Dell and Perot… and Google

I’ve been banging on about the provision of services (BPO and ITO) over the cloud. As we see increased consolidation amongst the hardware manufacturers and their generally smaller services brethren, the news yesterday that Perot Systems is being acquired for a 68% premium by Dell raises questions; and eyebrows.

Perot is still strong in the US, but its European business has suffered death from a thousand cuts. I was speaking to one of the ex most senior executives in PSE and he seems convinced that Michael Dell’s motivation is to disrupt IBM Global Services and HP Enterprise Services (neé EDS) in their expansion plans.

I know it’s a fools game to make predictions in today’s market, but I’m convinced that we will be hearing the words Perot, data centre, cloud, Dell, Google Apps and Chrome OS in the not too distant future!

Futurologist out…

We’re all doomed! – a response

Following my missive about the TPI results, Les Potton, one of my contacts from Northgate Arinso wrote:

The irony is that the potential savings from outsourcing could be a key route through the recession, but its the reluctance to commit funds up front or sign long term deals, that is likely to be contributing to the reduced number of contracts.

With purse strings tight, there will be the inevitable reluctance to spend anything, particularly if there is a perceived risk. Even if the potential solution could save a lot of cash, the process and implementation costs of getting there are often huge with the bigger outsource providers.

In my area of HR outsourcing the temptation for the big players is to go only for high value, long contracts, which may scare off some excellent prospects, who might want to start small but expand their outsourcing, as their business grows and once they feel confident it works. It is a big leap of faith for those used to having control at their fingertips.

Overall as a product, outsourcing is still a great opportunity for organisations to get quality service, best practice, specialist experience across multiple sectors and save money. However, I believe the sellers need to use a more creative sales approach and invest time understanding the prospect and helping them gain confidence in the concept (perhaps using pilot schemes etc), rather than putting a long term contract on the table early in discussions.

Whilst I agree with Les’ analysis generally, I think that the HR market is even more prone to delays in spending.

With the HRO World Europe event coming up in November, I’ll be very interested to see the mood of the HRO providers and advisors. Anecdotal evidence suggests that the market is flat/declining… watch this space.

Aligned contracting – the right way to deal

I’ve been giving a lot of thought into why clients and outsourcing service providers fall out and I think that in most cases, it comes down to different expectations; i.e. each party provides misaligned inputs leading to misaligned outcomes.

I’ve talked before about how outsourcing is mostly about guessing. The service BPO/ITO provider guesses what the client wants and what the competitive organisations are going to charge. The client in turn guesses what services are going to be provided and how closely this matches their requirements.

I now believe that all service providers must sign up to agreements which reward them for the delivery of a desired outcome. Most current contracts are based on an input specification, i.e. build an integrated finance system to take us from a to b to x specification. The principle here is that this specification would be turned around. The proposed system must enable y millions of transactions to be covered per annum with no or minimal disruption.

This kind of approach would mean instead of letting a contract for the construction of the system,  a contract would be let for say 10 years for its design, build and operation. The client’s governance structure/team leaves it to the vendor to decide how best to achieve this based on strict total cost of ownership criteria, with heavy disincentives for failure and gain share for success, this drives the right behaviour, both with the principle contractor and its sub contractors, it focuses on the purpose of the system not its fabric.

Outcomes of aligned contracting against which key performance indicators would be matched could include: cost savings, better services, economic regeneration in areas of low employment – this is good not only for the client, but leads into the political and economic growth agendas of the current and future government leaderships.

Is LPO the way to go?

There is a quiet revolution taking place in the legal market. At the moment, it is being kept hush hush because lawyers in the US, Australia and the UK are moving some of their “turn the handle” grunty back-office processes offshore – mainly to India. Of course, the reason they’re keeping it quiet is that they’re still charging top dollar/pound/euro to clients for these same services.

So far, so capitalist.

But, corporates are getting in on the act. As Matt Sullivan has said:

Organizations have traditionally retained outside law firms when they become parties to litigation or acquisitions. These situations, that create sudden, large volumes of documents to review, are exactly the circumstances for which LPO vendors are well suited. Many LPOs have the ability to quickly deploy large teams of young lawyers using the latest technologies to assess the responsiveness, privilege, confidentiality of litigation-related documents or to review the assignment and termination clauses of acquisition-related contracts. Indian LPOs can typically deliver these services for USD20 to USD50 per hour as compared to USD60 to USD100 or more for legal temps in the US. Low cost legal services sources are also emerging in such places as Israel, the Philippines, South Africa and Costa Rica.

To confirm this, I recently met Andrew Loach from CPA Global who is leveraging his 20 years of outsourcing experience with the general counsels of large corporate clients. As a result, he and his team are helping these corporations save USD10’s millions a year on their legal bills.

I’ve been checking around and his approach is being recognised by many legal luminaries as a brand new model which will change the composition of the legal landscape. Add to this the recent win of the Rio Tinto contract, and Andrew and his team are now probably the dominant force in this area world wide.

He has developed what he calls a “legal heat map” which helps general counsels segment and categorise work done internally and with law firms and then model the financial and operational implications of outsourcing lower level legal work to CPA’s various onshore and offshore centres.

Here’s a prediction for you and the outsourcing markets… KPO is going to be huge and LPO will lead the way. The US and UK magic circle need to pay close attention to this; when someone like Loach engages with law firms’ corporate customers, the legal boys and girls had better watch out. I know Andrew well and he has a track record in the outsourcing industry as someone who is innovative (and obsessive) when it comes to saving money for clients.

TPI, harbingers of doom… in a good way

At last, some realism is leaking into the market; fetid and rank it may be, but like all good boils, this one really needs lancing.

The latest research from TPI does not make happy reading for the outsourcing service provider and sourcing advisory/consulting communities. The message is simple;  information technology outsourcing (ITO) is in the dolrums and  business process outsourcing (BPO) has fallen off a cliff.

Providers have returned woeful results. Total contract values (TCVs) for deals worth at least USD25m were down 22 per cent during the first six months of 2009, compared with H1 of last year. In addition the number of signed contracts was down 11 per cent, with only 135 contracts awarded during the last quarter.

BPO deals have declined across all regions and all functions; finance and accounting and particularly human resources have been hardest hit. The value and number of BPO contracts were at their lowest levels since 2001. In fact, at USD2.4bn for Q2, TCVs were down 69 per cent compared to the same period last year.

Let’s put this in context. In order to match the figures for 2008, the outsourcing service providers will need to sign deals with TCVs in excess of USD53bn. Hands up all those that think that this is a probable outcome?

So, we have all of the service providers with clogged pores, pressure building inside until we see such an expulsion of people last seen in the heavy industries in the 1980s.

What should we do, pack up, stay indoors and hide our faces until clients arrive back with ready supplies of Clearasil?

Well, I say lance the bugger!

The medicine is easy to administer, the pain short-lived and the opportunities are better for a glowing complexion afterwards. What are the medicines in my opinion? I’ve discussed cloudsourcing recently and we urgently need to go back to “what clients want and need – not what we think they should want and need”.

The sooner we do this, the better the prognosis.

A time to reflect – a time to act

It is my estimation that, unless one’s involvement is peripheral, nobody survives a war; the people who come out the other side are not those who went in. Oh, I know, we all change, every day, and each morning emerge from our cocoon of sleep a different person, to confront an unutterably alien face, and any illness, and all shocks, age and change us by their given degrees… yet when an illness is past or the shock faded, we rejoin, more or less, the same society that we left, and recalibrate our selves by it. Such triangulating solace is denied us when that community itself has changed as much as or more than we have ourselves, and we must remake our own beings as well as the fabric of that shared world.

This quote comes from Iain Banks’ A Song of Stone. It is applicable to friends and relations who are currently in Iraq and Afghanistan, but is also applicable to the outsourcing and BPO industries in a time of recession.

With the systemic changes in the makets driven by the current economic climate, clients are facing a changed community of advisors and service providers. Not all will survive; not all should, but the recalibrating community of people and companies that address the real and growing needs of clients do create the fabric of our shared world.

Now is the time, I believe, to build stronger and longer-lasting relationships in this world. Innovation in the constructing and transacting of outsourcing deals has been driven out of late. Comparing “apples with apples” is a sure-fire way of rapidly reaching the lowest common denominator; there is no room for innovation, for imagination, for passion. The process becomes the outcome and we – the consultants, advisors, service providers and clients – are all the worse for it.

So let us change in this current “war”; this current recession, to build wiser, more informal and ultimately more imaginative relationships that extend and expand the horizons that our shared world of outsourcing can embrace.

Lies, damned lies and politicians

There is a conspiracy in the UK between politicians. No surprise there, you might think; but this affects us as individuals, companies and the outsourcing market generally.

The conspiracy revolves around the number ten.

Whilst the Conservative Party has admitted that its spending cuts will amount to an across the board ten per cent, it says that it is using Labour’s figures to calculate this. Labour in its turn, says that it will not cut but will go for “zero per cent growth”!

They know, we know, and they know that we know, that this is complete obfuscation. Labour is terrified of the results of the comprehensive spending review (CSR10) due next year; which is why its trying to avoid doing it. CSR10 will indicate that UKPLC is effectively bust. We’re not going to be talking about ten per cent cuts, its going to be between 25 and 30 per cent.

So, what to do? Governments of both political colours have already tried a technology-led approach to cost-cutting which involves re-platforming, undertaking business process reengineering to deliver efficiencies in operational departments enabled by the new systems.

An alternative is to outsource back office functions to deliver savings in technology, finance and accounting, human resources, procurement etc. However, with the CSR10 time bomb waiting to go off, this shaving the parmesan approach is now completely untenable. As a result, government must seek new ideas to transform their operating model from undertaking the whole range of services that they perform today down to a core of commissioning, policy, strategy, budgeting, and compliance.

This approach allows a fundamental redesign of how citizens receive their services. In the process, administrative and personnel costs can be drastically reduced.

Some departments and local government authorities favour the “grand outsource”, where everything that doesn’t fall into the commissioning and strategy unit, is outsourced to a single company, which sub contracts work out, and is the legal entity responsible for the risk associated with delivering those services. Examples of this include Essex and SouthwestOne.

I believe that this kind of approach is ultimately doomed to fail, as this requires one company to take the entire risk, both financially and to its brand, on to its balance sheet.

The answer, I think, must respresent a transformation; a step change, a fundamental rethink of the way in which the government interacts with its citizens, becoming much more agile in response to changing citizen demands, spending money on high impact services and redesigning how more traditional services are delivered so as to improve asset utilization and minimise overheads.

The government must immediately maximise the proportion of budget spent on direct service provision and optimise its activities to minimise administration costs. In so doing, it can minimise the impact on citizens in terms of number and quality of services available, without need for significant increases in tax.

Postscript: I wrote this blog on 4 July (happy Independence day to American readers). The headline article in the UK Sunday Times today (5 July) quoted Whitehall (civil service) sources:

Secret “doomsday” plans for 20% cuts in public spending are being prepared by senior civil servants, who fear politicians are failing to confront the scale of the budget black hole.

So, I’m not that far out…

The death of outsourcing…

Yesterday, I was asked for my predictions for the future of human resources outsourcing (HRO) for a project for the Gerson Lehrman Group. It got me thinking about the future of all business process outsourcing (BPO) in light of recent developments in the cloud.

I know that to most outsourcing service providers, the cloud is still, well, in the clouds.

This however is about to change.

For those of us who grew up in (or built) large, people-heavy, consulting-led businesses from the mid nineties, the use of high technology was seen as an enabler. In most cases, this was actually seen as an opportunity to marshal – and sell – large numbers of high-cost (and highly profitable) consultants to clients to build enterprise resource planning (ERP) systems and drive out cost-savings through business process re-engineering (BPR). This is why the audit companies ran into such difficulties with conflicts of interest.

If the consulting arm of the business is making gazillions in fees more than the audit arm, where are the checks and balances, where is the governance? This of course is old news, but let’s take the story forward to those companies that acquired these fabled consulting arms.

Suddenly, IBM, Capgemini, Atos wielded enormous clout. They collectively had some of the best (and most expensive) brains in the market. All flourished; all are profitable. But…

With cloud solutions, the use of technology over people utterly breaks the IBM, Capgemini and Atos – and HP, EDS, Accenture et al – business models. As the cloud business model, currently typified as software as a service (SaaS), evolves into providing services, the old consulting-led businesses suddenly lose their shine.

Take for example the humble desktop. In multi-country corporations it generally costs about USD1000 per user per year once you factor in all associated costs. By outsourcing this to one of the companies mentioned above, the cost drops to about USD700. With a cloud-enabled service this figure will, I promise you, drop to USD5 per user per year.

This represents a 1400 per cent premium for the outsourced norm and is, as you would expect, untenable.

This transformation will not happen overnight. Two things will slow it down, the first is that getting the security elements sorted between internal and external clouds (which is the only way I can see it working in the near-term) is not easy. The second, will be the feet dragging, fear, uncertainty and doubt (FUD) and general nay-saying by the very companies that should be embracing this new opportunity.

If you have invested the very same gazillions in buying and/or developing the best consultants in the world, you really don’t need some snotty new business model stealing your lunch. As Upton Sinclair said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it!”

Cloud offers us – the forward-thinking ITO and BPO firms – the chance to stick it to the old guard. What’s not exciting about that?

Domestic protectionism has a domestic cost

Since Barack Obama vowed to punish US “corporations that ship our jobs overseas,” the backlash from offshore locations against such a move has spread to officials from government, industry associations, and leading outsourcing service providers. And while they say they want to wait for more details, they are also clearly concerned about the implications such policy would have.

While today’s highly interdependent global economy renders Obama’s 19th-century notion of “our jobs” meaningless, the bigger issues are the impact such a move would have on the Indian economy’s ability to continue being a major consumer of US-manufactured products and services, and the likelihood that other countries would react to Obama’s protectionist stance with their own equally unproductive and trade-reducing positions.

As Bob Evans has said:

“If protectionism would solve the problem and lead to things like “full employment,” I’d be all for it. If government-mandated limits on what level of profit businesses can make would make those companies more competitive and successful and lead to higher employment, I’d bang the drum loudly. No matter how painful it is to see the impact on some American workers as the global economy unfolds, we cannot attempt to create a future that’s a frozen image of a past that’s just not compatible with today’s round-the-clock, round-the-world economy.”

Protectionism is defended by two major arguments. The first is that protectionist policies save jobs in domestic industries. This argument reasons that if a domestic industry is forced to compete against a foreign country that provides services more cheaply, such as India, then that domestic industry will have to lay off hundreds or thousands of workers in order to stay competitive. Entire communities whose livelihoods depend on the service or industry will be decimated by poverty.

The second argument, a corollary to this one, is that eventually, left to compete for too long against an offshore location, a domestic industry might collapse completely, leaving the protectionist-prone country dependant on foreign operations. This, the argument goes, could be devastating as it would find itself unable to provide a badly needed resource.

So the question, when times are is not, “Should we save these jobs?” It is, “Should we save these jobs at the expense of other jobs, or should we let economic efficiency decide where people and resources are best employed?”

Domestic protectionism always has a domestic cost. Most of the time, however, the costs of protectionism go unnoticed, because protected jobs in one industry are concentrated and easy to see, while the costs throughout the economy are widely dispersed, over a hundreds of industries and millions of consumers.

If offshoring becomes “the” industry that the US seeks to repress, it’s my opinion that this protectionism will cost the US domestic economy much and achieve little.

Coterminous joined-up articulation habits

Working within a consulting environment, one tends to get used to the jargon dreamed up by people who make their money by confusing the hell out of clients. We have all “engaged with stakeholders” and “circled back with the partnership team”, but what I described as “consultese bollocks” several years ago is obviously alive and well in government.

Take a look at this article by Roland White for today’s Sunday Times… and weep.