Articles Posted in Industry Trends

Change is hard. Big change is harder. And big change in big companies is extremely hard.

So it is not surprising that when it comes to large outsourcings, the amount of change can be a deal-killer. The friction costs of outsourcing can result in hurdles that are just too high to overcome – even for deals that ultimately produce significant savings and that clearly would be in the best interests of the company.

These friction costs of moving forward with an outsourcing transaction go well beyond the obvious “hard” costs of the service provider’s transition charges and cost of severance. The “harder” friction to overcome includes:

The topic of the day appears to be “big data,” meaning the aggregation, mining, and analysis of data. This data analytics helps determine customer profiles so that companies can tune their offerings and sell more of the right things to the right customers. As recently reported in the New York Times Magazine, Target, through the use of such analytics, was able to determine that a teen was pregnant by her purchases before her father knew she was pregnant. This allowed Target to adjust its coupon offers based on Target’s knowledge of buying practices of mothers-to-be. But, at what cost does this analytics come?

Caribou Honig, writing on Forbes.com, makes a case “In Defense of Small Data” that collecting, storing, and processing mounds of data is costly and provides no more–and perhaps less–useful data than analyzing only the limited data set that really matters. In addition, storing this volume of data has its own direct costs.

And this is only half of the story . . . There are also legal costs and risks to big data.

Transition Services Agreements (TSAs) have become common (and more complex) in corporate divestitures, mergers, and spin-offs due to the increasing operational complexity of the environments impacted by these transactions. And if M&A activity increases as expected, despite a slow start in 2012, these agreements will continue to play an important (but often undervalued) role in the success of the transaction (especially after the closing dust settles).

Transition services typically are provided by the seller to the buyer (or by the former parent to the spun-off enterprise) to ensure business continuity and interim operational support for the impacted business during a “transitional” period after closing. Transition services may also be required from the buyer or divested enterprise where, for example, commingled tools, operations, software products, and know how need to be leveraged by the seller or former parent for some period of time. These “reverse” transition services are often overlooked.

In effect, transition services are a form of outsourcing where the processes that were previously handled internally are performed by the formerly affiliated enterprise during the transition period. Sounds simple, right? Isn’t it just maintaining the status quo for a short time?

After deciding recently that peeking cautiously at quarterly brokerage statements might not be the best investment strategy, I can now say that while I’ve been sleeping at the investing switch for the last couple of years, innovation has been working overtime.

Having scoffed for a while at what “good paying green jobs” might have meant, it didn’t take a lot of poking around in the battery, fuel cell, natural gas and chemical industries, to paint a more vivid and alluring picture. As an investor waking up from a long hibernation, I only wish this was a party where I had shown up unfashionably early.

Despite most of us having spent the last few years of the economic meltdown hunkered down, reducing our expenses and keeping a low profile, there have been some brave souls that have been hard at work reinventing how the world might work in this century.

The following headline recently caught my attention:

“Bill would OK secret privatization, outsourcing of Florida agency functions”

What is not news is that State and Local Governments (SLGs) are struggling to maintain the services their electorates are accustomed to. Blame declining tax revenues caused by the housing market bust and the “Great Recession”. But unlike the Federal Government, SLGs do not have unlimited resources to deal with budget shortfalls. So officials find themselves playing with the unpopular options of cutting services and/or raising taxes. In the search for a silver bullet, the concept of Private-public partnerships (PPPs) is garnering increased interest.

News that Accenture Life Insurance Services has won an eight-year business process outsourcing (BPO) agreement with BNP Paribas Cardif may be a sign that the European life insurance and pensions market is set for increased outsourcing activity.

According to Accenture’s press release, “Accenture will manage an important portfolio of BNP Paribas Cardif’s group life insurance policies business in France, including the administrative management of the insurer’s call centres and ancillary accounting operations.”

“The life insurance industry is undergoing fundamental change, driven by increased regulation and risk management pressure and more volatile markets,” said Daniele Presutti, managing director of Accenture Life Insurance Services. “This provides an opportunity for some insurers to gain market share. Outsourcing can help them strengthen capabilities to reach their objectives.”

For the past decade or so, IT organizations looking to lower delivery costs have outsourced day-to-day IT operations activities to IT suppliers who in turn send the work to low cost locations (primarily India). Typically, this is done by executing a knowledge transfer process whereby the IT suppliers capture the information needed to operate the client’s environment and then train offshore resources to do the same work. Ideally, the IT supplier also contributes processes and technology best practices and actually improves the execution of the services formerly performed by the client.

While these solutions worked to cause one-time reductions in IT costs, the savings from offshoring is declining while productivity and cost challenges require CIOs to continue to demand more. Do we simply encourage suppliers to keep chasing cheaper labor around the globe? Do suppliers use knowledge tools to keep pushing the work down to lower (cheaper) levels of staff? Neither of those options are particularly appealing. Perhaps suppliers can continue to improve their processes and execution to reduce the time and effort to deliver services. How much incremental value is that really going to deliver? Maybe a few percentage points in productivity improvement annually and maybe none after inflation.

What’s needed is a sea change. CIOs need a disruptive technology-driven solution to challenge the traditional role of human labor in running day-to-day IT operations – specifically the execution of repetitive tasks performed every day by IT resources around the globe. They need automation in IT operations.

There’s a small, but growing, group of people that are willing to purchase their own computing devices and software required to be compatible with their Windows-based colleagues, forego most of the help provided by their employers’ IT service desks, figure out how to gain access to exposed enterprise services and pass the secrets along to others willing to march to a different drummer.

And yet, while such individuals oftentimes represent those that are most likely to develop the breakthroughs on which their businesses depend, enterprise IT’s overwhelming response has been to make it difficult for such employees to co-exist in the neighborhood.

Up until now, that’s been the collective opinion of big business and research organizations focused on such matters. But with a report just issued by David K. Johnson at Forrester (it’s US$499 for those who don’t subscribe), they have now decided that “It’s time to repeal prohibition and take decisive action.”