attractive as it was before, but then I don’t consider a TCS or an Infosys to be an Indian company any more; they’re just as global as IBM as Accenture, and they’ve diversified very successfully into Eastern Europe and China and South America and places like that. But one of the things we’ve seen, just before this hit – and I wonder what the impact is going to be – is that we’ve found clients more comfortable with setting up captives in remote areas, in Eastern Europe, in China, in India, wherever, because of some perceived dissatisfaction with service providers. Service providers are getting spread really thin in their delivery teams. We’re all going for similar skill-sets, whether it’s a major service provider, one of the advisory firms like us and our competitors, or a client with its performance management and governance - and so the thing with service providers is that clients think they’re not getting out of the deals what they expected to, and start to think about going more into the captive environment. So it’ll be interesting to see over the next few months if that continues as a trend – and some of our research has shown that a lot of people are going to more captive - or if they will leverage the financing that I mentioned earlier through service providers to go the outsourcing route.
Tony Rawlinson: From an EquaTerra research perspective we’ve certainly seen signs of a slowdown in the trend to captives. I think we’re beginning to see now – depending on the market and the proposition of the provider – certainly a growing maturity and range of some service provider offerings, and I think I’d expect to see the credit crunch at least make financial institutions and other organizations reassess whether they want to be in the captive game, and certainly in some circumstances – as the Citi example has shown – to focus on core businesses and leverage the growing capability of some of these providers to pick up commodity services, whilst at the same time assessing which of the processes that are in their captives right now give them competitive differentiation, and making sure they hold onto those.
Brian Smith: Tony raises some good points there; we just did some benchmarking of captives in India and observed that the smaller captives – even the medium-sized captives – are not as efficient as third parties; it’s only the bigger ones that can achieve that degree of efficiency, and it tends to be the bigger ones which get sold, as we’ve seen happening twice recently. My sense is that I do agree that people do want to have captives, but sometimes the economics don’t support that decision and sometimes it’s more a politically or risk-driven decision.
Phil Fersht: We definitely don’t see a move back towards captives at all at AMR; it’s been much more of a shift away from that strategy, particularly for captives smaller than 150, 200 staff that are very challenging to run, very costly, and where in many cases the cost per transaction or the cost of managing staff has spiralled out of control. The other issue is finding providers that actually want to invest and buy them. You look at the financial services space right now and the cost per transaction or trade is through the roof at the moment - because you can’t lay off staff very easily in India, it’s very complex to do that - and at the same time these companies want to be more flexible. They want to have a more flexible infrastructure that can allow for future divestitures, and the common thinking is that an outsourced model allows for more flexibility in the future. We’ll see a few selective strategic acquisitions like TCS-Citi, and we may see Lehman and a few of the other captives get snapped up, but I don’t think this is going to be a broad trend. I just don’t think there’s enough appetite to buy all these captive centers. We’re going to see a lot of them being slowly phased out and merged into outsourcing operations. That’s the way we see things right now.
SSON: Are you saying that – without wishing to be too melodramatic – we might witness the slow death of the captive?
Phil Fersht: I think unless you’re a big-brand, well-resourced organization where you want to invest in having high-quality processes running offshore – and a lot of the captives now are very high-quality, they do very good work, they’re just expensive – in a down-market or volatile market it goes against the model of being predictive and being nimble. I think we’ll always have specialist areas remaining within certain captive operations, but I think it’s going to be more in areas like engineering than in back-office, data-analytics, areas like that where we’re getting a proven model. Offshore companies are very good at doing this stuff: it doesn’t make sense to keep it all in-house.
Charles Aird: I would agree with that. When I say "captive" I go back to my definition of sourcing which includes manufacturing, engineering, R&D, and so on, and a lot of the time we see our clients going as captives into China, India, etc, in manufacturing and R&D because again they’re not able to find resources in the US, whereas they’re not as likely to do that in IT or accounting or the F&A processes that are not core to their operations.
Phil Fersht: We were talking with some clients the other day, and a lot of them have reduced budgets for next year in things like IT, and now have no choice but to look at outsourcing models that work for them; anything that is bread-and-butter like core HR, core financials, they’re looking at moving out now, and actually taking industry-specific areas that give them the value-add, that are client-facing, and consolidating that stuff in-house. That’s really where things are moving and I think we’ll see a heavy move towards non-core, non-mission-critical support operations being moved into the outsourced model; I think this economic crisis is just going to accelerate and expedite that process.
Tom Tunstall: I would agree with that. Captives represent something of an opportunity, either as an acquisition candidate, or as a way to put together a creative deal to help clients move to more of a variable cost model.
Tony Rawlinson: The only other thing I’d add – and it’s been a thread running through our conversation anyway – is that a lot of clients have very complex sourcing maps, multi-sourcing, multi-provider landscapes. Some of them have not traditionally been very good at managing these landscapes. So in an era when we’re all agreeing there’s going to be greater pace to selectively offshore and selectively outsource more, the skills that are going to be fundamental to success are going to be around governance and managing these multi-source landscapes. So there’s certainly going to be a need for us in the advisory community to play our part in equipping clients to successfully make that trip.
SSON: Let’s talk a little about locations. We were discussing India a minute ago, and the idea that it might benefit a little from the downturn in terms of people postponing their decisions to move out of the country. Is it too early to pinpoint the winners in terms of locations that might come best out of the crisis?
Katherine Kawamoto: I think it depends on what you’re sourcing. If you’re talking about services, then I’d say whatever country has the largest talent-pool and the lowest wage inflation. From a wage standpoint you could look at the US and claim we would be one of the better countries as far as sourcing goes.
Charles Aird: I think India has a lot of issues that may cause them even greater pain during the crisis. I’ve lived in India, set up centers there, and am very acquainted with the environment there; but over the last few years the retention issues they have, the escalation in wages, and the perceived drop in quality in both IT and BPO, have caused a lot of frustrations with clients. So I don’t see clients knocking on our doors to say "let’s go to India". More and more they’re looking at alternatives: China, Eastern Europe, South America, those countries that started making inroads into what India has been doing. I think the current crisis may cause even more of that to occur.
Brian Smith: I do think however that this will maybe cause a reduction in the attrition rate in India, which will be a good thing and one that will make people feel more comfortable. We may also see some change in the underlying economics of offshoring particularly from some of the less expensive regions within the US, and making the business case for doing this may get more difficult.
Tony Rawlinson: I think it’s got to be looked at through the lens of what the requirement is, where the point of service delivery is, where the point of service receipt is, and against that backdrop EquaTerra feels that India will continue to be the dominant market for these services. I think they’re going to be helped clearly by the move we’ve already talked about from captive to outsourced; I think some of the weakness in the global economy is going to feed through to lower wage inflation in India which might address some of the frustration that was mentioned a minute ago. We see China maturing but frankly not rapidly enough to be a universal service delivery response, and clearly Eastern Europe has its supporters mainly around continental European customers who take a more conservative approach to risk.
This is very much an Anglophone discussion and we’re seeing the emergence of places like Morocco serving the French market, for instance, and we’ve talked already about Brazil serving the US market. I think overall our view would be that India will continue to be the big player but we’d also see a "horses for courses" approach being taken by clients and a recognition that risk needs to be managed on a global basis: it doesn’t make sense to have all your services running out of one country.
Phil Fersht: I can add a little additional perspective on that: let’s look at the types of services that are being outsourced to different locations. When you look at IT, I think India has developed a very strong position now delivering high-quality programming, application development services, at labor costs often a quarter of what you’d find in places like the US or UK. I think that’s just going to go from strength to strength as that model matures. They have a real industry developing, with strong training programs and very strong footprints. I think a broader area where it’s still an open game is BPO, and when you look at the fact that you can hire BPO staff for $25-30,000 a year in rural areas of the USA, the arbitrage trade-off with India and other countries isn’t that great – and if Obama takes power and gives even further tax breaks to incent countries to onshore, I do think that nations like the US – and even the UK – are still in the game. And I think that that’s going to be the area where we’re going to see some change globally.
Don’t rule out the Latin American countries for providing voice services and employee services and things like that. But I think on the IT side it’s almost a done deal now: I think India has cemented their footholds, they’re moving into the European markets, they’ll develop intelligent resources in the US and the UK and other places to service their clients. It’s more in the BPO area where we’re going to see more variety, and different countries offering different unique characteristics.
Katherine Kawamoto: It seems to me that wage inflation is such a key factor in these decisions; a couple of people have mentioned Brazil, but if you look at the inflation there that seems to be on the rise – or at least is trending in an upward direction. Globally these are really tough decisions to make because the economies themselves are so unpredictable at this point. We really can’t predict with any certainty what to predict in the way of wage increases. As to the point about Obama: I think it will have an impact; I don’t know how soon it will have an impact, however. I’m not as certain that these things will turn around as quickly as some of the panel have indicated. I really think this is a much longer-term issue that we’re faced with.
Tom Tunstall: I think there are some things that – no matter who’s in office – will preclude an easy repatriation of jobs, if you will. With the electronic mechanisms available, some of that stuff is going to be fairly difficult, and frankly a lot of the jobs that do get outsourced are on the lower end whereas jobs created through outsourcing often are managed in the US and tend to be higher up the value-chain. The idea that whoever happens to be in the White House will affect these things greatly is likely oversimplifying things a bit. Global macro effects override a lot of that.
Charles Aird: I think I’d agree with that. I’m pretty cynical about election campaigns – and we went through a lot of this same rhetoric in the last campaign; some of you may remember Lou Dobbs and all of those things. And then we didn’t see a great deal of change. Obama will more than likely win the election – I can’t imagine him not, given the way things are going these days – and I think the issues he will have to face when he becomes president are much larger than what’s happening in outsourcing around the world.
Tony Rawlinson: I think it’s maybe worth looking at this more holistically as well as from a service provider perspective. The Indian players are becoming global players, the MNCs have deepened their investment in India and other low-cost economies. I think the successful service providers are going to be able to load-balance their client requirements across multiple geographies - so actually it’s probably going to be smart in many cases for clients to let the service providers take those decisions and let the economics of the deals drive where the requirements are placed.
SSON: That sounds like another reason to be concerned about the future of the captive model.
Tony Rawlinson: I think so, overall - although we shouldn’t be too black and white. Yet another driver here that we need to look at – and I’m not sure I know the answer to this one – is there have been signs in recent months, until the credit crunch, of wage price arbitrage not being the only driver of offshoring. It was increasingly coming to be seen as an acquisition of capability. So I think potentially what we’re going to see at least in the short term is a reawakening of the wage price arbitrage driver and I do think to your last point that that’s going to be associated predominantly with outsourcing.
SSON: OK, let’s move on. How can people in the industry best mitigate against the worst effects of the crisis in the short-term – what are the easy wins which can at least lessen the impact of what we know is going to be a pretty lengthy downturn?
Charles Aird: Somebody mentioned this earlier: for a lot of clients maybe it’s time to take stock of the relationships they already have, and improve their governance and performance management. We see a lot of organizations that get through the honeymoon period – whether it’s captive or whether it’s a service provider relationship – and they’re not getting out of the deals what they expected to get. And quite often it is those two areas: the governance is poor, the training on both sides between the client and the service provider is really bad, and the performance management is just not up to speed. In the short term, trying to improve the performance of the deals that are currently in place would be an excellent way for a client to go forward.
Brian Smith: I would agree with that. I think that there are many smallish transactions that have been done - small numbers, moved either domestically or offshore - that have never truly been leveraged across organizations because they belong to one business unit or one particular function within an organization, and I think this may prompt people to realise that looking for that enterprise-level direction is something that is going to add value at this point in time, and to get more strategic in how they manage these relationships.
Tony Rawlinson: We see the value-leakage in outsourcing at the front end of the sourcing lifecycle: ie where a client’s got the wrong strategy or the strategy is too distributed across business units. So there needs to be some focus there to ensure that some of the short-termism that will inevitably be around doesn’t lose sight of the need to have a sustainable target operating model. I think the other area, as Brian covered there, is that value-leakage often is most rife around sourcing and management, so I see a continuation of the multisourcing approach. I think there’s an interest in clients to go to best-of-breed providers, but I think as more stuff is outsourced I think that that governance challenge has to be met head-on, and we need to help our clients invest in the right skills to manage these multi-provider landscapes successfully.
Tom Tunstall: One of the things from ACS’ perspective that we intend to do is continue to focus on client intimacy - which to Charlie’s point should help us better understand the landscape and client requirements. The other thing we intend to do is make greater use of business process utility, delivering the same standardized process to multiple clients, our own technology and best practices; those types of approaches in the short term should allow our clients to save money and we think certainly in the near term that’s going to be top of the list: minimizing investment and saving costs.
Katherine Kawamoto: One of the things that we recommend is that now is really the time to benchmark current processes, and redesign if necessary. Certainly if you’re not already outsourcing but it’s something you might want to look at, it’s better to have a good process that you throw over the fence, versus what we’ve seen in the past where people have just given whatever processes existed at the time to someone else to go and sort it out. We are recommending that people do some self-assessments, do some benchmarking, and proceed with a little more knowledge.
Phil Fersht: All really good points here. We spend a lot of time talking with a lot of business leaders about this and the key issue now is for providers and leading sourcing executives to sit down and work out how to create some innovation within an engagement. Innovation doesn’t just mean operationally effective; it means actually finding new ways of doing things, finding ways of bringing together things like application design with business process design more effectively, and building business-level metrics that can achieve that. So how can you incent vendors to deliver business performance, and not penalise vendors for missing their metrics one quarter, that sort of thing.
We’ve seen that penalising vendors doesn’t really work; there needs to be more collaboration, there need to be better ways of managing vendor relationships, and I think it’s up to the intermediaries, the third parties, the consultants, the analysts of this world, to really help drive this conversation to the next level, to really help create more innovative contracts. It doesn’t help when vendors sell deals that are literally just providing bodies to the client, and the client doesn’t really know how to manage them. There needs to be a greater focus from companies on how to do this more effectively.
Look at the Big Four consulting firms; they need to build practices that are specialized in governing outsourcing contracts. I think too many of those companies are too focused at this point on old-style business models, on shared services and things like that. The vendors need to step up, the buyers need to step up, everybody needs to step up and start being more innovative and thoughtful about how this industry is changing and how we can design a curriculum to reflect that.
Charles Aird: One of my concerns is that our clients use consultants too much! And everybody may be appalled at that but: we find that they’re too dependent on us for helping them set up the governance or the deal or the shared service environment or whatever, and then when we go away they’re not able to maintain it, so more and more we’re encouraging them to embed a center of excellence, or a sourcing team - call it whatever you want - into their organizations so that they can take tools and templates that come from us, or others, and then extend them through their organizations over a period of time to be able to do the deals themselves. So that’s a hope. It may even be a dream. Some organizations obviously have been able to carry it off very well in the world, but I think most of them are still struggling around that and, as I say, I think most organizations use consultants too much, and depend upon them too much.
Tony Rawlinson: I’d generally go with that, and I think it’s got to the point now where it’s incumbent on all of us to incorporate skills trends in our advice. I think there’s enough outsourcing that’s going to go on for us not to be too frightened of clients growing their capabilities, and I’ve always been very evangelical about outsourcing only working if it’s properly managed by both provider and client. I think it’s in everyone’s interests at the end of the day.
Brian Smith: A client who’s not doing this and does not embrace the need for them to manage is not going to succeed, and I think we need to help them understand how to embrace that. We need collectively to evolve our way of helping them through that post-deal phase of life and we can do that in many creative ways.