What Service Providers (outsourcers) need to do to find growth in an increasingly Digital World…

Is the sun setting on outsourcing…

Ever had the feeling something is going on you should know about, that others are responding, planning and you haven’t yet caught on…

I have spent a considerable amount of my working life in IT Services, Outsourcing and BPO and since 2005 have been operating in a digital world. It has occurred to me for a while now the current crop of Service Providers [providers] are not at all well positioned to compete effectively in the Digital Era and will be increasingly vulnerable.

What about the new generation of Living Services…

The progress and adoption of RPA Robotic Process Automation and the impact on jobs…

Robo Adviser (decision making BOTS)…

Next generation Platforms as a Service and of course Digital as a Service…

The impact of Smart contracts based on Blockchain protocol…

Many providers would have us believe they are on top of things by plastering the word digital all over their websites and apparent offerings. Creating a sense of being a digital company, talking about a digital lab or garage to no doubt convince customers they have their fingers on the digital pulse… We have been here before with Cloud (access to a data-centre somewhere) but nothing really changes other than your don’t have to own it. Hardly remarkable.

Other providers are already losing considerable market share as the dynamics and operating levers of the outsourcing and business services world change. Someproviders simply don’t know yet, as they appear to be winning new contracts… Others are losing ground to new market entrants who have very quickly reached scale filling the digital void left by the current leading providers (discussed later), and other providers are not yet on the pitch, with some not even changed and ready to go on…

The traditional outsourcing sector is now at a point of run off where they have to decide how to deliver the contractual backlog while investing in new digital infrastructure, assets, skills and propositions to support an entirely different range of services that fits the customers’ agenda and they themselves must embark on wholesale change and their own digital journey.

The key question for providers: how to deliver the traditional contractual backlog of contracts whilst creating, selling and learning to deliver new propositions that fit the digital agenda without disrupting revenues. What will be the new Target Operating Model and who is going to create it… Many providers themselves don’t have the necessary skills to do this alone and also require help…

Which operating model…

Historically providers run one of two operating models: a Balanced Matrix model (where the deliver assets sit under the country P&L) or Unbalanced Matrix model (where the delivery assets are marginally costed as global lines of service) both relying heavily on labour and the advancements in technology (Moore’s Law) helping to reduce cost to serve (of processing) that protect margins. One could argue Moore’s law and use labour arbitrage has bailed out the outsourcing sector and created an artificial advantage that has until now hidden inherent inefficiencies in what are old operating models…

The fundamental issues remain. Traditional providers’ operating models are created around a hierarchy of services and capabilities that can be easily managed, resources deployed, and sweat deliver assets, so the things that are delivered to the customer can be defined, measured and reported on. A complex world of Service Level Agreements and Key Performance Indicators that support a tight schedule of services to be delivered and consumed by the customer. And where change is discouraged or seen as the opportunity to charge more.

I have written about this before. The basic premise of outsourcing is the industry relies on things that can be easily measured. Where the provider achieves scale and critical mass the customer doesn’t have (a faster, better. cheaper mantra). A service proposition that fits well with hierarchical organisations and traditional lines of decision making and functional business processes that largely follow the principles of standard costing, as transactions move around the business.

But in a digital world where organisations are entirely led by delivering the right Customer Experiences (as Outcomes), providers are faced with a world that is entirely fluid, and where new operating models are flatter, some as platforms, many as growth models organised around the concept of ‘stacks’ where all staff know and see all customer activities. Where the ROI is a happy returning customer. Where the nature of work and how it is divided between people and functions is different, with often no recognisable demarcation of responsibility, blurred lines where everyone is responsible for deliver the CX.

All organisations’ now desire ultimate flexibility as they come to terms with their fast changing digital world. They need help and lots of it. They cannot afford to start again and require a trusted partner to help them through a period of change where they may not come out at the end as winners…

Are providers the new aggregators that bring all parts of the digital eco system together but do not necessarily own specific assets… Will the next generation ofproviders look like Uber…providing a menu of service choices to consume various elements of the digital world…

The Change: a harsh reality

Some providers recognise the world around them is changing rapidly and understand the things they have to sell are no longer a match with what customers are looking to buy.

The evidence traditional IT Outsourcing, BPO and Managed Services is in rapid decline is everywhere. There is a year on year decline of larger outsourcing deals now at a 10 year low, with the average term of contracts length falling to an average of only 3 years. Sending a clear message as to the general direction of travel.

A scenario summed up well by John Keppel of ISG the outsourcing advisor in a CIO Magazine article.

“Digital helps fuel a fire that was already burning very well,” says ISG partner John Keppel. “Digital impacts across industries are fundamentally changing the way business is done — not just with implications on IT but on entire business processes. It even impacts places where businesses interact with their customers, deliver their product and services and potentially even drive growth and profits. In times of radical change or disruption, speed of response is everything. So flexibility is key, and shorter deals provide this flexibility.”

Customers’ no longer want to be locked in and want to be able to consume services in any quantity at any time, want to have access to skills and do not want to own anything, and why infrastructure providers such as ServiceNow has done so well as they have an operating model that allows organisations to support a single device for a short period to entire estates over longer period. The customer decides. The provider delivers the service for the customer and not what benefits the provider.

IBM has also accepted the need to face the prospect of cannibalising existing revenues and has shifted the business towards a digital future, building and investing in new assets, skills and resources. A steady re-invention to becoming a technology led business again chasing new sources of income. Potentially offeringeverything as a service priced to consume on any platform and via all channels simultaneously.

Few providers have taken IBMs lead preferring to fake it labelling everything possible as digital. Banging on about helping organisations with digital transformation yet are not digital themselves. Nor can they clearly define what their particular version of digital really is and what they can deliver for customers. Let us be clear here the customers are also faking it. I read endless board packs buried on the investor tab where the CEO slide decks mention digital everywhere, but with no clear articulation as to why, how and a clear strategy. Here is the thing: ‘Digital is not a case of putting lipstick on a pig’…

It is hard for outsourcers to depart from conventional operating models that have served them so well for over 50 years and thus many providers are resigning themselves to a future of declining growth and margins, as their markets simply fall away…

Providers are starting to understand they have to deliver more than just cheaper labour and some cloud infrastructure. The epiphany is to realise customer organisations are looking for a digital partner to help them design a digital journey and provide the essential digital backbone. Supported by key digital skills required to reinvent the customers’ organisation, to deliver for their customers where everything is measured in CX terms and is outcomes led.

Accenture understands the need to align service provision, skills and resources to the digital agenda and have proven to be adaptable and open and is themselves driving the digital agenda. Investing in new skills and defining the journey for customers who often don’t know what they need or what their digital journey will look like. They are aligning their core business to a digital future…

As Paul Daugherty Accenture CTO explains “$2.5 trillion in market value is sitting in 15 platform companies. That market value will grow substantially as platform models spread to more industries”

However Paul doesn’t mention is these platforms: Amazon, FB, Airbnb, UBER, Apple iTunes, eBay, Alibaba and many others are based of Growth Operating Models that have an entirely different operating structure, staffing profile and their ability to serve customers efficiently at marginal cost drive explosive growth. They are the new performance benchmarks of how to grow quickly, deliver better margins, own fewer assets and have global and social reach…

Some providers confuse growth with consolidation and convince themselves they can get greater economies of scale by merging and acquiring with other providers. Believing strength and performance comes from scale and global coverage. That size matters. A strategy that has not delivered for customers or shareholders in the past, and one that is unlikely to do little more than delay the inevitable decline in their fortunes. It may ultimately accelerate their demise, entrench risk and make any change impossible.

New kids on the block…

Other Providers are acquiring digital agencies and consulting businesses and look to partner with other providers than can deliver parts of the digital eco system.Others are creating a set of digital assets and services [Infosys AiKiDo for example) that will support customers but it is not clear if they have changed the underlying operating model. While others (Wipro Digital) have created what looks like a separate business, a wrapper, operating under a digital banner but it is not yet clear if this direction is supported by a digitally adjusted operating model as they (like most providers) rely heavily on arbitrage to deliver most of their operating performance.

All providers as one would expect are jumping on the digital bandwagon. But let us be very clear here. Conventional IT Services and Outsourcing operating models don’t work in a digital economy.

They are founded on a legacy past and cannot support a digital future. It is not just customers who have to change.

Providers have already lost the infrastructure war where pricing has for a long time reached commodity values. Providers have not invested and can no longer compete with Amazon Web Services (AWS), Google and others…

The lift and shift labour arbitrage as organisations outsource their problems in a digital context has no future. In a digital company how the work gets done is entirely different. Not only are we seeing offshoring eroded by nationalist behaviours across the EU and USA, where the political agenda is to bring the jobs back onshore. But this is not the end of the debate.

But there is nothing to stop providers competing with themselves and covering both angles…

Digital tools — RPA

The rise of Robotic Process Automation (RPA) is waiting in the wings that will fuel a new debate about ‘BOTS’ and the social impact on jobs no longer handled by people. However in a digital context the jobs will be different and the staffing of both the provider and customer organisation will change. But although RPA is useful it isn’t a digital agenda by itself and revenue opportunities for providers are mush smaller.

Then there is a new generation of Living Services and Frictionless BPO via automated Platforms as a Service that can provide the bridge to supportprovider transition and provide a vital component of the customers digital journey.

Again the everything as a service approach is also not going to deliver a digital eco system for providers.

It would appear providers have few options. They cannot ignore their backlog but at the same time should realise adding more contract volume is not going to help their cause. That placing a digital wrapper around conventional services will not wash with customers who will soon see through the façade when the promises are not delivered and any content evaporates.

Digital Services require a different operating model to support the delivery of services to customers…staffed by different skills, organised and deployed around smart-er contracts and a digital backbone, that forms the new digital eco system.

When in place this allows the provider the ‘white label’ all aspects of what they do for customers…and embed themselves more readily as part of the organisations digital eco system…

Most of all providers need a different approach and culture to address/do digital properly. The demand creation and engagement process, the design of the customer solution, the deployment of skills and knowledge, the use if data insight, the hands on approach to defining individual customer journeys of the customers customer. All things the likes of Globant do better than anyone else.

Digital is not only fundamental for providers and customers alike, it offers customer organisations’ the opportunity to address their markets and reach customers in new ways. Providers need to reach their customers in new ways by positioning what they do as a much needed digital partner to help the customer plan for and deliver their digital future. Laying out a set of new services adapted to new demands, a range of Digital as a Service model(s) surrounded by full automation platforms that delivers the entire addressable market, and not just the larger businesses that can afford it…

Embracing stacks as (Independent Growth Models) is in my view the way forward for providers and with it questioning the tradition roles of sales & business developers, account managers, customer service managers, service deliver manager, transition mangers, service line and functional solution specialists; as these roles are not supported as the jobs functions for working with customers fundamentally changes.

The entire design thinking approach starts to play out here and growth operating models with a digital as a service platform is potentially a game changer forprovider and customers at the same time. Where both parties can also use their balance sheet in new and different ways, and where commercialising the relationship is entirely geared to customer outcomes, and unrelated to volumes…as we move entirely to consumption. The Smart Contracts.

Digital by Design

A new breed of Digital by Design service providers have already captured the infrastructure ground amassing huge scale in Cloud and Data Centre resources — Microsoft Azure, Amazon Web Services and Google are prime examples. From the other angle there are Digital Design Agencies (Globant springs to mind) who have added technology services who provide digital options for organisations at scale. These newer providers are serious competition and they already have mature Platforms as a Service and their own tried and tested digital stack.

The game is set. Providers must wake up to a new reality and re-engineer their operating models (eating their own dog food) around new propositions that deliver real digital content to customers.

My calculations suggest providers already have to find new business to replace the 20% — 30% of revenues that are hit be contractual renewals annually, that simply won’t be renewed and new traditional opportunities are harder to find. Where customers will buy new services and engage with new digital providers. Over the next 5 years I expect some providers could see a collapse in global revenues unless they face up to the digital reality and ramp new services to replace eroded income streams.

You cannot sell a credible digital future to a customer with unless your organisation (as provider) has embraced a digital by design operating model…

© Digital BOOM 2016

Written by

Nick Ayton is a Deep Tech advisory to Boardrooms & Investors, Quantum Computing, AI, Blockchain specialist. Futurist speaker. Film Maker

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