Services Safari

Finance/HR Jobs to go Offshore

          Crying Time for 1.5 Million Service Professionals

I know I've recommended a number of articles for people to read. This is one that should be taken while sitting down. Hackett Group (http://www.informationweek.com/news/showArticle.jhtml?articleID=193402615), a part of AnswerThink, is releasing a report on Nov. 7 that suggests that the Fortune 500 could save $58 billion a year by moving a number of general & administrative (G&A - That is, finance and HR) positions offshore.

This prognostication has been anticipated. We've seen architectural, engineering and IT jobs moved offshore. The time for payroll clerks, accounts payable clerks and supervisors, general accounting specialists, fixed asset accountants, management reporting personnel and many others to face the grim news has come.

Those that will be most affected will be lower level accounting and HR personnel. These people have positions that business process outsourcers(BPO) like GenPact, OfficeTiger, Accenture and others can do well and at lower cost. Some of the BPO firms will offer one-time labor arbitrage while better firms will deliver continuous improvements to their clients. Smart buyers will sort out this differentiator.

Fortune 500 firms will have to move to lower cost G&A solutions simply because domestic processing costs them competitively and Wall Street will demand better performing back office functions. The cost of back office operations has dropped in U.S. businesses from about 4% of total revenues in the 1950s and 1960s to around 1.5% of total revenues today. Well run firms can do this in about 0.4% of total revenue (all stats are for $1 billion+ revenue firms).

If companies choose to keep G&A internally, they will need to seek a global shared services environment where many G&A functions are performed, more cost-effectively, in lower cost countries (e.g., Ireland, India, China, Eastern Europe). What won't be cost effective is to permit the continued use of complete, redundant G&A groups in every country where a firm operates. Not every country's operation needs to do its own invoice matching and payment processing. Likewise, many payroll and general accounting tasks can be consolidated into lower cost service centers. Where work is done is not country specific.

Smaller companies will simply have to outsource to remain competitive.

Change is definitely afoot. This Hackett report will spark some serious discussion in the executive teams of large and small firms. How will your firm react?

Quick Stat

                     Size of BPO Market

If you need a quick stat for that business plan/presentation, Gartner is estimating the worldwide 2006 BPO (business process outsourcing) market to be $134.7 billion. This is up 8.3% from 2005.

(source www.eweek.com, the buzz)

Data on Service Spend

  Are Your Consultants/Vendors Spending Too Much on Travel?

My friend and colleague, Vinnie Mirchandani (www.dealarchitect.typepad.com ), loves to advise buyers of software and services. It’s what he does for a living. Vinnie has bent my ear on more than one occasion when he speaks of the high overhead costs of major systems integrators, consultants, outsourcers and software vendors. Vinnie hates seeing waste and he’ll likely have some interesting remarks related to this blog posting.

Business Travel News (www.btnonline.com) published its annual Corporate Travel 100 special edition this month (August 2006). It ranks the top 100 buyers of air travel in the

United States

. Each of these companies is profiled with many profiles identifying the net change in travel spend year over year, the best practices each firm is employing and how many employees are currently participating in these programs. Sadly, the data is not complete or consistent for all of these firms.

I read many of these summaries and have placed key data on service firms in the attached table.

If your firm is negotiating with a major service firm, you might want to ask them some tough questions regarding this big piece of their SG&A spend. Why? Because your firm is paying their high billing rates just so they can fly and entertain others. You need to determine how well they are spending their money and whether you should subsidize some of these costs.

I wish Business Travel News had captured the total number of

U.S.

employees (and the total number of

U.S.

employees who travel) for each firm. That extra data field would have permitted us to calculate travel costs/traveling employee. That number would have gone a long way to understand which firms are the most efficient in managing their travel costs.

In reviewing the Business Travel News materials I was surprised at:

-          the sheer size of IBM’s

U.S.

travel costs

-          the fact that McKinsey is outspending Accenture. Can that really be right?

-          the enormity of the total U.S. T&E costs of these firms. I must have missed a bunch of great meals during my Big 8 days.

I wasn’t surprised though at the much higher travel costs these firms encounter outside the

U.S.

Great service firms have a number of great travel practices that I wish more used. For example:

-          100% of traveling employees using company booking tools

-          100% of employees using corporate travel/charge cards

-          Mandated meetings policies

-          Automated monitoring of airfares

-          Use of collaboration technology in lieu of travel

-          Consistent progress in reducing travel costs/employee

-          Better monitoring for employee compliance

-          Consistent travel systems in use throughout the global firm

-          Negotiated travel agreements with hotel chains, airlines, etc.

Also, the top 100 travel spenders included a couple of software firms. Their data is presented below.

This blog will be cross-posted on Software Safari (www.softwaresafari.typepad.com) and KiteBlue (www.kiteblue.net) .

Cobbler's Children

                     Re-Engineering Service Firms - NOW!

As part of some client work I've been completing lately, I've had time to reflect on a few major points concerning professional service firms, especially systems integrators.

Finding #1 - Margins are not where they should be. When I examined the margins of companies all across the technology stack, I fully expected margins to be at their greatest when companies and products are closest to end-user/buyers. By and large, that was true except for two notable exceptions: Software Companies and Commercial IT Service Providers. The former had stupendous returns (mostly due to exceptional returns by MSFT, SAP and ORCL) while the latter did poorly at around 5%. (see Margin Map graphic)

Finding #2 - The competition for commercial systems integrators has changed yet again. One of the new combatants are ERP vendors who have been clawing back services revenues from these players for years. However, if ERP vendors are successful in rolling out newer versions of products that require less implementation effort, the effect on SI revenues could be chilling. Other competitors, like offshore firms, have really cut into the meat and potatoes of SIs. Moreover, corporations just don't want or value the old type of general consulting these firms offered in abundance in the 1970s-1990s. Specialized hosting and BPO firms (e.g., Hewitt) are chipping away market share, too.

Finding #3 - Global Service Delivery Models are easy to claim in sales presentations but are an expensive and difficult feat to pull off. Several commercial SIs that are dragging down group margins are still trying to sell and organize around an obsolete business model.

Finding #4 - Consultancies are finding that it is easier to give advice than take it. Telling a client that they are not operating at first quartile performance is one thing, but, doing something internally is a real change management challenge.

________________________________________________________________________________

Change strategies are needed now.

There is no magic one size fits all answer here. However, I recently re-discovered this chart in the book "Strategy Safari" by Mintzberg (no connection at all to my site). Way back in the book is this graphic by Ulrich (see below).

Every service firm should assess where they are in this curve and see what strategy is appropriate is right for them.

To illustrate, I conducted a Point of View sales training day the other day for a major ERP vendor. I gave them a case study involving a major systems integrator. When they read the background materials on this firm, one team after another expressed shock at how dysfunctional and troubled this company was. While the intent of the case study was to get them to see how they need to prep more before doing their old 'dialing for dollars' sales practice, it also shocked them to see how messed up a major, publicly traded SI could be.

Look over the Ulrich chart - where does your firm need to focus?

This brings me to the quote of the week:
"I don't think competition causes companies to fail. Much more often, they rot from the inside". 

(Source: InfoWorld 5/22/06 pg. 48)

New Reports from Wachovia

                  Government Service Stats Available

            IT Services Statistical Quarterly Just Released

Wachovia just released two relevant reports for the services space. The "Government IT Services By The Numbers" report (5/8/2006) is an extensive report on the players, drivers, etc. of that space. The report is approx. 45 pages in length and includes sector metrics and company profiles.

Also this week, Wachovia released its IT Services Statistical Quarterly. This baby is my best resource for key operational and financial metrics for offshore, government and multinational service firms.

Both  are highly recommended.

Earnings Roundup

Growth of Indian Service Firms

Now that most of the big earnings announcements are in, InformationWeek has recapped the overall trend. Here are there conclusions, in a nutshell:

- Indian Companies    36% revenue growth

- IBM                          3% revenue growth

- EDS                     -2.8% revenue decline

- CSC                         8% revenue growth

Obviously, the numbers point to where the job growth lies. However, let's not forget how large the non-Indian firms are. A small growth change within them is a lot. The divisor, as I learned in grade school, is as important as the numerand.

Growth in Outsourcing Space

TPI – Quarterly Outsourcing Report

I listened in to the Wachovia/TPI Quarterly Index Outsourcing call yesterday. A 25 page slide deck of this is available at www.tpi.net .

TPI reported the following:

-                          Restructuring of outsourcing contracts is on the rise. Since many of these are extensions to existing deals, this bodes well for the space.

-                          Overall, IT outsourcing deals were flat or slightly down. However, BPO deals, were definitely up. BPO deal volume was high both in Q4 2005 and Q1 2006. Overall BPO is up 13-15% and looks like this is the most bullish Q1 for BPO to date.

-                          Mega deals (those over $1billion total contract value) are doing well as were deals in the broader market (deals over $50 million total contract volume)

-                          When deals are coming up for renewal, loyalty to the incumbent is weakening a bit. This should concern outsourcers as it appears that brand and solution differentiation isn’t seen as varied enough to keep buyers’ loyalty.

-                          BPO deals that involve some modicum of transformation are growing in importance and are now 33% of BPO deals (from 2004 to today)

-                          Of BPO deals, FSO got 44% of the pie, while Procurement got 11%, HR outsourcing got 11%, and, multi-process outsourcing also got 11%. The remainder went to Finance & Accounting (5%), Document Management (4%) and other.

-                          The market is very segmented. Names like Pitney Bowes, RR Donnelley and Xerox are active in Document Management outsourcing while completely different players operate in different BPO spaces. Even more players operate in the IT Outsourcing segments. Only the largest firms (e.g., Accenture, EDS, IBM) operate on both the IT Outsourcing and BPO arenas.

-                          Big 4 North American firms grabbed a growing chunk of the largest deals while the European Big 5 firms lost some. However, when viewed from a context of total deals, the situation is reversed.

TPI executives also observed that many small deals actually take longer to negotiate and close than large deals. The logic is that many small deals represent the first outsourcing deal a company has undertaken. Once they get past the learning curve, the speed of deal completion escalates.

When asked about the NHS deal, TPI executives indicated that front-loaded deals like this put outsourcers into a ‘banking’ role and this is just unrealistic. We shouldn’t expect these arrangements to continue.

As to the pending sale of CSC, the polite consensus was that this could be good news, short-term, for CSC competitors.

A Correction in the Marketplace

Accenture Earnings

Accenture made the news in a big way yesterday with its decision to set aside $450 million for potential losses on a $3.3 billion National Health Service outsourcing deal.

That event notwithstanding, the company did post increased sales of 6.5% for the quarter. Other factors would indicate that this one deal is an anomaly. Accenture management indicated that the company is meeting its targets. The stock market didn’t exactly punish the stock. ACN shares fell $1.79 or 5.8%. While the announcement seemed to surprise some, it appears the consensus on Wall Street views this as an isolated event.

Latest Service Metrics

Service Metrics – 12/2005

This weekend, Wachovia Capital Markets released their IT Services Statistical Quarterly report. This is a dynamite publication and one I find quite valuable. Wachovia breaks up the IT services space into three groups: Commercial (e.g., Accenture), Government (e.g., CACI International), and Offshore (e.g., Satyam Computer Services Ltd). The report provides data on Gross Margin, Operating Margin, Tax Rate, Billable Head Count, Voluntary Turnover, Revenue/Billable FTE, Bill Rates, Utilization, Total Debt, Cash, DSO, Total Debt/Total Capitalization, EBIT/Total Capitalization, Market Cap, Enterprise Value and more.

Accenture remains the big dog in the bunch and its prospects, according to Wachovia, remain quite bullish given continued improvement in the space. Of the commercial firms, Answerthink and Computer Task Group posted strong year over year growth; however, the offshore firms as a group showed the strongest growth with most firms reporting better than 27% year over year actual growth.

Gross margins were highest for offshore firms (averaging 38.4%) with commercial firms (30.1%) and government firms (24.1%) lagging. Operating margins were also the best for the offshore firms.

What also caught my eye were the voluntary turnover and Revenue/Billable FTE stats. Voluntary turnover looked much better for the offshore firms and appeared to be less than that experienced by either the commercial or government firms. However, since less than half of the offshore firms provided this data, one should not infer that a new trend has emerged.

Revenue/Billable FTE is still interesting. For the commercial firms, revenues per billable FTE ranged from $135,000 – 344,000 with several in the low $200,000s. In contrast, offshore firms reported values of $44,000 – 57,000. From this one can only conclude that all the talk of developing global delivery models (for both domestic and offshore firms) is still in its infancy. Until these numbers get closer, offshore firms are still relying on low cost, notably Indian, resources and commercial firms are still staffing with local, in-country personnel.

Call or email if you’d to discuss this further.

Worth of an Employee

Worth of Employees

Paul Strassmann is one of the hardest working thinkers when it comes to finding the value in IT. He’s an ex-CIO and author of several books on the subject of IT and ROI.

He recently had a small piece published in Baseline that challenged readers to compute the worth of one’s workforce. Personally, I believe it’s a metric that more professional services firms should track and improve.

In rough terms, here’s how you calculate it: If you were to take the market value of your firm (roughly your stock price times the number of outstanding shares) and subtract the financial value of your firm (roughly the owner equity), you would get the knowledge capital value for the company. Divide this by the total number of employees and you get the knowledge value per employee.

When you compare that to the average wage (fully loaded) of employees, hopefully you’ve experienced a significant positive difference. This difference represents the power your firm has from its brand, methodologies, productivity improvements, great processes, etc. This difference is the market premium Wall Street rewards you for being a well-run services firm.

As a corollary, every service firm should understand these metrics too:

-          average revenues/employee

-          average wages/employee (Is this less than average revenues?)

-          average age in months of skills earned (when this climbs, skills are getting old, dated and less marketable)

We’ll cover more performance metrics in future posts but the one Mr. Strassmann asks is still very important: How much is an employee worth? If you’re a privately held firm, try this adaptation: Calculate the future income streams of each employee less their compensation. Are there employees earning more than they make? Do some employees have excessively short backlogs?

More on these issues soon….