The search for signs of intelligible change from the outsourcing universe.
By Anthony Hesketh
It might be difficult to believe, but talk of transformation is back on the outsourcing agenda in 2011. One executive recently explained the “transformational turn” in outsourcing to me: “There’s only so much cost-cutting you can do before you have to do something a little more creative, which has impact.” Ah, impact, especially of the capital variety: that most material, yet elusive, of management concepts.
I felt a little ahead of the game. Just last November at the Annual HRO Today Europe Summit in Amsterdam, spurred on by an increasing frustration with the consulting rhetoric surrounding the performance of outsourcing, I had led a session with outsourcing executives exploring the financial impact of HRO. “If outsourcing providers were sued by practitioners for breach of contract on their promise of transformation,” I challenged, “could they marshal enough evidence to defend themselves?”
It was a very lively session. A great deal of executive talent is at work in HRO, but it has recently been somehow distracted by software-as-a- service (SaaS), declining total contract values (TCVs), and the seemingly constant delay in the manifestation of promised deal pipelines. Similarly, those on the buy-side of the market have mere revenues, debt covenants, and a sluggish global recovery to contend with. It’s a war out there.
So what might a prima facie case against outsourcing look like?
The plaintiff’s opening statement would contend that no clear evidence exists to underpin the claim that employees served by the accused have been provided with service transformation. Any vague improvements, the attorney would argue, have been purely coincidental and, in large part, the responsibility of other enterprise resource planner (ERP) third party providers, aided and abetted by SaaS and/or internal shared services arrangements on the part of clients. “Don’t you SaaS me!” the Hon. Judge Judy, presiding, would inevitably demand.
Crucially, at that point, plaintiff’s counsel would play its ultimate card. Given the complexity of all of the moving parts at work in transformational outsourcing listed by the defense, the burden of proof on the defense might simply be seen to be too great.
Perhaps it would be more accurate to describe transformation as the corporate equivalent of a “magic bullet,” passing through service optimization, changing course to allow a greater focus on the core mission of the business, while driving down costs and improving customer satisfaction scores as ratios of return on investment (ROI) to talent scaled heights hitherto unseen. “Praise the Lord for the magic bullet!” screams a man in drag from the public gallery.
The defense’s opening statement could claim evidence of outsourcing’s transformation of business by showing how it has been driving the financial performance of client organizations, while simultaneously improving the quality, cost, and performance of key enabling services and processes. To audible sharp intakes of breath around the courtroom, the defense could even suggest that outsourcing has enabled company executives to focus on—and even deliver—the primary commercial objectives they have promised to their stakeholders. Silence in court!
The defense’s main case could comprise seven parts:
1. The identification of a number of landmark BPO deals signed since 2002, many of which have delivered transformational change in the HR function’s capacity to enable the client’s business to deliver on its wider commercial objectives.
2. The subpoenaing of a Fortune 100 CEO and CFO in order to ask them to account for the primary reasons why they engaged in BPO. The likely questioning would focus on C-level strategic objectives and how BPO has enabled these. For what other possible reason, the defense might maintain, would a C-suite executive want to engage in outsourcing?
3. The subpoenaing of a member of the C-suite from either BAE SYSTEMS or Philips to account for the financial upside of either selling one’s share in a JV with an outsourcing provider or to comment on their monetization of their captive shared service center (SSC).
4. The subpoenaing of a Chief Human Resources Officer, such as Alex Wilson of BT, in order to ask him to comment on the shift from 14,500 to just 600 HR staff, whilst simultaneously transforming service breadth, quality, and cost performance on a global scale.
5. The subpoenaing of several HR professionals—again, from the likes of BP or BAE SYSTEMS—in order to simultaneously cross-examine and demonstrate the transformation of their mindset from a back-office to front-office and commercially aware service-first orientation, not to mention revealing their re-location from porta-cabins to impressive and bespoke new office space and IT facilities. Surely their working lives have been transformed?
6. The subpoenaing of an academic or market analyst to comment on the correlation between outsourcing, especially HRO, and top-level organizational financial performance.
7. Finally, and notwithstanding the above, the defense would play its best card last. If outsourcing were simply a cost-reducing, one-trick pony, why then are clients signing up for and claiming significant cost reduction through their engagement in bundled outsourcing arrangements? “Praise the Lord for the multi-buy!” screams the man in drag once more from the public gallery . . . as he is escorted from the courtroom.
The plaintiffs, of course, would also be granted leave to cross-examine the various witnesses forwarded. During this cross-examination, they would seek to refute each of the defense’s accusations. Let us deal with each of the above in turn.
1. On deal volume, only one out of three organizations has engaged in any form of HRO, and still less in what might be described as landmark BPO deals. Other options—such as high performance or bundled service delivery via low cost geographies, or process–specific offerings underpinned by significant investment in IT—are more attractive to clients. Moreover, any evidence relating to outsourcing utilization claimed by the defense would have to concede recent data from TPI that points to the demise of large-scale BPO contracts. The recent spat between TPI and Horses for Sources Research over what constitutes a large-scale deal, or even outsourcing itself, has only served to muddy the transformation definition waters.
2. On C-suite sponsorship and advocacy, the plaintiffs would surely ask the witness CEO to agree with them that corporate-level transformation is very hard to measure in tangible or financial terms, especially when there are so many moving parts within organizations that are outside of providers’ control. At this point the plaintiffs might seek to discredit the witness with relatively poorer performance than market contemporaries. Surely, no amount of post-hoc rationalization from the CEO (regarding the speeding up of their financial performance to a point not as far behind that of their peers when the deal was originally signed) would convince the jury of the material impact of outsourcing?
3. At less than two-to-three percent of operating expense, and in some cases much less, there is more financial heat than light over captive monetization. The financial case of “brownfield” SSC monetization looks less attractive to clients or providers. Had clients taken a different view before engaging in the triple jump, acknowledging the talent-HR distinction, and the buy versus make decision, things might have been different. But organizations rarely think so far ahead.
4. On CHRO advocacy, cross-examination here would simply be designed to destroy the credibility of the witness in the stand. Many CHROs now in place didn’t even originally sign their deals and struggle to articulate the primary transformational aspects of BPO beyond cost-cutting, especially now when engaging in renewals. Times change, along with C-suite personalities and their commercial objectives, with clear corollaries for BPO contract scope creep, not to mention escalating cost.
5. Mindset transformation might be presented as code for, “no tangible financial savings.” To which the defense would doubtless object: “Surely he is leading the witness with nothing but unsubstantiated conjecture?” Judge Judy’s ruling? “Sustained. Be very careful Mr. Plaintiff, ”you’re on thin ice!” At this point the plaintiff’s attorney would apologize and then in the same breath suggest the ice on which he stands is nowhere near as thin as that of the outsourcing providers to the UK, who have to deal with those three little letters: VAT (value added tax). The devil lies in the detail, he might maintain—and the detail just got 2.5 percent more difficult.
6. Academically speaking, the plaintiff might suggest that ultimately, the C-suite remains unconvinced about outsourcing’s capacity for material impact beyond transactional levels. Transformational deals are seen as taking too long to deliver costs savings or desired step-changes in performance on either the income & expenditure or balance sheet, if at all, with few businesses capable of seeing beyond the next quarter, let alone beyond a three-year timescale.
7. Nobody in the courtroom, the plaintiff’s attorney would argue, is buying the argument in favor of bundling. Indeed, very few people are buying bundled services at all.
After a quick recess for lunch, and perhaps in time-honored tradition, an academic expert witness would be given the post-lunch graveyard slot. His evidence might certainly wake even those who had partaken in a little alcoholic tipple over lunch.
For starters, our eminent professor could report on his ongoing research exploring the evidence base for outsourcing. His findings would certainly cause a stir in the courtroom.
Firstly, he would suggest both transformation and performance are complex concepts
He would suggest that transformation has meant different things to different organizations, executives, and commentators (not to mention attorneys and advisors.) He would also suggest that cloud maps charting this area have certainly evolved during recent years (see Exhibit 1 and Exhibit 2).
The good professor might point out that Exhibit 1 demonstrates to the court how sophisticated and extensive textual analysis reveals how a decade ago outsourcing providers talked of little else other than business transformation outsourcing. Now, a decade later, analysis of their marketing materials and texts reveals how transformation has almost disappeared.
The plaintiffs could, of course, suggest this is merely semantics. The professor would probably agree: It could be. In his expert opinion, however, he might want to conclude that such a significant change is indeed material and indicative of a shift in the commercial proposition—at least at a discursive level. In the space of a decade, transformation has been wiped off the outsourcing industry’s radar. He would suggest it is for others to decide the reasons why.
The plaintiffs would then ask the professor to comment on Exhibits 3 and 4. These relate to his research investigating the different ways in which the outsourcing industry refers to transformation and how these, in turn, map onto different types of evidence of transformation his analysis has revealed.
Encouraged by the defense attorney to continue, the good professor would suggest Exhibit 3 captures the continua or scales along which transformation and performance evidence are described by outsourcing providers.
On the one hand, transformation might refer to the improvement of an individual service through to enterprise-level transformation. On the other hand, evidence can run from the personal, expert opinion of a senior individual executive, through to clear financial impact reported in quantum and financial form. The professor would suggest this latter form of reporting is a rarity.
Naturally, the plaintiffs would be quick to ask the professor just how rare. At this point he would suggest no more than 30 percent of all output from the outsourcing industry making claims about transformation falls into the hard evidence-based category.
Moreover, Exhibit 5 would then reveal when combining claims of transformation and the evidence used to support it, the professor could conclude less than one-in-five equate to enterprise-level, evidence-based transformation. The plaintiff’s attorney at this stage would throw a wry smile at the jury hoping to obtain maximum impact from the good professor’s striking revelation.
The defendants would inevitably retaliate. Just because you can’t measure it, the attorney would observe, doesn’t mean it doesn’t exist. The good professor would agree with him. Indeed, and probably throwing the courtroom into disarray once more, he would point to additional evidence suggesting there is, in fact, material and financial evidence to support the claim that the outsourcing industry has provided transformation.
As Exhibits 6 and 7 slowly come into view, the faces of the outsourcing providers brighten. There is now clear evidence before the court to suggest that gains in market capitalization—the ultimate test of how investors rate the performance of companies—has increased at a far quicker rate in those companies engaged in outsourcing. This pattern is replicated across a number of different industrial sectors.
The plaintiffs would counter quickly with the observation that such a gain has not been prevalent across all industrials. The good professor would agree but would then point to the data in Exhibit 7, which clearly demonstrate how variations in pay are much less in those organizations engaged in outsourcing.
This would result in the defendants moving in for the kill. In the closing statement, their attorney would postulate that if those companies who outsource have greater predictability and control over their costs, doesn’t this also mean they have a clearer line of sight to where value sits within their companies? With such clarity and control aren’t these companies in a better position than their competitors to focus on what ultimately transforms their business at an enterprise level: namely the creation of new value constellations driving investment in savings where investors, customers, and employees will be more excited?
For the plaintiffs, sophistry would arguably be the best strategy. Transformation, they would argue, is too complex, too intangible, and ultimately impossible to prove. The greater the claims made on outsourcing’s transformational capabilities, the greater the onus on the industry to prove its impact. By this logic, they would claim that the defense has palpably failed to meet its challenge.
In summing up, Judge Judy might suggest that this is a serious case and one that turns on a number of different aspects:
1. The definition of transformation itself. Despite it’s ephemeral and fluid nature, you should find for the defendants if you can believe transformation has taken place.
2. The ascription of causality is also a complex one, not least because of the expert witness’s account of how one establishes a line of sight between outsourcing and organizational financial outcomes. You need to satisfy yourselves first that transformation can be established, and second, that outsourcing can be established as its cause.
3. Given the gravity yet complexity of this case—some $3 trillion worth of value sits in the back offices of global organizations—I should be happy to accept a majority decision.
“Mr Foreman of the jury, have you reached a majority decision?”
“Yes, your honour.”
“Please can you let me have your decision?”
“In the case of the People against the outsourcing industry, we find the accused …”
And, dear reader, please send your own verdict to
Anthony Hesketh is a professor at Lancaster University Management School.