Subject which should be on the agenda of vendors, part 2

This post continues the my thoughts on the subjects top management of BPO and ITO providers are busy with these days (except for getting (profitable) new clients in and getting existing contracts extended) The first part can be found here and discussed the most pressing agenda points. These were margin pressure, reputation (e.g. Satyam scandal) and legislation (e.g. making offshoring more expensive for U.S. companies). The two last pressing short term topics in my mind are access to capital and adaptation to new business models. The two last topics are also important, but not critical.

Access to capital
There was a lot of M&A and other activities the last couple of years which required access to non-equity capital and a good deal of the demand for bonds or other forms of debt came from ITO and BPO/KTO service providers. Some indications that there is serious need in the market for capital in the near future:

• More than €2 trillion ($2.53 trillion) worth of public sector, corporate and financial institution investment grade-rated debt will mature in the next two years, forcing companies and banks to come back to market and refinance the bulk at costs higher than ever before (Financial News Online, 27 October 2008)
• Businesses in the UK will have to repay £110 billion in debt during the year ahead, figures show (Chartered Institute of Management Accountants, 5 January 2009)
• According to the EU's Eurostat statistics agency, non-financial sector liabilities excluding shares and other equity stood at 128 percent of gross domestic product in the euro area just before the credit crisis reached its worst point last fall (ABS CBN News, 18 January 2009).

These bonds and loans have typically an expiry date, but are not always paid in full by the end of the term. This means (part of) it has to be refinanced. But access to capital is now a total different ball game compared to lets say 2007. The type of business outsource service providers are in is characterised by a high level of competition and low margins. Many service providers are struggling to write black figures and the outlook for the industry as a whole is still gloomy. With banks now shier to lend money to a risky business than ever will demand high interest rates, if they provide capital at all. And paying 7% interest to the bank with a margin of 4% is not a sustainable situation.

That M&A activity has not dried up yet completely within the outsource market is indicated by the take over of EDS by HP in July last year and more recently statements by Capgemini that it is ready to make acquisitions in its Outsourcing Services (OS) unit.

Adaptation to new business models
To win clients on more than price alone is it important to develop new business models and new products/services through innovation. Quiet a lot of these ‘innovations’ are marketing fluff or re-branding of existing technologies. Topics that are currently ‘hot’ within ITO and thus have to be adopted by all players are SaaS, HaaS and Cloud Computing. See for my thoughts on these developments also this post. Developments within BPO and KTO are more business function specific, but generally do these ‘transformations’ include the introduction of a higher level of standardisation and automated workflows (so reduce cost through: lower wages by offshoring, automating manual tasks and replacing paper in/output by digital in/output).

Keeping the service catalogue up-to-date as a service providers means investing time and money and that is difficult for players that do not have a well-filled bank account like for example the Tier 1 Indian companies. These smaller companies with less cash can pursue the following strategies:

• Focus their resources on marketing, in other words: sell first and worry about delivery later. This is a very risky situation of you are the launching customer and make thus sure to visit at least one reference client during the due diligence/contracting.
• Team up with a service provider who has the delivery capabilities already in place and pitch together for clients which require service components you cannot deliver yourself (e.g. one party delivers connectivity, the other party hosting)
• Focus limited innovation and marketing budgets by selecting one or two hypes/developments and choose to either not deliver other services or partner with other suppliers for those.

For client companies who read how great SaaS, HaaS, business process transformation and other services are on websites and in marketing flyers:

• Cloud computing, SaaS and HaaS are still relatively immature services and lower cost (=higher return) is typically balanced by a higher risk. Be aware of this and be sure to initiate adequate mitigating actions.
• Ask for references and make sure the service provider has a proven delivery capability.
• Pay adequate attention to ‘what if’ scenario’s: what happens if the service provider cannot deliver as promised? When can you invoke an exit? Who pays what? You might also want to include option pricing techniques when building the business case as it allows for the inclusion of the value represented by postponing investment decisions.

Diversification of clients
The United States remain the largest market for suppliers, measured in total contract value, but it is also the country hardest hit by the crisis. The huge drop in demand combined with a devaluating US$$ against emerging economies, causes major concerns in boardrooms of suppliers that operate from India, the Philippines, China, South-Africa and other developing Currency fluctuations can be covered in a contract, but the dependency of the United States forces offishore suppliers to double their efforts to penetrate the continental European market.

I myself am approached by several Indian service providers who want to get a foothold in Europe and ask for my help. I see on the internet also other initiatives from companies which aim to link Tier 3 offshore suppliers with either potential clients or local Tier 3 service providers. See also this post.

Access to skilled resources
This topic is less prominent these days, but very relevant from a long term perspective. The population with may Asian countries is still young compared to Europe and the United States, but the amount of young people which have an adequate education level and can speak English and other languages at a proficient level is far from limitless. In India do some regions have a very strong accent and when I stayed there I found it difficult to understand some of them. But with the collapse of demand due to the current crisis is there in the short term an abundance of supply, so I expect this topic to be at the bottom of their to-do list.

More in how business and economic trends influence the decision making related to outsourcing and shared services can be found here and here. How business trends drive shared services and outsourcing, part 1?