From the Chairman’s Diary: A Review of Shared Services & Outsourcing Week 2013, Europe
What are the seismic shifts occurring under our feet, which will re-write the future of shared services and outsourcing? We may not have recognized them clearly yet – but their effects will be unmistakable. SSON's 2013 Chair of Europe's Shared Services & Outsourcing Week summarizes the trends.
Last month, I had the opportunity to chair SSON’s 13th Annual Shared Services & Outsourcing Week in Prague. It’s Europe’s premier event in this field, and in preparation, our team debated a lot about which topics could be classified as "new trends" and were worth including, versus the existing phenomena of the industry. Some of the big topics from last year’s event – GBS, Cross-Functional, Captive Shared Services, Outsourcing, Hybrid Sourcing Models, Hub and Spoke – though still relevant, didn’t make the top cut – we agreed that the networking discussions would allow enough opportunities for these. Moreover, some of the topics would remain contentious for the foreseeable future.
As our team is primarily made up of industry practitioners, we do a lot of networking with friends and peers from various parts of the world. This networking made clear to us how some of these "trends" had turned into seismic shifts.
The most relevant ones for our industry have been captured in the following segment. We believe they will (in some cases already are doing so) re-write the future of shared services and outsourcing.
Europe & Global Centres
Definitely a seismic shift: The competitiveness of contrasting ideas is getting more convoluted and decision-making is becoming more individualistic, rather than combining the collective wisdom of the industry. While it’s true that conventional, near-shore locations in Europe are losing their attractiveness, there doesn’t seem to be a cohesive alternative. Instead the myriad of options available requires a PhD to figure out. New fringe locations as well as global centres are challenging the very core of the near shore bastions. Here are a few broad trends:
- In the traditional markets of Western and Northern Europe, we see the emergence of Scotland, re-invigoration of high-end analytics in Ireland, and the Baltics seem to provide viable near-shore locations for the Nordic region. These phenomena are re-defining what "near-shore" means. Some of them may mirror a consolidation of services into Centres of Excellence, but the majority provide a sustainable and competitive advantage. Clubbing the option together with the cultural requirements, one seems – at least on paper – to get a pretty good deal.
- In Southern Europe, Spain and Portugal still seem to make an occasional appearance as Shared Services locations, with their long-promised, but well past expiry date, emergence as the "next location" for shared services. Promising locations like Cyprus unfortunately managed to get itself entangled with the Greek tragedy playing out on the European stage.
- The world is changing in Central and Eastern Europe as well.
- People no longer mention big cities like Prague, Budapest and Warsaw as future Shared Services locations.
- Bulgariaand Romania are regularly appearing on the radar.
- In Poland, we see the emergence of the so called Tier 2 and Tier 3 cities – such as Brno, the Gdansk / Tricity Region, and Eastern Poland.
- New countries like Estonia, Lithuania, and Latvia are promising to be the "new" Eastern Europe, and indeed, seem to be technologically-enabled to give the first wave of East European economies a run for their money.
- Further afield, classic centres such as Bangalore, Delhi, Shanghai and Manila are being favoured as global centres, supporting both a wider geography and a wider scope of work.
- China is making great efforts to increase the attractiveness of locations beyond its coastal regions with the view to becoming global destinations – for example, Wuhan has been particularly good at attracting French companies into the region.
- In Latin America, Mexico, Costa Rica, Colombia and Venezuela are all viable and alternative locations to the mainstream.
- When you add in locations such as Sri Lanka, Johor in Malaysia, Morocco in North Africa, Uganda, Kenya in East Africa, Mauritius, and South Africa, then we really do have a global footprint.
- On the other hand, we’ve had a few hiccups – for example Egypt; but people will probably be keen to get back in when the time is right, simply because so many have seen the real potential on offer there.
What does all this mean? At a basic level, there’s a lot of choice, and a highly competitive environment, which means that there are many locations on offer at lower cost. It’s worth bearing in mind Hackett’s warning statistic of about 50% satisfaction rate with the GBS model, though. In addition (and given Hackett’s statistic, perhaps significantly), many so-called GBS structures profess to have a global presence, yet are not truly "globalized" and have not become truly integrated operating models. Clearly, the ball is being dropped somewhere.
So, on the one hand, you can applaud the choices and reap the opportunities; but on the other hand, this poses a threat to the more mature near-shore locations. As the noise of this approaching threat reaches new decibel levels, how are near-shore locations reacting? The answer is probably connected with taking advantage of the capability and skills that have already been established. This dovetails nicely into our next topic.
Commoditization vs. Diversification
Back in the early nineties, the first outsourcing initiatives were primarily interwoven with a cost reduction appeal. Two decades on, there’s still no respite from the constant pressure to reduce cost. In fact, we believe that this will never change.
With the proliferation of newer, cheaper, locations, the agenda is now even more amplified! On top of that, process standardization is further commoditizing traditional transactional activities. The result is that many processes are not only independent of location, but are also highly transportable.
So the question is: How do existing shared services organizations meet this challenge and, in particular, gear up to take advantage of the years spent building their capabilities? And how do we reach out for opportunities outside our normal zone of influence, and generate new lines of service that are valued and provide a distinct competitive advantage?
Some organizations have taken the bull by the horns by diversifying into higher value-added work like Analytics andBusiness Intelligence. These organizations have recognized the writing on the wall and are looking at turning a threat into an opportunity. Some of them are embracing a holistic approach to people and technology while others are taking seats closer to the C-level suite to ensure that board members hear their insights. Organizations like Oracle, GE, and P&G are leading the pack in innovative ways.
The third section deals with the perennial debate of "where to reside the control levers" of an organization: Do you "make" or do you "buy"?
Captive vs. Outsourcing
There are very strong sentiments concerning outsourcing’s liberating impact on a shared services organization intent on diversification. On the other hand, the more conservatively-minded want to keep a tighter rein on controlling the entire mechanics.
In today’s world, we are seeing many more organizations taking advantage of selective outsourcing. And in spite of significant numbers of companies opting for wholescale outsourcing, the world continues to vote with its feet and the hybrid remains the most popularly implemented model.
Of course, there are complex considerations and decisions behind any sourcing strategy, but most often shared service organizations partner with BPOs to take advantage of:
- Services – transaction processing
- Products – Travel and Expense platforms
- Capability – Stat & Tax compliance
- Lower cost – taking advantage of cheaper location
Outsourcing innovation continues as a hot topic. There is no doubt that many talented people work for outsourcing providers, and there is no shortage of innovation. But the best intentions, as displayed by both customer and provider during the bidding process, generally get lost in translation when it comes to contract negotiation. In fact, contract negotiation tends to be a very trying period for both parties, and much of the excitement and inclusiveness gets lost during this phase. Over the years, we have observed that only a few organizations have been able to overcome the mutual mistrust created during contract negotiation. Generally, the relationship rights itself over the course of "second-time-around" renewal discussions. Organizations like Microsoft have re-designed the engagement model and commercials by incentivising both parties to behave in a collaborative manner (as opposed to "us-against-them"). Shell is trying to get away from SLAs, as a tremendous amount of overhead is added in just maintaining these. Honestly speaking, when things are going well, people seldom use SLA metrics to judge performance; but when relationships sour, SLA metrics often provide fuel to the fire. In truth, it’s not a matter of who provides the greatest service at the cheapest cost with the least amount of disturbance – essentially, it boils down to one word: Trust. Club it together with the right dose of clear roles and responsibilities, and you have a stable model. It’s the process of creating an "understanding" that is critical to developing a high level of trust – not the piece of paper itself.
And the Rest
Apart from these three core topics that are impacting sourcing, here are a few other emerging themes and opportunities:
Cloud developments – enigma or reality?
As technology is evolving and newer business models are being created, these aspects are re-drawing the shared services model. Instead of managing the headache of carrying your own inventory and IT hardware, cloud-computing offers a very distinct and compelling alternative. There are now so many viable offerings on the market to support services like P2P, T&E, and HR, that in some ways it’s surprising that adoption levels are as slow as they are. Could it be that we are simply waiting for the dam to break?
Outsourcing vs. Backsourcing – new trend or simply "settling-in"
In recent times, we have witnessed sporadic instances of work that was outsourced moving back in-house. While there have been credible reasons for doing so, back-sourcing is largely the result of lack of patience (through stabilization), personality clashes, vested interests, and nationalistic jingoism. Back-sourcing is often the result of outsourcing going wrong, rather than a sane sourcing decision. Having said this, one argument that stands out in favour of back-sourcing is that of financial intelligence. In the rush to get quick financial benefits through labour arbitrage, on-site teams have often removed some of the residual, but vital, contextual knowledge that is necessary to provide business intelligence.
CRM – the magic sauce?
Shared services is, after all, a services product and so managing customers should be of paramount importance. Instead, we constantly observe shared services having weaned themselves away from a place where they are extensions of the primary support teams like Finance, HR, and IT. Moreover, lack of customized CRM tools and discipline across the organizations have made CRM adoptions very limited. This phenomenon is more than likely to change in the near future as organizations are trying to outwit their competition through new offerings in a highly commoditized world. Referring back to Hackett’s research about customer satisfaction with GBS models: is there a "perception versus reality" gap at work here (in addition to other things)? Is CRM too far down the list of things to do? – when in fact it is critical to managing business relationships, and it impacts perceptions of service as well as of value? If the perception is negative on value, that clearly acts as a block for future expansions.
Risk – going beyond controllership?
As the confidence and trust in this model increases, given the stability of individual shared services centres and the "industry" at large, the push for SSOs to take on higher risk tasks will also increase. We expect to see functions like Treasury, Internal Audit, Credit Risk Management, etc, to be increasingly managed by the shared services teams. This evolution has already started, with lots of organizations outsourcing some of the lower risk elements in these domains to the shared services support function.
We are living in exciting times. Whereas in the past, it sometimes felt that the same topics or trends were still on the boil, albeit a bit "louder," this year I sense a real emergence of strong new ideas that will change the way we think and work in this space. Never before have we seen such a convergence of so many disparate trends, and in Europe, too. While shared services is evolving around the globe, the Europe marketplace is facing a revolution in the making. It’ll be interesting to review what happens at next year’s conference.
Note 1: Anirvan Sen, also from Chazey Partners, stood in as Chair for David O’Sullivan on Thursday, May 23, and collaborated with David on this review.
Note 2: Shared Services & Outsourcing Week is run annually in the US, Europe, Latin America, Australasia, And Asia-Pacific regions, alongside more country specific events. More details