The assault on everything we once knew as stable is now in full throttle, choking the very life out of businesses whose leaders are struggling to find immediate answers to many emerging problems. There has never been a time when third-party help has been so needed to help businesses drowning in spiraling inflation, wages and energy costs, crippled by attrition, tormented by cyber criminals and new compliance regulations, and under massive pressure to drive down operating costs. Net-net, enterprises are desperately in need of access to skills and capabilities just to keep their business operations viable as they fight this global assault on their survival.
Outsourcing is going through its most significant pivot-point to help enterprises with this plethora of crises
The whole focus on pricing and scoping outsourcing engagements is being completely rethought, as are the strategies of the leading service providers to support them. The IT and BPO services industry is reaching its most defining moment since Jack Welch doubled down on India in the 1990s.
The challenge facing outsourcers is three-fold:
The Great Resignation is over… keeping hold of key client-facing and delivery staff is now under extreme client scrutiny. Every organization has suffered from attrition since the post-Covid economic boom, with employees jumping jobs for large pay hikes or pursuing their “dreams” in start-ups, where most got hired from the comfort of their living rooms. Most providers got a free “attrition pass” for a little while, but the Great Resignation is now behind us (we will reveal data on this very soon). If you can’t keep hold of your talent now, you’re in real trouble as a services firm. Enterprise customers are walking away from providers whose delivery quality is falling apart from staff turnover.
Smaller deals and price competition are forcing innovative engagement models. Enterprise clients are demanding engagements at similar pricing levels from pre-inflation days. The sheer number of competitive service providers is piling pressure on them to stay price competitive to win engagements while maintaining their profit margins. In addition, most enterprise customers are demanding smaller-sized engagements to deal with focused areas in immediate need of support, such as cyber, app modernization, cloud migration, customer and sales support, data management, etc. While smaller deals make it even harder for providers to benefit from scaling people on the engagement, it also opens the door for performance-level pricing that involves more automation, SaaS delivery, and better data integration. Hence, providers that have a strong capability to deliver services with less need for people-effort are in a position to offer creative pricing that rewards performance, not merely effort (you must read our earlier piece on this). The key is to convince enterprise customers to de-link pricing from simply provision of effort and align it with the delivery of services, provision of data, and (where appropriate) provision of innovation that creates new value for the client over and above the existing baseline of services.
Big “consolidation deals” are back on the table, but select them carefully, as bad client moves could cripple you. For larger multitower multi-year areas, we are seeing an increased appetite for larger deals that take advantage of economies of scale, vendor consolidation, and commitment to pre-inflationary pricing. UK firms, for example, are especially concerned about inflationary pressures and how this impacts services pricing, with many trying to get IT services contracts locked in quickly at pre-inflation rates. In short, we are actually seeing interest from enterprise customers in longer-term deals to protect themselves from the unpredictable economy. We are also seeing a similar appetite for large ‘consolidation’ deals in industries struggling in the current economy, such as financial services, mortgage brokering, consumer packaged goods, real estate, etc. Any services provider worth its salt has a bulging pipeline and selecting the enterprises to build long-term partnerships with has never been as crucial. The consolidation deals come with real margin pressures and can suck up precious resources from the onset, so investing in the right clients is critical for future growth and development.
So what must outsourcers do to thrive (not fade away) in today’s market?
Invest in technology but sell services. Many services firms have been talking about Business Process as a Service (BPaaS) for years, while others have made software investments and attempted to resell licenses to customers and bundle their services on top. The stark reality is that enterprise customers do not want to buy technology products from services firms – and services firms are not good at selling technology products either (requires a completely different channel and capability set).
The answer actually lies in services firms building technology-enabled service delivery themselves but only exposing and charging their customer for the services they consume or data/outcomes they need. For example, if a services firm wants to provide customer support services to smaller-scale enterprises, it could build its own CX platform that utilizes digital assistants, automates workflows, runs smart analytics etc., which all contribute to the enterprise client receiving efficient, low-cost services and the data they need to make decisions. If the provider has to partner with an expensive CRM platform, it is stuck with only making revenues from providing the people-effort, and has little incentive to automate to drive down costs and improve workflows. Hence the service provider can differentiate themselves by selling cost-effective services and providing the data its clients need. Why should their clients care about the people-effort being provided if they get exactly what they want at a price they are happy to pay? This is why we have been defining the emerging market for Business Data Services as the new generation of BPM, where enterprises pay for outcomes and data.
Control attrition, which is critical to stay in the game. If service providers can’t keep their workers and have them deliver more value to their clients, they will end up in a zero-sum race to the bottom, and many are already losing business because their clients are not tolerating the attrition and the impact on delivery quality. Net-net, we are in a war to retain people to keep our businesses functioning, and this is likely to be the case for several years to come as people reject employers who fail to develop them, pay them well, and offer them career expansion. This is especially the case for staff working in operational roles, whether it’s part of a shared services organization or a professional services firm. Smart service providers are getting ahead of this with increased investments in their talent development efforts, wage increases across the board, and announcements of plans to open new service delivery centers in locations with pools of concentrated talent that can be fast-tracked into their model. We are also seeing several service providers target talent from community colleges and high schools, where they can offer them their own development experience that is highly relevant to their clients’ needs. Most importantly, service providers must invest in training their managers to develop their staff effectively in today’s hybrid work environment. The old style of “check the box” management that may have worked in the old factory model is failing.
“Taking the people” with the deal is becoming more attractive. We can go back to my very first blog (here) on BPO value in 2007, and we were droning on about moving to standard processes and new technologies back then to make outsourcing add value beyond labor savings. Fast-forward 15 years, throw in a two-year pandemic, spiraling inflation, chronic attrition, a military conflict in Europe, and a desperate need from enterprises to hurry into functioning virtual models and supply chains, and enterprises need more help than ever from third-party outsourcers and their armies of millions of staff to keep their businesses moving forward. Outsourcing deals that involve talent moving to the service provider, many of whom may actually welcome their new employer, are looking a lot more appealing to many service providers in today’s environment. While most engagements are fairly small ($5m-$20m TCV), there are a few major consolidation deals under discussion where a lot of people transition is in play. Expect these to increase as recessionary pressures bite in the coming months, especially in Europe.
The Bottom-line: We’ve reached a make-or-break time in outsourcing history… those that invest in the right relationships, the right tech, and inspire their talent will win
Enterprise customers are quickly evaluating what talent is core to their differentiation and then determining whether they have the ability to attract, retain and develop it themselves or whether they are better placed (and the risk lower) to partner with a service provider. The latter option is becoming increasingly attractive in this recessionary economy and shortage of available talent.
Conversely, service providers are more hungry than ever to take on people they can integrate into their model to mitigate their own attrition risks and cement deeper and far more strategic relationships with their key clients. The main question now is whether the right firms are engaging with the right service providers to achieve mutual medium and long-term success. Those that get these new relationship decisions right to stay in the game will emerge as the leaders in their business ecosystems.
At HFS, we have redefined how we evaluate service providers and tech suppliers to reflect the value ambitious enterprises demand in today’s business environment with our new HFS Horizons. Now we’re excited to share the first-ever Horizons Report—on Cloud Native Transformation.
Cloud Native Horizons aligns the performance of today’s service providers with driving the functional building blocks of technology transformation (Horizon 1), creating the business transformation experiences their clients enjoy (Horizon 2), and the Cloud Native synergies their clients are developing across their ecosystem partners to create new sources of value (Horizon 3). And it’s all summed up in this picturesque new HFS Horizons landscape, which positions the leading service providers within the three horizons that their customer engagements typically demonstrate:
HFS Horizons – Cloud Native Transformation, 2022 Note: All service providers within a “Horizon” are listed alphabetically
According to the Horizon report co-author Tom Reuner, “There is a fundamental disconnect in how the industry discusses organizations moving toward the cloud. The supply side is evangelizing technology and capabilities with containerization and Kubernetes as the focal point for that marketing noise. Conversely, the buy side is struggling to capture the value of their cloud investments, as very few clients have a well-defined cloud transformation strategy at an organizational level, which can lead to transformations done in silos. Only by aligning technology transformation to business objectives will organizations get closer to capturing value from their investments. Thus, we need to reset the discussions on cloud native transformation.”
Some additional excerpts from the report:
The market noise around cloud remains deafening. Despite all the noise, the journey toward cloud native remains challenging. For many organizations, costs spiraled out of control, and the harsh lessons of ineffective controls are sinking in. Often, a change of provider has accompanied the realization of these challenges. Too often, the industry leads with capabilities and technology jargon rather than providing clarity on what broader strategic outcomes should be and how to deliver on them. We must confront the new operational complexity that moving toward becoming cloud native entails. To help, HFS is launching a new Horizons study on cloud native transformation (CNT) to learn from the experiences of organizations that have not only moved workloads into the cloud but also transformed their operating—or even business—model.
The inaugural HFS Horizons: Cloud Native Transformation, 2022 report examines the capabilities of 20 IT service providers and management consultancies (in alphabetical order: Accenture, Capgemini, Cognizant, Deloitte, EPAM, EY, Genpact, HCLTech, IBM, Infosys, KPMG, LTI, Mphasis, PWC, TCS, Tech Mahindra, UST, Virtusa, Wipro, and Zensar) offering differentiated approaches to meeting the transformation needs of clients. This research effort will assess how well service providers are helping their clients to envision and deliver cloud native transformation outcomes.
We assessed and rated the transformation capabilities of these service providers across a defined series of value propositions, innovation capabilities, go-to-market strategies, and market impact.
This report also includes detailed profiles of each service provider, outlining their placement, provider facts, as well as detailed strengths and opportunities.
HFS subscribers can download the report here (available free for a limited time).
10 years since HFS introduced RPA to the industry (see link), and we’re finally focusing on automation as a value-lever that drives business outcomes, as opposed to mere cost takeout in the back office.
The pandemic has shifted the automation focus from creating efficiencies in the back office to delivering immediate business impact, where talent shortages can be overcome, where digital workflows can operate despite broken supply chains, and where businesses can find new opportunities in their virtual and hyperconnected ecosystems.
Our recent pulse data of 602 enterprises proves beyond doubt that automation is the number one initiative currently underway to support enterprises in meeting their strategic priorities:
Why automation finds so many problems that really need solving
While so many organizations are facing well-documented problems with talent retention, this is only sixth in the order or priorities behind the race to implement emerging technology, cater to changing consumer needs, and modernize apps for the cloud.
This tells us that automation is becoming so increasingly important to businesses as it helps solve so many of these endemic problems being caused by labor shortages, wage inflation, and poorly integrated systems, workflows, and processes. Simply put, if you get better at automating, you’re solving a lot of these other problems at the same time.
Automation is a discipline and a mindset
Smart business leaders have realized that automation is a mindset and a discipline that needs to be ingrained into every business practice. It is not why we do things; it’s how we do them. Automation makes what we have function effectively without needing constant human attention and manual workarounds. And the better we understand automation, the more autonomous it can become to drive genuine artificial intelligence interactions and processes in the future. AI and automation are becoming increasingly synonymous as we figure out how automation can really work within a business operation.
If there’s one thing the pandemic taught us, it’s been the necessity to re-think processes to get the data; what should be added, eliminated, and simplified across our workflows to source this critical data. And there is simply no option but to plan to design processes in the cloud using web-architected applications. In this virtual economy, our global talent must come together to create a borderless, completely digital business ecosystem where we can connect with other organizations that share common goals and purposes. This is the true environment for real “digital transformation” in action.
The Bottom-line: Most enterprises are only at the start of the real automation journey
As I reflect on our research covering over 500 automation leaders of major enterprises, what hits me the most is that 70% admit they are still novices. It seems the more they learn, the more they realize they need to know. We’re only at the start of a long journey for the majority of today’s ambitious organizations, and selecting the right partners along the way to help them design, implement and learn from automations across their businesses is so important. As one CIO delightedly pointed out to me recently: “I’ll keep finding automation ’till I die”… now that’s the attitude that is changing the whole approach to automation as the new IT mindset.
Our new IT/business services talent study, covering the experiences of 1800 services staff across major regions and the leading 16 service providers, reveals why attrition has been running at the 30% level (and that is only what is officially reported) and showing few signs of slowing, despite a worsening economy and the threat of recession.
As you can see, close to 9 out of 10 staff want to feel more challenged (and are bored), 61% will jump to a competitor for a pay hike, and 75% believe they can easily find a job as good as the one they currently have. The only saving grace for the IT and Business services industry is that 90% of employees are passionate about the impact they can have on enterprise clients.
There is salvation, folks, and it holds real potential if service provider leaders can get their heads out of the sand and challenge both their clients and their staff to raise the value of their partnerships.
This industry is at a pivot point, and winning the talent war is the only way to survive
Simply put, there aren’t enough skilled workers out there to deliver billions of dollars of services, and most of these service providers still have a prehistoric mindset of routine work being cranked out in cube farms by zombie staff willing to work for low wages. Well, those days are pretty much over, and those service providers that fail to become more attractive places to work, with challenging work to deliver, will quickly fall away in the emerging environment, which will not be for the faint-hearted. If they can’t keep their workers and have them deliver more value to their clients, they will end up in a zero-sum race to the bottom and likely lose business because their clients will not tolerate the attrition and the impact on delivery quality.
The problem with the services industry is that when companies provide outsourced services for enterprise customers, it’s most often the monotonous tasks the customer can offload at scale, such as application testing, infrastructure monitoring, accounts payables or receivables.
Even sexier-sounding work, such as content moderation for social media sites or product support services is usually very tedious after a while, especially when the services worker is just instructed to follow a standard operating procedure without any incentives to use judgment, creativity, analytical skill, or common sense. It’s no wonder staff are quitting in droves in search of something more challenging when there is so much demand for workers to perform elsewhere. Now that next job may turn out no more challenging than their current gig, but if there’s 30% more money for doing it, why not?
Service provider leaders must stop blaming entitled staff and become better employers
Now we can moan and groan about the attitude and self-entitlement of some Gen-Zs and Millennials who have no loyalty, don’t care about longevity on their CVs, etc., but put yourself in their position: you’re ambitious, and other companies are offering you more challenging work, more money, and are simply more exciting places to work. Why would you want to suffer a life of soul-crushing work for a company that still operates the same way it did 15-20 years ago? And can you blame staff for preferring to work from home than suffer from the monotony of a stuffy cube kingdom where most of the management isn’t even there? Let’s be blunt: it’s often the management who have become self-entitled, not the staff. The problem ultimately lies with bad leadership, not bad working attitudes.
The Bottom-line: The services industry has a huge opportunity to increase its value to enterprises, but its leadership must radically change old habits
Our new research shows that enterprise clients are willing to pay for more than just routine work delivered, with two-thirds declaring they would shift to an outcomes-based model. So why aren’t they? It’s simply a two-way proposition: service providers need to demonstrate they have the capability to take on higher-value work, and they need to convince and demonstrate to their clients that they have the workforce and leadership skills to do just that.
Quite simply, the conversation regarding what constitutes value needs to change – enterprises need to be convinced to pay for value than mere effort… is it really that hard? Seems to me that many service providers lack the leadership talent to have that conversation… and need to address that asap.
When 90% of services workers are passionate about IT/business services and are clearly wanting to take on more challenging and interesting work, we have a huge opportunity. When service providers have multi-year agreements to get down and dirty with the institutional processes of a client, isn’t this a wonderful opportunity to upsell them new work, new ideas, and new ways to excite their staff? When the trust is already there, what is stopping IT and business services from moving up the value chain and helping enterprise customers desperately need more support from smart talent who understands their challenges?
This is a leadership challenge to recognize where the industry will fade away and make big changes to take their firms in a new direction. We’re already operating in a cut-throat global environment where the very stability of our economies, businesses, and livelihoods are under an unprecedented assault. We can either rise up to these challenges and find new sources of value or struggle to stay afloat as the mayhem subsumes us.
Ashish Chaturvedi and wife Sampada holidaying in Goa earlier this year
Who was it who once said, “The time to expand your business is when everyone else is standing still”?
I think it was actually me once in some pub blowing my own trumpet. But in any case, that is exactly what we are focused on at HFS as we expand our global team and research coverage, with a 4th analyst addition in just the last six weeks. Joining us today is a terrific chap with real energy, research pedigree, and a long-proven reputation in the industry: Ashish Chaturvedi, who will drive our coverage in retail and supply chain, in addition to many areas that bleed into them. Ashish is taking on a global Practice Leader role for HFS, based out of Bangalore, where he previously worked as a Principal Analyst and Program Lead for sourcing advisor ISG.
So let’s dig into more about him and what his plans are for HFS…
Phil Fersht, CEO HFS Research: Welcome to HFS, Ashish!So, what gets you up in the morning?
Ashish Chaturvedi, Practice Leader, HFS Research: I might sound philosophical here, Phil, but it’s the desire to make my life meaningful. At a personal level, it’s how well I can play the role of a husband and father. On the professional front, it’s about how I can be a better analyst. The following keeps my dopamine level up – reading, reflecting, interacting, connecting (the dots), and producing (research).
You’ve been an analyst most of your career, Ashish. What do you like most about it? And what do you find most frustrating about the analyst industry that you would change if you could?
There are many positive aspects, but if I need to point out one thing I love about being an analyst, it’s the magnitude of impact we have on the enterprise and IT provider business. From choosing the right technology stack and implementation partner to shaping a firm’s go-to-market strategy, the world relies on us.
About the not-so-likable aspect, most research outputs right now provide a balanced and diplomatic view v/s being direct and decisive. I firmly believe that putting a wrapper around your ‘research’ dilutes the meaning and messaging. One more change I would like to see is restoring the balance between education-oriented v/s marketable research. Over the last decade, it has become disproportionately skewed towards the latter.
And why do you think you’ll bring something a little different to the analyst industry at HFS? What will you be writing about? What is it you care about?
I highly regard HFS for its fearless brand of research, Phil. Moreover, it has one of the most diverse research offerings in the analyst industry. I think this bodes well with my aspirations and goals. So, the intention is to conduct more holistic research and be more clear, direct, and specific. I plan to spend most of my capacity on decoding the future supply chain (across industries) and covering the advancements in the global retail sector. Additionally, from a technology per se, I would focus on disruptive technologies and their impact on various industries.
So, finally, Ashish, what do you think we’ll be talking about in a year? Can many of today’s enterprises survive if they don’t change their legacy habits? Many firms have changed little since the pandemic (even moving backward), while others are rethinking their whole business and IT strategy to embrace the future…
I’d certainly like to run you through the past year’s highlights (of my research). Talk about what’s changed in my coverage space and comment on the short- and long-term impact of that change. I’d also like to take you through a report card mentioning technologies that lived or not lived up to the hype and progress made by enterprises, providers, and software vendors in the supply chain and retail space.
Coming onto the second part of your question, I think enterprises require three things to succeed in the market – Education, Intent, and Purpose. If any of these three are missing, you are bound to fail, which happens with 95% of enterprises. Let’s look at a real-world example around one of these – ‘lack of education’ – I regularly witness enterprises equating (digital) transformation with cloud migration and equating cloud migration with a lift-and-shift approach to the cloud. They eventually fall way short of expected outcomes. Let’s decode this:
First, Transformation does not mean Cloud migration. It also includes aspects like supply chain visibility, internal systems talking to each other, an agile workforce working in a DevSecOps model, and automating your IT processes.
Second, Cloud migration does not mean Lift-and-shift. To reap the benefits of cloud migration, you need to do much more than just moving workloads to the cloud. An enterprise needs to assess and work on its current IT landscape – some applications might have to be rewritten to make them cloud-native and composable, the technical workforce needs to be working in an effective set-up like a squad-based configuration, high-grade quality engineering processes need to be in place, application consolidation is required to the selected technology stack, and the core needs to be modernized. There are multiple other aspects.
Here, we analysts have a massive responsibility to impart the proper knowledge.
Welcome to HFS, Ashish – we can’t wait to read your keen insights!
Thank you, Phil! It’s an honor to be working with one of the most passionate and capable bunch of analysts in the industry.
The world of enterprise innovation has changed dramatically since pre-pandemic days, and we – at HFS – have redefined how we evaluate service providers and tech suppliers to reflect the value ambitious enterprises are demanding in today’s business environment.
Today, we’re officially launching “HFS Horizons’ to align the performance of today’s service providers and tech suppliers with the outcomes they help their clients define, the great experiences their clients enjoy, and the synergies their clients are developing across their ecosystem partners to create new sources of value:
So why is it time to phase out the HFS Top 10?
When we introduced the famous HFS Top 10 over four years ago, the whole purpose was for our analysts to put a stake in the ground and produce something relevant to support enterprise decision-making. We wanted to differentiate HFS from our competitors by producing a relevant decision-making support tool for enterprise leaders, not marketing fodder for vendor press releases.
Fast-forward four years, and the analyst industry hasn’t changed a bit – we are still subjected to Magic Quadrants, Waves, and Peaks developed solely for the paid inclusion in supplier sales decks and press releases. While some are pretty decent, there are so many that miss key suppliers, lack the integrity of customer references (if they do any at all), and are scored largely on how well the vendor wows them in a briefing and at their fancy conferences.
Moreover, by lumping so many suppliers into the top right of their charts, the analyst has essentially made many of them “winners” to make it easier to sell more licenses to eager marketers. As a result, the HFS Top Ten has become hugely popular as the one decision tool that enterprise buyers really trust to access deep profiles of suppliers across many dimensions of innovation, execution, voice of the customer, and OneOffice alignment.
However, like all good things, we need to evolve with the times, and while we want to build on the integrity and depth of the Top Ten research, we strongly feel it is time to align supplier performance across the three horizons of innovation: Outcomes, Experiences and Synergy:
While the rest of the analyst industry persists in looking in the rearview mirror at the world, we’re determined to keep looking forward
We need to stay true to our reputation of being unafraid to challenge and disrupt ourselves and keep looking forward. The best time to retire a product is when it is successful!
So how will Horizons reports work?
HFS Horizons reports will be completely aligned with our vision for enterprise innovation and will paint the supplier landscape across:
Horizon 1: Outcomes (based on functional digital transformation)
Horizon 2: Experiences (based on a OneOffice mindset)
Horizon 3: Synergy (based on a OneEcosystem approach)
Instead of ranking based on execution, innovation, and customer satisfaction; we will be evaluating suppliers based on the “Why, What, How, and So What” of enterprise innovation:
Why? – The value proposition
What? – The solutions and capabilities
How? – The Go-to-Market strategy and investments
So What? – The market impact in terms of mindshare and wallet share
While customer feedback will continue to be a critical ingredient for Horizonsassessment, we will also expand our data sources to understand employee experience and partner experience. HFS will invest and rely on its own proprietary data sources more heavily versus supplier-provided information
Beyond supplier-provided client references, we will survey relevant clients in our own network leveraging HFS Pulse
We will also reach out to employees directly (and anonymously) to understand their perceptions on their employers
In addition to client references, we will also ask for partner references
The HFS Horizons reports will be governed by an agile research process:
No laborious RFI responses. The value is in conversations. Essential data requirements will be shared as an appendix to the briefings
Customer references are recommended but not mandatory. We have in-depth network of clients who are willing to talk to us to provide unvarnished feedback
There is no opt-out. Sharing information and briefings with analysts is helpful and recommended, but we will leverage our network to assess suppliers.
HFS Horizons report will also allow us to be more inclusive where there are 20+ suppliers in a market
If you have questions on the new HFS Horizons reports and how you can get included, please email [email protected]
Today’s current “effort-based” BPO (BPM) services model is failing, but there is hope that this industry can course-correct its outmoded ways of behaving, with two-thirds of enterprise leaders preferring an outcome-based approach. Here’s why:
The economics of the current services model are capitulating
About 90% of business process outsourcing engagements are still largely priced and valued on low-cost labor. Moreover, that labor is becoming increasingly costly as inflation deeply kicks in and the talent supply drains away – especially at the lower-income levels. Service providers will walk away from many of their clients as they simply can’t make the numbers work to deliver their contracted services effectively and profitably. It’s becoming a painful race to the bottom… a zero-sum game that could see the BPO industry rapidly consolidate – and even shrink – if enterprises and their service partners cannot change how they engage with each other.
Our new research, which we will be presenting at the NASSCOM’s Business Process Innovation Showcase next month (see details), is revealing an industry primed for some fundamental changes as the current “effort-based” model becomes more and more misaligned for clients seeking better data, better performance, and much more dynamic partnerships to help them operate effectively in the current climate:
The purposes of client and provider must be aligned, or the relationship ultimately fails
When engagements are priced on the number of people, there is very little incentive to explore new methods of creating value, such as automation, AI, quality data, etc. The service provider is incentivized to maintain/increase the staffing levels, not invest in programs to reduce manual dependencies. Enterprises need to pay for performance, not effort if they ultimately want to benefit from sharing a common purpose with their provider. Net-net enterprises and their service partners must be motivated to achieve the same goals if they want to enjoy a long-term, mutually beneficial relationship.
Why legacy many services engagements become bad business deals
So what incentive does the provider have to become more effort-efficient if they will be penalized financially? The short answer is that there is no incentive, which is why many services engagements move to different service providers when contracts end. In most cases, it’s preferable for the incumbent provider to lose the business rather than cannibalize its own revenues with that client.
The sad reality is that the enterprise client just lost a service partner which has years of experience running their institutional processes – which could probably have automated the crap out of them and delivered a game-changing scenario. But they just had no financial incentive to do so. So the cycle continues, and that same client has to go through the same dog-and-pony show with another provider for the next 5-10 years. They still have the same crappy operations that will remain crappy with another partner, which also has little incentive but to deliver the same crap to maintain the effort levels as bloated as possible, to keep the business as profitable for themselves.
So what needs to change to get the focus on value versus effort?
Clients and suppliers need to jump to a new S-curve of value creation where the client pays for the performance, not just the effort (See Exhibit below). Performance should be measured based on some attribute of business value, not just cost and efficiency. Business value can be defined in terms of working capital optimization, speed-to-market, improvement in business metrics (e.g., DSO or DPO), customer/employee satisfaction (e.g., NPS score), or procurement spend reduction.
Most services relationships get stuck at stage 1 and start witnessing diminishing returns because you just cannot keep squeezing the lemon for more juice. In a performance-driven relationship, the supplier and client share the risk and reward while providing services at the lowest cost possible starts to become a given.
Most sourcing advisory consultants describe a gain-sharing approach at this stage, but be careful as gain-sharing can drive opposite behavior than initially envisaged. A “pay-for-performance” pricing is often more practical. This is how it works:
Identify the desired outcome for a potential relationship by milestone
Supplier proposes fixed service fees to implement milestone
X% of Supplier fixed fees “at risk” for non-performance
Supplier earns a “performance bonus” (up to Y% of fixed fees) if it exceeds project Savings Target
This pay-for-performance pricing is simple, transparent, and mutually beneficial as the service provider is incentivized to create value, it is relatively straightforward to track and measure, and the buyer payouts cannot be so huge that they can cause budgetary issues.
A gain share model backed with an “innovation fund” is also a better idea than pure gain sharing. Here the supplier (and buyer) commits to a pool of money to drive innovation. A joint innovation council identifies potential projects and uses the innovation fund. The supplier recovers its investment using a gain-share approach with a potential upside if the project is a huge success and a downside if it fails.
Finding a common purpose in a relationship can convert it into a growth engine for both parties
The most mature relationships are not based on math on some complex savings calculations but on a shared drive or goal (see stage 3 above). This is where co-creation happens. When combined with the supplier’s experience and technology, the buyer’s data and real-life business context create a unique solution that can be taken to the market jointly, with both parties sharing the potential windfall. Suppliers struggle to develop innovative solutions in a vacuum, and co-creation allows buyers to drive the partnership toward revenue creation. Purpose-driven associations rely on each other’s strengths to build a strategic, mutually beneficial relationship. A recent example is where bp and Microsoft formed a strategic partnership to drive digital energy innovation and advance net zero goals. Microsoft would further bp’s digital transformation with Azure, while bp would supply Microsoft with renewable energy to help meet the company’s 2025 renewable energy goals.
Bottomline: There is no pricing nirvana in IT and business services. But pricing structures should evolve as the relationship matures from effort to performance to purpose
Each pricing structure – input or effort based (e.g., FTE-based), output-based (e.g., price per transaction processed), or outcome-based (e.g., gain sharing, pay-for-performance, innovation fund) has its pros and cons. It generally makes sense to start a new relationship with some effort-based pricing to establish the baselines and build trust, but then it is time to move on to pay for value.
Where we are seeing most progress toward performance-based relationships is when the CEO gets involved to learn the nuances and value of moving towards areas of common purpose that can also involve other entities in that industry ecosystem. The challenge for service providers is to have leaders capable of developing C-suite relationships and changing that age-old master-servant conversation to one of common purpose to create mutual value.
In the past, spending our weekdays in the workplace entailed sacrificing our time in exchange for food and shelter. Now, many people want to “work” and not sacrifice anything.
We’ve talked about this virtual work environment thing to death for the past couple of years. Literally to the point where I can’t take another person sounding off about “empathy” and “flexibility”… oh god, put another record on, puh-lease.
There has to be a balance in the workplace
Yes, we need to create environments where managers invest time with their people to understand them, motivate them, and show they care about them. And staff reciprocate by appreciating more flexibility on the job to focus on family needs/lifestyle etc. (see earlier blog). But at some point, there is a line to cross between giving staff flexibility and essentially allowing them to “work” when they want. The problem many organizations are now facing is teams of disengaged and “burned out” employees who struggle to identify with their jobs and think it’s OK to work when they can be bothered.
Motivation is on the wane, and burnout is to blame.
We’ve been talking about “burnout” on the job for years before the pandemic, and the cure was normally to delegate more, take a break, even go to the gym / find an outlet for stress, etc. Today, most people are claiming they are burned out; however, the reasons are more than being stuck at home staring into a screen all day while enduring soul-crushing video meetings where they’re trying to multitask and appear engaged. Yes, that is burnout behavior, and we need to get smarter about the incredible time wastage having half these meetings, but the real reason is the shear multitude of worrying events happening to us that are destabilizing our lives… inflation, recession, job security, energy crises, the climate crisis, extreme, irrational politics, ongoing war, etc. Yes, we are living in a world where we’re all burning out by the sheer instability and misery emanating all around us.
What is essentially happening in many organizations right now is a breakdown of the very fabric of a company… what it means to belong and spend most of your working week with your colleagues and customers. Many people I am engaging with these days are simply disengaging from their companies. They are literally having a handful of in-person meetings with a select bunch of colleagues over the course of many, many months. They are trying to keep the threads of connectedness going, but the reality is they are drifting further and further apart.
The Bottom-line: With all the instability in the world, the workplace must become a place where we can focus on positive things and engage with each other like we used to
In pre-pandemic days, your job was an important part of your life, and the people around you mattered. Work mattered, and performing well really meant something. Today, many people are withdrawing from engaging with their colleagues. Many are producing the bare minimum to stay relevant in the workplace.
With such a global assault on the stability of our lives, shouldn’t this be a time when we find some solace with our colleagues? Isn’t this a time when our bosses and colleagues are people with whom we can share our concerns and find some comfort in working together? Because the more we distance ourselves from our workplace, the more we are cutting off a valuable place that can help us through these challenging times.
Employers have no choice but to re-engage their workforce by any means possible. This means managers set the example, going into the office at least two days a week and demanding their staff follow suit. This means companies getting tougher with employees who are simply underperforming… especially when other staff sees their colleagues getting away with coasting, as many will follow suit. Sure, we all got a free pass during the pandemic, but those days are long in the past, and organizations must refocus on being meritocracies.
While it’s easy to point the finger at this coasting culture, the major reason behind this hybrid work failure is poor management. Far too many mediocre managers out there haven’t adapted to the remote environment and are simply failing to approach the job differently to be effective. Good managers are driving better collaboration across colleagues, encouraging more in-person sessions, investing in technologies like whiteboarding and smart meetings that really help collaboration, investing time in social activities that promote staff bonding etc. It is no surprise to me that so many staff are disengaged because they do not have mature, motivated leadership to give them direction and motivation.
There has never been a time like this where the very nature of doing a good job is under threat. Companies settling for mediocrity are going to face a huge struggle trying to get their mojo back in the future. It’s not OK to be meh… it really isn’t.
One IT services provider delivering superlative performance in recent years is Capgemini, recording over 20% revenue growth in the first half of this year while also enjoying growth in operating margins, despite all the inflationary pressures and high attrition across the industry.
As it approaches its $20bn revenue milestone, it’s high time we caught up with Group CEO Aiman Ezzat to understand what’s driving this growth since he took the helm over two years ago…
Phil Fersht, CEO HFS Research: So I’ll dive straight into this, Aiman. Did you always want to be a CEO of a €20 billion services giant? Was this what you always wanted to do when you started out?
Aiman Ezzat, CEO Capgemini Group: I’ve been with Capgemini almost 27 years now, Phil. I am a chemical engineer, but I started my career with IBM in the mid-80s, IBM Europe, actually. I stayed there for a few years and then went to do an MBA at UCLA. After that, I was curious about consulting, so I joined what was called the Mac Group, at the time, which was a strategy consulting boutique which was created by Harvard professors, and as I joined, this company got acquired by Capgemini to create what was, at the time, called Gemini Consulting, which was a transformation consulting arm of Capgemini. I stayed there for nine years, half of the time in Europe, and half of the time in the US, I was based on the West Coast. I left in 2000 to join a smaller firm that was supposed to go public, it never happened. I stayed there for four years. At the end I was running the non-US business; I was based in D.C., but running Europe and Asia. I left in 2004 to come back to Capgemini.
My career restarted in Capgemini, after that four years’ divergence, I was first in group strategy, I was Deputy Director of Strategy, I did a lot of the transformation programmes, I did a lot of the acquisitions. And I moved to help one of the acquisitions, which was Kanbay, to help create our global financial services P&L. I joined as COO, and after one year, I became the CEO of that business, to make it a global business for Capgemini. That was 2007, and I became CEO of our financial services entity on the 1st of January 2009, perfect timing to see the financial market crash. This was an interesting experience, of course. At the end of 2012, I became the CFO of the group, I stayed CFO until mid-2018. In the meantime, I was chosen as being one of the two people to potentially become the successor for Paul Hermelin, so I also became COO. And then you know the rest. In September 2019, I was confirmed as being the next CEO, and I became CEO on 20th of May 2020. So that’s kind of my career, very, very Capgemini, but very diverse in Capgemini, as well, because I touch a lot of things, strategy, operations, finance.
Have I always dreamed of becoming a CEO? No. There are some people who, when they are 18, they want to become a CEO. Me, I wanted to do interesting things in life. So I followed my career, from one thing to the other, always trying to find a way to be able to add value and learn something. I was quite successful in the CFO role, I was chosen to be one of the two potential people to succeed Paul, and it was only then that I realized that I could potentially become the CEO of Capgemini. That’s kind of how my career went. So I’m not a big power guy; I was interested in taking the CEO job because I had ideas about what I could bring to the group. This is it. When you take the CEO job, it’s for that. It’s not for power; it’s because you have a vision, and you see that you can add value, and see what you can bring.
Phil:So who have been your influences along the way that you can share, maybe some personal and professional ones, Aiman?
Aiman: There are a few things that marked (ph 05.28) me through my career. When I was younger, I was interested in strategy and did a lot of reading, one the persons that influenced me was C.K. Prahalad with Strategic Intent and Core Competencies, that was early 90’s. In the late 90s, one guy that influenced in terms of thinking was Chan Kim, who is a professor at INSEAD, who with Renée Mauborgne wrote a piece called Value Innovation and Fair Process, and then went on later to write Blue Ocean Strategy. That influenced me in terms of how you need to focus on the client, and how to create value for the client; moving away a bit from the notion of competitive advantage, and much more around value creation being focused on the client. This influenced me, in terms of thinking.
In terms of people, you look at a lot of people, you learn from a lot of people, I cannot say I have one role model. But someone that impressed me, in terms of what he did, is Steve Jobs. He was passionate, he had a vision, and people could tell him whatever they want, they didn’t necessarily agree with him, but he was convinced about what he wanted to achieve. He created a lot of value. That’s someone I like, in terms of personality, in terms of his commitment to achieving something, his vision., He drove it all the way to the end.
Phil:Yeah. I love watching some of his old videos, including when he launched the iPhone, he could accurately see 15 years into the future. It’s incredible if you watch that 2007 launch.
Aiman: Exactly.
Phil:But when he relaunched the Apple brand, he was all about experiences, not products. It’s like when you watch Nike commercials, you don’t see products being sold, do you? You see athletes, you see health, you see what this brand stands for. And I think he brought that into the consumerization of IT, which is fascinating… he really did change the industry.
So Capgemini has grown a lot over the years, and with a lot of M&A… you’ve done a lot of acquisitions as a business. But I feel that one of the defining acquisitions you’ve made is Altran. You’ve built this unique OT/IT focus, it gets you really heavily into supply chain, and engineering, and sustainability. One, do you agree with this? And two, how do you see Capgemini’s DNA today, as you hit this €20 billion milestone?
Aiman: Yes, it definitely was defining, Phil! I think some others in the history of Capgemini were defining in different ways. There were many geographic expansions in Europe: Hoskyns got us in the UK, Volmac got us in the Netherlands, and Programator in Sweden. So a lot of the expansion was geographic, a lot of the expansion was around getting us into new territories. We changed a little bit, after that. The Kanbay one was really around India, and how to learn the India model, and the one-team model, etc., so we had to move from a western model, to a much more Indian integrated model. IGATE was about scaling in the US. But yes, the Altran one was defining in terms of it was probably one of the more strategic ones, because this one was really around a vision we had around the concept of intelligent industry, and how the convergence between the digital and physical worlds is going to happen, and the need to be able to have people really understand the physical world, to be able to create that value around intelligent industry.
So I fully agree that this is definitely something defining, in terms of Capgemini’s evolution, in terms of strategy, as well. It’s about a space that was being created in the market. People bring it to Industry 4.0, and the concept of intelligent industry goes beyond that. Because it’s not just about digital manufacturing and intelligent supply chain, but it’s also about the creation of the new products and services of the future, and their platforms. A car now becomes an intelligent product, full of software, and it needs to run on a cloud platform. So it’s not just how we manufacture the car, and the supply chain that goes with it; it’s how we create, how we conceive the car.
And this is where the understanding of the physical world becomes important. If you think about it… look at the financial services industry. What was specific in financial services, compared to other industries, from an IT perspective, is that it was already in the product and the service. A credit card is made out of IT. A bond, an equity, a payment system is made out of IT. In most other industries, IT was not in the product or in the service. IT was not in the car. And suddenly, IT comes into the car. And what was specific in financial services is that you moved out of the horizontal needs. You were not in finance, in HR, etc. Of course, you could do that. But when you talk to the business, when you talk about credit card, you need to understand the credit card business. You cannot develop products or functionalities for a credit card if you don’t understand the credit card business. And when it comes to a car, it’s exactly the same thing. You cannot develop the software architecture of a car if you don’t understand how a car operates, or what a car is made of.
And that’s really what we got through Altran. We had people who knew how to build cars, how to build planes, understand how a factory operates, understand the pharma companies, in terms of 3D manufacturing, and engineering, and R&D. And when you bring that with digital, that’s really when you are able to give birth to the intelligent industry concept, which, as I said, goes beyond the digital manufacturing and intelligent supply chain.
Phil:As we get into manufacturing and supply chain, the role of providers with sustainability becomes much more relevant, doesn’t it?
Aiman:Sure, Phil. When we look at sustainability –we are pretty big on sustainability – there is, of course, the internal part. We are doing the job, but we are a service firm, we are not a big emitter. A lot of it is linked to business travel; you reduce business travel, your footprint goes down quite a bit. realizedTechnology, digital and data have a big role to play, in terms of helping to drive sustainability solutions. So we made a commitment to help our clients reduce their carbon footprint by 10 million tonnes of CO2 by 2030. Following that commitment, we started developing an offering architecture around focused on “How can we make this happen? What value-add can we bring to our clients?” So, of course, there is the strategy. How do you get to net zero? What are the levers, depending on your industry, that you can act on, to be able to get to net zero? (? 13.17) That’s the business consulting, the strategy consulting part, you need an industry understanding, understand the levers that people can use, energy efficiency, or others depending on their industry. And from there, you can say, “Okay, these are the levers, this is how you can get there, this is how you can do the saving, this is what you need to change, these are the technologies that are available to you to do it.”
At the other end, you have one of the most complex parts, which is measurement and monitoring. On one side, you have to be able to measure the carbon footprint, and I think that’s an area where we evolved, we’re working with a number of technology partners around developing calculators, and other tools, and measurement, including on the procurement side. On the other side, you have the monitoring; how do you monitor the evolution of your carbon footprint? And in the middle, I call it the doing part. The doing part has three legs, for us. It’s green IT, or sustainable IT. We are definitely in that business, we help our clients reduce their technology footprint. The second part is sustainable operations, that’s really by industry. We’ll not cover all industries, because it’s very industry specific. There are things that are common, like energy efficiency, and energy transition that you can work on, but there are things that are very industry specific, and there you really have to go to the heart of the industry to understand what levers you can use. And here again, the engineering capabilities are important. And the third leg is sustainable products and services. We work on helping clients redesign a gearbox to reduce its size, and also the materials to make it lighter in order to reduce the carbon footprint. We worked with a forklift manufacturer for a completely redesigned forklift in order to reduce the carbon footprint over the lifecycle. This is the doing part. It’s the sustainable IT, it’s sustainable operations, and it’s helping clients to redesign their products and services to make them more sustainable, with the monitoring and measurement and, of course, the strategy part. We are starting to do a lot of projects, it’s really taking off, and I do believe that it’s going to become a big business.
And one other positive thing about this, besides being good for the planet, is that it’s a talent magnet. Young people love to work on these projects.
Phil:And in that vein, I know you’ve mentioned this is a long-term change in the way that we’re approaching talent and work. Can you share a bit more about your thinking here, Aiman?
Aiman:There are two different things happening at the same time, Phil. On one side, a big shortage of technology talent, because we are moving to a digital economy. Companies are impacted across the value chain, and they all need technology talent. Whether you are talking about your customer relationship, how you manage your company, how you design your products, how you manufacture them, or how you move them through the supply chain, so the whole value chain now requires technology, not just the management of the business. This has significantly expanded the demand for technology capability in most companies… in the economy overall., Technology spend is becoming a bigger part of the economy, , and to be able to fuel that, you need more talent. That talent does not exist. The growth of demand is far too fast. We have a big imbalance between supply and demand of talent. That’s one side.
The second side is the evolution of the new generation, Gen Z, which is coming with different expectations, and the whole evolution of the workforce, and the model of working, coming from hybrid. You have to combine the two, the two are happening at the same time, and you need to deal with the two. First, there is definitely the reskilling of talent, and we have done a huge reskilling of talent internally and we are also helping our clients reskill talent. Going beyond reskilling, we take people with no technology background and train them. We work with universities to develop new curriculums. We even tried to influence a bit some of the governments, saying “We need to think differently. The technology talent is not just engineers.” Otherwise we’ll never have enough talent. You need people who can do coding. They don’t need to do five years of engineering to write code. We can train people, if they have the right math background or logic to write code, we can train them in 12 to 18 months, or 24 months. We need to find a way to diversify the education model, to be able to bring more people up to speed to fuel that digital economy.
So upskillingbut also the creation of new talent is important. That’s why we hire a lot more young people, train them, sometimes people with no technology background.In our industry, we are big employers in terms of tech; with all our large competitors, we are the ones who can really train massive amounts of people, and fuel these people into the economy, going to startups, to other tech firms, to our clients. This creates attrition, because of the imbalance between supply and demand, you cannot do anything about it. That attrition is coming because the demand for talent is so high. You have to learn to live with it, for the time being, until we come to a more balanced environment in terms of supply and demand. Attrition will probably remain high for a while. It will probably come down a little bit, quarter after quarter, as this imbalance gets reduced.
The second part is the whole evolution of the interaction between employees and the firm, but even going beyond that, it’s people who you want to associate to what you do, who are not necessarily going to be your employees. That’s why I talk more and more about the talent ecosystem. First, there is, of course, your employees, and here people join because of your purpose, because of what you are trying to do, because of the interest of work, because you care for them, the whole people experience becomes important, the whole trusted work culture becomes important. The leadership model has to evolve. You have a generation that doesn’t want to be told what to do, but wants to be given a direction, be motivated, be cared for, and have some freedom in how they get things done. Which is quite different. . So it’s much more an alignment, and a leadership model, than it is a management model. I’m going a bit from one extreme to the other, it’s somewhere in the middle, but there is an evolution in the way you have to lead, with all this generation, if you want people to stay with you.
And the realisation, as well, that the workforce is going to become more fluid, people move easily from one company to another, you have to learn to live with that. The fluidity of the workforce will increase, and it’s a fact. We will not go back to where we were pre COVID, where people will stay for a long time in companies. You definitely need your core of employees, of people who stay longer, but you’re also going to have people moving faster. Which means that you need to start to learn to live with what I call a talent ecosystem, which is not only your employees, but also people that go beyond your employees, gig workers, potentially people who have retired, potentially students, people who only want to work three or six months a year. All this is an ecosystem of talent. They are not employees. But I put a very important concept in that; that you need to identify them. It’s a bit like personalised marketing. I can work with them, if I know who they are, because I know when to call on them, and they might or might not be available. In a certain way, I need to identify them, I need to get to know them. And maybe I get to know them because I am certifying them. I give them a Capgemini certification, they have been trained by me, and they can go and valorise that certification somewhere else. By doing that, I also get to know them, and I can ping them when I need. It’s at will. But having identified a much larger pool of talent, which goes beyond my own employees, I can be in touch with them, and associate them with my work.
So it’s really an evolution, the foundation is going to be your employees, but you enlarge it with an ecosystem of talent that you know, and to whom you are connected.We can really make it happen.
Phil:My final question, just a quick one, is how are your feelings about the future, when we look at the chaotic times we’re in with geopolitics, and inflation, and things like that? Are you feeling slightly positive? Are you feeling negative?
Aiman: Of course, like everybody, Phil, we are closely monitoring the situation. There are a lot of complexities today between geopolitics, inflation, and the big evolution in terms of what’s happening in the economy: we cannot be ignoring it. On the other side, I am optimistic, because the fundamental trends, the structural trends are positive. In the past it was the Industrial Revolution, now this is the Digital Revolution. Everything is moving on a technology platform, on a cloud platform, we’re going to have a lot of new digital services, we’re going to be able to use quantum computing to discover new drugs. So there’s plenty of positive trends. As an industry, we are in the middle of that, we are in the middle of the transformation of business and society. I can only be positive about the structural trends, being part of digital transformation, being part of inventing new products and services, being part of inventing new public services, being part of enhancing people’s lives, being part of finding solutions to sustainability. I am very positive about the fact that we are creating a digital economy. Structurally, the long-term trends are good. In the short term, we have to monitor closely what is happening, and learn to be agile and adapt to what’s going on in the market.
Phil:Well, thanks for your time, this has been really insightful, I look forward to sharing this with everybody… it was great getting some time with you today, Aiman.
