January 07, 2014

Deal Dynamics: Outsourcing Models That Will Thrive in 2014

In 1984, Wendy’s coined the slogan “Where’s the beef?” For outsourcers, the answer in 2014 is unanimous—it’s business outcomes. Gone are the days of labor arbitrage. “Technology is changing so fast that the focus is now on outcome-based models where value is driven from measuring business impacts and linked to compensation,” predicts Lalit Dhingra, President of NIIT Technologies.

Tracing the changes he’s seen in the evolution of the outsourcing market over the past 20 years, Amitava Sengupta, Global Solutions Head at HCL, agrees that today’s buyers expect clear business benefits. “Generation 1.0 outsourcing was centered on time and materials, tactical and staff augmentation. Then Generation 2.0 brought fixed priced, IT SLAs and megadeals. We are now seeing enterprises buy based on business outcomes and KPIs tied to business operational KPIs.”

In recognizing the move from labor-centered deals to outcome-based contracts, it’s important to understand the key factors and trends behind this new generation of outsourcing.

Trends Driving the Shift

“The digital transformation is a huge change that impacts the entire business value chain,” suggests R. Arun Kumar, SVP, Application Services, at Capgemini. “IT leaders will need to reimagine what it means to partner with the business and share in value creation. This extends to funding mechanisms, budgeting, metrics, planning, governance models, and all aspects of how IT—as a function—is managed”, he adds. Passionate about how sourcing has evolved, Arun and other outsourcing industry executives identified five key trends enabling business outcome-based models:

Mobility – Proliferation of smart devices and easy-to-use mobile applications are driving the demand for data. Everything from front end to back end applications are being digitized as consumers interact with businesses in whole new ways.

Globalization – Economies are still volatile in many parts of the globe, but models must be able to go global and provide consistent delivery across every region that a firm operates in. Global experience is the key to the productivity curve. Local languages are increasingly important.

Faster Pace of IT Changes – Technology changes rapidly. IT is out-of-date daily. Consumers have become the champion through the use of their smart devices. This is also leading to a Bring Your Own Device trend within IT.

Lower Labor Costs – Globally available talent and fluctuations in exchange rates have reduced the role of labor and location.
Cloud Computing. As-a-Service cloud-based offerings with ready-made platforms are predicted to have a huge impact on deal dynamics and the shift to the new model. Transaction-based pricing, multi-tenant deals drive more innovation and business outcome services.

Building Business Outcome-Based Models

Leading outsourcers agree that enterprises have already started to buy business outcomes. The digital enterprise is part of every deal. Rick Windon, VP of Strategic Business Development & Client Services at Zensar Technologies knows firsthand that cost reduction and risk transfer are only the foundation for this new outsourcing model. Revenue generation is essential with customers asking how providers can help them make more money. Windon suggests that “Revenue generation, market penetration, and brand awareness are all essential ingredients to the outsourcing equation.”

“Business aligned SLAs are the cornerstone to today’s business outcome based model,” suggests Amitava Sengupta of HCL. “A major retailer rewrote one of their key business processes to ensure prices at the storefront were up to date 98% of the time by 8 am. This is a huge change from uptime-oriented SLAs.”

Another area ripe for change is bundling across vertical stacks, predicts Capgemini’s R. Arun Kumar. Managed Intelligence as a Service and Managed Business Intelligence are top opportunities for build, manage, and run.

Global adoption rates vary, but every region is shifting to business outcome based models, suggests Vipul Doshi, CEO of InterGlobe Technologies. Mobile technology deployment is driving the shift in North America, specifically the US, while social media and analytics are pushing business oriented models in Europe and Asia.
Providers Respond with Innovative Services

To facilitate this new model centered on measuring business outcomes, providers recognize the need to deliver new tools and frameworks.

Realtime Dashboards – “Month-end reports must be replaced by realtime dashboards in order to respond to today’s omni-channel consumers,” details Sengupta.

Processes & Frameworks – Closer relationships between business users, IT and outsourcers mandate changes to process and frameworks. HCL has created a benefits management framework for transformation, tying benefits to payments.
Stepped up security. “Production workloads with serious business impacts demand security shift to the forefront. Innovative approaches commercialized from government applications are expected in the next few years,” predicts Scott Vogel , VP NA Sales at Unisys

Other Changes

Fewer megadeals. There are still some large deals, especially in Europe, but many report that large megadeals are being broken down to match service needs or lines of business. Rick Windon offers: “the growing number of smaller deals in the $5 million to $40 million dollar range, allow corporations to drive a new level of precision into the engagements, ensuring achievement of desired business outcomes”
Best of breed providers. How to get the work done with the best skills in a high quality environment is the key. IP protection has created what Lalit Dhingra at NIIT Technologies calls virtual captives where business users and IT have more control. “Company resources work with outsourcers with best in class skill set,” concludes Dhingra.
Flexible terms, shorter duration. “Right sizing to the environment is critical. Outsourcers must be able to adjust to geographic changes, business trends and sales volumes,” indicates Scott Vogel. Matching the quick pace of technology change, “5-10 year deals are fewer and fewer, with 3-5 year contracts more common,” he adds.

CIO’s Role

There’s no doubt the role of the CIO has changed when it comes to selecting an outsourcing provider. Many predict even further changes in the next few years.

Enabler, integrator. “CIOs are no longer focused on IT or legacy IT but are quickly becoming business experts, partners that can add real business value through IT. Conversely, IT decision-making is no longer only the CIO’s mandate and is in fact moving to business units outside of the CIO’s office.” concludes R. Arun Kumar of Capgemini.
Chief Business Transformation Officer. “Many organizations are embracing the digital age by changing the title and role of their key execs – we are seeing new ones like Chief Innovation Officer, Chief Digital Officer, Chief Customer Officer, and Chief Business Transformation Officer,” says Amitava Sengupta of HCL.
C Suite Partnership. Marketing departments are much more active in working with outsourcing providers. CMOs understand IT and work with CIOs to ensure decisions are not technology driven. What added value can be delivered is now the key is how Vipul Doshi describes who he sees involved in outsourcing deal decisions.” All three business leaders, CIO, CFO and CMO are at the table,” concludes Lalit Dhingra, “and CFOs are an equally powerful player because they take a business-oriented view.”

Capitalizing on the Changes

The shift to business outcome-based models is here to stay. But many have not yet capitalized on the benefits. Don’t wait any longer to consider how the new model can be applied to your business.

Here are four ways enterprises across nearly every vertical can seize the opportunity to improve business outcomes in 2014:

Focus on the customer. Most all businesses can seize the opportunity to outsource. “Consumer facing industries such as media, publishing, financial services (including banking and insurance) and retailers are at the forefront,” suggests Sengupta. “The travel industry is moving fast,” confirms Doshi, “shortened development times from years to months and intense competition are just two factors that are driving adoption. Envision a travel agent who now has the ability to service customers end to end from their initial interest in planning a trip to full concierge service every step of the way. This is what a business outcome-based outsourcing model can support in the future.”

Rick Windon at Zensar said it best when he indicated, “the value of outsourcing is well documented for large organizations but small to medium sized businesses can achieve equal or better results by applying business outcome metrics in combination with an ‘As-a –Service-Models’.”

Small businesses can use their size to more easily define and exceed their customer’s need and set specific result metrics. The As-a-Service approach provides the flexibility and economics for almost every business regardless of the number of employees or locations.
Modernize the front and back-end. “Data intensive enterprises such as financial services, utilities, telcos and retailers are at the forefront,” indicates Kumar. “These businesses can’t stay with legacy ERP systems. Continuous modernization is demanded.” Lalit Dhingra predicts “within 2-3 years you’ll see more outsourcing of back office applications to the cloud.”
Consider outsourcing with every new product or service plan. “Lifecycle thinking has definitely taken hold,” cites Dhingra. In the past, outsourcing was used to cut costs after successful product introduction. But now the value associated with outsourcing has been proven. Successful business planners are applying end-to-end thinking when launching a new product or service.

Knowing exactly what in-house skills are points of difference allow enterprises to outsource point-of-parity capabilities. Countries are no longer competing on low labor costs but rather on skills expertise that offer business planners outsourcing options to shorten time to market and product costs. India, once known as a low cost labor market, has shifted to a center of excellence for business operations. In Europe, Poland centered its expertise on engineering solutions. Leveraging outsourcing solutions for skills expertise is a good match for enterprises who take a long-term view of their portfolio.
Renegotiate existing deals to add new benefits and providers. Providers recognize the need to keep customers happy. “Modernizing existing contracts and finding ways to diversify to show the value will help laggards,” suggests Scott Vogel of Unisys.

Vogel also predicts enterprises can benefit from multisourcing where two or three vendors may be needed because of recognized specialization. IT service management is exploding forcing providers to work together. Outsourcing providers should understand their core competency while knowing the importance of systems integration. Today’s marketplace demands an integrated, ecosystem approach. Multiple providers mean new governance models. Proactive outsourcers are offering metrics that account for this and are willing to modify contracts to remain relevant.
So long labor arbitrage.

The era of the body shop is over. Delivering business outcomes serve up the “beef” to enterprises hungry for tangible business benefits. As Rick Windon eloquently concluded, “Providers need more than tools, process, and cost reduction methods in today’s outsourcing market. Customers want providers that have a cultural fit and an unobstructed contextual understanding of their business.”

R. Arun Kumar predicts 2014 will see more changes to the emerging sourcing playbook which is disrupting businesses: “While sourcing models and deal dynamics will continue to evolve, enterprises and CIOs now have the opportunity to make their IT business-aware and future-proof through the right sourcing strategy and implementation. Labor and location are going to be replaced by automation and cloud in this new era!”

Coverage also appeared in the following publications: Outsourcing-Center.com