OUTSOURCING PERSPECTIVES

Does HP + EDS = FAO Market Upset?

The rumored bid of HP angling to buy services giant EDS is finally a piece of fact.  My gratitude to industry thought leader Naomi Bloom who has sent me bits & pieces about this news also, including this article of today in ZDNet outlining what the acquisition means.  (Naomi is a dear colleague of mine for many years and one of the few people I respect for her deep subject matter expertise around HRO as well as her commitment to integrity.)  I have read myriad articles and market talk back about the effect that this merger will have on the IT world, esp. IBM who is being targeted most directly with this "hit" in the IT services sector.

Well, here's my take on what will happen in the FAO market as a result of this merger.  Some burning questions are:  Will IBM, Accenture and the host of offshore FAO suppliers start scrambling to change their strategies and run for cover from this new services behemoth?  Will FAO buyers be more confused than ever about the supplier landscape and jump at the opportunity to work with this newly-merged HP entity with a combined ITO/BPO skill set?

Nonsense.

I see this merger having little to no effect at all on the FAO space.  Neither HP nor EDS have any critical mass to speak of with regard to FAO business.  Both have tried unsuccessfully over the past several years to launch broad FAO strategies, but neither EDS nor HP have won the favor of advisors or buyers around the world seeking a long-term, trusted outsourcing partner.  Buy how could this be?

There have been too many failures.  Too much overpromising.  Too many senior executive leadership changes.  Too many financial disappointments.  Too much bad press and negative analyst news.  Too many layoffs and sales director shifts.  And far too much back-and-forth movement as to the new "direction" that each firm claims to be paving each quarter/year.

The only advantage that HP now has in the FAO space is that the combined customer base will be a ready-made prospect list to upsell FAO business.  Existing clients often reach for incumbent suppliers to manage additional services.  That said, however, to go from here...to there...will be a stretch.  And just imagine what the integration scenario will look like.  Yikes!

My bet is that NOT ONE of the consultants and lawyers advising on outsourcing has a deep, confident sense of what HP can bring to the table.  EDS has backed out of nearly every FAO RFP they have been presented with by this group.  The credibility just isn't there any more.

I am sounding incredibly harsh (moreso than ever before, I think!), but having had EDS as a client for many years (via IDC then Ross Research, and a prospect of FAO Research), I feel highly confident that I know what I am talking about.  And HP has never been able to share with me a straight story as to who they are in the FAO space.

So, yes, we will continue to watch what happens with HP.  They will have a presence in FAO, but I am not expecting a major landscape shift at all.  I can only imagine now, though, speaking honestly, that recruiting specialists from every other major outsourcing services supplier are on the hunt for the many HP and EDS executives starting to "look around" for opportunities.  Just watch.

SaaS to Replace FAO? Maybe for Some.

SaaS is not yet a "top of mind" concept for CFOs around the world, but there certainly is more of a buzz these days about this operational model, and, no doubt, CFOs are starting to listen.  They want increased flexibility and a scalable model.  Enter at least the consideration of SaaS.

SaaS essentially is replacing the terms "on demand" which IBM touted heavily way back when and "ASP" which Accenture pushed as a twist on ADM in the '90s.  It also is being confused with "PaaS", platforms.  Suppliers are all too familiar with SaaS - they use iterations themselves and for their customers.

As SaaS offerings from niche providers evolve, I think that they will become a disruptive technology to full-scale FAO suppliers, especially those angling to get a piece of the mid market pie ("SaaS on the Rise with Small-to-Medium Business").  SaaS can offer many of the same benefits that FAO can, including SLAs.  It can be employed on a business level, skirting a company's need for additional significant investments over existing ERP. It can be integrated relatively easily with existing applications. And most importantly, it offers more immediate cost benefits.  As a result, straight financial SaaS may drive down the pricing of FAO engagements.

That said, there is a SIGNIFICANT drawback to SaaS, being that the function being run typically is only one piece of the Finance puzzle - there is a significant human component, analytics, decision support, strategizing and a host of other processes/functions that need to occur in lockstep.  In addition, the SaaS market lacks sufficient maturity to offer extensive customization for companies needing it.  Lastly, FAO is more of a holistic solution, addressing the problem not just the symptom/s.

I predict that especially during these difficult economic times, some companies may forgo the risk of investment in an outsourcing initiative and opt for SaaS, especially the mid-sized entities for which that may be their easiest, menu-drive choice - however, for the larger guys - the typical buyers of enterprise services, suppliers will continue including SaaS elements into their offerings, as needed, and a fuller suite of services likely will be brought into every engagement.  The cost component (especially those capital related) simply blesses the equation.

Avoiding Arbitration with FAO Contracts

Litigation/arbitration is one of the largest and fastest growing practice areas at many law firms.  It covers disputes around intellectual property, insurance, mergers and acquisitions, antitrust, and other commercial litigation. It also includes disagreements between parties engaged in outsourcing arrangements.

Late last week, I was asked by a law firm to serve as an “expert witness” in a situation wherein an FAO service provider has "failed" to deliver on specific SLAs and benchmarks, according to a buyer/customer…and the customer is engaged in arbitration.  They want an independent party to come in and compare what the contract actually says to what has been delivered and then figure out if/where the disconnect lies.  Turns out, I could not fill this role, as the potential "defendant" is one of FAO Research's clients (yikes!), but I can refer this situation to one of the many sourcing advisory firms out there who would be happy to serve this role...many do this all the time.

So what's going on in the FAO space?  More importantly, what's going wrong?

The last thing a supplier wants is for its customer to pursue dispute resolution in a formal manner.  Every FAO contract has the arbitration clause, but very few ever get to the point of invoking it.  I'm hearing more and more these days, however, of arbitration situations similar to that in the queue right now.

FAO buyers seek to resolve their disputes via arbitration because it's faster and cheaper than court litigation, it's private, the process is flexible, and enforcement can be pretty swift.  The downsides - other than having to had to come to this situation - are that it's expensive, it takes a while to get to the bottom of the problem, and it characteristically includes an award of damages that further serves to tarnish an already damaged relationship.

Ultimately, the problem lies with mismatched expectations based on a breakdown of communication along the way.  It may have started during contract negotiations, perhaps executive oversight was missing from one or both sides along the way, or perhaps the supplier really is not delivering what it promised to deliver.  Anything is possible...but being the risk taker that I am, I'd put all of my money on option #1 - the contract never was set up for success.

It's partly the fault of the buyer who may have not laid out expectations effectively (or even knew what they were).  It's partly the fault of the industry, as no standard terminology really exists in terms of service level definitions.  But I blame this fully on the supplier.  There is no reason at all that this situation should have escalated to this point.  FAO client relationships are for the long haul - the hope is that once a client ultimately chooses you, that they always will stay with you...and stay with you not just for the contracted services but for an expanded scope of offerings.  You want to move upstream - building upon trust and proven expertise...not question every little move and get to the point of a total communication breakdown.

As with every relationship, FAO engagements are a give-and-take...sometimes a buyer gives a bit, and sometimes a supplier gives a bit.  But they both have got to do so consistently...and avoid, under any circumstance possible, the engagement of external legal counsel to be brought in to fix up their mess.  Nothing against the highly-knowledgeable legal community, but it just doesn't bode well for repairing trust which is the de facto requirement for successful contract management.

If You Could Ask an FAO Buyer...

A very close friend of mine runs the entire sourcing function for a global, mid-sized company - one of the most well-known in the gaming software space.  He travels across the country, all over the globe and has teleconferences and email chats galore, 24/7.  He outsourced F&A a few years ago, and I've heard the trials and tribulations of outsourcing too much too soon and having too high (and also unmet) expectations.  Things finally seem to be leveling out, to a degree.

I find conversations like that fascinating, in this space.  People like that have so much to teach us - as analysts, suppliers, buyers - you name it.

Another guy I know runs the shared services center of his major, global CPG company - another mid-sized company - but he will not outsource F&A for the life of him.  Nope.  No way.  He spoke for IQPC, Shared Services Week, you name it.  It's not that he doesn't know any better; it's just a conscious decision that FAO is not for him.

I find that fascinating too.  Aside from culture - and those few companies at the upper echelon of achieving superior benchmarks - I just don't get it.

OK...I have a little task for you readers of this weblog.  Let's pretend that I could get you in front of three people - like the one who's outsourced F&A, the one who hasn't and won't, and the one who wants to but hasn't yet.  What would you ask each of them?

Send me an email (lisa.ross@faoresearch.com) and shoot over everything you want to find out.  I'm doing a little pet sort of research project and am curious what folks like you want to know from these types of people.  Only if you send me your questions will I send you their answers.

We should always keep listening and learning.

Outsourcer in The BusinessWeek 50

How interesting that an outsourcing services supplier ranked #19 on "The BusinessWeek 50, 2008" in the magazine's latest issue!  As a matter of fact, Cognizant Technology Solutions is the only IT services company on the list (!!!).  It got there based on outstanding performance over the past three years of two financial measures: growth and average return on capital.  (Also interesting, to me at least, is that Accenture has ads splattered ALL OVER THE PLACE in this issue, specifically within the top 50 section but also on the BW website - check out the links herein - with Tiger Woods and their golf analogies abounding.)

In case you're unfamiliar with the company, Cognizant's (CTSH) revenues climbed 50% last year to reach $2.1 billion, with net income of $350.1 million.  Wow...not a bad year at all!  Cognizant mostly offers ITO services but also provides BPO within three verticals: financial services (including insurance), healthcare and life sciences/pharmaceuticals - sectors with some of the hottest demand for BPO.  The company stresses governance, risk mitigation and process excellence (like Six Sigma) as hallmarks.  And they have a flagship client list.  They offer FAO types of services a bit - mostly transaction processing stuff within its select industries - but have not pursued pure FAO business to date.

But I expect that to change...

1. They have the cash to grow, organically and via acquisition;
2. They have domain offshore expertise similar to that of the other top-tier India-based suppliers, with wide geographic diversity for the delivery of services;
3. Their relatively-new CEO is on an aggressive growth path, seeking higher-margin opportunities within their current and new markets.
4. They are following the paths of their counterparts - some figures rank them at #5 in India's IT services landscape, so just as the others have moved upstream with FAO, there is little to no reason why they would choose a different path, especially with FAO demand expected to surge, especially in the EMEA region.
5. They can cross sell FAO to their existing clients, a ready-made qualified list of potential customers.

Infosys is far ahead of the pack in terms of FAO expertise, followed by Wipro then TCS - and if you include Genpact in the mix (although not usually seen as an "offshore" supplier), Genpact is way ahead also.  So it will take mammoth effort for Cognizant to win similar mindshare and opportunities in today's FAO market. That said, we already are seeing firms like Patni, Convergys and others at least take a peek at this space, and more established players like H-P and Capgemini striving to gain bigger pieces of the pie.

I predicted in early 2007 that the FAO supplier landscape will become much more diversified toward the end of the year and beginning of this, and already we are seeing such activity, with Cognizant positioning itself to capture business outside its traditional segments.  And there's LOTS of activity going on right now in India, with major firms chatting (as I write!) with investment banks for more of a likely market consolidation.  Just keep an eye on Cognizant, and mark my word...they're on their way.

Somewhere Over the Rainbow

Although this post is not FAO or outsourcing related, I wanted to share with you a link that a dear friend just sent me - http://www.youtube.com/watch?v=2A2Jt4WOxN8&feature=related - that's gotten nearly 6 million views.  Sadly, the singer of this melody, Israel Kamakawiwo'ole from Hawaii, died at age 38 of weight-related respiratory complications.

If you're anything like me, it's so easy to get WAY off balance with our crazy schedules that we tend to forget what really matters most.  This link helped "center" me a bit as we enter the weekend and helped me re-gain a bit of perspective.  I trust and hope that it will do the same for you.

Have a nice weekend...

-Lisa

Further Convergence of BPO Market - Collections

Should collections be considered part of FAO?  Well, the typical consultant's answer would be "it depends" - but my definitive answer, as an analyst, is that collections absolutely should be considered part of FAO.  (And I thank Andy Kitcher and Helen Ricardo , highly-regarded sourcing consultants from Alsbridge Europe in London, for their lively discussions with me on the yays and nays of this topic!)

I ask this question for a few reasons. One is that I've been getting queries from companies that provide collections services (like Ocwen, NCO and CGS) who claim emphatically that they provide FAO services and want to be included in our research.  My response has been "no, we typically do not include companies of your type/size/leaning as offering comparable services to the others in our purview, like IBM, Genpact, Infosys, EXL and the like.  But they keep insisting.  Another is that I get informed all the time about "FAO" contracts that include collections, but again, I generally pay little attention, as collections hasn't been part of our wider FAO universe.

The argument AGAINST including collections as part of FAO, is that collections is usually considered part of their business operations, generally voice/call center for retail companies (banks, insurance, utilities).  Companies who are B2B don't like Finance staff contacting their valued customers, as the account manager sees it as potentially damaging to the relationship.  So this "back office" operation generally isn't included as FAO.

The argument FOR including it is that it's a finance function!  "Collections," by definition, is pursuing payment on debt - collecting revenues as payment for products/services rendered.  Some departments are even called "Finance & Collections".  Collections jobs even are listed in MySpace job listings under the category Finance/Collections.  We technically could make the same argument for the "credit" business process which involves the provision of financial resources.  That, too, hasn't been part of traditional FAO.

At the end of the day, collections services are offered by nearly all of the major FAO suppliers, but the customers who want to engage fully in this space - especially to achieve an FAO 2.0 mindset - generally look for a supplier with deep process knowledge and a broad range of experience in FAO.  They typically higher a big boy for FAO total.  But that's not to say that every prospective customer operates that same way - some may choose a process specialist for collections and engage in multi-vendor relationships.  There's a lot to be said about that model but the vendor management aspect can become a nightmare.

So...the point is that we as analysts - and you as suppliers and/or advisors and/or buyers of FAO services - must see the wider universe of services being offered.  As with the convergence of FAO and procurement outsourcing (the entire order-to-cash process) - and with FAO and HRO (payroll, as example), there's now a clear convergence between FAO and Call Center Outsourcing.  Go figure!

The real question becomes then, as suggested by my colleagues, how do you define FAO...is it Finance & Accounting Outsourcing or is it Finance & ADMINISTRATION Outsourcing?  I would say regardless of what we call it, most business functions should be under scrutiny as potential candidates for outsourcing.  Call it FAO or create your own acronym.  But as most business processes touch the finance function, I think it's safe to say that the universe of FAO is much wider than we think.

Mid-Cap FAO Market Finally Opening Up

At long last...as predicted last year...I am seeing extreme evidence over the past few months, finally, of the mid-market opening up to the prospect of FAO, and even BPO in general. 

This market segment is out of the purview of most FAO suppliers and advisors who tend to focus on higher-margin, more financially-lucrative business.  It's a difficult market to reach, let alone serve.  But there are reasons to start paying attention, more closely than ever before....

The economy stinks.  You think the large firms are suffering?  It's the small and mid-sized guys who feel the impact of lower spending too, sometimes even moreso.  Just ask any CFO or CEO in these companies, and you'll feel only an inkling of their pain.

Processes aren't working right.  Many of these folks haven't yet invested in ERP or company-wide tools to standardize and facilitate rollups of financial information.  They lack the ability to know at any precise moment their financial standing.  Or how their finance functions are impacting the rest of the organization.  And many of the systems they do have in place are less efficient than they know they should be, but they are settling for sub standard as the status quo.

Outsourcing is becoming a more acceptable operational alternative.  Everyone is hearing about it, let alone trying it.  India, China, Philippines...they are all commonplace this year in business news.  Execs are feeling that if they're not trying FAO, then maybe they should be. 

Small- and mid-sized companies have such a small, or nonexistent, peer network to facilitate knowledge sharing about FAO that they literally have "no place to go" for information.  What is FAO, really?  Who's doing it?  And what would it mean for them?

Business in this segment takes time to realize...so it will be interesting to see over the course of this year who will leverage FAO and who will serve this segment the most effectively.  My prediction is that this under-served segment will be ignored largely for not that much longer.  A twisted sort of irony in light of the U.S. release of the movie "Horton Hears a Who" with a similar message about big versus small.  :-)

Beware of Your Marketing Spend in Outsourcing

I just got three "complaints" in one day about sponsored outsourcing events and how little impact could be attained by these different venues.  One was with a buyer, one with a supplier and one with a fellow analyst colleague.  These conversations got me into a bit of a crusty mood.  Here's why.

There is an over abundance of outsourcing-related venues on which you could spend your precious marketing and sales-related budgets, and it gets me so mad that suppliers, buyers and advisors in this space are spending SO much money without really understanding the true "value" they ultimately will gain from participating.

OK, let's personalize it.  It's not what you expect to gain, but, instead, when you walk out the door AFTER an event or after paying to join an association or buying an advertisement - what value did you really get?  We're taking MAJOR money here that these guys plan to make off of you...so what really will be in it for you???  In our economic climate, we can't just choose straws anymore.

Let's start with your intention...and you should have intention with every thing you spend your marketing money on. 

• Are you affiliating to get new business, or to make new contacts so you could start new conversations to get new business?
• Is it for information gathering...to get tips or learn success factors about the outsourcing domain? 
• Is it to make connections and network for business partnerships, or even future job opportunities?
• Or is it to meet like minded people - peers with whom you could share your deepest and darkest outsourcing-related fears...and they'll just "get it", because they too may have the same anxieties?

Depending on your intention, you need to get in front of the right audience AND have plentiful access to leverage the opportunity to accomplish your intention.

It's come to the point in the outsourcing space where everyone is trying to do the same thing.  It's easy to pull together a great agenda.  We all know the same people.  We all know what information needs to get out there.  We all know that the majority of people are "in it" for bullet #1.

The real differentiator is - and, by the way, I see noone doing this successfully at all - who is sitting in the seats...or reading the magazine...or specifically noticing that YOU are there?

Keep an eye on every event out there related to outsourcing so you understand the "chatter" going on in this space.  Understand what the associations are trying to accomplish so you can share in the bigger picture of industry concerns.  Read the articles so you can gain perspectives of industry experts and see how theirs may differ from yours. Understand your intention.

But most importantly, be sure that the value is justified by the money you intend to spend. 

I bet that in the overwhelming majority of cases, it's not.  This is where we are, as an industry.  Maybe it's time to shake things up a bit and dictate a better course of events.  Noone likes feeling that they are being cheated.  Or used.  Or bullied into spending money.  There IS a right way to do things...and it includes integrity too. 

You're busy.  I'm busy.  And everyone else in this domain is busy.  So...wherever you spend your time and money, be sure that ultimately it will be worth it for you, for your unique intention.

Take Note Before You Hire a Sourcing Advisor

I cannot stress enough how helpful it is to involve a sourcing advisor in the FAO process - especially with regard to transition assistance, risk mitigation and governnance - but there are many challenges to consider before engaging an external consultant:

You may be able to get through the sourcing lifecycle solo.  Working with a consultant is expensive.  It's invasive.  It's time consuming.  All prospective suppliers will give you advice on what they think you should/should not do anyhow.  You or your peers may have outsourced in the past and/or have a good handle on what your internal state is and where you want it to be X years down the road.  Or your organization may be culturally adverse to hiring third parties.  Rational or not, all of these perspectives must be considered.

Sourcing consultants are “billable,” for the most part, paid on an hourly basis, so they are not incented to get the deal done quickly and may prolong the process.  Some consultancies charge fixed or cap rate fees for certain phases of the sourcing process, with rewards for achieving agreed-upon milestones.  Most times, however, consultants (and suppliers) are constricted by customers’ behavior – their ability and willingness to make timely decisions – so advisors generally stay away from fixed fees for situations that may be out of their control.

Some sourcing consultants have overly rigid methodologies, so much so that they strip out supplier’s potential to demonstrate innovation or a “value add” that may otherwise have come across to prospective customers.  Also, the very important, intangible, relationship factors, such as likeability, culture and operating philosophy, cannot be exhibited fully within these confines, thereby reducing prospective buyers’ abilities to judge suppliers’ packages appropriately.

Some sourcing consultants have been accused of showing biases by recommending certain suppliers repeatedly, of accepting bribes from suppliers (although uncommon) or other unethical business practices, so it is incumbent upon prospective buyers to perform due diligence appropriately to work with a skilled, well-reputed firm that they can trust.

Many FAO suppliers feel that they get less input into the sourcing process when an advisor is involved and often have little room for input directly to the buyers.  This is not good, especially since the advisor is only there for a short part of the lifecycle - the buyer & supplier have to "live together" hopefully for a very long time. So initial trust building can be hindered.  This applies to the larger, well-known advisory firms as well as the lesser known consultants in the FAO domain.  And to the lawyers - some have contract templates that are overly long and ultimately of no value over the long haul.

ALL OF THIS SAID...the best incentive for sourcing consultants is to earn referenceable clients and repeat business, so in most cases, they work diligently to overcome all of these challenges.  Just take note of these potential obstacles, as you would before you dive into any major investment with the goal of a positive return.