So what on earth does the future hold for sourcing advisors?

Can we still keep our sourcing advisors busy?

Last week’s outsourcing advisory bombshell wedding between KPMG and EquaTerra may well prove to be a turning point in the way buyers are serviced in the future. Management consultants need to have deep experience, knowledge and data on the operational guts of outsourcing, while boutique advisors need to offer a much broader consultative value proposition for clients who are tackling global operational issues.

HfS’ Esteban Herrera, himself a veteran advisor and consultant prior to venturing into the analyst community, asks the question that many of you raised after last week’s announcement:  So what on earth does the future hold for sourcing advisors?

Over to you, Esteban:

Advisors: What next?

KPMG’s acquisition of Equaterra has raised a lot of questions about the future of the advisor business. I, for one, have been forecasting the demise of the traditional advisor model (which, by the way is how I have made my living for the last decade) for at least five years, and the consultants stubbornly prove me wrong by staying in business and acquiring new clients.

That said, I do believe winds of change are blowing, and KPMG may well be on to something—something difficult to pull off, but something potentially special and different. The bad news, for them, but the good news for customers of outsourcing and outsourcing consultants, is that others are onto this idea too. First, let’s look at what is happening:

1. Every one of my friends in the business believes that “transaction advice” projects are getting smaller and less profitable. This has allowed most firms to contract to their very best folks, but these are folks with lots of years of experience and correspondingly high costs. Nobody has figured out a model where inexperienced “kids” are leveraged by cynical grey-hairs to execute a deal on behalf of a client.
2. The big clients that can pay hundreds of thousands, if not millions, of dollars for transaction advisory deals have learned their stuff. They’ve done their deals and they don’t need an army of consultants to renegotiate an existing deal or launch a new one.
3. The next tier of clients, which might benefit from experienced advisors to do deals because it is newer to them, rarely have deals big enough to warrant the investment, so they go at it alone or hire one of the many talented lone rangers who are out there.
4. Procurement departments are getting more savvy or over-confident, depending on who you ask, but either way they are looking to carry a much heavier load of the work in an outsourcing transaction
5. While all the major (and minor) advisory firms have made big investments in “governance” and the myriad of things that go on post-transaction, none of them has established a large enough practice to merit much notice. There are a number of reasons for this: rates are too high, additional investment in the deal erodes the business case, the client believes its retained staff should handle these responsibilities (whether they are qualified or not), etc. But I have always felt there is another, more compelling reason not to hire consultants post-transaction: the provider generally knows what they are doing! Every single one of their clients has had to transition, and has had to govern, so they are kind of experts at it. The fox in the henhouse argument falls of deaf ears because outsourcing providers are not nearly as incompetent as many make them out to be, and because paying for transition/governance once is better than paying twice.

So given this precarious state of affairs for transaction advice, what is it that KPMG sees in Equaterra? Why are PWC and Deloitte roaring back into the outsourcing advice business? And why are there constant rumors about the other boutiques being snatched up? I cannot speak for the strategists at these firms, but my take is that even as the deal advice gets commoditized, it is a powerful sub-product in an overall offering that aims to optimize the operating model. Outsourcing is here to stay, and it has to be part of every enterprise’s back office. But it does not replace that enterprises back office. The notion of a single firm that can optimize the entire back office is an attractive one.

But this type of offering requires a very different skill set. Twenty-five years at EDS may have made you an expert at outsourcing IT, but it did not teach you how to run a recalcitrant back office environment that is just plain hard to optimize. In order to do that, you need to combine:

1. Vertical expertise (which the boutiques, no matter their claims, never had the scale to provide, but the audit/consulting firms have in spades)
2. Business Process expertise. Nobody knows the gotchas in existing processes as much as the people who spend their lives trying to find them—auditors.
3. CFO-level relationships. Like it or not, this is where big cost decisions are made. I’ve lost count of the times that a CFO overturned a sourcing-advisor selection in favor of her/his preferred advisor. Advantage audit firms.
4. Big picture focus—its not about MIPS, or SLAs, or throughput, though all those things matter at some point. It’s about how you build a well oiled machine that supports an enterprise well at a very, very, very low unit cost. I’ll argue that nobody has an advantage here, because if someone had figured it out, we’d know about it because they would have stopped messing with their back office.
5. Shared services expertise. It’s been painful to watch the outsourcing advisory firms pretend they can do shared services. The large-scale consulting firms have a slight advantage here.
6. Transaction Expertise. Run them quickly, run them well, run them in such a way that they leave behind a mutually professional relationship that lasts. I’ll give the advantage to the sourcing advisors over the big audit firms on this one.
   

   Esteban Herrera, Chief Operating Officer, HfS Research (click for bio)

7. Operations focus. This is the holy grail. Can any consultant be valuable enough to stick around for years? It’s rare, but if they combine the six points above with a relentless focus on execution that works in the context of the client’s business strategy, they might get there.

Clearly, I believe the transaction advice is a critical arrow in the quiver of any firm that wants to fix your back office. In fact, they are just not credible without it.  The issue for the multi-service firms is this: Can they defeat their own silos to bring the combined capability to a client? The services required to transform the operating model may actually all reside in a single firm today. But no firm I know of can beat the politics inherent in a bunch of partners/executives whose concern is their own P&L, and not the integrated fantasy offering I’ve described above. It’s a challenge that we hope the various firms now playing in this space can embrace.

Posted in : Business Process Outsourcing (BPO), IT Outsourcing / IT Services, Outsourcing Advisors, Sourcing Best Practises, sourcing-change