I am seeing increased demand for outsourcing advisors early this year to facilitate outsourcing transactions. The applications outsourcing space, in particular, is showing no signs of slowing down as companies seek to renegotiate existing contracts and a host of enterprises are evaluating their options for the first time. Having spoken to several outsourcing providers over the last couple of weeks, I am increasingly seeing small advisors with low cost-bases in on the game. These firms can afford to work with clients and run deals for $250-600K for a typical 4/6 month outsourcing advisory engagement. The 4-6 month time-frame is what it typically takes to conduct a baseline analysis, develop and administer an RFP, downselect vendors and negotiate a contract. When firms want to negotiate a $10m ADM deal, for example, they do not want to spend more than 5% of the TCV on advisory fees to do the deal in the first place. This causes issues for the higher-cost advisors, who simply cannot afford to entertain low fees at this level to conduct the same work.
I am seeing smaller advisory firms such as W Group, Argea, TBI, Pace Harmon, Alsbridge and Archstone Consulting as very active in the industry facilitating client engagements right now, and competing very effectively with the established outsourcing advisory brands, namely Deloitte, TPI, PWC, Equaterra and Everest Group. So what is going on here?
1) Enterprises need advisors to facilitate and negotiate deals for them. Quite simply, most enterprises do not have the inhouse expertise to manage these complex transactions themselves. They have to use third-party support, or risk getting a poor deal and poor service levels.
2) Once an enterprise has made the decision to outsource, it wants a transaction done with "no frills". Advisors are differentiating themselves in the market with their experience, their existing IP from previous deals, and their skills in helping firms make strategic outsourcing decisions, developing post-transaction governance programs, helping to manage the initial vendor relationship(s) and develop change management programs. While enterprises like these offerings, they only really care about getting a deal done and think they can take care of all the additional issues themselves. While we have outlined here the potholes many firms have fallen down in the evaluation process, many still only view the world in a short-term "transactional" way.
3) Short-term thinking is rife. Many executives put in charge of the outsourcing decision-making are not being made accountable to think long-term about the ramifications of outsourcing, and only really care about the short-term dynamics of performing a transaction with an outsourcing services supplier.
4) The small firms can afford to do this for less. When an advisory firm has a handful of employees, its running costs are often not a great deal more that its advisors’ salaries. It can outsource its marketing, IT support, travel support, and even switchboard. Normally, advisors work from home, so there is no office rent. Kit out some smart experienced outsourcing veterans with a laptop, blackberry and a corporate AMEX and you are in business. When you aren’t dragging around corporate overhead, such as heavy marketing, HR, IT and management costs, you can, quite simply, afford to do this work for far less cost.
5) The objective of outsourcing is usually to save money. When an enterprise is in the mindset to outsource, saving money is normally the prime driver, and this mentality normally transfers over to the cost of using an advisor to broker the transaction. If you can find someone to do the same work for you for 300K, as opposed to $1m, then you may be tempted to take a few shortcuts to get the same outcome.
6) The smaller firms may have some impressive consultants. At the end of the day, advisory services are only as good as the advice from the advisor giving it. If an enterprise feels the smaller firm knows how to broker an outsourcing deal as well as a bigger branded higher-priced advisor, then the choice to go with the smaller firm is a no-brainer.
Posted in : IT Outsourcing / IT Services, Outsourcing Advisors, Sourcing Best Practises
Phil,
You are absolutely right here, let’s face it – staying lean, agile and mobile is the trend which is catching up everywhere – not just consulting or advisory services.
Taking your point further (esp. about lower overheads of these smaller firms) they’re following what they preach. After all, most of their customers are considering IT outsourcing arrangements to keep themselves competitive, agile and cost-effective.
Now if they can find in an advisory partner someone who is lean and agile itself, thats definitely a right start. I would contemplate that most of these advisory companies which themselves are lean would advice their customers to prefer outsourcing providers which have lower over-head costs and don’t follow bulky bueraucratic approaches (as this over-head costs are only ultimately borne by these customers)
This translates not only in a cost-advantage for their customers alone, but also in better profit margins for the leaner outsourcing advisors and outsourcing providers. So its a win-win-win for all 3, and the only ones to loose out in the future would be the FAT ones out there.
Also, another interesting trend to note which favors these smaller players is that the average contract size is getting smaller day-by-day although greater number of relatively smaller-value yet more focused contracts are popping up.
Best Regards,
Ali
Phil,
These boutiques are unquestionably cheaper but- as usual- you get what you pay for. As you point out, it is all about getting the right advisor. You want someone with deep knowledge and experience to guide you through the 4-6 months of getting a deal done, while planning for the transition and governance. Here are a few other thoughts:
– That 4-6 months is littered with landmines so proceed at your own risk and choose an advisor with broad skills to help you through all the people and process issues you will face.
– Will those boutiques be there for you when the deal goes south a couple years down the road? typically they do deals and then you never hear from them again.
– The probability of getting the right advisor is considerably lower at these boutiques. Many of these advisors are working as quasi-contractors for them, which is part of how they keep their overhead low. Advisors jump from one boutique to another all the time.
– Boutiques are frequently making it up as they go along rather than relying on tested approaches, templates and the collective knowledge of organizations that have helped thousands of organizations through transformational initiatives for years. As much as people see it as a deal, outsourcing is about transformation.
So…if all you care about is getting the deal done at the lowest price then these boutiques may be an option. However, you will likely leave considerable value on the table (vendors are happy to take it) and you will probably be forced to deal with the mess you have created down the road. Or maybe your successor will…
In my experience it comes down to time and skill set, as simple as that. Does the firm considering the outsourcing have the skill set and the dedicated TIME to properly evaluate all of the variables that go into the decision. I agree there has to be a Champion within the organization, but in most cases the research needed to be done to get from “aware of outsourcing providers” to “these are the critical factors that determine who, when, where and how” the company places its bets is much deeper than many realize. Outsourcing consultants are not all alike, nor qualified in every vertical and geography. Good ones play an invaluable role in providing a gut-check as to what the firm’s likelihood of success with their production/service/function being outsourced and the hidden costs associated (including changes in process). Like the market for anything, good consultants are in the minority, average is average and there are many that just want the work and will arrange a deal no matter what. The geographic options available now are more complicated than most mid-size companies can grasp, MNC’s have more internal knowledge but politics become more of an issue.
My experience in Asia is that if you have someone on the ground dedicated to the project, it can work wonderfully – if given the proper time and skill set. If you don’t have someone within the company that can vet the possible options, you must find a reputable partner who’s fees are tied to not only finding a solution, but possibly the first year’s success in implementation. Don’t let them walk away after you sign the deal.
Greg
Phil,
“Advisory services are only as good as the advice from the advisor giving it”. I think this quote is going to be used many times in the future – you have summed up this whole business perfectly. Companies need outsourcing consultants who have been through the process many times before and know the pitfalls intimately. Whether that advisor works for McKinsey, or Jo Shmo’s consulting boutique, it really doesn’t matter. The anonymous contributor before me is incorrect in assuming a boutique can’t perform well here. It’s all about the experience and quality of their consultants, and you often get more seasoned ones in the smaller shops, as opposed to the large machines, which tend to operate like bodyshops and charge crazy prices for their billable services. It’s down to the buyer at the end of the day, and the level of comfort they have with the consulting firm. Also, the beauty of consulting here is you can always kick out one consulting firm if it is doing a lousy job – not ideal, but it’s much easy that kicking out your vendor.
DJ
Phil,
Nice observation. I work in industrial products, providing engineering and QC support to companies who are outsourcing. I keep costs down and capabilities up by partnering with some great companies. We can work together or apart — we can be large or small — adjusting costs and capabilties as the situation demands. In my humble opinion, this is the way of the future!
Blake
Yes low cost matters but that is not *the only* factor driving outsourcing (whether it is onshoring or offshoring is a different issue altogether)- the most important factor I feel is the *Expertise* in the given work/domain; We do outsourcing services with a clear focus on Software Migration and with an expertise of more than a decade and we win projects (in our focus area) easily even though there are others who give a much lesser quote – question is no one is sure that they will complete the job atall and if they do on time and on budget where as “Experts” will do as proposed removing all blushes and losses in the end.
Manjunath M Gowda
S7 Software
Where Migration meets Innovation
Phil,
In an environment where a very large percent of our Infrastructure is outsourced, from my perspective we have often looked at the small firm/low cost advisor companies to level set our current agreements and compare the findings of the outsourcing advisor company to industry benchmarks as well as with our current service offerings and rates etc.
So I look at the low cost advising trend as a tool companies are using to evaluate outsourcing deals agreed to years prior to make sure the continuous improvements built into the contract have remained competitive and not just a tool for companies to decide whether or not to outsource.
Brian Lynn
Phil,
The low cost advisers also offer a degree of flexibility and personalization of services which helps a company to outsource effectively. Having been involved in the outsourcing field for more than two decades now, I have experienced how soft skills like relationship building and performing like one team (not like a typical client-supplier model), can make or break an outsourcing arrangement which goes above and beyond written contracts. Many of the smaller outsourcing advisers bring in a blend of experience from both client and provider ends of outsourcing to work on these aspects effectively.
Regards
Uttiya Dasgupta
Phil,
I think you are spot on but I would further Ali’s closing comment. One of the reasons we will continue to see a rise of low-cost advisors also has to do with the emergence of smaller “mid-market” companies exploring HRO for the first time.
The 1st generation of HRO deals were the mega deals. I believe we will continue to see the vast majority of that type of deal flow going to the top-tier advisory firms.
However, we are also on the front edge of a wave that will vastly increase the quantity of deals that are for mid-market HRO, which can be defined alternately by a smaller size client and/or a smaller outsourcing scope. With a much larger pipeline of deals, there is going to be much more opportunity for the lower-cost advisory firms to play.
Until the premier advisory firms can grasp a cost effective way to maintain quality while pushing more smaller-size, smaller-margin deals through their pipeline, the smaller advisory firms are going to get their fair share of mid-market deals.
Regards,
R
Randy,
Some small advisors are definitely taking on some mid-market engagements, but I am seeing some mid-market firms spending a ton of money on expensive high-end consultants for, ultimately, small contracts, and also some F500 firms using small boutiques for very large deals. It’s a real mixed bag out there right now. It’s really a “horses for courses” game at the moment…
PF
Phil;
Great insight here with this question. I am an advisor, Vice president of Business Development for TBI, Inc. We are finding that outsourcers as well as potential clients are noticing the bigger firms have an agenda that is costly and not client focused. By ensuring a client focused strategy to get the job done and do it efficiently and correct pleases all.
Our firm also uses seasoned veterans that have been at TPI, Everest, and Big 4 companies and have decided that quality, not quantity, is important.
Best regards;
Gary O. Claytor
Phil,
This will continue to increase, as more and more consultants from vendors such as Cap Gemini, having worked on 10-15 customer engagements and with a network in BRIC countries, are setting up with small agile advisors from their home base.
This is good for entrepreneurship. However, for SMBs, they should take care as the lower price comes with a risk, as documentation and operation support in steady state are very dependent on individual skills.
Steen Isdahl
Phil,
Well this is very interesting, and it tells me I have been seriously underpricing my services. We are probably one of the top small shop “marriage brokers,” in the region, and we have been damned successful in the Central American Market. Thanks for posting this, this is very interesting food for thought!
David Anderson
http://www.davidscottanderson.net/blog/?cat=10
New Discovery…
An awesome blog dedicated to outsourcing… And a great article that shows me that I have been seriously undervaluing my services… I am seeing increased demand for outsourcing advisors early this year to facilitate outsourcing transactions. The appli…
Phil,
Small is beautiful and flexible.
Small companies can align themselves easily with the client’s business goals.
Small companies can work as an extended arm of the client.
Aravindan
Personally, I’m glad to see competition from firms in this field. An industry which has catalyzed the recession in the USA needs a dose of its own medicine. We’re seeing our industrial base eroded for short term profit margin gains. Results? Lower quality goods at prices too cheap for legitimate American manufactured goods to compete. Who are we really helping here?
Hi Phil,
You have an interesting line of thought, having said that you have some real power house of intelligent responses as well. I just want to add a new dimension to this.
I see two components to your observation;
a) Why outsourcing – and you have said its savings
b) The role of advisories – big & small firms – their efficacy
For a) I would agree that there is significant cost arbitrage available to take benefit of, but I would strongly suggest and stay away from the short cuts part of it.
For b) Most outsourcing firms do not have too much clue about the culture, efficiency, capability, processes, scalability, management bandwidth availability, redundancies & so on as does the vendor offering the outsourced services. Once the deal is done the advisories may handle the transition, change management modules and so on but they themselves are little aware of the micros that are involved in vendor selection vis – vis the the project requirement unless the vendor is transparent enough and the advisories / outsourcing firms smart enough to ask the right and hard questions – and this is not any advisories fault or the outsourcing firms fault, it just goes that way in business and I cant fathom why?
Post deal be it in the space of development – product & solution, testing, infra management, PLC including legacy support, call centers etc. the client is at the mercy of the vendor particularly for transparency of information and willingness to partner with the parent to sustain and improve solutions. It always becomes a holding on to your account game and that without collaborative approach is a disaster in waiting. And I guess this is what makes the difference in successful client engagement and good advisories v/s poor client engagement and bad advisories – it doesnt really matter if they are big or small – what matters is do they understand both markets, in case of offshoring, and both parties if its onshore outsourcing – advisories play a very key role and I guess my experience is of help to all in the chain.
Regards
JR
Phil
Interesting issue.
I feel there are organizations that require attention to details and niche ideas as they take their key initiative. Of course, cost savings as they engage a partner is crucial in making their decision.
Though many say today that IT outsourcing has become a commodity, many fumble upon on how to go about it. These advisors become useful for helping to identify your objectives, aligining them as short, mid & longer term goals, and of course from RFI, RFP to evaluation metrics that are objective-driven and not just subjective and perception driven.
Both options have their positives and negatives, but it boils down to the question of your needs vs what the advisor can bring as value when you take this important step.
Kind Regards
Sai, VP – PLS
CSS Corp (www.csscorp.com)
I guess as one of the so-called ‘little’ guys I have to say something – As a senior member of Alsbridge – an award winning global advisory firm with a presence across Europe, North America and Asia Pacific – I’m not sure that having well in excess of 100 time-served expert advisors that cut their teeth at Big-4 consultancies and Blue Chip companies and providing a global reach is that small.
It is however very focussed, as sourcing advisory and execution is just about all we do. Focus means we don’t get distracted by other ‘sell-on’ opportunities –something that our clients value.
The main focus of the original question was cost – cost is always a result of a number of different factors including scope, scale, responsibility, process, pace and good old fashioned programme management.
It’s also about behaviour and philosophy and depending on what yours is and how well you execute – costs will vary dramatically. The traditional arms-length approach that promotes driving detailed specifications, engaging in adversarial negotiations and squeezing the last penny out of the process simply creates a ‘last man standing’ scenario, which is counter productive to all parties involved. And it is also VERY EXPENSIVE.
Don’t undercut yourself or sell yourself short simply to meet a budget – it should be about creating sustainable outcomes and getting to the most effective outcome for the client in the optimum time – and then ensuring that the client is capable off managing the relationship effectively once the advisor’s primary role has been completed.
Each advisory company’s approach and philosophy will be different – find the one that matches your culture and objectives, that can demonstrate excellent delivery capabilities and credentials and that has a set of principles that you would like to aspire to.
As you mentioned it’s also about individuals – you need to have the confidence that the individuals being proposed are people that you can work effectively with and that you have the confidence in to deliver. So much advisory work is conducted on the basis of referrals for this very reason.
One final set of thoughts that you may find useful with whoever you work with – its not a magic formula but it will help make your journey far less painful and the outcome more certain and sustainable.
Make sure that you advisor(s) give a commitment to clients and respective bidder(s) alike to:
• enable and facilitate a full, collaborative and non-restricted interaction between all parties
• promote a fast, efficient and effective process without excessive tender documentation
• encourage the supplier to co-design the solution
• not waste the supplier’s time
• promote interest based, not adversarial, negotiations
With any sourcing programme we seek to ensure that Suppliers
• do not promise what we will not contract for
• are clear and complete about the service and pricing
• involve delivery staff early and put the solution before the deal
• ensure deal economics are aligned and sustainable
• recognise the negotiating process needs give and take
And we expect our clients to step up to mark also to:
• dedicate quality time, and take decisions promptly
• be open and honest about the baseline costs and services
• be realistic about future service improvements and how they are created and delivered
• recognise the economics and expect a fair rate for the services; and
• recognise the negotiating process requires flexibility from all parties
If anyone wants to discuss this further please do not hesitate to contact me through my email address – [email protected]
Just one of the ‘little’ guys.
Links:
http://www.alsbridge.eu
Maybe you can alter your services to focus on the backsourcing model…
John,
I think one of the steps that the “detailed requirements gathering” process does drive is full verification of baselines costs and capabilities. Change control provisions are costly, especially if effective CFOs are taking outsourcing savings to the bottom line. Some deals have significant enough size relative the company that the repercussions are felt by the street.
Simply put, if I’m giving X to Vendor ABC and we negotiate a good deal based on the economics of X’s category, but then the parties find post transition that X is really X+25%, Vendor ABC has every reason to ask for compensation. It only takes one minor omission to create a major change order (I saw one company leave off 400-600 servers because it simply forgot about them).
One last consideration: There is an underlying assumption that there is only one way to do a deal. I would suggest that companies that do not use advisors, but attempt to leverage the ideas you’ve shared are likely to pay a significant amount over market for the services they are purchasing/leasing, in addition to probably partnering with the wrong vendor. The reason is simple. Advisors’ experience regulates the deal and prevents the vendors from playing all their sneaky vendor games. There is a reason why a vendor’s business development team is paid handsomely…and it’s important to note that these sales teams frequently lack a complete focus on the best choice for the client because they want to position their services as the best regardless of the client’s needs. Not all salespeople are like this, but the vast majority are.
The software industry began a partnering attitude toward negotiations, but now their heavy handed approach to negotiations, contracts, audits, and renewals is the norm. Blame Computer Associates if you like for making this change, but that’s fact. I would suggest that the outsourcing industry is heading that direction in every commoditized service (data centers, telecom, help desk, mailrooms, print, call centers, back office transactions). What isn’t commoditized today, will be tomorrow.
So, companies are best served by hiring advisors to make sure they are inoculated from the vendor “Jedi mind tricks”/ploys and stay focused on making the right deal. Without an advisor or experienced executive to regulate, I wonder if companies are frankly better off taking a procurement perspective rather than fall pray to their own weaknesses?
Tony
http://360vendormanagement.com/