Part Two–Vinnie Mirchandani discusses macro trends driving the outsourcing market and why innovation can still flourish.
Vinnie Mirchandani is outspoken and a passionate observer of the IT services and software marketplaces. His Deal Architect advisory service is read by many of the leading corporate buyers around the globe. Using him to advise on a sourcing transaction can instantly level the playing field for corporate buyers as they interface with the armies of experts at provider companies. In this second of a two-part interview, he discusses why business processes need periodic angioplasty, macro trends shaping the outsourcing market, and the future of blogging.
JV: It appears that you have coined the term business process angioplasty. This sounds just awful. What do you mean?
VM: I deliberately coined something awful. Business processes are arteries, highways, and rivers. They keep corporations and cities running—but need to be kept clean of different types of “plaque.” They periodically need dredging and angioplasty.
JV: Didn’t the reengineering movement address the need for streamlining business processes? What causes the plaque in our processes to build up and impact process efficiency?
VM: When I was at Gartner, the term reengineering was very popular in corporate America. The reengineering movement was fueled by Michael Hammer, who wrote the seminal Harvard Business Review article “Don’t Automate, Obliterate.” Hammer wrote books and conducted seminars around the globe preaching that we baked a lot of fat into our business processes and that we needed to restructure and simplify them. Well, Hammer had some impact, but if you look at what has happened during the past 15 years, we have added four layers of plaque onto our business processes.
The first layer is technology. Technology was supposed to make business processes more efficient. But technology is a little bit like cholesterol. There is good cholesterol and bad cholesterol. Some of the technology implemented over the past decade was very helpful, but a lot of technology was too expensive and it burdened processes with complex ERP systems and applications that have a questionable payback. In many cases, we allowed software vendors and consultants—not the consumer—to define what the process should be.
The second layer of plaque build-up is compliance—SOX across the board and by industry, as well as HIPPA, FDA validation, and others. Most of the focus on compliance reflects opportunistic laws from politicians.
If you look at what SOX has done to our financial processes, it is pretty expensive. Gartner would say that almost 15 percent of the IT budget now is SOX-driven. The Chinese don’t pay this. The Indian offshore firms don’t pay this. But SOX is a growing cost of business and a burden for U.S. companies competing in the global economy.
The third layer of plaque that has developed is a result of 9/11, the increasing cost of security. Now security is very important, but I have been through many airports and looked at security and wondered if it has really improved or just added a few steps to the basic process. From my perspective, it seems like we are spending a lot in security with a questionable payback.
Finally, we have added plaque around people. Globalization has forced us to realize that we have an expensive workforce compared with the cost and even the productivity of the offshore workplace. Whether we like it or not, that is the reality of today’s marketplace. So when you see the cumulative impact of these four layers of plaque on our business processes, it is clear that there is a need for periodic dredging and angioplasty.
JV: When you look at outsourcing in general, do you see macro trends pushing CIOs and CFOs to outsource more functions?
VM: Do you remember the scene in the movie "The Graduate," in which Dustin Hoffman is told he needs to be in plastics? If the movie were made today, it would say you need to be in services. There are services everywhere: web services, software services, BPO services, evolving application services, third-party maintenance services. It really is the golden age of services.
This is good for outsourcing providers in general as they clearly have the sales and marketing expertise needed. They know how to write service level agreements (SLAs), how to manage a team, and how to recruit, etc, etc. What I am a little bit concerned about is the amount of boardroom pressure to outsource. I am not sure the outsourcing market is the most efficient at this point to handle the growing demand, and the providers may be taking on more than they should. Demand may overwhelm supply.
JV: Where is offshoring going? How are the large global firms responding to the growth and increasing sophistication of offshore providers?
VM: So far it’s been a great arbitrage game for the offshore firms. These firms are still coming in at half to a third of the costs that leading global outsourcing firms propose. While these large outsourcing firms have built up their offshore operations, they don’t seem willing to significantly reduce their pricing to reflect offshore cost savings.
There is still a comfort level or a DNA at these firms that impact their willingness to reduce their margins. It’s like when Southwest Airlines comes into a new market, they charge a fair price for travel, but well-established airlines such as American, United, and Delta are slow to adjust their pricing and quickly lose market share. No surprise that the pricing differential between offshore providers and large global outsourcers has opened new doors for the offshore firms.
Buyers have been turned off by the pricing strategies of the larger outsourcing providers; a number of buyers won’t even invite these firms to bid on certain types of projects. Having said that, offshore firms are struggling to handle their sales growth. They have to move beyond a one-country model and build more process and industry expertise. When given a chance, however, the offshore firms have shown they can deliver phenomenal process improvements, and this will enable these firms to expand their service offerings and go up the value chain.
JV: What is the role of third-party advisors and analysts in shaping the decisions of outsourcing buyers?
VM: From all of my work with buyers now, what I am finding is that buyers are becoming more reliant on peers and less reliant on analyst firms. Buyers are learning to leverage four or five sources of influence. They will rely on the analyst firms for magic quadrant data and talk to the firms in the leaders’ quadrant. They will rely on advisory firms such as TPI, Everest, or EquaTerra for the RFI/RFP process to make sure it is rigorous.
They increasingly rely on blogs such as my dealarchitect.typepad.com blog to gain much more instant and independent analysis, as blogs tend to focus on what’s on your mind rather than what’s politically correct. On big deals, buyers often listen to Wall Street analysts, and they read CIO magazine, Computerworld, Information Week, and trade journals that cover their industries. So it’s a fairly broad spectrum of influencers that buyers seek out.
JV: Have outsourcing providers restructured their analyst relations programs to reflect the expanding group of influencers that buyers reach out to?
VM: Some vendors have very structured analyst relations teams, but in too many cases, these teams do not know how to effectively interface with leading RFI/RFP sourcing advisors or blogs. They have been conditioned to focus on the top analyst research firms. In my blog, I alluded to the Soviet Union when it broke down. The U.S. State Department didn’t know what to do with the new republics that came out of the Soviet Union. They kept looking at Russia as the old Soviet Union, even though some of the republics such as the Ukraine were fairly sizeable and economically viable on their own.
Something similar is happening in the influencer game. A number of vendors are still focusing on the research analyst firms when they should be spending more time with firms such as TPI, Everest, and EquaTerra or working with advisors such as Deal Architect.
JV: What about the future of blogging? Is it just at the infancy of its impact or is it a passing fad?
VM: It is a revolution, just like Guttenberg with the printing press. He took the power of printing away from the church and put it in the commercial arena. The economics of that required that you have decent-size newspapers and publishers. What blogging does is take the power away from the traditional media companies and puts it into my hands or your hands. It’s amazing the viral influence of blogs and how bloggers link to each other and how within minutes news can travel. We are at the infancy of blogging. With any phenomenon like this, there is no control over it, and we have no idea where it is heading. But at this point, blogging has already proven itself to be a great tool for information sharing and analysis.
JV: What’s in the future for Vinnie Mirchandani?
VM: I’m going to continue to blog and work with buyers through my advisory practice. It is gratifying and an honor to be involved with shaping as many deals as I do—and through my blog, influencing and challenging people to think about efficiencies and innovation and so on. When I first started my blog, I had a little bit of a pessimistic view of the IT world with so much going offshore, but actually during the past year, I have seen so much innovation going on that I feel pretty good about the technology market right now.
This article was co-authored by Kerry Ann Vales. For more information she can be reached at KAVales@aol.com.