12 March 2009
Interview By Jamie Liddell, Online Editor
Jamie Liddell: What have been the biggest consequences for the shared services and outsourcing space of the economic crisis over the last six months?
Marco Busi:The three biggest consequences in my opinion are a general, impressive, unsurpassed far of failure at all levels and functions in all organisations (with all that it entails); lack of spending across the board; and lack of product/process innovation (being also the most worrying long-term effect).
Clearly though, this depression has mostly had different impact on private/public sectors and on different industries, and larger enterprises have reacted and are reacting differently from smaller ones. One consequence that we have observed for larger enterprises is the decreased number and size of investment made available for new product/service development, expansion into new markets and marketing. Measures of Return on Investment are increasingly being requested and discussed from board level down to operational level. Accountability is also playing a major role: decision makers are being “measured” much more carefully than ever before and are being held accountable for the types of initiative (internal or external) they decide to fund. This is showing natural behavioural consequences, some good (e.g. increased buy in and involvement in the projects funded) and some bad (e.g. favour of business as usual rather than taking any risk in doing things differently).
The experience for Small and Medium Enterprises (SMEs) has been different though. Whilst it is true that SMEs are being hit hard by the lack of available finance, it is also true that the typical disadvantages of SMEs (such lack of resources, lack of structure, etc.) are actually becoming advantages at times like this. The ability to be leaner and more agile (and cheaper, let’s not forget) gives SMEs a cutting edge these days. Also, because of all the same reasons, SMEs are more prone to spend time developing new products and services, and this is paying off in terms of attracting new clients. Those SMEs who manage to tighten the belt and survive on their own working capital actually have a huge opportunity to exploit the impact that this crisis is exercising on the larger businesses. In a way, by reacting so rigidly and fearfully, larger enterprises are levelling the field of competition, allowing smaller enterprises to bid (and be considered for) more contracts.
Limited spending and increased attention to cost savings, in particular related to labour and infrastructure, have become The decisive decision driver lately. We have already started to see a number of outsourcing and shared services deals being put on hold. However, 6 months is too short a time to have witnessed what the major changes will be at the global industry level. Certainly though, both current and future improvement projects and outsourcing deals are being reviewed on this basis and I am pretty sure we will start observing the real consequences of this in 6 to 12 months time.
Jamie: Specifically (and in as much detail as you can give!) how has the crisis impacted upon your own organization?
Marco First, let me clarify two points to set my response in context. Carisma RCT falls within the Small Business definition; and our core offering within the outsourcing and shared services space is improvement through redesign of business models, strategies and operations. That said:
The most obvious impact we’ve seen on our own business is probably no different than many others have seen too in our sector: quite a few negotiations have been brought to a premature end due to unforeseen lack of funds and there is a generally tighter control of project cost-benefits due to increased accountability of project sponsors.
Having said that, if I was asked to identify one good thing about this global economic meltdown, it’d be that losing money, facing budget cuts and fearing failure make businesses more likely to try and improve and optimise whatever they can in order to squeeze every possible penny out of what they currently do/have. This often results in either one or both of these two scenarios: initiate process improvement projects, outsource non-core processes (or do both).
In the short time, decreasing revenue, decreasing profit margins and limited working capital available (in both larger and smaller businesses), is driving executives to prioritise process efficiency through business process re-design as it has the potential to generate benefit quickly. Which is melody to our ears, of course!
In addition, in desperate pursuit of cost savings, even multibillion dollar corporations are starting to favour the higher nimbleness and speed of delivery and lower cost base of smaller business services firms to the rigidity and higher costs of the usual well known names in consulting. Which again, doesn’t sound too bad at all to us!
In other words, all this indicates that this dark cloud of recession actually offers a silver lining to our business. There are opportunities now for us to work with forward looking (small and large) businesses (on both end of the outsourcing relationship – i.e. supplier and clients) which understand that, in order to survive this crisis and to come out on top, now is the time to go back to the basics, i.e. the process design, and are ready to support targeted investments in improvement, innovation and development.
Spending at times where the cash is the hardest thing to get by may seem illogical, as many businesses out there seem to believe so strongly. The only comment I can make about this is: let’s wait and see what will happen to these businesses in a year time.
As for the public sector …that’s a completely different story. My view may be skewed by the fact that since the crisis has started we have dealt primarily with the regional development agency in the northern part of Scotland. Here, we have observed an incredibly strong fear of failure which has resulted in the government first hitting a stall – nothing has happened at any reasonable speed for a long while - and then awarding contracts mainly to either well established businesses or extra-large-businesses. This obviously has a huge impact on the economy as it is basically slowing down the natural innovation cycle that should keep national industry abreast with the rest of the world developments.
Jamie: Six months in, what’s your perspective on how you see the space developing over the next six months?
Marco: As I said, 6 months are usually too short a time frame to be able and observe changes at a global industry level. I am sure that in the next 6 months we will really start to see what this crisis means for businesses. To try and look into the future of outsourcing/offshoring/shared services, we cannot ignore the various events which are taking place at present: the new US President and his policy concerning outsourcing/offshoring, the restructuring of the financial services industry world-wide, the constant fluctuation (which is mostly downward!) of currencies and all the rest.
The picture of the future can -as usual- be different depending on who paints it: the media (the world is doomed, nobody is going to have a job in the future, we are all going to die!), industry representatives (outsourcing is here to stay, the sector is recession-proof, we will be bigger and better!) or the people on the ground (I have no clue what’s going to be, but I sure know that I won’t go on holiday this summer!). Surely though, you don’t need to have a Nobel prize in Economics to understand that the future is not going to be bright for all, although everything will eventually go back to normal. After all, that’s the normal cycle of the economy, isn’t it?
Anyway, I think that in the next six month we will observe the following:
- Targeted investments: spending will still be limited. However, we will probably see more and more businesses investing in targeted areas. From a client perspective, these will be: process re-design, definition of sourcing strategy (what / where to outsource) and design/ coordination of outsourcing relationship (how to outsource). From a supplier perspective focus will mainly be on moving up the value chain (I’ll touch on this in a minute) through designing innovative delivery models (e.g. shared services) and/or improving services delivery performance
- Industry growth: this is a tricky one. From one end, as budget cuts are necessary, they are likely to continue. This will probably result in decreased amount and size of new outsourcing contracts being initiated, which will eventually lead to a general industry growth slowdown. However, following the “business as usual” preferred route, it is not likely that existing contract will be scaled back (also because outsourcees would face the big challenge of recreating the knowledge loss to the outsourcers over the years). From the other end, for the same reason – i.e. lack of finance –, businesses will be looking to outsourcing more and more, hence we should expect to observe industry growth. However, I think this will happen beyond the next 6 to 12 months, when, after having hit rock bottom, the industry will start building up confidence again and we will see many more deals coming on the scene.
- Industry consolidation: there is not much to say here apart from the fact that, as we have already started to observe, the trend towards consolidation will continue and we will see more and more industry players teaming up to share the pains of this recession. Probably more so in the SME sector.
- SMEs outsourcing uptake: SMEs will try every possible solution to stay afloat. As the outsourced services offering broadens, becomes cheaper and easier to access, we may see a steep increase of outsourcing uptake in the SMEs sector. In this context, contracts based on the Shared Services model will growth significantly due to the important benefits this model is capable of generating.
- Moving up the value chain: as profit margins are eroded for standard and repetitive transaction outsourcing, the focus will shift towards transformational outsourcing. Outsourced service providers will have to move up the value chain by broadening their offering, taking up more and more of a client’s business.
- Shared Services: I’ve mentioned this already but I believe it’s worth underlying that in the current climate we will see the Shared Services model becoming the model of choice by both suppliers and clients.
- Global sourcing/Offshoring: I don’t think we will see any major change in the global outsourcing industry. Whilst America is still one of the biggest clients for the outsourcing industry in Asia, China is enjoying a healthy national market and India sees both a huge number of captive operations as well as an increasingly global clientele. There are some industry specialists which say the pressure on cost resulting from this financial slump will actually increase the size of contract sourced from offshore. I personally don’t agree with that view and I think that in the long run the most important outsourcing decision driver is going to be a combination of cost cutting, efficiency improvement and quality. Which indicates to me that price alone is not going to be an order winner.