Thursday, February 14, 2013

Business Function Outsourcing - Close yet very far!

IT Services Industry is moving fast towards Business Function Outsourcing (BFO). Read Why Traditional Models are failing to know what is driving this change. This is not a new concept and has been existing for a while but the industry has been very slow with its adoption. What is holding the industry back ?

Reasons behind Slow Adoption

a) Lack of Intimate knowledge of the Client Business. Industry has so far focused on achieving operational efficiency and building infrastructure and scale. The need for learning client's business was never felt that urgently because there was no dearth of business and the challenge was sheer execution. It's only when the pipeline has dried in the last 3 years is when the industry is beginning to realize its oversight. We have been a victim of our own success!

b) BFO requires confluence of Consulting, Product Development, IT & Operations - Those who have been in the industry know that these four businesses are very different from each other. Most IT Services organisations run consulting, IT & operations as separate horizontals and in silos. Bringing them together, therefore, isn't something that can be achieved overnight. On top of it, integrating Product development is even tougher. Why ? Cost points, revenue model, people policies, hiring practices, quality of infrastructure & leadership required for running these businesses is very different from each other. There are numerous examples in the industry where this confluence has been attempted and has failed.

So the trick is how to build strong "institutionalized" knowledge of the domain and bring consulting, product development, IT & Operations together to perform full business function outsourcing. 

Lot of companies are trying to solve this problem but unfortunately most seem to be making similar mistakes because we are all trying to "tweak" our proven models rather than unlearning what we have learnt !

What we have learnt so well is:

a) Build scale by institutionalizing our learning & processes
b) Drive operational efficiency in every aspect of the business
c) Utilizing lower experience workforce to do complex tasks by de-skilling the job

It's time to perhaps unlearn some of this, if not all of it. Building capability & competence, a key requirement for BFO, is neither a scale game, nor you can succeed if the goal is operational efficiency at the onset nor you can use inexperience or "bench" workforce. Running IT & Operations, which is the second requirement for BFO, is very well known to the IT industry. How do you, therefore create an environment for innovation & creativity and marry it with scale? Whereas latter is Industry's sweet spot, the former is where it has struggled, an area product companies thrive at.

Looking at the failure rate across, it is obvious that something isn't right.

Common mistakes being made

1. One of the biggest issues I see is that most firms haven't changed their "process" for creating competence and hence have used existing business support groups, most importantly HR & Recruitment. This complex confluence of four different mindsets & businesses requires a grounds-up HR & Recruitment organisations, preferably coming from a product company rather than a services company as existing services paradigms are severely lacking for this new reality.

2. Another change that is a must but often over-looked is the need to establish a strong Take-ONLY relationship in which this group is entitled to draw the required talent it needs from the rest of the organisation but its own talent is unavailable. I have seen that the moment you create a differentiated group in a services company, more often than not it gets absorbed in daily rut because of revenue & delivery pressures. This alone is capable of killing any such initiative.

3. It is not possible to build products & platforms from grounds-up because it will take forever so this business has to be bought. Be it platform or product companies or even buying-out IT platform from Tier 1 banks to get started. My experience is that most public companies get bogged down in valuations and impact on bottom-line & street reaction rather than focusing on the fact that if we do not change we will be extinct !

At the end building true capability (not trained capability) and creating products & platform based services business for BFO is a very different beast that requires IT services firms to unlearn what they have learnt since last 2 decades. Perhaps this is best run as a separate entity that can draw whatever it needs from the parent without giving anything back.

Product creation or building Platforms and real domain capability is diagonally opposite to running a well oiled services business. No wonder a group of product companies recently broke away from NASSCOM to form its own consortium called iSPIRT. 

1 comment:

Aagen Dev said...

Truly enlightening post! EQ definitely outshine IQ as we grow older because at the end of the day what gives us fulfilment and happiness is the relationship we created with the people amongst us.