This article originally appeared in Outsource Magazine Issue #28 Summer 2012
In recent months a debate has arisen around the utility – or otherwise – of the term “outsourcing”: is that one word sufficient, or appropriate, to describe the plethora of different activities and endeavours which it currently encompasses? Driving this debate forwards has been Phil Fersht, CEO of our research partner HfS Research – so who better to explore this compelling topic than Phil himself, and who better than the chairman of our partners at the National Outsourcing Association, Martyn Hart, to join him? Read on for a truly unique, wide-ranging and compelling Head-to-Head, featuring two of the biggest names in outsourcing – or whatever you want to call it…
Phil Fersht: There is a level of sophistication that’s now developed in the industry, in the last two to three years in particular, where we really do need to start to create more of a business focus for our clients – and they need career focus as well – and the term “outsourcing” just does not mean much. It is really just a vehicle for externalising process. Whereas the real discussions in our industry are much more about how do we achieve new value; how do we get a better alignment of stakeholders; how do we make sure, when deals are signed at the senior level in a company, that business objectives are translated down to the trenches, the operations managers and people like that? So I think we are getting near time for some change in terms of the way our industry is perceived, and the roles and responsibilities of all key stakeholders.
Martyn Hart: The NOA started in 1987: a long time ago now. Outsourcing, we say, actually started much earlier than that (it depends on who you talk to, but thousands of years). I think the real problem the NOA had when it first started was, how do you define outsourcing? You said “externalisation” – in fact that’s what the French call it, externalisation – but we really struggled with to come up with a name that means what outsourcing means to us, the people who understand it, rather than “sourcing” or even “externalisation” (because even the French eventually decided against using that phrase for outsourcing).
Outsourcing means more than just placing a contract with someone else, it’s really a generic, if you like, a way of approaching getting someone else to do something for you. And the sort of things you have to do in outsourcing – you mentioned alignment of stakeholders, and also of governance and relationships which are the main key areas that the NOA is focussing on – are also things you have to do for shared services and also even just to get a team within an organisation to do something.
So the NOA would agree with you in a sense: outsourcing is an overused phrase, and according to the latest NOA research the general public can’t differentiate between outsourcing and offshoring (and as you are in the States you probably recognise that Obama has difficulties with that as well), so the general feeling is that we probably agree that we need some encapsulating word or phrase that we could reuse. But at the moment it’s defeated us what that should be.
You also have to remember there are lots of organisations that make money from using the words “outsourcing” or “shared services”. Of course, it is not in their interest to destroy their brands or products just for the sake of a name.
PF: At my company HfS we make our living by being known as the analyst firm which is purely dedicated to “outsourcing and shared services”. So if we start calling it something else we are pretty much putting ourselves at as much risk as everyone else!
MH: But if we could get a name we all agree on – at least the major players in terms of the people that support the industry – then maybe, at least, that would be a step forward. But my gut feeling, Phil, is that it won’t happen. It might happen if something completely new could come along that could make a step change – and if you read some of the Gartner reports, some Gartner analysts have said “cloud will be the end of outsourcing”; but of course people who are saying that are probably talking of ITO and probably thinking that rather than outsource as ITO per se, if you move to cloud you get the benefits of virtualisation and pay-as-you-go. Maybe: but with most outsourcing, the end users (of an outsourced service) could not care if it was in the cloud or on the moon or anywhere else as long as it delivers their service.
PF: The term outsourcing is a symptom of something much larger, and that’s the way that the corporates and midsize businesses today are approaching how to run their global operations much more cost-effectively. That’s really what this is – and there is a hell of a lot of stigma attached to it. So to address your points, I think we are going through something that we’ll ultimately look back on as a generational shift in this business.
So we had the Head of Sourcing of one of the biggest banks addressing us in a meeting of 41 – let’s call them “buyers” because that’s what people seem to be calling them at the moment. They said one thing which really hit home to me, which was: “All the new people we are hiring to run our operations tend to be a slightly younger generation of individual who have only ever known this ecosystem, this way of doing things – globalisation, offshoring, outsourcing, whatever you want to call it. And they are used to working within this reality, and they are spending their whole time trying to improve process, trying to perform effectively – and the big issue is with the older generation of people who continuously compare what we’re doing now with the way things were done ten, 15, 20 years ago, and refuse to change and embrace.” I think in 10 years’ time our conversation now will be completely moot, in that we will have gone through this generational change and will just accept the business reality of the day.
So that’s what I think is really going on. The image problem is really tied to corporate determination to drive down cost and become efficient – but people within the outsourcing business itself get targeted because they are looking at the actual act of one of the vehicles of making this happen.
MH: Just to endorse some of that: the NOA’s view is that it’s a sign of the maturity of the market. So as the market matures, more and more things gets outsourced that perhaps would not have been outsourced or offshored previously, and things which maybe five years ago maybe would have been thought a bit leading edge are just taken for granted. So right now for example I don’t suppose any large corporation would even think of starting up its own full-blown in-house IT department.
PF: When I think of the small businesses of today which are growing, they are the ones where everything is pretty much sourced intelligently, and the ones who are going to build the business models of the future.
MH: So companies like Virgin are a good example where it’s the brand which is important rather than the way they do things. Mind you, if the NOA’s recent research is right, there is a gulf between large corporations and the medium and small enterprises. Large corporations are sophisticated enough to understand the logic of outsourcing and offshoring and why they are doing these things; but as you start moving to smaller companies they begin to align more and more with what the general public believes, and so therefore what the outsourced vendors are seeing in Europe is the cost of sale to medium to small enterprises is just as much as to the large ones – so they are not intending to encourage it.
PF: Getting into research: we did a massive study where we partnered with ACCA and spoke with 1,800 organisations globally. We used their European network and our US network. When you look at large-scale organisations today – which is $3-billion-plus revenue companies – barely ten per cent of their business is predominantly in an outsourced model; the rest of it is split between a purely shared services model or a hybrid model. So they retain a lot of their shared services and tend to restrict outsourcing to more transactional tasks. And that’s the more common MO for the large enterprises – and even in the mid-market, the billion-euro-size companies, only 12 per cent of their model is predominantly outsourcing and still going much down the shared services route and blended delivery. Five years ago it was really about moving to an outsourced model and since the recession the mindset has changed; outsourcing is now seen as an element of a bigger corporate picture and it’s a component that helps companies develop more holistic strategies where you can get better leveragability between shared services, between outsourcers – that’s why everyone is going on about GBS. But the reality is that shared services is not going away any time soon, and outsourcing hasn’t dominated in the manner we thought it would dominate five years ago, and we’re looking at a different way for organisations to manage their global operations.
MH: Or maybe, Phil, it is may be about what exactly they term as outsourcing, because if you look at some of the recent press they are predicting a significant rise in outsourcing. And in fact outsourcing is rising significantly.
PF: When you get down to “where are you going to invest more in the future?” then more business are looking at increasing outsourcing and increasing shared services – and actually when you get down to the industry level that’s where you see the real differences. It’s those industries going through a more secular, fundamental change to their economics which are more embracing of outsourcing than those which are more staid and cyclical. So I agree with you here that outsourcing is not going away, it’s growing and it’s growing rapidly – but it’s growing as part of a bigger picture of sourcing frameworks that companies are able to adopt.
So we are in a very interesting time where companies are figuring out what’s the best model for them. One of the things which I did want to add which is quite alarming is how little companies use their outsourcing or their shared services or their hybrid frameworks as they deliver process to the company. So we’ve got some data to show that when you get to processes like procure-to-pay, or order-to-cash, these types of things, only ten per cent of these processes today sit in an outsourced model, and in shared services model it’s barely 20 per cent.
So even though companies are investing an awful lot of their money in the shared services infrastructures and trying to get into more outsourcing, they are still talking about barely a fifth of their actual work being done. Everything is still sitting in-house, Martyn.
MH: Which means there is a fantastic opportunity, Phil, because if you think about it in the good old days you would say for an average organisation, IT accounted for three to five per cent of its turnover. Maybe less, even, depending on its administration load. So even if you said five per cent, that’s the sort of market of ITO and cloud and the other stuff that aims for that – but for business process outsourcing we are talking about the next 90 per cent, and as you say we have hardly scratched the surface. So there is a massive opportunity for all organisations to take some of this away.
But do you think there may be a cultural issue here? People don’t want to lose control, they don’t trust it – not everybody can be a Virgin…
PF: You’re giving the editor his headlines here, Martyn! I think, if you’ve ever walked around a company as a consultant, or even as an analyst, doing an outsource evaluation for that business and you were looking at a process – say, let’s look at finance for example, which outside of IT is the biggest area of potential opportunity for outsourcing for most organisations – and you did an operational analysis that says “accountant A spends 80 per cent of his time doing relatively administrative tasks: pumping data from SAP, into spreadsheets, creating reports, things like that; and he spends 20 per cent of his time doing actual high-value strategic work, such as preparing analysis and research for his board, that sort of thing. The whole adage here is that “he can remove a lot of that 80 per cent and focus on the 20 per cent” – and if you think about it you are taking away 80 per cent of someone’s job, and telling them just to focus on the really strategic stuff or the high-value stuff.
Unfortunately, not everybody can claim they have even the 20 per cent of the high-value work today. I mean look at HR for example: it’s all admin and operations work. That’s why you get such a violent resistance to bringing in a third party because its really just threatening people – and it gets to a point where the business functions resistance is overwhelming, and that’s why multi-process HRO never succeeded because you are really fighting a business function who aren’t really creating a value. That’s what is happening in other areas as well.
The IT area was much more operational. You could actually take a bunch of those activities like SAP maintenance or programming a particular application or some of the lower-end work and it was easy just to replicate it.
MH: I agree with your cultural point in that if the business is against it, it’s hard to bring it through. But I think IT is its own worst enemy: people did not communicate, they acted like priests around the great god Mainframe… But the business part of the organisation just got fed up with them. One of the reasons why some people said they outsourced (in NOA surveys around 2000) was to get rid of the IT department!
PF: If you look at the roles of the CIOs today, they’re business managers, they’re not technologists. The whole function is going from strategic to reactive over the course of maybe five or six years.
MH: Maybe that will happen in some other functions; companies need to be competitive, Phil, they have to take some drastic action. Your example of HR is a good one. Maybe they outsource the entire HR because the strategic or interesting level of HR also means you have to be up to date with all the latest regulations – and of course here in Europe, the directives seem to come out without number. In a medium-size company, can you really afford to have an expert in those regulations and the rules of HR, just because you might need them? Wouldn’t it be better to outsource the whole function, so you get rid of your administrative stuff and also you’ve also got someone in the (supplier) organisation responsible to make sure you have the best advice and that your company does follow the rules and regulations?
PF: I think this is a great point you’ve raised. I have been involved in a number of outsource evaluations where from the start of the evaluation to finishing it, companies would actually downsize a lot of their overhead to get to the point where outsourcing didn’t look as attractive and would eventually go away. With HR for example it’s hard to find organisations – small, medium or large – who actually have bloated HR. It’s been cut to the bone. In the outsourcing business case taking out costs is often not that key any more; you are really trying to sell them the value upside of being able to hire better people etc but in terms of saving money the business case is getting much more difficult. There are however huge amounts of overheads sitting in Finance in many organisations and it’s a question of being able to move out some of that cost and being able to spend it on better things. The more companies look at this, the more you will start to see companies becoming more competitive naturally in-house and looking at outsourcing more as a vehicle to do that.
MH: I think that’s right… To come back to our first point about “what is outsourcing?” Do we have a term we can look at this thing with? You may be right that it’s the wrong name; but how do we get the right name, or how do we get people to understand this particular name of sourcing – rather than insourcing, rightsourcing, offshoring, whateversourcing or whatever other terms companies would like to put in front of sourcing? There are two things: either we change the name or we educate people to understand that this is more than going outside to buy something. It’s a long-term involvement in which you have to do a number of things like alignment, build relationships, govern it, make sure it’s viable.
PF: Well, we have looked at terms like business services or business optimisation services – but I think to find the answer we have to dig into where the problems are arising. And right now we see the biggest problem sitting on the client sides, where you have clients who are just trying to figure out what this is all about and how to manage it effectively. Now, I have had an unbelievable amount of CVs from people on the buy side desperate to get out. They hate it. Because it’s sitting on a contract you’ve known for four or five years, and you’re still trying to get alignment internally; you are an unpopular figure within your organisation because you are going against the grain of protecting jobs and things like that. There is no defined career path for those who do outsourcing on the buy side. On the sell side it’s fantastic: go to a vendor, make tons of money, become a VP or whatever you want to be. You can really profit in this business. But on the buy side it gets challenging: if the buyer organisational leadership can’t step up and create proper roles and responsibilities and true governance functions that add value then we really are in danger of going down this slippery slope to the lowest common denominator.
We just did another study – this one with PwC – which basically reveals that the majority of governance functions today are really only doing administrative work: they’re managing contracts. They are basically glorified procurement. And because of that, it’s hard to have proper discussions about innovation or anything like that: it’s really just about how do we manage all these vendors and keep them tied to the contract etc.
So I think our industry needs to focus heavily on the career path for the clients, helping them become more empowered, and helping them to get educated on how to do this more effectively. That’s where I think we find the nub of the issue. It’s not on the sell side: the sale side is doing what it needs to do to market itself and sell more gear. The real issue is how to get these sell-side guys more empowered to manage the deals more effectively – and once they stop talking about “outsourcing” that’s where I think a change will come. It’s about how do we effect the cultural shift, how can the industry help facilitate that. And part of this might be to stop using the term “outsourcing” because it does not create positive behaviours, it just creates negative behaviour. Maybe we should start to talk a bit more about global business services or business services, something like that, which really embraces the change that’s going on.
MH: Yes, “business services” is one of the things we talked about. However, here in the UK within the orbit of “business services” comes everything from construction to hospital cleaning: you can argue they are outsourcing but they are not at the level of sophistication we are talking about.
What the NOA is trying to do is, we have accredited academic qualifications now in outsourcing, and because we believe what you actually do for outsourcing is generic these qualifications are also valid for shared services and in-house. So we are trying to address that issue you mention.
I think you are right in terms of what happens to a buyer, or someone running an outsourcing contract: there is nowhere to go. I am thinking of the sort of people I deal with: obviously a lot are in procurement and only a few companies have a Chief Procurement Officer. Do you become Chief Finance Officer or Chief Operations Officer or something as you come up through those roots? Or is outsourcing something that is adjunct to other things you do?
PF: I think this ultimately has to move to the business function. Creating the outsourcing professional, while these are important skills and qualifications to gather, ultimately the CFO needs to run a finance function which has a globally distributed delivery model, whether it’s shared services, outsourcing, in-house, whatever. Same with IT: the CIO needs to figure out how to manage IT to the best of his or her abilities using all the best resources and external capability available.
MH: So your argument, Phil, would be a bit like an MBA, where you can become a Master of Business Administration: you’d have those finance, marketing, admin, operational-type modules, but you’d also have a parallel module that will allow you to find out how to get the best from outsourcing and shared services, to help you achieve your functional requirements.
PF: Absolutely and I would really hope that today’s MBAs all include that… Let’s take a look at what’s going on today in that governance organisations tend to be administrative functions helping to shepherd through a contract often signed between a C-suite executive and a partner within a consulting outsourcing firm. The people running the actual day-to-day outsourcing are just trying to get through the contract as that’s all they know and as that’s all they have been told to do.
I think when we look at the future needs of the governance organisation, the real strategic alignment sits within the business units; so while its admirable that people like the NOA are creating qualifications and spreading education – I think it’s absolutely essential – I do think ultimately companies on the buy side can’t just go out and hire loads of qualified personnel to run outsourcing: they need to train their personnel to do this better and more effectively. So it’s actually taking those people in business units with institutional knowledge of their processes and their functions and educating and training them more effectively on how to manage in a globally distributed model. That is the only way to do it – and keeping it aligned with business functions. So procurement outsourcing is very different from finance and accounting. It’s all different – so it’s all about helping each function to cope better within a global model.
MH: That’s why it’s hard to have a vertical profession in terms of promotion, like the example you gave for sales. The salesmen will always move on to sell something else, or bigger instances of what he’s selling already, and he is rewarded in terms of how much he sells – but an outsourcer is always doing it in conjunction with another business function. So it’s the business function, as you say, that needs to understand outsourcing rather than having a Director of Outsourcing or a Chief Outsourcing Officer.
PF: Absolutely – and let’s talk about how the industry is evolving to keep pace with that. In the old days it was the consulting firms like the old Andersen and PwC who had partners who developed close relationships with their clients and it would be very much a business conversation about how to optimise more. Today we have a lot of vendors in our business who don’t have that calibre of consultative personnel; today it’s much more transactional and administrative, and they are trying to sell outsourcing aggressively to their customers based on a risk mitigation cost reduction pitch, and I think that really is beginning to hit a wall in terms of those providers who really are investing in talent to help those clients transform versus those who talk a big game but when it comes down to it really don’t have the talent to help their clients move beyond a cost reduction standpoint. Again that’s one change you are going to see happening in the industry. It’s just going to take a few other providers to step it up – and show they are making that difference.
MH: Showing that they are making that difference beyond cost savings…
PF: You have been around for a long time, Martyn; have you seen that evolving or do you still see more of the old stuff around risk mitigation or cost reduction, just with a bit more sophistication?
MH: I think with the recession we’re certainly still looking at cost reduction… I think some suppliers have tried to do value for money or produce business benefits up and beyond cost reduction, but I don’t see the customers going with them on that. I think the problem with a lot of customer organisations is, if they are outsourcing for the first time a lot of knowledge is going to move out of that client to the outsourcer. Most large organisations are not outsourcing for the first time – it’s their second or third time – but they still haven’t done it very often for that particular function. So it’s still not done very well. They are not following any best practice.
And, also, the people who are doing it, because they don’t do it very often, move off and so you are usually left as you say with transactional people just following some contract rules which may or may not be applicable to what they are doing right then – because the world’s changed.
But then: if you look at the senior management: how long do they stay and what sort of targets do they have? The senior management of most organisations are held to their institutional investors who want to see gains, rises every quarter rather than a year or two or three years, so there’s no long-term investment. This is unlike Germany, of course – over here, Phil, there has been a big spotlight on the way German companies operate: many take very long-term views and they are willing to invest in the long term and they involve their unions so there is not an us-and-them-type attitude that we can have here; the result is everyone is bought into a long-term picture.
So back to the cultural issues: it’s not just businesses not wanting to be outsourced, it’s the fact that senior management are on a different incentive band from the people underneath them and probably from the people outsourcing – and the outsourcing suppliers. Most big outsourcing contracts are still five years, ten years, and the rest.
One I was told about yesterday, one of the EOA Awards entries, said over a period of the contract they would save £5 million; so I asked what the period was and it turned out to be 26 years and costing 50 million a year!
Anyway, you can see the point I am trying to make: there are all these conflicts at the different layers of management – particularly in the UK and I suppose the US because they are both similar economies – and that sort of fossilises, in a way, the position we are in.
PF: I would agree with you. I think the industry can move only so fast as the sell side allows it to. They are the ones who are building the centres, taking on staff and delivering this stuff. Right now we are in a particular situation where clients are in a nice situation where they can bid on low-cost bids, they have a number of providers who give them capabilities in the lines of business they want to outsource – and the challenge they have later is how do they find a partner who can really help them improve business processes, improve technologies and do things better.
Having said that, the providers are struggling to provide a calibre of account manager – because they have to bid competitively. The clients want to have the kitchen sink and they don’t want to pay for it. The providers on the other hand would love to have clients who want to change and invest in them. The whole industry is in this chicken-and-egg situation – and I think that we can look at the sell side and start to see a few of the providers who really do have a focus on low-cost, offshoring etc, who can couch this in as much PowerPoint as they like, but the bottom line is that they don’t have true consultative business transformation specialists, domain experts in their team for their clients and they’re never going to get beyond risk mitigation and cost reduction. Those providers who have that skill, have that capability, and are willing to invest in their clients and grow with them, will be the ones who win out. And I do think that is where we are right now.