Several new impacts on outsourcing are beginning to influence buyers’ decisions throughout the life cycle, where contract negotiation, pricing, governance, and value creation are concerned. This article looks at the following impacts:

• Source of the next big pool of value creation in outsourcing
• Platform approach to service delivery
• Pricing models
• Managing an outsourcing initiative
• Controllability of offshored work

Next big source of value creation in outsourcing

“There is an incredible premium now being put on predictability,” states Bob Pryor, senior vice president, Sales and Marketing, HP Outsourcing Services. “Customers know that service providers are talented firefighters — very good at fixing problems. But there’s a shortage in people with the competency to avoid the problems and put in place an environment that doesn’t have major service disruptions or outages,” he notes.

HP finds a big trend today is that even if a company has experienced only one outage in the last two years, it now demands that the provider take proactive, pre-emptive steps to ensure the buyer’s business stays up 24/7/365.

But with the increased requirement for that level of reliability comes shorter windows of opportunity for maintenance and downtime. The only way to achieve the required service, says Pryor, is with a much higher level of automation and standardization of the environment. “That’s the next battleground and the next big tranche of value available for providers and customers.”

When companies see the provider putting its capital in play to provide a highly automated environment, they now see it as an efficiency play. That becomes a differentiating factor in the buyer’s mindset toward choice of provider and solution, Pryor says, “Standardization and automation really have incredible substance and teeth right now for the solution that’s ultimately delivered to a client.”

Platform approach to service delivery

Gianni Giacomelli, head of BPO Strategy and Marketing, SAP, takes the discussion a step further. By creating a service delivery platform based on a provider’s own standards for each process, the provider’s system engineers can work on one delivery aspect for all clients in parallel instead of reinventing the wheel for each of them. Those standards will drive economies of scale and keep costs down.

However, the industry has seen challenges in the platform effort for the past few years, notes Giacomelli. A provider’s consultants typically approach clients with solutions for “building things that are radically customized.” Consultants propose transformational solutions and system integration and typically anticipate only 10 percent of the work will be standard. The provider compensates them on customized solutions.

In contrast, the platform approach says “this is the standard way we do it,” and every customization is an exception with an additional price tag often associated with it. The approaches are polar opposites, and the differences run very deep in provider organizations — organizational structures, incentives, and sales quotas, for example. “Traditionally, there’s a bunch of people who actually have very clear incentives to push back on the standard platform,” says the SAP exec.

He adds that in a sales pursuit providers often send both groups to a potential client. “It’s not unusual for them to end up somehow — even if perhaps not explicitly — competing against each other on top of competing against the other providers. That’s one reason why the cost of the pursuit is sometimes so high.”

Watershed event. Giacomelli believes the outsourcing industry experienced a watershed moment in February, 2008. That’s when Tata Consultancy Services (TCS) segmented the polar opposites in its company, creating a new business unit for Platform BPO Solutions, separating it from the traditional transformational and system integration work.

“TCS recognized the idiosyncrasies and decided to fix them,” says Giacomelli. “This means that some parts of its organization now will compete with other parts; but at least both will have a fair chance to do what they know how to do. In its new scenario for potential deals, TCS will need to decide whether to send in its consulting side or the platform side of the house.”

He predicts we’ll see more and more of this in 2009. “Everybody is talking about platforms these days. All those that are serious about it will need to put their money where their mouth is and do something like what TCS did.” The change may not be creating a special business unit, but it will at least require creating different governance structures and KPIs.

He warns that it will impact provider revenues. Providers get a fair amount of revenue up front from a consulting approach, but a platform approach defers to equal installments over the years. “In the short term after switching to a platform approach, they might actually see revenue from specific clients going down,” he says.

Success in a platform approach depends on a provider’s domain expertise. “It’s basically deciding today what the service delivery is going to be for the next five years for the next 50 customers, and you really need to know very well what you’re doing before implementing anything,” Giacomelli explains. That makes providers that already have strong domain expertise the best candidates to be early providers of platform approaches. He believes that onshore service providers have more of this expertise. Offshore providers are, in many cases, not far behind, as they’re now investing in domain capabilities in insurance and financial services, for example.

A third group of providers that may quickly adopt the platform approach are the ones that have domain expertise but “have been running wounded. Their service delivery model — based on a bespoke model — is no longer profitable, and if they continue winning deals, they’ll have to run faster, then will bleed more, and go belly up,” states Giacomelli. He predicts these companies will either call it quits or will now begin really pushing the boundaries of the platform-based approach.

The platform-based approach will change the risk profile along with the way buyers contract, operate, and exit deals. That’s a good thing, as Giacomelli sees it. “With a platform, the solution will be clearer and the money will be more predictable. Clients will either like the way it looks and feels along with the price - and buy it — or not. It will bring a lot of sanity into the decision process.”

Pricing models

Anirban Dutta, head of strategic deals for high tech verticals, Satyam, says his company is seeing variation in customers’ deal structure requests, which is changing the pricing model. “Earlier it was per-seat based or time and materials. Now some customers are asking us to buy out part of their IT or part of their company.”

He says the customers’ mindset for these requests is not solely a matter of costs. “It helps the customers get a sense of guarantee. When they see we are pulling out the stops for them, they understand we are saying we know this will work because in these deal structures we’re basically willing to take more risks.”

However, the contracts associated with these types of deals are for longer terms than in recent years. Dutta says he doesn’t believe this will result in inflexibility and other challenges the industry experienced with long-term contracts in earlier years. “Outsourcing has matured and the buyers’ knowledge and sourcing skills have improved, so they are better at doing contracts now.”

Pryor at HP notes a “huge” change in pricing models based on the business outcomes. “We’re now seeing in contracts some components of pricing or risk that is associated with the business outcome.” This has been growing in prominence for several years, but he says it’s now coming down to clients asking for a price on a per-customer or per-subscriber basis, thus enabling the client to make its costs predictable with its own customers.

“There is a lot of focus and interest in this, especially in mortgage companies and financial services,” say Pryor. “We’re not yet seeing contracts predicated on that, but we’re seeing an increasing demand for that in portions of our contracts and portions of our services.”

Benchmarking prices. Joanne Wisniewski, vice president Client Solutions & Offering Support at Fidelity, observes an increase in buyers sending RFPs that just focus on checking prices. “As providers, we need to understand exactly what the buyer is looking for and how it wants to move forward in a partnership with us. Responding to an RFP with just the cost is not the best approach. We need to spend time up front together so we’re both clear on what the buyer wants and what we would deliver.”

That includes determining whether a governance model lines up with both companies, determining how they can work collaboratively, and understanding the provider’s strategies for the next three to five years and how those strategies tie into what the buyer is doing. “When companies don’t take the time to do this,” she warns, “they’ll miss the opportunity to have a smoother transition and fully achieve their objectives.”

Managing an outsourcing initiative

“We’re watching with exceptional interest the way that companies are starting to push the outsourcing model from the top of the house,” says Deborah Kops, chief marketing officer, WNS Global Services. “They’re sparking the need for a business unit or a geographic area of their business to start looking at outsourcing as a rational strategy.”

She notes that there are still some companies focusing on where to get a quick hit and managing outsourcing initiatives by a business line or silo function. But more are shifting their focus to top-level management and looking at how to “really effect a change in the operating model.”

“These companies are thinking about how to change something relatively quickly and comprehensively,” she says. That requires buyers managing outsourcing from a corporate perspective rather than at the unit level.

To that end, many are setting up global sourcing PMOs (project management offices) or centers of excellence on an enterprise-wide basis, and this is having an impact on the way buyers initiate and negotiate deals. Kops adds that PMOs can fulfill either a pushing or a facilitating role. Buyers can use PMOs in conjunction with traditional sourcing advisors or without them.

Controllability of offshored work

Companies will soon send more higher-value work offshore, predicts Giacomelli of SAP. First, they need to know that they can control it and detect if the offshore worker is doing the work as expected.

The fact that a supervisor is sitting 10,000 miles away has an effect; if a company sends its own people to do the work 10,000 miles away, they will be less directly controllable. That’s even the case if they work from home just a few miles away.

“When you can use technology to map and enable processes and monitor what people are doing, you can clearly see if they’re working at the level of quality required; the method they use to make decisions; and, if they make mistakes, whether they learn from their mistakes; if they’re stealing data; or whatever. The moment you can do that, you can have control over people working at home, or in Bangalore, or anywhere outside the boundaries of a supervisor sitting nearby,” he explains.

Internet-based applications, online tools, and other technologies underpinning the mapping of what people do will create less resistance for offshoring or for working from home.

“To some extent, service providers are reluctant to put too much investment into such technologies because the key to offshore value is cheap labor,” Giacomelli says. But the paradigm will shift, he believes, because cheap labor enabled by technology controls will allow providers to do more complex work at lower cost. Some products enabling visibility already exist in the marketplace; but he believes people are not yet adopting them because they’re not acquainted with them. He says that’s about to change.

“Ensuring visibility of a process at every step from everywhere will soon become a very, very powerful value proposition in outsourcing,” Giacomelli predicts.