Is it time to reconnect offshore?

Posted on : 15-01-2020 | By : john.vincent | In : General News, Innovation

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At the end of last year I travelled to India to assess the capability of a potential supplier for our clients. Over the years I have always both enjoyed and been impressed with my trips India. The culture, capability of the people I meet, their client focus and general level of friendliness have always made my trips ones that I look forward to.

This trip was no different and reconfirmed my views. However, I did return with one nagging question;

Why do many corporations not extend their technology services operating model to include partnerships with offshore providers?

Our Broadsheet publication has discussed the changing face of sourcing models many times over the years. Through the late 90’s and over the subsequent 20 or so years much of the focus was on cost reduction. As the efficiency agenda bit into available budgets, many leaders looked towards the labour arbitrage benefits that India could offer, either through their own captive operations, or via sourcing partners to help address the squeeze.

Offshoring business cases often paid lip service to the potential added benefits in areas such as access to skills, quality of delivery or agility, and innovation was often not mentioned at all

So companies transformed their operating model to offshore delivery models throughout this period. Initially the focus was on Business Process Outsourcing (“BPO”) and Information Technology (“ITO”) with back office operations roles and development forming the lion share of the skills transfer. As the model matured, more sophisticated roles in each were shifted offshore in more “value add” areas such as research development and production, as well as infrastructure operations to manage the emerging cloud delivery models through Google, Amazon and Microsoft platforms.

However, with the acceleration in technology innovation over the last few years in areas such as Artificial Intelligence, Machine Learning and Automation, there does appear to be a huge opportunity to harness the talent that the offshore providers have developed?

The first movers in the India offshore business have both an advantage and disadvantage in the new digital  economy. Labour arbitrage largely fuelled wave one of the model, enabling companies like TCS, Infosys, Cognizant and HCL to grow their workforce dramatically (TCS now employ c.425k staff at the top end and HCL have c.120k at the lower). However, whilst this is growth has been good on one hand it also means that these organisations will have a difficult transformation to go through with their own operating model through areas such as automation. Their capability is without question, but they now face the same challenges as their clients in how to introduce the new technology without eroding their core business.

So let’s look at the next tier of offshore providers. Here we find companies such as MindTree, UST Global and Zensar, all of which still have significant staff numbers, but sub 30k. Naturally these providers have focused their service offerings around digital rather than increasing headcount.

In my view, this puts them at a significant advantage when it comes to engaging with clients for the delivery of new disruptive technology. By building new platforms to automate operations they can take on new clients without the need to hire at the rate required by the previous Indian offshore pioneers, thus limiting the challenge of what to do with what may become a significant surplus of skills.

So what about tapping into this capability for new technology? Offshoring is something that still divides opinions a lot. Yes, there are probably as many tales of woe as there are of delight. However, this is something that we also find with the more traditional onshore models. In truth, when both sides enter into the model as a partnership and understanding what needs to change in the engagement, roles and responsibilities, strengths and weakness and a shared ambition, then it can really benefit both the client and offshore partner tremendously.

One of the key success factors is to set up the operating model with a common shared interest, irrespective of organisational and geographic boundaries

One of the things that struck me on my visit was just the depth and scale of the talent in new technology, not only within the providers I visited, but also in the very visible growth for big name companies, consultancies and technology mainstays. AI, Dev Ops, Cloud and ML are core to this revolutionary growth.

In our view, the next few years will bring opportunities to develop partnerships, or even new “captive” type models, with those organisations that are on the pioneering end of the digital growth. Organisations should ask themselves “Why build the capability themselves?”. Often the answer to this question has been coloured by the perceived overhead of managing service provider delivery, through vendor management, security oversight, service delivery management etc.

However, organisations should take a “green field” thought approach to tapping into the offshore provider capability. Core platforms can be delivered by technology and service providers with business services layered on top. Also, this should not be structured as a linear end-to-end service chain, coupled together with hand-offs between the parties, but through a Joint Product Led team. This helps to drive efficiencies, a more agile delivery and an end product aligned more closely with expected business outcomes.

We should say something about the wider macro considerations to using Indian offshore talent. Firstly, from a security perspective there is a noticeable increase in the level of physical security when entering almost all establishments (in response to events over the last 10-15 years). This used to be consigned mainly to corporate access, but this is now visible at hotels, shopping malls and the like. Not an issue, just an observation.

Secondly, India is under pressure to retain its offshore status not just from the nearshore providers, but also from areas such as the Philippines and most notably China. However, this is simply a natural evolution and the competition will provide more choices.

It certainly seems like this decade will bring further opportunities to tap into this offshore digital talent for those that chose to look for it.

Extreme Outsourcing: Should companies just keep the tip of the iceberg?

Posted on : 30-09-2014 | By : john.vincent | In : General News

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Recently I’ve thought about an event I attended in the early 2000’s, at which there was a speech that really stuck in my mind. The presenter gave a view on a future model of how companies would source their business operations, specifically the ratio of internally managed against that which would be transitioned to external providers (I can’t remember exactly the event, but it was in Paris and the keynote was someone you might remember, named Carly Fiorina…).

What I clearly remember, at the time, was a view that I considered to be a fairly extreme view of the potential end game. He asked the attendees:

Can you tell me what you think is the real value of organisations such as Coca Cola, IBM or Disney?

Answer: The brand.

It’s not the manufacturing process, or operations, or technology systems, or distribution, or marketing channels, or, or… Clearly everything that goes into the intellectual property to build the brand/product (such as the innovation and design) is important, but ultimately, how the product is built, delivered and operated offers no intrinsic value to the organisation. In these areas it’s all about efficiency.

In the future, companies like these would be a fraction of the size in terms of the internal staff operations.

Fast forward to today and perhaps this view is starting to gain some traction…at least to start the journey. For many decades, areas such as technology services have be sourced through external delivery partners. Necessity, fashion and individual preference have all driven CIOs into various sourcing models. Operations leaders have implemented Business Process Outsourcing (BPO) to low cost locations, as have other functions such the HR and Finance back offices.

But perhaps there’s are two more fundamental questions that CEOs or organisations should ask as they survey their business operations;

  • 1) What functions that we own actually differentiate us from our competitors?
  • 2) Can other companies run services better than us?

It is something that rarely gets either asked or answered in a way that is totally objective. That is of course a natural part of the culture, DNA and political landscape of organisations, particularly those that have longevity and legacy in developing internal service models. But is isn’t a question that can be kicked into the long grass anymore.

Despite the green shoots of economic recovery, there are no indications that the business environment is going to return to the heady days of large margins and costs being somewhat “consequential”. It’s going to be a very different competitive world, with increased external oversight and challenges/threats to companies, such as through regulation, disruptive business models and innovative new entrants.

We also need to take a step back and ask a third question…

  • 3) If we were building this company today, would we build and run it this way?

Again a difficult, and some would argue, irrelevant question. Companies have legacy operations and “technical debt” and that’s it…we just need to deal with it over time. The problem is, time may not be available.

In our discussions with clients, we are seeing that realisation may have dawned. Whilst many companies in recent years have reported significant reductions in staff numbers and costs, are we still just delaying the “death by a thousand cuts”? Some leaders, particularly in technology, have realised that not only running significant operations is untenable, but also that a more radical approach should be taken to move the bar much closer up the operating chain towards where the real business value lies.

Old sourcing models looked at drawing the line at functions such as Strategy, Architecture, Engineering, Security, Vendor Management, Change Management and the like. These were considered the valuable organisational assets. Now. I’m not saying that is incorrect, but what often has happened is that have been treated holistically and not broken down into where the real value lies. Indeed, for some organisations we’ve heard of Strategy & Architecture having between 500-1000 staff! (…and, these are not technology companies).

Each of these functions need to be assessed and the three questions asked. If done objectively, then I’m sure a different model would emerge for many companies with trusted service providers running much on the functions previously thought of as “retained”. It is both achievable, sensible and maybe necessary.

On the middle and front office side, the same can be asked. When CEOs look at the revenue generating business front office, whatever the industry, there are key people, processes and IP that make the company successful. However, there are also many areas where it was historically a necessity to run internally but actually adds no business value (although, of course still very key). If that’s the case, then it makes sense to source it from specialist provider where the economies of scale and challenges in terms of service (such as from “general regulatory requirements”) can be managed without detracting from the core business.

So, if you look at some of the key brands and their staff numbers today in the 10’s/100’s of thousands, it might only be those that focus on key business value and shed the supporting functions, that survive tomorrow.

 

Is it the time for Joint Shared Services?

Posted on : 29-11-2013 | By : john.vincent | In : Innovation

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Last month we wrote about how the rate of technology change is outpacing the internal IT departments of organisations. It certainly seems that the “squeeze” is on with cloud and external providers offering more agile compute services at the infrastructure level (now at an on-demand cost which can compete), and the business consumers procuring what they need, when they need it and of course where the need it through Software as a Service (SaaS) providers.

Two years ago the ability for CIOs to raise the virtual “Red Card” at these external forces through risk, compliance, data security, cost and the like still existed, particularly in areas such as financial services (although we constantly heard anecdotes of technology services being brought on credit cards in the front office and expensed back). However, today it is more a case or working out how to protect digital assets and company reputation from the increased decentralisation of technology governance (business/end-user empowerment), whilst continuing to deliver operational services against a backdrop of having to justify value.

So, whilst this move of technology governance to the corporate edges continues, the question is “What approach should organisations take to sourcing their underpinning infrastructure commodity services?”

We have seen decades of ebb and flow for the sourcing of technology services….Outsourcing, off shoring, near shoring, right shoring (we may have finally run out of prefixes…), managed services and the like. Internally, organisations have coupled this operating model with shared service functions such as Finance, Human Resource and Operations to deliver further efficiencies. What is less prevalent, however, is collaboration between client organisations.

Large service providers have shown the benefits through economies of scale to running client technology platforms. However, whatever your position is on outsourcing technology, many would argue that the clients themselves do not benefit fully from these efficiencies. This is of course natural where there is a fragmented delivery chain and limited client side collaboration. So, is the time right to extend the shared service model and create shared service models, or joint ventures, between peer organisations?

If you take the infrastructure layer then we think…YES. As we said in our previous article, where is the business (or more importantly brand) value in having technicians crafting infrastructure services? There are pockets/exceptions, but typically the “compute plumbing” supporting business applications does not drive competitive advantage. However, in todays fast moving landscape it is very easy to erode value through rigid or elongated timescales for service provisioning.

The pace of change is clearly illustrated by the transformed data centre market. Back in 2005/2006, many large corporate CIOs were scrambling to purchase their own data centres as space and power became scarce. Fast Forward to today and many of those same organisations are sitting with surplus capacity.

In the space of a few years, driven by new the revolution in virtualisation and cloud computing, it would now seem a bad strategy to build and manage your own client facility. 

The question to ask is how organisations can collaborate together to source their compute requirements together for mutual benefit. For back office processing there have been “carve outs”, collaborations or joint ventures such as in the investment management and insurance markets. Leading on from this, there is no reason why peer organisations couldn’t combine to create a SPV/JV for their underlying infrastructure requirements. This has the potential to bring many benefits, including:

  • Increased market leverage for commodity service pricing
  • Reduced fixed overheads and move from Capex to Opex
  • Improved standards and policies in areas such as security and risk management (through collective influence)
  • Increased agility and time to market
  • Enhanced technology innovation 
  • Improved focus on core business competencies

There are many others (and no doubt many counter arguments, which happy to receive…)

So what stops organisations proceeding? Well, most of all we are talking about a cultural shift which, if driven from the technology organisation themselves (CIO), is unlikely to get much traction. This level of change is not something that can be technology driven. This needs to be a top down, business led discussion.

It also doesn’t apply only to technology. Many years ago (I think late 90’s) I attended a conference where the speaker talked about measuring real company value and how organisations would over time “jettison” those operations that didn’t contribute to the customer proposition. What is left in the final end game? In the extreme example it is simply those creating the Strategy and Brand alone, with everything else sourced from the market. When you think about it, it does make sense.

Every year previously we have produced our predictions for the coming 12 months. We don’t see this happening in that timeframe but at least opening up the discussion should be on the CEOs “to-do” list in 2014…

Is the tide turning – the arrival of reshoring for manufacturing – are knowledge industries next?

Posted on : 19-10-2011 | By : richard.gale | In : General News

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Outsourcing and Offshoring

 Outsourcing or letting other firms run parts of your business that are peripheral  to allow you to concentrate on your core business has been around for a long time. Most large scale manufacturers have clusters of firms surrounding them to supply components. This has more recently spread to knowledge led industries where businesses have taken to the concept with great enthusiasm outsourcing IT, back-office, accounting, HR and many other functions.

As outsourcing became more sophisticated the idea of off-shoring took hold. Improvements in communication/networking links combined with the rise of highly educated and cheap people allowed firms to hive large sections of their organisations to  off-shore companies for considerably reduced costs. Some larger organisations have gone a stage further and built wholly owned off-shore organisations or ‘captives’ to take advantage of labour cost differentials.

This model has developed over time and is often the first on the agenda when analysts & consultancies are called into assess an organisation’s future state.

Changing Climate

 The success of off-shoring had some interesting implications – offshore resources with in demand sector/product expertise often play ‘musical companies’ which is causing wage inflation in certain areas such as  India. Some companies now are locating to different areas in the offshore countries to try to retain and grow the workforce. Additional benefits are being offered to help reduce the churn of people. These factors point to an overheating of demand vs. supply in certain countries.

In manufacturing the same is true even with further influxes of resources from the countryside the labour costs in large Chinese cities are rising fast. In addition the increase in wealth and growth of the middle classes means that more of the population is spending more time in education with the view to work in white-collar industries potentially outside of China.

Reshoring

In the U.S. it has been reported that rising numbers of firms are repatriating their manufacturing capabilities back home. There are many reasons for this but a major focus is that the cost differential between the U.S. and, say, China has disappeared. China labour costs have gone up but also the efficiency of manufacturing in the States has also risen. Previously it may have taken 3 people  at $200 per day to build an industrial oven in the States and 10 people at $50 p/d in China. Now with improved technology and manufacturing processes then the U.S. team would only need 1-2 people.

A side benefit of this is that the core market for U.S. companies is the U.S. and putting a badge ‘Made in the U.S.A’ sells more product – especially in the retail area.  Even in Switzerland where the white-goods manufacturer ZUG has started labelling its’ products ‘Swiss Made’ and seen a 12% increase in sales to Germany and other countries.

Although this trend could be seen as a trickle, the dimensions have changed, and it would be easy to see this growing over the next few years.

So the question for us is will it be applicable to the knowledge industries? As mentioned in last month’s blog there are improvements to technology and process to allow a more disparate workforce to work from home or wherever – this reduces overall costs, allows flexible working to a larger resource pool. Also in parallel to this customer satisfaction of having a ‘Located in Your Country’ sticker on a company’s call-centre is not to be underestimated. Whether it turns into a major trend is yet to be seen but a number of factors will guide it:

  1. Niche or commodity – already some banks are pulling their call centres back to their homelands and they have never been off-shored for the ‘premium’ clients so a local presence is seen as a strong marketing tool – if technology plus rising international costs make this more attractive then it will only continue to grow from certain niche to more generic actitivies.
  2. One question mark is – can the US/EU ‘re-tool’ in these skills – do we have the capability or desire to do this? As the recession bites and unemployment grows this is likely to get Governments interested in the problem and solution and so help with education, motivation and subsidy.
  3. As China and India grow then the off-shore costs will rise. Also with the growth of the wealthy classes in these countries then demand will start to come from within reducing further capability to external companies. Other off-shore countries are on the rise such as Vietnam & Brasil and also the African continent is seen as a long term potential growth area and the Chinese are spending a great deal of time and money working with African states.

So the offshore winds that the UK and other countries have been experiencing may be changing direction. Of course the picture is more complex than this and the countries/organisations will also change to counter the change in climate.

We think the sourcing mix will continue to change and develop with multiple financial, regulatory, client  and political factors deciding outcomes. Reshoring is another area to be considered in this debate and we are watching it with interest.