The Crisis: Six Months In (Part 3: What Now?)
Six months after the collapse of Lehman Bros and the beginning of what might now be considered the main phase of the global financial crisis, the world economy is in a pretty parlous condition with much of the developed world in, or on the brink of, recession, and the impact of the crisis being felt in every corner of the globe in the form of redundancies, repossessions and bankruptcies. But what signs - if any - are there that an upturn might lie around the corner? How will the shared services and outsourcing space in particular respond to whatever the future has to offer?
In the final part of our three-part series to commemorate half a year of the crisis, SSON members turn their thoughts to what lies ahead, for their own organizations and for shared services and outsourcing in general, addressing the question:
Six months in, what’s your perspective on how you see the space developing over the next six months?
Director, Decision Support, Integrys Energy Group
Corporate earnings pressures will create both opportunities and challenges for shared services. Opportunities from the standpoint of opening the door for innovation in service delivery, including outsourcing which historically has not been widely embraced in the overall organization and more wide-spread deployment of business process improvement tools such as Lean and Six Sigma. Challenges include being able to marshal resources to deploy the business process tools, looking at outsourcing when our internal service delivery model is in an immature stage and therefore running the risk of "leaving money on the table" when we do outsource, and the natural tendency of our internal business partners to want even more for even less as they struggle with their own financial pressure.
Manager Business Development, Oxfordshire Shared Services
There is considerable interest in buying services from other public sector organisations and we suspect that as financial pressures increase, that interest will develop further. As a result, we believe that biggest potential impact the economic situation will have on ourselves is to offer an opportunity to grow the business and create the challenge to expand and develop partnerships to be able to do that.
Head of the Technology, Sourcing and Commercial Group, DLA Piper
I suspect that we will be in for more of the same; outsourcing in particular will continue at a steady pace, as customers implement additional outsourcing projects to drive costs out of their businesses, and existing deals are considered for renewal or renegotiation. Equally, organisations electing not to outsource will still look to cut costs, and investigating and implementing shared services models will likely be a key component of this.
Talent Acquisition Diva
So the RPO groups are working feverishly on the RFP’s, developing the solutions, and spending the dollars to win the business in what I believe will be a longer than normal sales cycle. But I do see RPO and shared services picking up and becoming at least a part of the future for many organizations. In the early 2000s, it was full RPO, but as we learned more and the industry grew, we started seeing more co-sourced solutions implemented, and I see this trend continuing. Co-sourced meaning that the client and the vendor (hopefully seen as a "partner") will develop and manage the solutions together.
Shared services groups that have some experience under their belts, and have proven their worth, should continue to grow and find themselves an integral part of corporate structure. For the newbies, proving their value quickly will be critical so that their clients see the long-term potential and will continue to invest in these solutions and move forward. Unfortunately, not all "innovators" can get past current financial woes and may quickly find themselves in the recycle bin. RPO and shared services functions require C-Level support and strong internal champions to succeed. Especially now.
Outsourcing, co-sourcing, shared services, SaaS solutions, I believe will prosper sooner than later, simply because organizations will be searching for ways to "do more with less." Cut, cut, cut and who do you have left to get the job done? This group of sourcing solutions is focused on providing niche-specific value to a global audience. The opportunities exist for companies to be more forward thinking than just how to get from point A to C without spending more. The smart players are looking at economies of scale that will actually allow them to do things not only "differently" but actually, better. Innovation is the fad word of the day... but creating more value, using any and all tools necessary, should be the desired outcome.
Director, The Hackett Group
For me the key question is: "Will shared services be part of the problem or part of the solution - reactive or proactive?" Are they "overhead to be trimmed" or an accelerator that allows firms to grasp the issues of efficiency and effectiveness in the back office and help drive simplification and standardisation to create long term lower cost solutions which will in turn create sustainable value in a way that traditional cost cutting cannot.
Hackett's experience from the last back office "shock" - the need for increased compliance work (and therefore cost) in response to Sarbanes Oxley - was that firms who had simplified and standardized their back office processes before the shock hit responded more quickly with less incremental activity to meet the new challenge. As a result the cost of Finance in "World Class" hardly increased - whereas average costs of finance as a % of turnover increased by 10-15%. I predict we will see the same again. The leading "World Class" shared service centres will move onto the front foot and see the current environment as an opportunity rather than a problem.
Thomas Tunstall, Ph.D.
Advisory Liaison, ACS
A sea change is underway, and organizations will restructure significantly in order to successfully manage through the crisis. Outsourcing activities will increase as management takes a much harder look at what processes and functions are considered core versus what processes and functions can be more effectively delivered by external specialists.
The transition to a truly extended organization will accelerate as companies seek to position themselves for the eventual rebound. It’s these companies that have seized the opportunity for transformation that will be in front of their competition when the economy picks up.
Research Director, Everest Research Institute
Specific to financial services, we expect to see two types of players. The first set, focused primarily on minimizing new spend and without any major corporate restructuring efforts. These companies are likely to move more slowly in increasing their outsourcing/offshoring portfolio. The second set, comprising more aggressive movers or those which have completed acquisitions is likely to see active offshore expansion to lower costs and support restructuring of combined operations resulting from acquisitions.
From an overall perspective, we expect to see continued caution in terms of new initiatives leading to delays in decisions. Over the next 3-6 months, we believe this will gradually ease and as the stock markets find the bottom, companies will be better positioned to make decisions more efficiently.
Chief Operating Officer, Steria UK
As more and more organisations undergo restructuring and headcount reductions there is increasing recognition that "business as usual" must be maintained across processes such as finance and accounting, payroll, debt management and even the maintenance of a robust web platform.
Interestingly, it is private equity and venture capital firms that have already begun to see the benefits of external IT and business process providers, and there’s no reason why private sector organisations or government and public sector bodies shouldn’t share this confidence in the ability of IT and BPO partnerships to deliver results.
CEO, Carisma RCT
As I said, six months is usually too short a timeframe to be able to observe changes at a global industry level. I am sure that in the next six months we will really start to see what this crisis means for businesses. To try and look into the future of outsourcing/offshoring/shared services, we cannot ignore the various events which are taking place at present: the new US President and his policy concerning outsourcing/offshoring, the restructuring of the financial services industry worldwide, the constant fluctuation (which is mostly downward!) of currencies and all the rest.
The picture of the future can -as usual- be different depending on who paints it: the media (the world is doomed, nobody is going to have a job in the future, we are all going to die!), industry representatives (outsourcing is here to stay, the sector is recession-proof, we will be bigger and better!) or the people on the ground (I have no clue what’s going to be, but I sure know that I won’t go on holiday this summer!). Surely though, you don’t need to have a Nobel Prize in Economics to understand that the future is not going to be bright for all, although everything will eventually go back to normal. After all, that’s the normal cycle of the economy, isn’t it?
Anyway, I think that in the next six month we will observe the following:
- Targeted investments: spending will still be limited. However, we will probably see more and more businesses investing in targeted areas. From a client perspective, these will be: process re-design, definition of sourcing strategy (what/where to outsource) and design/coordination of outsourcing relationship (how to outsource). From a supplier perspective focus will mainly be on moving up the value chain (I’ll touch on this in a minute) through designing innovative delivery models (e.g. shared services) and/or improving services delivery performance.
- Industry growth: this is a tricky one. From one end, as budget cuts are necessary, they are likely to continue. This will probably result in decreased amount and size of new outsourcing contracts being initiated, which will eventually lead to a general industry growth slowdown. However, following the "business as usual" preferred route, it is not likely that existing contract will be scaled back (also because outsourcees would face the big challenge of recreating the knowledge loss to the outsourcers over the years). From the other end, for the same reason –i.e. lack of finance-, businesses will be looking to outsourcing more and more, hence we should expect to observe industry growth. However, I think this will happen beyond the next 6 to 12 months, when, after having hit rock bottom, the industry will start building up confidence again and we will see many more deals coming on the scene.
- Industry consolidation: there is not much to say here apart from the fact that, as we have already started to observe, the trend towards consolidation will continue and we will see more and more industry players teaming up to share the pains of this recession. Probably more so in the SME sector.
- SMEs outsourcing uptake: SMEs will try every possible solution to stay afloat. As the outsourced services offering broadens, becomes cheaper and easier to access, we may see a steep increase of outsourcing uptake in the SMEs sector. In this context, contracts based on the shared services model will growth significantly due to the important benefits this model is capable of generating.
- Moving up the value chain: as profit margins are eroded for standard and repetitive transaction outsourcing, the focus will shift towards transformational outsourcing. Outsourced service providers will have to move up the value chain by broadening their offering, taking up more and more of a client’s business.
- Shared services: I’ve mentioned this already but I believe it’s worth underlying that in the current climate we will see the shared services model becoming the model of choice by both suppliers and clients.
- Global sourcing/offshoring: I don’t think we will see any major change in the global outsourcing industry. Whilst America is still one of the biggest clients for the outsourcing industry in Asia, China is enjoying a healthy national market and India sees both a huge number of captive operations as well as an increasingly global clientele. There are some industry specialists which say the pressure on cost resulting from this financial slump will actually increase the size of contract sourced from offshore. I personally don’t agree with that view and I think that in the long run the most important outsourcing decision driver is going to be a combination of cost cutting, efficiency improvement and quality. Which indicates to me that price alone is not going to be an order winner.
Principal, Deloitte Consulting LLP
Assuming the recession is still in full force, "Centers of Excellence" may be more heavily utilized as headcount pressure drives companies to pool limited resources and leverage knowledge across a narrow but deep band. In addition, the focus on reducing the operational costs of the SSO itself will give way to, or be supplemented by, a focus on leveraging the SSO to increase enterprise-wide cash flow and improve cash management. One way to do this would be to mine the tremendous amount of data an SSO consolidates from across the business – accounts payable, accounts receivable, time and expense information, employee data, customer profiles – for opportunities to change business processes or policies in ways that cut costs, increase cash flow, reduce credit risk, and so on. For example, if an SSO aggregates credit and collections information, that data can be analyzed to identify problem customers and adjust credit and payment terms appropriately.
HR Service Delivery Manager WEMEA, Avon Products
My view would be that as in previous crises, creativity and innovation come to the fore as people strive for cost effective, new and inventive ways to achieve their goals - and so far I've been seeing that, and I'm sure I'll see more. Just because it's tough out there doesn't mean it’s doom and gloom everywhere; it can prove to be quite the opposite.
Vice President of Global Sales & Marketing, LawScribe
I genuinely feel that the real boom period for LPO will be as the market begins to settle down slightly, hopefully by the end of the year. I do not anticipate that the law firms will re-employ the huge swathes of associates that they have cut loose, because they will not wish to revisit the overbloated operating model that has been simply unable to cope with the reduction in demand for legal services. They will also be unable to ever go back to billing junior associate rates for commoditized, repetitious, legal functions such as document and contract review, due diligence etc. Corporate legal will not allow this to happen. Even when the economy does pick up, what has gone offshore, or to domestic based LPO providers, will not suddenly be brought back in-house within the confines of the AmLaw 200.
Prof. Dr. Soeren Dressler
Director, Offshoring Institute
If – and we hope so – the crisis will slowly settle towards the middle of the year we expect a number of serious SSC/BPO activities taking place. Everybody in the corporate world is aware that the next crisis WILL be deadly if they don’t transform. Satyam and Wipro have ruined the image of outsourcing to a certain extend – I guess India will have a hard time in the future. But the idea of outsourcing will get more steam.
Alan Hamzah Sendut
Group Head/SVP Global Services Centre, Sime Darby Berhad
Six months from now, the pressure to deliver the savings will be intense. Suffice to say, companies that are cash accretive are likely to continue to invest in improving their people, processes and technology to stay ahead post the turnaround. For companies who are in a cash deficit, everything else is moot other that the fight to stave of bankruptcy.
Welcome to globalisation.
(These comments, representative as they are, are of course only a drop in the ocean: we’re keen to get your thoughts too, so why not write to the editor to give your own feedback? We’ll follow up with some more of your thoughts in a couple of weeks.)