The Year in Review: 2009 in Shared Services & Outsourcing
As a truly remarkable year draws to a close, it's time once again to cast our thoughts back over the previous twelve months and ask: "What the heck was THAT all about...?"
In accordance with an age-old (ok, year-old) tradition, SSON reached out earlier this month to network members, asking for their thoughts on what characterized 2009 in shared services and outsourcing. The result? SSON's Year in Review special. Read on, enjoy, and see how far you agree with what our experts have to say about the last year...
2009 was the year of challenge for shared services leaders, with short term pressures on cost control as part of organization-wide freezes restricting investments at the same time as demands from customers to do more for less. Large investments in e.g ERP upgrades were put on hold so a large number of small-scale initiatives have been carried out - such as shared services and process diagnostics, process improvement driven by techniques such as Lean, starting off scope expansion projects, and the assessment, design and implementation of "niche" solutions, particularly in areas such as automated AP invoice processing, improved collections processing, automated reconciliations, automating HR processes - projects which can give a payback of less than a year and add to the corporate bottom line as well as improve efficiency. The best leaders have delivered significant bottom-line benefit by techniques such as dynamic discounting leveraging the consistent, standardized and stable processes that an optimized shared service can deliver.
Global recession is probably the lasting image of 2009 – with just about everyone looking like a rabbit that has just been caught in the headlights. The low seasonality of the Christmas period lasted for 3-4 months into Easter with the market waiting see who would twitch first and which way they would go. Outsourcing initiatives that were in development (or in-flight) were restructured and/or deferred; the drive for flexibility and innovation that was gaining momentum came to a crashing halt as cash became king once again as a primary tactical driver.
As if the global recession wasn’t bad enough, the year had started on a downer almost immediately with the Satyam scandal: the chairman of India’s fourth largest outsourcing service provider, Ramalinga Raju, resigned on 7 January 2009 after notifying board members and the Securities & Exchange Board of India (SEBI) that Satyam's accounts had been falsified (cash on its books inflated by $1bn; $253m liability incurred on funds personally arranged by Ramalinga Raju; quarterly revenues for the period ending 30 September 2008 overstated by 28% and earnings overstated by $125m). This sparked a huge crisis of confidence and sent shockwaves around the outsourcing world placing major question-marks against India’s position as a premier destination for outsourcing IT services - plus the role of its auditors, PricewaterhouseCoopers, in the whole saga.
I think the year will also be remembered for its merger and acquisition activity, following in the footsteps of HP’s purchase of EDS in 2008, a trend that I can see continuing into 2010. Deals included:
- Oracle stepping bravely into the ‘open-source’ systems market with its $7.4bn acquisition of Sun Microsystems in April 2009 after Sun’s discussions with IBM broke down.
- Tech Mahindra picking up the ashes of Satyam by taking a controlling interest in April 2009, initially operating them as an independent company under the name of Mahindra Satyam before bringing them under the group umbrella.
- Dell’s $3.9 billion acquisition of Perot Systems in September 2009 giving them a stronger position in the IT services market and deep government / healthcare experience.
- Xerox launching into full blown BPO most recently with their acquisition of ACS (October 2009) helping them in their transformation from a document company into higher value end-to-end business processes.
… Oh yes … and then there was "Cloud" and "everything" as a service … with BPO and ITO becoming ever more intertwined. Watch this space …
ANZ Operations & Technology Pvt. Ltd
The year that went by had some real challenges...:
- specific industries like travel were really hit and anyone doing back office work for this had to look at other options;
- as predicted at the beginning of the year, we saw a drop in profits making PE investors force companies to offshore/outsource more;
- the volatality of the dollar was so high and across different currencies, that it got a lot of companies off guard. Of course, many banks made money;
- many companies moved hard on productivity, salary cuts, no raises, lower bonuses, no promotions to higher level jobs, etc.
Founder & MD
This time last year we were in economic Armageddon! Countries, governments, financial markets and enterprises were often in near panic mode. There was little visibility or confidence, all "discretionary" spend (however that was being defined) was stopped, and we didn’t know how deep and how desperate this recession was going to be. This time this year many economies have returned to growth for the first time in 18 months (with one notable exception being the UK), in large part due to significant government stimulus packages. Economists are now debating whether this is a "V"-shaped or a "W"-shaped recovery and whether we are really over the worst or might yet suffer a double dip. Then there is the very critical longer term question of how to deal with the huge deficits that public finances have got into as many governments have borrowed to fund their economic stimulus packages.
So what does this all mean for governments and businesses and, specifically, shared services and BPO? Some of the world’s most respected business leaders rightly tell us that a time of recession is a great opportunity to take stock, make important structural and strategic decisions and ready the business to come out stronger than ever. Shared services and BPO can and has been a part of this. Many organizations have looked to shared services and BPO to help drive out inefficiencies and cost, get control of operations, generate cash and closely manage working capital. Improving service levels to the business have remained important but the "burning platform" has for many businesses been cost and cash. The challenge has been how to "invest" at a time of restrictions on "discretionary" spend and availability of cash. Time will tell whether short-term actions will reap longer-term pain or gain. Any effective and sustainable move to leverage shared services and/or BPO across in-scope processes such as Finance, HR, IT and Procurement requires a robust approach with investment in people, processes, technology and a new service delivery framework. Short-term moves to cut heads and costs through something called "shared services", offshoring or outsourcing will likely fail – and quickly – if these are done as a "quick fix" or simply "slash and burn" type activities.
On the flip side, organizations that may not have previously thought much about or really leveraged existing shared services operations or BPO relationships have turned to them and reaped the benefits. Sometimes, there is nothing quite like a "burning platform" to get things done! But long-term sustainable success will not be achieved in just 12 to 18 months.
Offshoring has been an interesting and often quite political and indeed emotional topic in 2009. While offshoring can bring business benefits (often linked directly to cost) it also potentially means moving jobs overseas. What has definitely happened is that there have been far fewer expats being sent overseas to help establish and operate offshore captive or outsources centres.
KellyOCG - RPO
Obviously over the past 12 months, the economic situation has changed dramatically. Last year, in our global RPO survey report, which is conducted annually, over 70% of respondents cited recruitment difficulties. This year, the global figure has dropped to just 54%. Interestingly, however, at the time of the survey, that figure remained at 67% for European respondents. When this recession passes, as it will, HR departments around the world will have downsized significantly. HR departments which have been downsized in the lean times will be overwhelmed with the complexities of identifying and onboarding the quality and quantity of talent they need to fuel their company’s renewed growth. Many companies are using their employees within HR and recruitment in the midst of hiring freezes and layoffs, to engage in more social networking and passive recruitment. Unlike the economic trials after 2001 when companies had no interest in Recruitment Process Outsourcing (RPO) or developing recruitment skills, this time they want to retain and expand their knowledge of the current job marketplace during the slowdown. As well, today they want a more flexible cost structure, so they are looking for RPO providers who can become their long-term partners. Companies are transitioning knowledge now so the RPO provider will be prepared when the economy turns around and they are ready to hire. This provides much needed flexibility and scalability to companies.
Respondents to our 2009 global RPO survey cite a variety of challenges that are slowing the hiring process. Fifty four percent said the most common challenge was quality of hires. Following that, challenges include time to hire (37 percent), cost to hire (28 percent), hiring manager satisfaction (27 percent), performance monitoring (21 percent), and quality of recruiters (18 percent).
HR SSO Director
HR Shared Services
If the management of an HR shared service organization has ever been considered a challenge in the past, the last twelve months have reset the bar. In both the public and private sector the concept of a cost-saving business case is no longer enough to justify investment and commitment to transformation. The need to work within the boundaries of affordability, in an environment where cash is scarce and closely protected, has meant that we have to make more careful choices on how we progress our service offerings. This impacts on the design of our solutions and the pace at which they can be implemented.
It has also created a paradox in that there is an urgency to deliver much more to preserve and improve the business cost base but caution in moving delivery away from the corporate control where the benefits are not immediately obvious. There is also less capital investment available to make it happen.
It is likely this is a temporary hiatus as need surpasses caution. Certainly we have had a lot of interest in visiting the Rolls-Royce HR Shared Service Centre from private and public sector organisations alike. I think the next two years will see an unprecedented level of activity in HR transformation projects. Much of this will probably be in the public sector where the choice of back office infrastructure is weighed up against the ability to field front line staff. There is no real choice between the two and there are only so many options to reduce costs. Politically unpalatable collaborations between public sector entities could now be seen as very desirable. This may see the emergence of some of the very largest HR transformations.
This could be set to be a very exciting couple of years.
2009 has been a tough year for most organizations – characterised by a steep downturn but also great uncertainty. Uncertainty in business is deeply unsettling. Uncertainty in sourcing relationships is no different. We saw a noticeable trend in the second half of 2009 to a renewed focus on structured management of risk and performance in both outsourcing and shared services. This approach was driven by clients and service providers – both recognising that effective risk and performance management keeps costs down and service consistent. Management of performance has always been a key focus for organisations but as the importance of cost control is reinforced this is becoming more formal and rigorous.
WNS Global Services
2009 has been the "year of the survivor.". Supporting this theme are a few notable trends:
- Companies now recognize that business process outsourcing is an appropriate operating model for both good times and bad. Companies, both veteran and new industry entrants, are now embracing outsourcing with more alacrity. This year we saw historical outsourcing ‘laggards"—new industry entrants such as CPG, retail, logistics and media and entertainment start on outsourcing journeys side-by-side with more experienced industries such as financial services, who ramped up their initiatives in response to the worst economic conditions in 60 years.
- The second trend is the increasing globalization of service providers in response to more global programs of the buyer sector. During 2009, the provider community aggressively expanded their footprints to serve the needs of their clients.
- The third discernable trend is the pronounced waning of the era of captive centers. Many clients revisited their captive shared service center strategy with the recognition that third party providers can deliver the same or better levels of service at lower cost with less administrative hassle.
Shared Services International Inc.
In 2009, several companies had their business cases prepared but deferred their decision to implement shared services until next year. The primary reasons for this deferral were competing priorities e.g. other mission critical initiatives during the challenging economic times, ERP system implementation and lack of organizational capacity to handle incremental changes.
Another major question which required most of the debate in 2009 was: Do we create Shared Services first and then outsource or should we just outsource? Of course, there are two schools of thoughts - the outsourcers recommend one-step outsourcing because of quicker savings and single organizational disruption but the conventional wisdom suggests - two-step outsourcing i.e. get your house in order first by creating shared services and then consider outsourcing. The objective is not to leave more money on the table for the outsourcers. The pendulum seems to be swinging in favor of one-step outsourcing.
The reporting structures within the SSCs were also reviewed with a trend towards moving to functional reporting lines rather than continuing in a multi-function environment. In this case, various functionally based shared services are co-located in the same center and common management practices e.g. customer surveys, SLAs, pricing strategy etc. are being leveraged by creating a Service Management Office (SMO).
In addition, executives spent considerable amount of time discussing Lean Six Sigma, Value Stream Mapping & Business Process Improvement
When I was recently contacted by SSON's Jamie Liddell to provide my thoughts on "The Year in Review " for 2009, as well as "The Year Ahead" in 2010, relating to shared services and outsourcing I must admit that there was no shortage of ideas and reference material.
Over the past 12 months I have had the opportunity and privilege of interviewing some of the industry's top thought leaders on the subject of shared services and outsourcing including Sources for Horses and former AMR Research analyst Phil Fersht and IACCM's CEO Tim Cummins.
The Fersht interview, which originally aired on June 24th, was interesting on many levels, not the least of which was the fact that according to industry studies two-thirds of all outsourcing programs fail to achieve the expected results. While there were a number of reasons that had been cited and discussed for this dismal track record during the 45-minute interview, one of the most telling revelations came from the fact that even though organizations were looking to increase their activity in this area, few companies were actually going beyond the "rob Peter to pay Paul" mindset that led to the failures in the first place. Specifically, becoming disenchanted with outsourcing services through domestic providers, organizations repatriated development internally through the engagement of overseas providers from countries such as India.
The problem of course is that the change in geography did little to address the origins of the problems with domestically driven initiatives, which is the client's abdication of responsibility for managing the process. In other words, success with outsourcing will continue to be elusive if companies insist upon assuming a spectator role in their own business process improvement programs.
Recognizing these challenges and their overall contribution to the poor results, companies are now starting to turn toward solution providers that can facilitate without intimidating the management process, which was reflected in the PI Window on Business "Emerging Giants: Future Titans of the SaaS World series."
In particular, the August 20th segment in which I interviewed Blueprint's Senior VP and CMO Matt Morgan. Morgan discussed at length the emergence of "visual requirement definition" as well as the myriad of other tools that are now available to organizations who want to gain access to needed resources without losing control of the development process.
While organizations assuming greater responsibility and control for their outsourcing projects in 2010 will continue to be the trend, the question as to level of outsourcing activities beyond the domestic landscape remains to be seen.
On September 30th I welcomed both Canada's Trade Minister Stockwell Day and an international guest panel of experts that included IACCM's Tim Cummins to discuss the impact of the Buy American policy on both the domestic and international economic landscape. During the 90-minute special, Tim made the prediction that outsourcing activities would begin to shift away from India to South Africa where, as he put it, there is a nascent outsourcing sector that will make it the new preferred destination for companies looking to outsourcing for improved process performance and bottom line savings.
Whether this transformation will shift into high gear in 2010 or the year after is yet to be determined. However it is safe to say that 2009 was the starting point, and that 2010 will be the year of transition.
This latter point of course demonstrates how outsourcing activity extends beyond the sector itself to encompass and impact global economies.
As I had discussed on the PI Window on Business Show, and both the Procurement Insights and PI Window on Business Blogs, the Clark and Fourastie "three-sector hypothesis of industry" (which is now four with the advent of high tech and R&D industries) as it relates to the development of a wealthy nation’s economy, demonstrates outsourcing's economic impact . (Note: the now "four industry sectors" of the hypothesis through which a wealthy nation must progress to maintain its economic position includes the extraction of raw materials (Primary), manufacturing (Secondary), services (Tertiary) and later knowledge-based (Quaternary). Outsourcing encompasses elements from both the third and fourth sectors.)
Referring once again to India, the advent of that country's rise to prominence as a preferred outsourcing destination for American firms, each of which have committed to investing $1 billion into its economy, has significantly impacted its standard of living. In fact studies show that India has seen double-digit wage growth for much of the 2000s.
The critical points to consider regarding the India case reference is that outsourcing is a key cornerstone of the Tertiary and Quaternary sectors that are essential to a nation's economic viability and ongoing strength. How this plays out during 2010 and the ensuing years will likely have a significant influence on the global economy as a whole, especially if predictions such as the one by IACCM's Cummins forecasted shift from India to South Africa materialize.
Given the above, it is safe to say that as we move further beyond 2009, we will one day come to see it as a pivotal year of change that like 2010 will represent the bridge between past failures and future success on multiple levels of what is a complex industry.
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