At this week’s IDC Outsourcing Forum, which took place in Santa Clara, John Sedej, Sr. VP of marketing and business development for Genpact, shared some startlingly frank (considering that he’s now on the vendor side) and compelling parallels between the doomed evolution of the electronic manufacturing services (EMS) industry of the 1990s and the business process outsourcing industry of this decade. Genpact is the former GE business process captive center that went independent last year.
Sedej, who worked for HP in the global supply chain area during the ’90s recalled how EMS clients and vendors viewed outsourcing as a panacea with “unlimited growth potential.” The number one objective in those years was to grow revenues. Analysts rewarded revenue growth, predicting that if that happened, earnings would follow. Three beliefs drove decision-making:
- The industry was protected from both upsides and downsides. (If the demand for electronic manufacturing slowed down, client companies would turn to outsourcing to see them through cost reduction activities.)
- EMS vendors were supply chain specialists. Inventory management was the key.
- Higher-value activities would drive margins; earnings would flow.
Those same beliefs characterize much of the current thinking in the BPO space, said Sedej:
- The BPO industry is protected from market changes.
- Higher-value processes will improve margins — and everybody’s heading that direction. (Sedej recounted how on a recent trip to India, he watched talk shows on TV where everybody was talking about “this stuff.”)
- Size will yield economies of scale. In fact, the biggest risk is that a vendor isn’t growing fast enough.
As Sedej said, “Just growing bigger doesn’t mean you’re going to get better.”
Then came the tech crash of March 2001. The aggregate loss of the 12 major OEMs exceeded $1.28 trillion. That pain was immediately felt by EMSs too. Their growth created excess capacity. The contracts in place weren’t enough to protect either side, and billions of dollars were written off. Yet the early warning signs were there. OEMs were wracked with day-to-day execution problems, which included forecasting. EMS providers couldn’t scale or adjust quickly enough.
The problems were exacerbated by having people from procurement now in the position of managing relationships with vendors. The client side was guilty of running the new model as if it were still vertically aligned, taking a fragmented approach (“Where can I save a nickel on this component?”) instead of a holistic view. The EMS vendors were operating on razor-thin margins, focused on cost avoidance.
In the EMS business, providers had the idea that they could design entire products — such as cell phones — to fill out client portfolios. Yet, it takes a lot of investment to take on the entire spectrum of activities around total product development. Without the investment mandated by higher-end people, training and the rest of it, innovation is tough to achieve. Yet, there’s no guarantee that the margins will improve unless the provider knows how to manage those costs.
“Companies failed to realize that when you move to an outsourcing model, the old rules don’t apply,” said Sedej. “There are definitely new rewards and opportunities and definitely new risks.” For example, there was a misalignment of agendas and goals.
“Strategic partnerships” existed in name only, said Sedej.
What are the keys to achieving a different future for BPO?
One aspect he emphasized is to leverage sourcing to improve the entire process, rather than discrete elements. As he put it, “The piecemeal approach results in the suboptimal solution.”
Plus, we need to recognize that the business model is fundamentally different. It’s no longer vertically aligned. New people and new project management skills are needed.
Client organizations need to be clear on the expectations and to accept the outsourcing provider as a real partner. That requires communicating fully with the service provider, even to the extent that it has representatives at company-confidential planning meetings. The alignment of expectations requires constant synching. There needs to be agreement on the governance structure and team makeup. Success requires strong leadership buy-in and a willingness to acknowledge the adaptive learning process that needs to happen for the participating companies’ cultures to evolve together.
Along the same lines, the customer ultimately controls the success. “You set the tone of the relationship. You set the framework and boundaries,” said Sedej. “At the end of the day, the customer owns the success of that relationship.”
In the next few days I’ll share more of what I heard and learned about business process outsourcing, particularly in the area of finance and accounting, which is what the show concentrated on.
IDC will be hosting its east coast outsourcing event March 28 and 29. Mr. Sedej won’t be speaking there, but others will. Without a doubt, the war stories are worth hearing. You can learn more here: