Investments in IP-based delivery and platforms will enable traditional services firms to break the link between revenue and headcount growth and result in a net improvement in positioning of “India-centric’ outsourcing providers, according to new findings from Technology Business Research. The break in this linear equation will result from monetizing IP and represents an opportunity for professional services firms to increase margins that can drive bottom-line improvement and free up budget dollars for investments in cost of services, R&D and SG&A functions.
TBR believes IP expansion will be fueled by the more sophisticated use of analytics-driven KPIs to build processes that generate greater efficiency for the services vendor and for the end customer. Services vendor efficiency yields profit pool protection.The challenge ahead for services firms in monetizing IP sytems from convincing customers to pay for it. Customer agreementwill emerge as KPI metrics quantify the customer savings or productivity improvements. Proving customer efficiency enables shared-risk pricing that can drive margin protection by monetizing IP.
Acceleration of Non-Linear Growth
India-centric vendors discuss this concept regularly intending to develop sufficient IP-enabled processes to convert BPO services to cloud-based platforms run by customer labor, which will ideally accelerate non-linear revenue growth. MNCs, such as IBM and Accenture, approach this concept by taking IP developed in high-end engagements, scaling it down, and monetizing it.
Accenture, for example, released a white paper on high-performance BPO several quarters ago and is investing in consulting skills in low-cost geographic locations such as India. India-centric vendors drive their services pricing process to work within acceptable margin bands. TBR believes this best practice around project-based margin goals will be a critical success factor in managing the business economics of services delivery as commoditization permeates this business segment.
MNC and India-centric business practices show considerable divergence in a key aspect: Larger, established MNCs struggle growing faster than the market and have financial investors focused on bottom-line profits as well as top-line growth. India-centric businesses deploy a strategy of managing to margin bands and aggressively re-investing in their operations, or cutting price, to gain market share.Thus even if both models succeed in monetizing IP, the India-centric firms will still maintain an advantage given the greater financial flexibility they enjoy.
To test this hypothesis, TBR modeled out a leading India-centric services vendor, forecasting a 50% increase in revenue on a 20% increase in labor. Many of the India-centric vendors speak to this, most notably Wipro, when its CEO TK Kurien publicly stated:
“There are companies … looking at volume growth and adding people every quarter … others who will see how this job can be done with the same number of people. We are among the latter. Going forward, architecture skills, domain skills and program management skills will be critical for us.”
As the forecasting chart below indicates, 50% growth in revenue on 20% headcount will generate potential profit pool additions of 10 margin points by 2015 and an additional 16 margin points by 2020. This non-linear scale comes from IP enablements of traditional service lines as well as conversion of these service lines to cloud platform solutions. India-centric firms can invest these margin points in a number of different ways, as they already possess superior profit margin performance across all service lines. Specifically they can invest those funds into:
- Price relief that, if enacted, will accelerate the commoditization “race to the bottom” (as it is commonly called);
- R&D investment to convert best practices into monetized IP.The differentiation windows provided by KPI innovation will shorten as analytics quickens the time it takes competitors to gain parity;
Wage/Benefits Investments;Labor will bifurcate into low-wage transactional functions and high-value IP-related innovation functions.Low-wage labor stability can be improved by offeringcompensation slightly above market rates and work/life benefits that will attract entry-level talent to the services company.Similarly, for high-wage functions, reducing attrition in these critical skills positions is best achieved by keeping a watchful eye on market rates and staying ahead of them.Having monetized IP profit to reinvest in the labor innovation around IP will be a critical element of the commoditized services business operation.
Required: High Value Staff
The India-centric model will face challenges adapting to IP monetization as well. The critical success factor will be how effectively India-centric firms can add high-value staff for the IP development, which typically flows from advisory services commonly associated with MNCs at the high-end of the services value stack. In the past, these firms were challenged to build out value-added capabilities and upscale their brand reputations. Simultaneously, MNCs will have to scale down their thought leadership to drive innovations into price-competitive transactional offerings.
MNCs will have an edge, as KPI metric development can fine tune new transactional services. This divergence between MNCs and India-centric firms as their business models converge will challenge offshore and nearshore employment levels. The competitive skirmish will ensue on a global basis, and firms in all countries will need to recruit educated individuals to execute the scaling and monetizing of IP within services companies while evaluating and retooling their employee mix in an analytics-accelerated services market landscape.
Lindy Hanson directs TBR’s Professional Services business unit, which addresses Consulting& Systems Integration, ITO, BPO and Applications Outsourcing services with vendor-centric syndicated studies and custom consulting engagements. Geoff Woollacott leads a number of the large-scale custom consulting projects TBR’s Professional Services Practice executes. Lindy and Geoff also content review pieces of the syndicated research stream.