2023 was a year full of challenges for supply chain leaders. Recovery from COVID-19, avoiding supply chain disruptions, mitigating geo-political risk and climate changes, and understanding the implications of ESG on the supply chain were some of the headwinds leaders had to navigate. Amidst all these challenges and the corresponding need for a resilient supply chain, all the buzz around GenAI and ChatGPT added to the complexity of the supply chain technology roadmap for vendors and clients. 

As we enter 2024, the supply chain industry continues to grapple with most of these challenges driven by regulatory requirements and the need for supply chain visibility, and this year will see strong demand for sustainability services and technology enabling resilience in the areas of planning, distribution, network optimization, and track and trace.

Here are the top five supply chain trends that may reshape the industry and vendors' offerings in 2024 and beyond:

Conversational & GenAI to improve user experience and drive efficiency

2023 saw vendors proactively investing in GenAI and conversational AI and developing POCs and MVPs, while clients have been looking to embrace these technologies with successful use cases within the supply chain. The existing use of technology within the supply chain revolves around self-service reporting and advanced analytics alongside platform and SaaS solutions coupled with RPA, AI, and ML-based algorithms and proprietary tools from service providers.

Supply chain leaders have been working on the digital transformation of the supply chain and end-to-end technology roadmap. Still, adopting new technology within the supply chain varies significantly depending on the client’s supply chain and technology maturity. The use of technology in areas such as planning, forecasting, advanced analytics, scenario modeling, and network optimization has been one of the most common themes across vendors and clients in the last couple of years. The use of GenAI and conversational AI is still at a very early stage. NelsonHall estimates that ~50% of supply chain-driven organizations are investing in GenAI or looking to invest in 2024 to improve the accuracy of forecasting and demand planning, and virtual assistants to improve user experience, create and process documents across the supply chain, order tracking, invoice management, and risk management.

Digital twin to see increased demand and adoption

A supply chain digital twin uses real-time data and snapshots to create a detailed simulation model and help with scenario planning and analysis. A supply chain digital twin can be an excellent tool for understanding the supply chain’s behavior, predicting bottlenecks and anomalies, and troubleshooting.

With a focus on improving planning, forecasting, and driving user experience, NelsonHall expects two-thirds of large organizations to adopt digital twins in the supply chain within two years. This can be particularly useful in industries with a complex supply chain, such as manufacturing, energy and utilities, oil and gas, consumer goods and durables, defense, etc. Some of the tangible benefits organizations can leverage from the use of digital twins include:

• Long-term supply chain planning and forecasting
• Sensitivity analysis to avoid disruptions
• Inventory optimization
• Improving supply chain resilience and agility.

As organizations embrace digitalization of the supply chain, improving supply chain visibility, real-time tracking and tracing, advanced analytics, and control tower operations, the cost of adopting digital twins and barriers to adopting them will reduce significantly. However, from a vendor perspective, digital twins require a strong hardware capability or partnership and a robust engineering capability. Buyers of supply chain services need to weigh up their vendors’ end-to-end capability adequately. 

Increased demand for touchless supply chain operations

Supply chain disruptions have become more real post-COVID, and the recent events have added to the complexity. Supply chain disruption challenges, along with evolving customer preferences and regulations, require leaders to act swiftly, thus making them shift to a more autonomous and agile supply chain. Various areas within the supply chain where touchless operations have been  adding value are:

• Touchless planning
• Touchless order management
• Touchless analytics and reporting.

Vendors such as Capgemini, Infosys, IBM, and other major players have touchless planning services and claim to deliver tangible benefits such as:

• Up to 80% reduction in operations cost
• Up to 5% increase in revenue base.

In today’s world, when organizations are grappling with an overload of systems, platforms, tools, processes, and technology,  along with complex business organizations, a touchless supply chain can immensely improve user experience. A touchless supply chain will also ensure resources are utilized for more strategic work and free up to 60-70% of their time from mundane and routine work. At the core of touchless supply chain operations is the technology network, including RPAs, machine learning models, and AI, that ensures standard processes can be automated and performed independently with minimal or no human intervention.

With adequate planning, the latest technology, and domain knowledge, vendors have successfully delivered touchless planning and other operations for their clients. NelsonHall expects touchless planning, order management, and analytics/reporting/forecasting to have higher demand in 2024 and widespread adoption to 70-80% in the next 18 months.

Enabling end-to-end supply chain visibility

2023 was a dynamic and challenging year, with the ongoing Russia-Ukraine war, Israel-Hamas war, Panama Canal crisis disrupting trade routes, and Houthi attacks in the Red Sea. Not much has changed as we enter 2024 with most of these crises ongoing. This certainly means a lot of planning, decision-making, increased cost pressure, transportation constraints, and other associated challenges that supply chain managers will have to work with. These geopolitical uncertainties have exponentially increased the complexity for supply chain managers, and the situation warrants quicker and faster decision-making.

In today’s complex global supply chains, decision-making without real-time, end-to-end visibility can be costly and counterproductive for businesses. Lack of visibility of real-time transactions, orders, shipment status, and inventory significantly impacts cost, customer satisfaction, and associated supply chain risk. Vendors have developed an ecosystem of solutions that integrates real-time data across systems, allowing business users to make faster decisions and access actionable insights and decisions. NelsonHall expects the demand for end-to-end supply chain visibility services to stay strong in the coming months and years, driven by the need for transformation, digitalization, and faster decision-making.

Avoiding supply chain disruptions in 2024

Given the current market situation, the possibility of a major supply chain disruption is not too far-fetched. Companies must assess their supply chain resilience and identify and react to gaps. This may be a longer-term plan; however, companies must respond to ever-evolving internal and external factors to address and adapt to business challenges.

This may require a proactive approach and an assessment of the current supply chain landscape. Creating supply chain visibility will be the first step towards understanding the strengths and weaknesses of the existing supply chain. Without adequate data and insights, organizations may be sitting on a ticking time bomb in the current market scenario. Visibility of the supply chain can help leadership with sufficient insights and data points to proactively identify challenges and plan accordingly. While 2024 may be challenging, using technology coupled with adequate monitoring, planning, and partnerships can help organizations avoid potential disruption.

From NelsonHall’s recent discussions with the major service providers, some of the themes for 2024 that emerged were that clients are showing maximum interest in improved forecasting and planning accuracy, leveraging digital tools and technology and AI for transformation, use of GenAI in the supply chain, and sustainability services.

NelsonHall recently had a briefing followed by a demo of Tech Mahindra’s latest offering in field service management: Yantr.ai, an AI and ML-based bolt-on solution that can sit on existing scheduling systems. Yantr.ai provides a control tower solution to field service management, focusing on delivering operational efficiency, enhanced productivity, and improved workflow control by leveraging advanced analytics, artificial intelligence, and machine learning models to enable real-time decision-making. With Yantr.ai at the center of all data points, it can provide end-to-end visibility of granular operations insights.

Launched in 2022, Yantr.ai is an offering under Tech Mahindra’s BPS business with BPaaS and SaaS options. Tech Mahindra has been focused on offering BPS solutions with a combination of platform enablement in niche areas as part of its growth strategy. NelsonHall expects to see further similar offerings from Tech Mahindra in the coming months.

Yantr.ai Overview

Yantr.ai focuses on industries such as telecom, utilities, retail, oil & gas, pharmaceutical, and other similar industries where there is a sizeable workforce in the field, and field service directly impacts the customer experience.

With today’s Amazon and Google-like experience, customer expectations evolve almost daily. However, while many innovation and technology interventions have happened, effective field service management remains a key challenge. Customers expect excellent product quality, effective communication, and seamless support; and field service management is vital to customer satisfaction.

Yantr.ai focuses on transforming field spend, improving CX, and improving field workforce productivity. It incorporates a digital twin and control tower for field services, and focuses on creating end-to-end visibility, data-driven decision-making, and scenario and capacity planning to provide actionable insights. Tech Mahindra claims to deliver benefits such as a 1-3% reduction in operational spend, up to 10% improvement in operational efficiency, and up to 15% improvement in customer experience.

Yantr.ai’s core modules are:

• Capacity planning: forecasts the demand trend by incorporating external factors such as weather and seasonality to empower planners to remain prepared and responsive
• Strategic planning: focuses on monthly and long-term (up to two years) demand optimization, identifying and addressing challenges such as unmet demands, skill shortages, demand reshaping, and permanent relocation
• Operational planning: focuses on demand optimization for the next 30 days, with daily demand, capacity planning, optimizations, and SLA visibility
• Jeopardy planning: offers real-time triage, jeopardy, and unscheduled work order management based on multiple dynamic factors and business rules
• Route planning and optimization: ensures all vehicles/trucks take optimized routes to save time and money, thus improving service efficiency
• Scenario modelling: simulation of distinct scenarios based on various economic and weather factors like wildfires, tornados, floods, etc.

Forecasting is supported by machine learning models covering ARIMA, exponential smoothing, Naïve, and neural network time series forecasting. Based on the data input and forecasting accuracy, Yantr.ai will dynamically select the best model for forecasting and plot different visualizations for actual demand, forecast demand, and variance between actual and forecast demand.

Client Cases

One example of the use of Yantr.ai for field service is for a major Australian telecom company where the benefits delivered by Tech Mahindra are:

• $15m to $20m savings to field operations spend
• ~4 % SLA improvement
• ~10 % to 15 % work being saved from external suppliers
• Truck roll reduced by 10%
• 40% FTE reduction.

The client’s business challenges were managing extensive field service operations, optimizing inefficient technician assignments, reducing response time, and improving customer satisfaction. The client also struggled with no real-time insights or dynamic scheduling capabilities. Tech Mahindra deployed Yantr.ai to optimize technician assignments, provide real-time job insights, and improve resource utilization. Dynamic scheduling capabilities were used to help the client adapt more quickly to unforeseen challenges.

Beyond field service, Yantr.ai has also been used by a major Australian media company to address route planning. In this case, the company’s challenges were improving customer satisfaction by meeting SLAs for newspaper/magazine distribution to retailers and end customers, and optimizing routing to help in vendor negotiation and cost savings. Tech Mahindra implemented Yantr.ai to build an optimal routing model to reduce cost and improve delivery SLAs. Key benefits delivered to the client were:

• 15%+ higher accuracy in route planning
• Improved SLAs and customer experience, along with reduced travel cost
• Ability to do scenario modeling/analysis, including demand changes
• Profitability analysis of routes and optimization of remote delivery points
• “Right location of depot” suggestions.

Yantr.ai also offers data ingestion through standard connectors/APIs and a custom data ingestion pipeline for ingesting from different formats, including CSV flat files. The tool has an orchestration system to manage complex workflows, which can be modified based on the client systems and processes’ requirements or updated as the project progresses and requirements evolve.

Tech Mahindra claims it is the first company to build a planning engine and control tower for enterprises in field services. The tool offers intelligent DSR (decision support recommendation), on-the-day risk mitigation, routing optimization, and other demand and capacity planning capabilities.

Implementation, Pricing & Key Benefits

Tech Mahindra offers modular functionality deployment options for Yantr.ai. The pricing mechanism is a one-time implementation cost and ongoing license costs based on the number of workflows, infrastructure deployed, and consulting support. In the BPaaS service, Tech Mahindra also provides managed end-to-end field service management support.

The typical time required to implement Yantr.ai is estimated to be 6 to 9 months for a mid-size organization.

Tech Mahindra categorizes the key benefits clients can get by deploying Yantr.ai with the 3Ps (people, planet, and profits):

• “People” benefits include an increase in workforce productivity, improvement in CSAT and NPS, and an increase in technician reskilling
• “Planet” benefits include reduced fuel consumption and carbon footprint and improved decision-making and situation planning during natural calamities or other emergencies.
• “Profits” include savings in operational spend, reduced field technician expenses, truck rolls, and workflow management-related expenses.

Tech Mahindra continues to invest in Yantr.ai, focusing on partnerships with ServiceNow, IFS, isMobile, and Celonis.

NelsonHall expects Tech Mahindra to leverage the technology and architecture behind Yantr.ai to increasingly deliver solutions beyond field services in areas such as logistics, fleet management, and demand planning. Tech Mahindra will likely focus on the telecom, utilities, and oil & gas sectors.

In our recent discussions with suppliers about procurement transformation, a recurring topic was how the procurement function can help organizations meet their sustainability goals. While sustainability has become an integral business theme for organizations, many recognize they have much to do over the next few years. This blog looks at the current state of sustainability in procurement and how the function can play a broader role while leveraging sustainability services from procurement consulting and BPS vendors.

Procurement has extensive experience in areas such as labor practices and human resource management, environmental hazards, responsible sourcing, and improving spend with SMEs and diverse suppliers. But recent and upcoming regulatory changes on how organizations report their sustainability KPIs and targets, such as the EU’s corporate sustainability reporting directive (CSRD), place new demands on the function.

Sustainability in procurement

Sustainability in procurement and how to embed sustainability in procurement practices is an increasingly high priority for CPOs, though many, even those leading large procurement organizations, are still working out how best to adopt sustainability in their function. Major sustainability initiatives are not procurement-led and tend to focus on scope 1 or scope 2 emissions.

With up to 90% of an organization’s ESG risk impacted by purchased goods and services, procurement needs to have a well-developed sustainable supply chain: one of the most critical links between suppliers and the business is to drive joint sustainability programs.

The adoption of ESG considerations for supplier selection, including human resource and labor practices, diversity status, and corporate governance standards, has long been a part of a typical procurement process. CPOs now need to broaden their remit. 

Sustainability areas where procurement plays a crucial role include:

• Collaborating with suppliers to identify materiality ESG themes, topics, risks, and focus areas for the organization and help to achieve those materiality goals
• Leading their organization’s focus on reporting and reducing scope 3 emissions from the supply chain
• Implementing responsible sourcing ideas such as environment-friendly products and raw materials, increasing the extent of recycling, working with suppliers to implement sustainability programs, etc.
• Including small, medium, and diverse suppliers in the sourcing process and increasing spend with these suppliers. This is a mature practice in U.S. markets but is still in the early stages in other regions
• Reducing risk associated with suppliers’ bad practices such as using child labor, environmental pollution, and waste discharge. Such third-party risks can have significant financial and brand value implications on the organization
• Implementing a circular economy with the help of suppliers to ensure resources in the economic cycle deliver the highest value add by re-integrating waste and by-products.

Some procurement services specialists have been developing offerings to help CPOs with their sustainability roadmap and drive overall sustainability goals for the organization. 

Moving to sustainability as a service

Procurement consulting and BPS vendors have been developing ‘ESG as a service’ offerings, building a technology ecosystem around sustainability, and forming partnerships with the likes of Ecovadis, Scoutbee, Sievo, and Sphera. Companies like Infosys (Ecowatch), and TCS (Clever Energy, DigiFleet) have also been focusing on developing IoT, edge, and AI-based analytics tools that help them measure and report sustainability KPIs.

Offerings from major vendors include ones that help clients in:

• Driving a closed-loop procurement system: Accenture, Deloitte, TCS, and Capgemini are among those that have offerings that focus on closed-loop procurement systems and spend management, leveraging automation and analytics across the source-to-pay process and helping clients reinvest the realized value
• Commodity or category-level baseline assessments to identify and prioritize opportunities: Infosys offers advisory and managed services, which focus on sustainability assessments and identifying hotspots or opportunity areas
• Embedding sustainability criteria and metrics in the sourcing process and incorporating sustainability KPIs in the tender process: Capgemini sustainable procurement services has offerings that help upskill the procurement team with an emphasis on procurement process analysis concerning sustainability and helps the team understand sustainability KPIs in RFx process
• Analytics, reporting, and dashboards for tracking and reporting sustainability metrics: a common element  of ‘sustainability as a service’
• Procurement sustainability maturity assessment and sustainability strategy: another common element that helps organizations with sustainability strategy, sustainability capability maturity assessment, and capability uplift advisory offering.

Summary

Procurement has come a long way from being a support function to being strategically significant in helping organizations with their top and bottom lines. In many industries, most medium and large organizations have extensive experience of working closely with their suppliers to optimize the supply chain and deliver a competitive advantage. But with sustainability, many procurement organizations recognize they have a long way to go. The next few years will see some innovative collaborations between organizations and their key suppliers under the sustainability agenda across a broad range of areas, including logistics and energy procurement and the use of advanced analytics and technologies such as IoT for real-time monitoring of supply chain processes.

A few large organizations are already working in multiple directions, but mainstream adoption of sustainability in procurement might take another 12 to 36 months. This is when the first set of CSRD reports will be published and sustainability reports of various organizations can be compared.

Vaibhav is a Principal Analyst with responsibility for NelsonHall's F&A & Supply Chain Transformation research program.

Conduent’s FastCap service covers:

• Contract audits
• AP post-payment analysis and recovery
• Vendor statement solicitation
• Freight audits
• Spend forensics.

Extending Beyond Contract Audits to Accounts Payable Recoveries

Conduent has always had a strong contract analytics group focusing on legal contracts. The company has a tool, going back to Xerox days, that can handle millions of documents and search for keywords, etc., to identify key leakage areas. Conduent used the FastCap tool for one client to identify $8m in recoveries opportunities related to contract compliance.

Conduent is now leveraging that tool to data found in finance and accounting processes to look at contracts and invoices to identify erroneous payments, duplicate payments, open/unapplied supplier credits, contract/PO terms compliance, pricing errors, and missed discounts. FastCap uses 12 different algorithms to analyze AP data.

In addition, vendor statement reconciliation is another way of reducing the level of unreconciled items between organizations and their key suppliers, resulting in working capital improvements. Here, Conduent’s accounts payable audit teams analyze statements to identify credit recovery opportunities. This can involve combing through millions of records to validate statement credits and find the root causes of issues. The level of credits that companies can be owed can be huge, with their having little or no knowledge of this. Either the client or Conduent can handle the resulting discussions with the client’s key suppliers.

With freight audits, Conduent is leveraging a third-party tool to analyze and check freight statements from major carriers to find inappropriate billingsConduent has recently done this internally and estimates it has identified over a million dollars of savings.

FastCap is also used for procurement spend forensics. With spend forensics, Conduent personnel use the FastCap tool to analyze spend in targeted categories, typically in areas such as IT, facilities, and contingent labor and then provide recommendations and opportunities for quick wins. The client typically provides 1-2 years of spend data and enables Conduent SMEs to understand the buying process and systems used.

Achieving $20m in AP Recoveries

Conduent currently has eight clients using its FastCap solution. The strongest interest has been in the AP recovery audit solution. Conduent estimates that it has delivered over $20m in recoveries for clients to date. For one client, a mid-market organization, Conduent identified 210 duplicate payments to suppliers on an analysis of 12,567 transactions over an 8-month period, preventing duplicate payments of over $3.4m. There has also been some keen interest in the freight audit service, which is similar to an AP recovery audit in being low-hanging fruit.

Perhaps the most prominent of Conduent’s FastCap clients is an auto OEM, a longstanding major F&A client, that also uses Conduent for various procurement services. In its freight audit work for GM, Conduent was able to find erroneous payments that another provider missed during their audit.  Conduent also showed the client what changes could be made to prevent these from reoccurring by working with freight carriers to make sure they are more accurate in the future.

The FastCap Service Offers a 90-Day Timeline for Initial Recovery of Funds and Zero Up-Front Costs

The FastCap proposition is based on speed of recovery and outcome-based pricing, specifically:

• Speed and minimal disruption: Conduent offers a 90-day timeline from data collection and analysis to initial recovery of funds from suppliers
• Zero up-front costs: Conduent offers the FastCap solution with a managed services wrapper on 100% outcome-based pricing. The gainshare level on recognized savings differs slightly according to the service.

There is also a growing awareness by finance organizations that AP recovery audits can be useful not only for improving working capital but also for identifying system issues or process gaps. Conduent highlights that it can use FastCap for root cause analysis and then help clients put controls in place. Within BPS, the central value proposition has long moved from solely emphasizing efficiency improvements to helping clients develop more effective business processes; FastCap can clearly be useful here.

High Relevance to Major Multinational Manufacturers

So what type of organization should consider Conduent FastCap?

Clearly, FastCap is a no-brainer for Conduent’s existing F&A client base of around 45 accounts, both within finance and accounting and for wider contract and spend analysis.

However, Conduent FastCap also offers a quick return at zero risk to organizations that have retained their finance & accounting and procurement functions in-house, but lack the tools and expertise and desire to invest in areas such as AP recovery. This service offers a way of rapidly recovering an element of working capital while also identifying loopholes in current systems and processes without the need to adopt a full finance & accounting outsource. This particularly applies to large complex companies with many accounts payable or procurement transactions,

The AP recovery and freight audit offerings are especially likely to resonate for initial engagements.

The pandemic stress-tested many supply chains beyond previous expectations, identifying and magnifying any process shortfalls. The current economic downturn and additional disruption of supply chains by geopolitical factors have further exacerbated the difficulties enterprises face in their day-to-day supply chain management.

Accordingly, enterprises are typically seeking increased digitalization and efficiency in their supply chains, greater supply chain agility, and much, much better supply chain visibility.

However, organizations are typically not self-sufficient in driving supply chain transformation and look for partners to assist them in this journey.

So, what should organizations look for in a supply chain transformation partner?

Ability to Identify End-to-End Digital Supply Chain Operating Model

Larger organizations will be looking not just for a service provider but for a trusted advisor who can proactively deliver innovation and best practices. This typically entails finding a supply chain vendor to work with them using design thinking to identify their new target operating model that can achieve the key business outcomes sought. Such vendors typically have innovation labs where they bring domain consultants and technology experts to co-create with client executives. As well as innovation expertise, the vendor should bring its own benchmarks to measure the client’s current performance and assist in establishing target KPIs within the to-be operating model and understand the best practice processes that are key to achieving these desired KPIs and business outcomes. This level of process knowledge typically comes from operational process expertise obtained through many years of running and enhancing client supply chain processes. Hence, it is important to choose a vendor with both consulting and operational supply chain expertise to reimagine and deliver supply chain transformation.

End-to-end supply chain expertise is also becoming increasingly important. Supply chain transformation requires an ability to break down existing silos and integrate data and automation across silos, so vendors need to be able to design and implement an end-to-end operating model reaching from demand identification and planning & supply planning through order fulfillment and transport planning & optimization, to warranty & returns operations. Indeed, manufacturing optimization could even be included as part of the end-to-end supply chain view for a more enterprise-wide perspective of the supply chain. This holistic perspective is necessary to eliminate friction between departments and automate transactional activities to the extent possible.

Ability to Establish the Data Framework

Data is an immensely important part of this perspective. The existence of supply chain silos within organizations has often resulted in multiple data sources that are fragmented and potentially inconsistent and out-of-date. In the new supply chain operating model, the vendor must incorporate real-time data quality and consistency into the design to provide a solid data analytics and visualization framework. Accordingly, the new operating model should have strong master data management holding a single version of the truth. This will typically require the vendor to undertake ERP standardization and optimization, including improving existing ERPs' controls and implementing a data lake. It will probably also involve improving the level of integration downstream with distributors and customers, upstream with raw material and component suppliers, and within the supply chain itself, e.g., with logistics firms.

It may even be appropriate to undertake cloud migration of existing ERPs.

Ability to Deploy Pre-Built Plug-and-Play Components

The vendor should provide a comprehensive integration platform, control towers, and dashboards within the new supply chain operating model. This integration platform will typically access a wide range of pre-developed plug-and-play models. These plug-and-play models will be based on both proprietary tools and platforms and have the ability to seamlessly integrate specialist point platforms for areas such as transportation planning and inventory management.

While they are likely to have preferred partners for many of the point solutions required, the vendor should have a broad alliance ecosystem with pre-built APIs and supply chain integration and build in longevity to the digital supply chain operating model by providing the ability to switch platforms in and out within its integration framework as new platforms and opportunities become available. These platforms, whether proprietary or third-party, will predominantly be cloud-based to provide greater supply chain scalability and resilience.

Ability to Apply Machine Learning in Support of Supply Chain Simulations

Enhanced demand forecasting is currently a key component of supply chain transformation. Depending on the type of business, the vendor should be able to integrate customer data from point-of-sale, social platforms, and third-party data sources, ingest data from the organization's systems and apply this data within pre-built machine learning models. Machine learning models should be used to improve forecasting accuracy and to run simulations, for example, to indicate the impact of marketing campaigns and price adjustments.

However, machine learning and analytics have a much wider role in underpinning simulations across the supply chain, including in supply forecasting and logistics optimization. In addition, digital twins are starting to be deployed to test and refine transformational approaches before their adoption, while process mining should be used to check process conformance and further opportunities for process automation.

Summary

In summary, leading supply chain vendors will possess:

• A combination of consulting, technology, and operations expertise in supply chain management supported by design thinking labs
• Best-practice supply chain solutions based on integrated combinations of process models, industry platforms, and automation technologies
• A supply chain integration platform and a pre-built portfolio of supply chain plug-and-play models for process automation
• A strong alliance ecosystem for access to best-in-class supply chain tools and platforms
• The ability to think end-to-end, breaking down supply chain silos and automating transactional activities across the supply chain
• Dedicated supply chain talent with specialized skills and capabilities
• Predictive and cognitive supply chain capabilities, including strong forecasting and digital twin capability.

One of the impacts of the pandemic has been a broad acceleration in enterprise digitalization initiatives, and organizations are looking for strategic partners to assist them in their digital transformation journeys. While digitalization is now top of mind even in procurement, historically there have been challenges in applying intelligent automation to procurement, including budget constraints, poor process alignment, incompatible technology, a lack of perceived need, and  resistance to change (see here).

COVID-19 has helped drive acceptance of major changes in working practices and increased awareness of the need to free up skilled procurement resources to focus on strategic tasks. Against this background, Capgemini has refocused its procurement offerings in line with its Frictionless Enterprise approach, emphasizing digital.

Addressing the resistance to change

Capgemini’s Digital Procurement Services offering aims to address user adoption by focusing on the user experience. Its Frictionless Enterprise approach places importance on the digitally augmented workforce (see here). Capgemini’s digital procurement services focus on continually supporting end-users, ensuring adoption, supplier engagement (particularly during the onboarding process), and driving catalog content. In addition, Capgemini looks to apply design thinking and customer journey mapping capabilities to the UX in the procurement process, leveraging its expertise in user experience design with recent investments by Capgemini’s consulting group, including Frog Design.

Addressing the disconnect within procurement

With its Frictionless Enterprise approach, Capgemini looks to address any friction points between departments, functions, applications, data sources, devices, etc. As part of its digital procurement offering, Capgemini uses the concepts of Frictionless Enterprise to:

• Determine the objectives of the procurement transformation and align with the overall strategy for the function
• Assess opportunities for channel, spend, and working capital optimization
• Develop and deploy a frictionless operation model through the use of technology and analytics
• Deliver the operating model by leveraging Capgemini’s nearshore and far shore resources, as well as RPA
• Govern through implementing Capgemini’s Command Center.

For procurement, addressing friction points is vital for it to become a more integrated function internally and improve the alignment of procurement with other business units. Capgemini’s digital procurement offering targets the CPO, typically tasked with improving this alignment. In contrast, its digital P2P offering is typically targeting finance stakeholders. Digital procurement takes the lead on the end-to-end procurement transformation deals and leverages the tools and technologies available on the market, applying analytics and IA to drive consistency.

While procurement platforms and P2P process automation are common, the uptake of intelligent automation supporting sourcing activities has been slow to date.  To address this, Capgemini has:

• Increased collaboration across the Capgemini Group, which brings more strategic capabilities, such as upfront operating model design, category management, and strategy
• Partnered with emerging technology providers, such as Fairmarkit, a smart sourcing platform for tail-end spend, Globality for autonomous sourcing of services, and Beeline, a vendor management system focused on services
• Added functionality to its analytics services to support the upstream procurement process, e.g., savings tracking and commodity tracking to track indices based on proprietary and open-source data
• Established a global sourcing CoE with locations in Latin America (to service Americas), Europe (Krakow), and APAC (Chennai/Nanhai) for buying request management.

Looking ahead, Capgemini plans to:

• Expand its iValua capability within business services as a core platform for delivery, alongside existing capability across Capgemini
• Continue to establish partnerships with key technology partners such as risk management, sustainability to support the S2C process
• Strengthen its analytics capabilities by introducing predictive analytics to assist sourcing managers in being better prepared for future spend.

Capgemini looks to deliver its digital procurement services through a plug-and-play cognitive procurement ecosystem to provide a coherent end-to-end digital procurement transformation for its clients. The backbone for the platform already exists, and Capgemini is currently working on adding a front-end workflow layer. The plug-and-play platform will bring together a very broad range of capabilities for an integrated procurement function.

Conclusion

In conclusion, COVID-19 has highlighted the importance of further investment in automation as procurement gains strategic importance. Capgemini’s digital procurement offering leverages its Frictionless Enterprise approach to address key challenges in procurement automation – resistance to change and disconnect within procurement. Although the automation of the end-to-end procurement process remains a challenge, Capgemini has made initial steps and looks to further develop its capability in procurement beyond the P2P.

It is no surprise that COVID-19 is the main theme of virtual conferences such as Procurecon Indirect that focus on the procurement function. And at NelsonHall we are seeing that the pandemic has sparked a range of inquiries from procurement professionals about the art of what’s possible. One outcome of the pandemic is that it has shifted priorities in large enterprises, with an increased focus on business resilience, additional cost cutting measures, and enabling employees to work in the new environment – all of which have been placing additional demands on procurement departments.

As well as working with existing suppliers to sustain current supply chains, sourcing departments have been looking urgently for new suppliers to minimize any future disruptions. And some organizations have been re-evaluating their category management strategies as COVID-19 has disrupted typical spend patterns. Three things that are helping procurement departments cope with the additional workload are acceleration of digitalization, improved communications, and improved access to decision makers.

The biggest challenges in procurement continue to be budget constraints, poor process alignment, incomplete technology and, of course, resistance to change. But COVID-19 has created an environment where overcoming these challenges may become somewhat easier.

Acceleration of digitalization

The acceleration of already rapidly developing digitalization initiatives has been another obvious consequence of the pandemic. Organizations that were more technologically advanced at the start of the crisis have found it easier to cope with changes.

Looking at analytics, for example, there is an acceleration in the shift from using descriptive and diagnostic tools to leveraging predictive and prescriptive analytics. Procurement organizations are increasingly investing in data analysis and scenario analysis software to be able to predict and respond faster to any changes to the supply chain.

Similarly, demand for risk management tools has grown since supply chain risk management and contingency planning continues to be top of mind, with many large organizations looking as far as tier 2 and 3 suppliers.

And there is increased interest in the use of intelligent automation and AI in buying, something that had not really been well developed prior to the COVID-19 crisis.

Improved communications

In an environment where face-to-face meetings have essentially disappeared, procurement organizations in most large enterprises have found that communications with their major suppliers have in fact improved, as e-meetings make it possible to speak with a large number of suppliers across continents over one day; travel time has reduced, and even remote supplier audits have been possible. Although global collaboration is easier, organizations are still more likely to give priority to local suppliers, as long supply chains are unfavorable in the new environment. Some large enterprises with operations in the EU, for example, are moving to country-based systems, disrupting existing supply chains.

With improved communications, some procurement specialists have increased their focus on relationship-building with their suppliers in order to minimize risks associated with supply chain disruption. They have spent time on increasing trust by gathering data on COVID-19-related business continuity plans from their suppliers, as well as establishing new relationships with suppliers who can provide cover should an existing supplier fail to cope with demand, or if the supply chain is disrupted in some other way.

Faster decision-making

Global supply chain disruption has meant that procurement departments have been forced to become more agile and act faster. Longer-term projects became secondary and short-term wins were given preference. Since decisions had to be made faster, procurement, in some enterprises at least, has gained easier access to top level management, and the level of bureaucracy involved in the decision-making process has been greatly reduced.

The impact of these decisions is also being made obvious more quickly, which allows for fine-tuning, ultimately reaching a better outcome for all parties involved. Moreover, some procurement departments are seeing tangible benefits from shorter and more frequent meetings both internally and with their supply chain partners, again including reduced decision-making time.

Repositioning of procurement function within organizations

In some organizations, senior execs are now seeing the procurement function as more of a strategic value-driving function, not just as a cost cutting center. With the crisis, the self-confidence of some procurement execs has increased, and they are using the momentum created by COVID-19 to drive further cultural and organizational changes.

Improved communication has the potential to strengthen relationships, with suppliers delivering value by leveraging core competencies to stand out in the market. Once they see you as a customer of choice, suppliers are also more willing to develop and invest in R&D, which reduces the budget required for transformation. Moreover, by better understanding and managing core suppliers, procurement departments can play a role in creating more transparent supply chains and even achieving supply chain sustainability.

Conclusion

After a period of adjustment, COVID-19 has helped accelerate already existing trends in procurement, and more emphasis is being placed on building stronger relationships and using suppliers’ expertise as a source of competitive advantage. And with the procurement function gaining strategic importance and offshoring becoming increasingly risky, further investment in automation will be the key to ensuring business resilience and agility in the future. All in all, the transformation of some large enterprise's procurement function may happen earlier than anticipated at the beginning of the year.

Alisa has just started a major global research project on transformation in enterprise procurement, scheduled for publication in Q1 2021. She would be interested in hearing from leading suppliers and buyers of enterprise procurement services, and can be contacted at [email protected] and @AlisaS_NH.

Read Part 1 here.

Q&A Part 2

JW: What are the main supply chain flows that supply chain executives should look to address?

JJ: Traditionally, there are three main supply chain flows that benefit from automation:

• Physical flow (flow of goods from, e.g., from a DC to a retailer, the most visible and tangible flow) – some more obvious than others, such as parcels delivered to your door or raw materials arriving at a plant. To address these issues, the industry is getting ready (or is ready) to adopt drones, automated trucking, and automated guided vehicles (AGV). But to achieve true end-to-end physical delivery, major infrastructure and regulatory changes are yet to happen to fully unleash the potential of physical automation in this field. In the short-term, however, let’s not forget the critical paper flow associated with these flows of goods, such as a courier sending Bills of Lading to a given port on time for customs clearance and vessel departure, a procedure that often leads to unexpected delays
• Financial flow (flow of money) – here the industry is adopting new technologies to palliate common issues, e.g., interbanking communication in support of letters of credit
• Information flow (flow of information connecting systems and stakeholders alike and ensuring that relevant data is shared, ideally in real-time, between, e.g., a supplier, a manufacturer, and its end customers) – this is the information you share via email/spreadsheets or through a platform connecting you with your ecosystem partners. This flow is also a perfect candidate for automation, starting with a platform to break silos or for smaller transformation with tactical RPA deployments. More ambitious firms will also want to look into blockchain solutions to, for instance, transparently access information about their suppliers and ensure that they are compliant (directly connecting to the blockchain containing information provided by the certification institution such as ISO). While the need for drones and automated trucking/shipping is largely contingent on infrastructure changes, regulations, and incremental discoveries, the financial and information flows have reached a degree of maturity at scale that has already been generating significant quantifiable benefits for years.

JW: Can you give me examples of where Capgemini has deployed elements of an autonomous supply chain?

JJ: Capgemini has developed capabilities to help our clients not only design but also run their services following best-practice methodologies blending optimal competencies, location mix, and processes powered by intelligent automation, analytics, and world-renowned platforms. We have helped clients transform their processes, and we have run them from our centers of excellence/delivery centers to maximize productivity.

Two examples spring to mind:

Touchless planning for an international FMCG company:

Our client had maxed out their forecasting capabilities using standard ERP embedded forecasting modules. Capgemini leveraged our Demand Planning framework powered by intelligent automation and combined it with best-in-class machine learning platforms to increase the client’s forecasting accuracy and lower planning costs by over 25%, and this company is now moving to a touchless planning function.

Automated order validation and delivery note for an international chemical manufacturing company:

Our client was running fulfillment operations internally at a high operating cost and low productivity. Capgemini transformed the client’s operations and created a lean team in a cost-effective nearshore location. On top of this, we leveraged intelligent automation to create a touchless purchase/sales order to delivery note creation flow, checking that all required information is correct, and either raising exceptions or passing on the data further down the process to trigger the delivery of required goods.

JW: What are the key success factors for enterprises starting the journey to autonomous supply chains?

JJ: Moving to an autonomous supply chain is a major business and digital transformation, not a standalone technology play, and so corporate culture is highly important in terms of the enterprise being prepared to embrace significant change and disruption and to operate in an agile and dynamic manner.

To ensure business value, you also need a consistent and holistic methodology such as Capgemini’s Digital Global Enterprise Model, which combines Six Sigma-based optimization approaches with a five senses-driven automation model, a framework for the deployment of intelligent automation and analytics technology.

Also, a lot depends on the quality of the supply chain data. Enterprises need to get the data right and master their supply chain data because you can’t drive autonomy if the data is not readily available, up-to-date in real-time, consistent, and complete. Supply chain and logistics is not so much about moving physical goods; it's been about moving information for decades. A bit of automation here and there will not make your supply chain touchless and autonomous. It requires integration and consolidation first before you can aim for autonomy.

JW: And how should enterprises start to undertake the journey to autonomous supply chains?

JJ: The first step is to build the right level of skill and expertise within the supply chain personnel. Scaling too fast without considering the human factor will result in a massive mess and a dip in supply chain performance. Also, it is important to set a culture of continuous improvement and constant innovation, for example, by leveraging a digitally augmented workforce.

Secondly, the right approach is to make elements of the supply chain touchless. Autonomy will happen as a staged approach, not as a big bang. It’s a journey. Focus on high-impact areas first, enable quick wins, and start with prototyping. So, supply chain executives should identify those pockets of excellence that are close to being ready, or which can be made ready, to be made touchless, and where you can drive supply chain autonomy.

One approach to identifying the most appropriate initiatives is to plot them against two axes: the y-axis being the effort to get there and the x-axis being the impact that can be achieved. This will help identify pockets of value that can be addressed relatively quickly, harvesting some quick wins first. As you progress down this journey, further technologies may mature that allow you to address the last pieces of the puzzle and get to an extensively autonomous supply chain.

JW: Which technologies should supply chain executives be considering to underpin their autonomous supply chains in the future?

JJ: Beyond fundamental technologies such as RPA, machine learning has considerable potential to help, for example, in demand planning to increase accuracy, and in fulfillment to connect interaction and decision-making.

Technologies now exist that can, for example, both recognize and interpret the text in an email and automatically respond and send all the information required; for example, for order processing, populating orders automatically, with the order validated against inventory and with delivery prioritized according to corporate rules – and all this without human intervention. This can potentially be extended further with automated carrier bookings against rules. Of course, this largely applies to the “happy flows” at the moment, but there are also proven practices to increase the proportion of “happy orders”.

The level of autonomy in supply chain fulfillment can also be increased by using analytics to monitor supply chain fulfillment and predict potential exceptions and problems, then either automating mitigation or proposing next-best actions to supply chain decision-makers.

This is only the beginning, as AI and blockchain still have a long way to go to reach their potential. Companies that harness their power now and are prepared to scale will be the ones coming out on top.

JW: Thank you, Joerg. I’m sure our readers will find considerable food for thought here as they plan and undertake their journeys to autonomous supply chains.

Read Part 1 here.

Introduction

Supply chain management is an area currently facing considerable pressure and is a key target for transformation. NelsonHall research shows that less than a third of supply chain executives in major enterprises are highly satisfied with, for example, their demand forecasting accuracy and their logistics planning and optimization, and that the majority perceive there to be considerable scope to reduce the levels of manual touchpoints and hand-offs within their supply chain processes as they look to move to more autonomous supply chains.

Accordingly, NelsonHall research shows that 86% of supply chain executives consider the transformation of their supply chains over the next two years to be highly important. This typically involves a redesign of the supply chain to maximize available data sources to deliver more efficient workflow and goods handling, improving connectivity within the supply chain to enable more real-time decision-making, and improving the competitive edge with better decision-making tools, analytics, and data sources supporting optimized storage and transport services.

Key supply chain transformation characteristics critical for driving supply chain autonomy that are sought by the majority of supply chain executives include supply chain standardization, end-to-end visibility of supply chain performance, ability to predict, sense, and adjust in real-time, and closed-loop adaptive planning across functions.

At the KPI level, there are particularly high expectations of high demand forecasting accuracy, improved logistics planning and optimization, leading to higher levels of fulfillment reliability; and enhanced risk identification leading to operational cost and working capital reduction.

So, overall, supply chain executives are typically seeking a reduction in supply chain costs, more effective supply chain processes and organization, and improved service levels.

Q&A Part 1

JW: Joerg, to what extent do you see existing supply chains under pressure?

JJ: From a manufacturer looking for increased supply chain resilience and lower costs to a B2C end consumer obsessed with speed, visibility, and aftersales services, supply chains are now under great pressure to transform and adapt themselves to remain competitive in an increasingly demanding and volatile environment.

Supply chain pressure results from increasing levels of supply chain complexity, higher customer expectations, a more volatile environment (e.g., trade wars, Brexit), difficulty in managing costs, and lack of visibility. In particular, global trade has been in a constant state of exception since 2009, creating a need to increase supply chain resilience via increased agility and flexibility and, in sectors such as fast-moving consumer goods and even automotive, hyper-personalization can mean a lot size of one, starting from procurement all the way through production and fulfillment. At the same time, supply chains are no longer simple “chains” but have talent, financial, and physical flows all intertwined in a DNA-like spiral resulting in a (supply chain) ecosystem with high complexity. All this is often compounded by the low level of transparency caused by manual processes. In response, enterprises need to start the journey to autonomous supply chains. However, many supply chains are still not digitized, so there’s a lot of homework to be done before introducing digitalization and autonomous supply chains.

JW: What do you understand by the term “autonomous supply chain”?

JJ: The end game in an “autonomous supply chain” is a supply chain that operates without human intervention. Just imagine a parcel reaching your home, knowing it didn’t take any human intervention to fulfill your order? How much of this is fiction and how much reality?

Well, some of this certainly depends on major investments and changes to regulations in areas such as sending drones to deliver your parcels, flying over your neighborhood, or loading automated trucks crisscrossing the country with nobody behind the steering wheel; major steps in lowering costs and improving customer satisfaction can already be undertaken using current technologies. Recent surveys show that only a quarter of supply chain leaders perceive that they have reached a satisfactory automation level, leveraging the most innovative end-to-end solutions currently available.

JW: What benefits can companies expect from the implementation of an “autonomous supply chain”?

JJ: Our observations and experience link autonomous supply chains to:

• Lower costs – it is no surprise that supply chain automation already helps to lower costs (and will do even more so in the future), combining FTE savings and lower exception handling costs coupled with productivity and quality gains
• Improved customer satisfaction – as a customer you may ask, why should I care that the processes leading to the delivery of my products are “no touch”, that it required hardly any human intervention? Well, you will when your products are delivered faster, and that from order to delivery your experience was transparent and seamless, requiring no tedious phone calls to locate your product(s) or complains about delivery or invoicing errors!
• Increased revenue – as companies process more, faster, with fewer handling and processing errors along the way, they create added value for their customers and benefit from capacity gains that eventually affect their top line, particularly when operational savings are passed on to lower delivery/product prices, thus allowing for a healthy combination of margin and revenue increase.

We have seen that automation can do far more than simply cut costs and that there are many ways to implement automation at scale without relying on infrastructure/regulation changes (e.g., drones) – for example, by leveraging a digitally augmented workforce. Companies have been launching proofs of concept (POCs) but often struggle to reap the true benefits due to talent shortages, siloed processes, and a lack of a long-term holistic vision.

JW: What hurdles do organizations need to overcome to achieve an autonomous supply chain?

JJ: We have observed that companies often face the following hurdles when trying to create a more autonomous supply chain:

• Lack of visibility and transparency – due to 1) outdated process flows, and 2) siloed information systems often requiring email-based information exchange (back and forth non-standardized spreadsheets, flat files)
• Lack of agility (influencing/impacting the overall resilience of the supply chain) – the inability to execute on insights due to slow information velocity and stiffness in their processes, often focused on functions as opposed to value-added processes cutting across the organization
• Lack of the right talent – difficulty in finding talent in a very competitive industry with new technologies making typical supply chain profiles less relevant and new digital profiles often costly to train and hard to retain
• Lack of centralization and consolidation – leading to high costs, poor productivity, and disjointed technology landscapes, often unable to scale across the organization due to a lack of a holistic transformation approach and proper governance.

One thing that many companies have in common is a lack of ability to deploy automation solutions at scale, cost-effectively. Too often, these projects remain at a POC stage and are parked until a new POC (often technology-driven) comes along and yet again fails to scale properly due to high costs, lack of resources, and lack of strategic vision tied to business outcomes.

In Part 2 of the interview, Joerg Junghanns discusses the supply chain flows that benefit from automation, describes client case examples, and highlights the success factors, adoption approach, and key technologies behind autonomous supply chains.

Genpact has signed a procurement BPS contract with a multinational conglomerate to manage a spend of $10bn covering all major categories of indirect spend (except IT) including logistics, FM, MRO, professional services, travel, and contingent labor, globally.

The contract is of strategic importance to Genpact in that it involves the transfer of 130 category management and sourcing personnel, approximately doubling the scale of Genpact’s existing sourcing & procurement practice. Before the deal, Genpact had ~100 personnel in its sourcing & procurement practice, with an additional 50 S&P personnel elsewhere within the company.

The deal provides Genpact with nearshore sourcing category management delivery centers in Budapest and Monterrey together with additional capability in Bangalore (where Genpact already has a sourcing & procurement team) and a small center near Shanghai.

So it will have a major impact on the scale and level of expertise within Genpact procurement services. Genpact expects this new capability will enable it to maintain 20%+ growth over the next few years, and be instrumental in underpinning its new procurement BPS strategy consisting of:

• Integrated P2P
• Consulting in support of procurement optimization
• Sourcing & category management for leveraged indirect spend categories.

Taking Advantage of Accounts Payable Delivery to Target End-to-End P2P

Genpact has a major and longstanding presence in accounts payable, with ~14,000 personnel deployed on transactional P2P processing. While the majority of Genpact’s accounts payable clients do not currently purchase end-to-end P2P, the opportunities are increasing. Large enterprises with GBS operations have commonly appointed global process owners for P2P and these process owners are frequently looking to achieve “zero-touch” AP – and this can only be achieved by an end-to-end approach to P2P and ensuring that all purchases are digitized and coded and approved in error-free fashion at the procurement stage.

Accordingly, there is a major potential opportunity for Genpact to add procurement to at least some of these clients and provide end-to-end integrated procure-to-pay services.

Consultancy Services in Support of Procurement Optimization

Genpact recognizes that few major organizations will want to change their existing procurement platforms while at the same time frequently recognizing that their procurement capabilities require optimization. Here, Genpact expects its recent partnership with Celonis to be important, with digital twinning being used to show CPOs the “fact-based” reality of their operations.

Key tools then include micro-solutions such as dynamic workflow and elements of Cora, along with third-party point solutions.

Genpact has seven procurement consultancy offerings:

• Developing procurement target operating models
• Blueprinting, developing the execution plan to get to the target operating model
• Systems, small implementations around Coupa with the business growing organically and by word of mouth. Genpact is unlikely to acquire further implementation capability inorganically but has relationships with Coupa and Ariba and may look to add additional platform partnerships
• System optimization, firstly helping organizations optimize what they have bought and secondly helping them do procurement better. The latter could be around tail spend using solutions such as Tradeshift or using Cora dynamic workflow
• P2P optimization via process modifications and change management
• Sourcing diagnostics, using category expertise to identify possible opportunities
• Executing on the resulting short-term sourcing programs.

In addition to process analytics, sourcing analytics is also key, with Genpact’s F&A practice potentially a major source of category benchmark data.

Targeting Leveraged Indirect Sourcing & Procurement

Where the acquisition of these personnel is expected to have the greatest impact is in fundamentally facilitating Genpact in changing its offerings and delivery model for sourcing and category management.

Genpact will focus solely on sourcing indirect spend, and is aiming to own the execution and the delivery of sourcing & category management work by offering leveraged indirect sourcing and procurement services with a one-to-many model.

Genpact will not target high value, high-risk categories but will position as offering greater scale, repeatability, and savings in sourcing in the “leverage” category and in assisting organizations in eliminating, automating, and simplifying sourcing & procurement in very low risk, low-value categories. Genpact will target companies looking for a combination of “taking the noise out of the system” to improve the UX, potentially releasing some personnel to concentrate on more important categories, alongside achieving realized savings.

The contract with the conglomerate assists Genpact in acquiring centers “optimized for procurement with the right skill sets at the right price.” Clients will be offered a choice of delivery location, including onshore, nearshore for regional dependencies and language support, and offshore, with Bangalore being used for back-office support and for sourcing analytics. Genpact will look to use front-end category managers to serve multiple clients in a one-to-many model with resources in Bangalore and Budapest used to magnify their capacity and capability. Approximately 40% of Genpact sourcing & category management personnel are center-based with the remainder, including onshore personnel, more widely distributed.

Genpact will focus on the high-tech, manufacturing, & services, consumer goods, retail, life sciences, and healthcare sectors where it has gained experience of F&A BPS, and will aim to take prospective clients to “visual factories” based in their delivery centers where they can be walked through the sourcing & procurement process and also meet the category managers.

Sourcing & procurement BPS has traditionally been a difficult nut for vendors to crack; challenges have included its high geographic and category diversity, lack of talent (scaling category managers in this environment), lack of realistic offerings for tail spend management, and buy-side slowness to embrace S&P BPS, the latter partly because of limited choice in the vendor landscape. Genpact’s pragmatic approach to extending its business beyond transactional accounts payable to focus on S2P for low-risk indirect spend categories addresses some of these challenges. This approach, its newly expanded category management capabilities, and the fact that it has an extensive F&A client base to mine, position it well for future growth in a market where competition remains scarce.

SCM is one of Genpact’s “invest-to-grow” service lines, where the company is looking to make disproportionate investments and scale up the business: in this case, to become one of the top two global supply chain transformation services vendors. In its “invest-to-grow” businesses, Genpact is looking to achieve at least twice the level of revenue growth achieved by Genpact overall and to do this by investing in complementary competencies rather than scale.

Genpact identified Barkawi Management Consultants, part of the Barkawi Group, as a potential target by working alongside the company (from now on referred to as Barkawi) within in its client base. Discussions began in late 2017, with the deal expected to close this month, August 2018, once the regulatory processes are complete.

The acquisition of Barkawi provides a strong platform for Genpact to deepen its supply chain consulting practice, achieve a revenue balance in SCM between transformation consulting and managed services, strengthen its relationships and expertise in key supply chain technologies, and strengthen its presence in Europe.

Deepening Supply Chain Consulting Capability

In the area of SCM, Genpact had existing capability in planning & inventory optimization & demand analytics and a couple of large managed services contracts. However, the company had limited front-end consulting capability, with just 30 supply chain management consultants. Although Genpact was organically adding SCM consultants, this relative lack of front-end expertise was limiting its ability to handle a significant number of concurrent prospect conversations. The acquisition of Barkawi brings 180 SCM consultants to Genpact, enabling the company to have not only a greater number of simultaneous client and prospect interactions but also to have deeper and more end-to-end conversations across more SCM transformation dimensions (including operating model transformation, technology transformation, digital transformation, and customer-oriented transformation).

Prior to the acquisition, Barkawi had ~200 consultants, with the bulk of these (~180) in the U.S. (principally in a center in Atlanta) and Europe (principally in a center in Munich). These are the operations being acquired by Genpact. The remaining Barkawi personnel were based in the Middle-East and China, which are not markets where Genpact actively generates business, and these personnel will not be transferring to Genpact.

Barkawi principally employs two types of consultant:

• Management/process consultants active in supply chain and aftermarket services
• Digital/technology consultants where the larger part of the practice consisted of assessment/implementation/optimization projects around partner technologies such as Kinaxis and Anaplan.

The U.S. business was slightly larger than the European business and employed a majority of personnel active as technology consultants, while the European business employed a majority of its personnel in management/process consulting.

Achieving a Balance between Transformation Consulting & Managed Services

Barkawi will be combined with Genpact’s consultants into a single SCM consulting service line, giving a broadly balanced mix across management/process consulting and technology consulting. This global service line will be headed by Mike Landry, previously head of Barkawi Management Consultants’ U.S. entity, and will be organized into supply chain consulting, aftermarket consulting, and technology, with these horizontals matrixed against the following verticals: consumer products, life sciences, industrial machinery, and product manufacturing.

Genpact is aiming to achieve a rough balance between the Genpact specialisms of consumer products and life sciences and the Barkawi specialism in industrial manufacturing. Similarly, Genpact is aiming for a roughly equal revenue split between consulting and managed services, with the CPG sector having a higher proportion of managed services contracts.

Strengthening Supply Chain Technology Relationships

Another advantage of the Barkawi acquisition is that it brings Genpact strong existing relationships with, and expertise in, supply chain planning platform companies Kinaxis and Anaplan. Barkawi is one of the leading partners of Kinaxis, and the company’s partnership with Anaplan on supply chain complements that of Genpact's with Anaplan for EPM.

Strengthening European Presence

In terms of its client base, Genpact estimates that the majority of Barkawi’s clients in the U.S. (where it was typically selling ~$200K technology consulting projects), are prospects for a wider range of Genpact supply chain transformation services. In addition, Barkawi had a strong management/process consulting presence in major manufacturers in Germany, which Genpact will seek to build on.

In addition, while the bulk of Barkawi’s European personnel are in Germany, Genpact will look to extend this capability by growing its team in both Munich and across Europe to address supply chain consulting in the wider European market. Genpact perceives there to be major consulting opportunities within the leading manufacturing companies, assisting them in implementing and optimizing technology, working with data, and creating optimization models. This applies particularly to companies with a strong element of aftermarket services, where these companies need to optimize their aftermarket models and address aftermarket fulfilment, warranty management, and forecasting.

Overall, Genpact is still looking to grow the supply chain management consulting team further, will continue to recruit, to support these growth initiatives.

This is the first in an occasional series of blog articles over the next year on Blockchain initiatives related to the financial services industry. Blockchain is an emerging technology for which there are no current operational deployments, with initiatives still primarily at the consulting and design stage. Pilots have been deployed, but are relatively rare despite the rapid growth in experimentation and POC trials.

This article focuses on Genpact’s Blockchain initiatives, leveraging its extensive F&A operations experience to develop Blockchain capabilities that can improve financial outcomes, customer experience and operations costs. Genpact has decided to focus on order-to-cash (O2C) processing to begin with because it has the following characteristics:

• Multi-party process, where coordination across parties for technology and process structure is currently lacking or customized on a bi-lateral basis, not on a universal basis
• Lack of consistent data structure and data management frameworks between parties
• Need to drive customer experience by providing operational transparency
• Impact of the process on financial metrics like cash flow and bottom line profits for a company.

Genpact believes any successful solution for O2C will have:

• Blockchain: distributed ledger, which will require counterparties to adopt a common taxonomy and technology platform. To encourage common adoption, it is necessary to minimize the cost and complexity of deployment and maintenance 
• Smart contracts: computer protocols that get triggered based on specific events and are programmed to execute a sequence of actions. Smart contracts aim to provide security and to reduce transaction costs through automation.

Genpact has started developing the solution for the manufacturing industry, given its experience and client base within this industry. The manufacturing industry is looking to reduce the high costs of O2C processing. Even with a focus on reduced costs for superior performance, adoption challenges would have to be addressed until use of Blockchain becomes industry standard. Successful adoption requires both the buyer (manufacturer) and the vendor (supplier) to adopt a Blockchain platform. To facilitate adoption, Genpact’s approach is to segment the client’s customers to identify the few large customers who would be more willing to adopt this transformative solution given its benefits, and for whom this will deliver a significant percentage of the overall benefits.

Banks’ involvement in the payments part of the O2C cycle would automate the end-to-end process value chain. However, adoption by the banks should be easier, due to high levels of bank interest in Blockchain initiatives. Banks will benefit from improved customer experience in their payments service, and reduced risk from disputed payments.

Genpact is developing the solution on the Hyperledger Blockchain platform, an open source collaboration hosted by the Linux Foundation. Design work is done primarily at client sites in collaboration with client teams, with solution development done by Genpact teams in Palo Alto, CA and Bangalore, India. Development teams work virtually with client teams when joint development takes place. Genpact is currently discussing and working with multiple clients who want to be early adopters to develop different POCs.

Blockchain adoption is growing very rapidly for business case development and POC trials. Full operational deployment remains a future aspiration for all vendors of this technology and supporting services. Domain expertise and opportunity prioritization are critical to getting Blockchain initiatives off the ground. Genpact has developed a strategy to go after a highly focused target market with a high value proposition for its Blockchain initiatives. Next, it will need to convert early experiments into compelling operational business cases to drive adoption and a successful business. 

And, at the same time that basic accounting processes are being automated, so is financial reporting and analytics. Here, natural language generation coupled with analytics is leading to automatic reporting and interpretation of results while predictive and prescriptive analytics are increasingly identifying appropriate company behavior.

Finally, as the operational accounting and reporting processes become automated, the outsourcing vendors are increasingly moving upstream into financial planning and analysis.

So, the nature of finance & accounting is undergoing dramatic transformation. But can the same be said for the role of the CFO? So far this seems to be relatively unchanged, and we believe the time is right for a corresponding transformation.

Hence, NelsonHall tasked its HR department to identify a new CFO for the modern age. In the spirit of design thinking and achieving 10X impact, we thought, “Why not change the role, so that involvement with the CFO, rather than increasing the stress of all concerned (as has often been our experience due to the usual requests for budget cuts and increased performance), actually lowered the stress of all concerned and enhanced the mental health of the organization?”. This would be a truly transformational outcome.

So we set out with a charter to change the role of the CFO from stress-inducing to stress-reducing and to measure the falls in blood pressure of personnel after encounters with the CFO. And while we don’t yet have definitive quantitative results, I think we can confidently assert that this approach is working in the initial pilots.

We decided to look beyond the CFO stereotype of someone with traditional finance skills and a laser focus on analysis, reporting and control. In fact (and this might be a useful tip for executive recruitment agencies), we used the latest thinking in talent acquisition and “consumerized” our hiring process. The result was a generation Z hire (born after 2000) who displays none of the uptight characteristics normally associated with a CFO. We believe he’s a real cool cat.

His background is unknown (background checking was something of an issue), but then why adopt traditional hiring techniques when you are seeking to be transformational? Having said that, he is street-wise and knows what he wants out of his career and life in general.

In terms of daily routine, he turns up for work at about 07.30 in the morning. He commences his duties in corporate stress reduction by welcoming each employee with a purr, and following a breakfast (we presume his second breakfast) he purrs even more. Purring actually has healing properties – it makes the human heart-rate slow down, it lowers blood pressure and stress, and it boosts the immune system, enabling humans to better cope with the day-to-day tasks. So, a truly transformational impact in the role of the CFO.

We thought you might be interested to find out more about our CFO (Chief Feline Officer) Leo’s typical day in the office, so we have outlined this below as an example to all organizations considering taking this approach:

07.30: Leo arrives at work, bright eyed and bushy tailed, looking forward to his second breakfast.

07.31: “Let me in please……I want my second breakfast.” He’s keen.

07.35: “That’s better……I feel I can start the day how I mean to go on.”

07.45: “Now what shall I do?......That’s a nice photograph of me……I’m quite handsome, aren’t I?” Who said CFOs were posers?

08:00: Zzzzzz

11.30: “Is it lunch time yet?......Oh well, I might go back to sleep!”

14.00: Zzzzzzzzzzzzzzzz

15:00: “Not impressed with the task list for today……anyway, we’ve gone digital, so I don’t need this paper, but it’s great to sit on!  Maybe I’ll get some more sleep.”

17:30: Zzzzzzzzzzzzzzzzzzzzzz

18:30: Time to leave, but this guy is a workaholic. “The only way you're going to get me out of the door is to feed me some more cat biscuits!”

We hope that this brief case study shows you how you might adapt the role of the CFO within your own organization to achieve a truly transformational impact on corporate well-being.

As well as conducting extensive research into RPA and AI, NelsonHall is also chairing international conferences on the subject. In July, we chaired SSON’s second RPA in Shared Services Summit in Chicago, and we will also be chairing SSON’s third RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December. In the build-up to the December event we thought we would share some of our insights into rolling out RPA. These topics were the subject of much discussion in Chicago earlier this year and are likely to be the subject of further in-depth discussion in Atlanta (Braselton).

This is the third and final blog in a series presenting key guidelines for organizations embarking on an RPA project, covering project preparation, implementation, support, and management. Here I take a look at the stages of deployment, from pilot development, through design & build, to production, maintenance, and support.

Piloting & deployment – it’s all about the business

When developing pilots, it’s important to recognize that the organization is addressing a business problem and not just applying a technology. Accordingly, organizations should consider how they can make a process better and achieve service delivery innovation, and not just service delivery automation, before they proceed. One framework that can be used in analyzing business processes is the ‘eliminate/simplify/standardize/automate’ approach.

While organizations will probably want to start with some simple and relatively modest RPA pilots to gain quick wins and acceptance of RPA within the organization (and we would recommend that they do so), it is important as the use of RPA matures to consider redesigning and standardizing processes to achieve maximum benefit. So begin with simple manual processes for quick wins, followed by more extensive mapping and reengineering of processes. Indeed, one approach often taken by organizations is to insert robotics and then use the metrics available from robotics to better understand how to reengineer processes downstream.

For early pilots, pick processes where the business unit is willing to take a ‘test & learn’ approach, and live with any need to refine the initial application of RPA. Some level of experimentation and calculated risk taking is OK – it helps the developers to improve their understanding of what can and cannot be achieved from the application of RPA. Also, quality increases over time, so in the medium term, organizations should increasingly consider batch automation rather than in-line automation, and think about tool suites and not just RPA.

Communication remains important throughout, and the organization should be extremely transparent about any pilots taking place. RPA does require a strong emphasis on, and appetite for, management of change. In terms of effectiveness of communication and clarifying the nature of RPA pilots and deployments, proof-of-concept videos generally work a lot better than the written or spoken word.

Bot testing is also important, and organizations have found that bot testing is different from waterfall UAT. Ideally, bots should be tested using a copy of the production environment.

Access to applications is potentially a major hurdle, with organizations needing to establish virtual employees as a new category of employee and give the appropriate virtual user ID access to all applications that require a user ID. The IT function must be extensively involved at this stage to agree access to applications and data. In particular, they may be concerned about the manner of storage of passwords. What’s more, IT personnel are likely to know about the vagaries of the IT landscape that are unknown to operations personnel!

Reporting, contingency & change management key to RPA production

At the production stage, it is important to implement a RPA reporting tool to:

• Monitor how the bots are performing
• Provide an executive dashboard with one version of the truth
• Ensure high license utilization.

There is also a need for contingency planning to cover situations where something goes wrong and work is not allocated to bots. Contingency plans may include co-locating a bot support person or team with operations personnel.

The organization also needs to decide which part of the organization will be responsible for bot scheduling. This can either be overseen by the IT department or, more likely, the operations team can take responsibility for scheduling both personnel and bots. Overall bot monitoring, on the other hand, will probably be carried out centrally.

It remains common practice, though not universal, for RPA software vendors to charge on the basis of the number of bot licenses. Accordingly, since an individual bot license can be used in support of any of the processes automated by the organization, organizations may wish to centralize an element of their bot scheduling to optimize bot license utilization.

At the production stage, liaison with application owners is very important to proactively identify changes in functionality that may impact bot operation, so that these can be addressed in advance. Maintenance is often centralized as part of the automation CoE.

Find out more at the SSON RPA in Shared Services Summit, 1st to 2nd December

NelsonHall will be chairing the third SSON RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December, and will share further insights into RPA, including hand-outs of our RPA Operating Model Guidelines. You can register for the summit here.

Also, if you would like to find out more about NelsonHall’s expensive program of RPA & AI research, and get involved, please contact Guy Saunders.

Plus, buy-side organizations can get involved with NelsonHall’s Buyer Intelligence Group (BIG), a buy-side only community which runs regular webinars on RPA, with your buy-side peers sharing their RPA experiences. To find out more, contact Matthaus Davies.  

This is the final blog in a three-part series. See also:

Part 1: How to Lay the Foundations for a Successful RPA Project

Part 2: How to Identify High-Impact RPA Opportunities

As well as conducting extensive research into RPA and AI, NelsonHall is also chairing international conferences on the subject. In July, we chaired SSON’s second RPA in Shared Services Summit in Chicago, and we will also be chairing SSON’s third RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December. In the build-up to the December event we thought we would share some of our insights into rolling out RPA. These topics were the subject of much discussion in Chicago earlier this year and are likely to be the subject of further in-depth discussion in Atlanta (Braselton).

This is the second in a series of blogs presenting key guidelines for organizations embarking on an RPA project, covering project preparation, implementation, support, and management. Here I take a look at how to assess and prioritize RPA opportunities prior to project deployment.

Prioritize opportunities for quick wins

An enterprise level governance committee should be involved in the assessment and prioritization of RPA opportunities, and this committee needs to establish a formal framework for project/opportunity selection. For example, a simple but effective framework is to evaluate opportunities based on their:

• Potential business impact, including RoI and FTE savings
• Level of difficulty (preferably low)
• Sponsorship level (preferably high).

The business units should be involved in the generation of ideas for the application of RPA, and these ideas can be compiled in a collaboration system such as SharePoint prior to their review by global process owners and subsequent evaluation by the assessment committee. The aim is to select projects that have a high business impact and high sponsorship level but are relatively easy to implement. As is usual when undertaking new initiatives or using new technologies, aim to get some quick wins and start at the easy end of the project spectrum.

However, organizations also recognize that even those ideas and suggestions that have been rejected for RPA are useful in identifying process pain points, and one suggestion is to pass these ideas to the wider business improvement or reengineering group to investigate alternative approaches to process improvement.

Target stable processes

Other considerations that need to be taken into account include the level of stability of processes and their underlying applications. Clearly, basic RPA does not readily adapt to significant process change, and so, to avoid excessive levels of maintenance, organizations should only choose relatively stable processes based on a stable application infrastructure. Processes that are subject to high levels of change are not appropriate candidates for the application of RPA.

Equally, it is important that the RPA implementers have permission to access the required applications from the application owners, who can initially have major concerns about security, and that the RPA implementers understand any peculiarities of the applications and know about any upgrades or modifications planned.

The importance of IT involvement

It is important that the IT organization is involved, as their knowledge of the application operating infrastructure and any forthcoming changes to applications and infrastructure need to be taken into account at this stage. In particular, it is important to involve identity and access management teams in assessments.

Also, the IT department may well take the lead in establishing RPA security and infrastructure operations. Other key decisions that require strong involvement of the IT organization include:

• Identity security
• Ownership of bots
• Ticketing & support
• Selection of RPA reporting tool.

Find out more at the SSON RPA in Shared Services Summit, 1st to 2nd December

NelsonHall will be chairing the third SSON RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December, and will share further insights into RPA, including hand-outs of our RPA Operating Model Guidelines. You can register for the summit here.

Also, if you would like to find out more about NelsonHall’s expensive program of RPA & AI research, and get involved, please contact Guy Saunders.

Plus, buy-side organizations can get involved with NelsonHall’s Buyer Intelligence Group (BIG), a buy-side only community which runs regular webinars on sourcing topics, including the impact of RPA. The next RPA webinar will be held later this month: to find out more, contact Guy Saunders.  

In the third blog in the series, I will look at deploying an RPA project, from developing pilots, through design & build, to production, maintenance, and support.

As well as conducting extensive research into RPA and AI, NelsonHall is also chairing international conferences on the subject. In July, we chaired SSON’s second RPA in Shared Services Summit in Chicago, and we will also be chairing SSON’s third RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December. In the build-up to the December event we thought we would share some of our insights into rolling out RPA. These topics were the subject of much discussion in Chicago earlier this year and are likely to be the subject of further in-depth discussion in Atlanta (Braselton).

This is the first in a series of blogs presenting key guidelines for organizations embarking on RPA, covering establishing the RPA framework, RPA implementation, support, and management. First up, I take a look at how to prepare for an RPA initiative, including establishing the plans and frameworks needed to lay the foundations for a successful project.

Getting started – communication is key

Essential action items for organizations prior to embarking on their first RPA project are:

• Preparing a communication plan
• Establishing a governance framework
• Establishing a RPA center-of-excellence
• Establishing a framework for allocation of IDs to bots.

Communication is key to ensuring that use of RPA is accepted by both executives and staff alike, with stakeholder management critical. At the enterprise level, the RPA/automation steering committee may involve:

• COOs of the businesses
• Enterprise CIO.

Start with awareness training to get support from departments and C-level executives. Senior leader support is key to adoption. Videos demonstrating RPA are potentially much more effective than written papers at this stage. Important considerations to address with executives include:

• How much control am I going to lose?
• How will use of RPA impact my staff?
• How/how much will my department be charged?

When communicating to staff, remember to:

• Differentiate between value-added and non value-added activity
• Communicate the intention to use RPA as a development opportunity for personnel. Stress that RPA will be used to facilitate growth, to do more with the same number of people, and give people developmental opportunities
• Use the same group of people to prepare all communications, to ensure consistency of messaging.

Establish a central governance process

It is important to establish a strong central governance process to ensure standardization across the enterprise, and to ensure that the enterprise is prioritizing the right opportunities. It is also important that IT is informed of, and represented within, the governance process.

An example of a robotics and automation governance framework established by one organization was to form:

• An enterprise robotics council, responsible for the scope and direction of the program, together with setting targets for efficiency and outcomes
• A business unit governance council, responsible for prioritizing RPA projects across departments and business units

• A RPA technical council, responsible for RPA design standards, best practice guidelines, and principles.

Avoid RPA silos – create a centre of excellence

RPA is a key strategic enabler, so use of RPA needs to be embedded in the organization rather than siloed. Accordingly, the organization should consider establishing a RPA center of excellence, encompassing:

• A centralized RPA & tool technology evaluation group. It is important not to assume that a single RPA tool will be suitable for all purposes and also to recognize that ultimately a wider toolset will be required, encompassing not only RPA technology but also technologies in areas such as OCR, NLP, machine learning, etc.
• A best practice for establishing standards such as naming standards to be applied in RPA across processes and business units
• An automation lead for each tower, to manage the RPA project pipeline and priorities for that tower
• IT liaison personnel.

Establish a bot ID framework

While establishing a framework for allocation of IDs to bots may seem trivial, it has proven not to be so for many organizations where, for example, including ‘virtual workers’ in the HR system has proved insurmountable. In some instances, organizations have resorted to basing bot IDs on the IDs of the bot developer as a short-term fix, but this approach is far from ideal in the long-term.

Organizations should also make centralized decisions about bot license procurement, and here the IT department which has experience in software selection and purchasing should be involved. In particular, the IT department may be able to play a substantial role in RPA software procurement/negotiation.

Find out more at the SSON RPA in Shared Services Summit, 1st to 2nd December

NelsonHall will be chairing the third SSON RPA in Shared Services Summit in Braselton, Georgia on 1st to 2nd December, and will share further insights into RPA, including hand-outs of our RPA Operating Model Guidelines. You can register for the summit here.

Also, if you would like to find out more about NelsonHall’s extensive program of RPA & AI research, and get involved, please contact Guy Saunders.

Plus, buy-side organizations can get involved with NelsonHall’s Buyer Intelligence Group (BIG), a buy-side only community which runs regular webinars on sourcing topics, including the impact of RPA. The next RPA webinar will be held in November: to find out more, contact Matthaus Davies.  

In the second blog in this series, I will look at RPA need assessment and opportunity identification prior to project deployment.

For example, within F&A BPS, Hewlett Packard Enterprise (HPE) is investing in a tool to assess the automation potential of organizations’ finance & accounting processes, which is being built into HPE’s FIT (Framework for Innovation & Transformation) framework, and HPE is now developing automation and digitization assessments and roadmaps at the front-end of F&A BPS contracts.

In its targeting of F&A BPS, HPE is becoming more sector specific and incorporating metrics specific to target sectors within FIT, starting with the telecoms and oil & gas sectors.

HPE is also becoming more business metric focused in its approach to F&A BPS and highlighting that the benefits of automation extend way beyond process cost take-out. Cash acceleration and cash utilization are major areas of focus for HPE within F&A BPS. In particular, HPE is stressing that the benefits of source-to-pay automation go beyond halving the S2P headcount and start to open the door to profit improvement opportunities through dynamic discounting. HPE formerly used to advise its clients on negotiating longer payment terms with their suppliers; the company has now changed its focus to encouraging its clients to negotiate early payment discounts and automate/digitize their P2P processes to achieve rapid approval of purchase invoices so that they can optimize their early discounts against these invoices. In many cases, the purchase invoice approval process has been too slow and the knowledge of potential discounts too inaccessible to take advantage of what could amount to a profit improvement opportunity equal to up to 2% of total goods purchased. For example, HPE estimates that the HP GBS organization has saved $2.7bn in early payment discounts over the past three years by taking this approach.

Accordingly, HPE has established a center of excellence for automation in F&A, and is beginning to encourage use of data pdf technology to reduce the need for OCR or manual rekeying of invoices. The company has a number of pilots in this area.

In terms of robotics, the company is currently using UiPath and Blue Prism, the latter particularly for connecting with ERP software, and Redwood for support for R2R and month-end close, and has built-up a library of ~750 accelerators. The company is also extensively using PDF Cloud, and its own Vertica software. HPE’s Business Process Analytics Tool (BPAT) is based on Vertica, which is used to provide an F&A dashboard covering both an executive view of KPIs and drill-downs into service performance.

For example, within P2P, HPE is aiming to digitize F&A processes by:

• Reducing use of paper and scanning through use of PDF data capture and its partnerships with Tungsten and Tradeshift
• Further automation of invoice data entry and processing using RPA
• Identifying further opportunities for automation via BPAT.

Overall HPE is increasingly seeking to place automation strategy and vision at the forefront of F&A process design, with automation and digitization leading the way in identifying possibilities for straight-through processing. Indeed, based on HPE’s F&A services transformation journey diagram, the company expects ~60% of future F&A BPS productivity improvements to be driven by automation and 40% to be driven by process change and staff reallocation & best-shoring.

Contrary to some expectations, RPA is only one automation component. In HPE’s automation journey in F&A BPS, RPA is expected to deliver around a quarter of the total productivity benefits to be achieved from automation, with a whole range of tools and platforms contributing around 75% of the automation benefits to be achieved.

As usual, one of the major challenges over the past year has been in training the company’s solution architects in thinking digital and identifying benefits beyond those previously achievable. As HPE suggested, many of the existing F&A process benchmarks may need to be rewritten over the next 12-months.

F&A BPS is arguably the most mature of all the BPS services. However, with real-time analytics increasingly identifying the opportunities, RPA lowering the barriers to process improvement, and organizations increasingly willing to automate, F&A BPS is now off on a new journey that promises a step change in productivity. Automation plays to the strengths of HPE, and F&A digitization is an area where the company is intending to strongly invest and compete.

• Revenue was $4,817m, down 15.5% y/y, and down 10% in constant currency (CC), reflecting key account run off and weakness in EMEA
• Segment earnings before taxes (EBT) were $194m, a margin of 4.0%, up 143 bps y/y.

Q2 FY 2015 revenue by service line (with y/y revenue growth) was:

• IT Outsourcing $2,871m (-20.2%, -10% in CC)
• Applications and business services $1,946m (-7.6%, -2% in CC).

HP ES contributed 18% of HP Group revenue and 8% of Group EBT (up from 5% last quarter)

HP Group is nearing the completion of its 2012 restructuring plan. In Q2 FY 15, ~3.9k people exited HP making the total reduction to-date ~48k. The program has a total of 55k people expected to exit by the end of FY 2015, so a further 7k departures over the next two quarters.

HP has maintained full FY 2015 guidance for Enterprise Services of a revenue decline of between 4% and 6% on a constant currency basis, with an improvement in H2.

So where are the positives in HP ES' performance this quarter?

• A significant improvement in revenue performance in the Apps and Business Services segment, with a CC y/y decline of just 2%. This is led by the BPO business. And some geos are showing flat to slight CC growth
• Signings were up year over year, even without the $2bn Deutsche Bank deal closed at the beginning of the quarter (see our commentary here).
• And “Strategic Enterprise Services” signings continue to grow.... though no details are provided.

But the problems continue at  HP ES’ ITO business. It not only continues to be impacted from contract runoff from three large accounts continues, but is also being challenged by the evolution in the market. Meg Whitman refers to “risk in the longer term sustainability of this profit level if we don’t do further cost reductions”. As such, the current intention is to streamline HP ES and take up to $2bn of gross annualized costs out of the business over the next three years in pursuit of a longer term EBT margin target of 7% to 9%. The likely charge represents around 9% of HP ES overall revenues - and 14% of the revenues of the ITO business.

The restructuring actions in HP ES and in particular ITO will include initiatives such as further offshoring, data center automation, pyramid management… the same actions highlighted by CSC earlier this week.

Nevetheless, Whitman has made a clear statement of commitment to the future of HP ES: "the Services business in ES - (and the) -  TS Consulting businesses are  becoming more strategic to the future of Hewlett-Packard Enterprise…. “increasingly, services is becoming the tip of the spear”.

In particular, Q4 2014 showed a 6% improvement in BPO TCV year-on-year, with BPO accounting for 31% of total outsourcing TCV. Q1 2015 BPO TCV performance then improved further, up 12% year-on-year, accounting for 33% of BPO TCV. Nonetheless, while the last couple of quarters are an improvement, they are still underperforming relative to the seasonal average over the past five years and so there is continuing scope for improvement.

By geography, the focus on the major economies continues. There was a significant increase in BPO TCV in North America in Q1 2015 year-on-year. Within Continental Europe, for both Q1 2015 and for the last 12-months there was significant BPO contract activity in the Netherlands with Infosys winning a life BPO contract as well as a supply chain management BPO contract here in the past quarter. Overall though, the downturn in BPO TCV in Europe continues.

If we extrapolate this quarter’s level of BPO activity to the remainder of 2015, then BPO TCV across North America and Europe in 2015 will be 9% higher than that recorded in 2014.

At the sector level, the manufacturing sector is indeed showing progress, moving along the value chain from F&A outsourcing through procurement outsourcing and supply chain management. Within the manufacturing sector over the past 12-months, there was an increase in supply chain management BPO TCV alongside the increase in procurement outsourcing TCV. In Europe, the procurement outsourcing activity was in the pharmaceuticals and food & beverages sectors.

Within customer management services, the telecoms & media sector predictably dominated over the past 12-months with the manufacturing sector taking over second place from the retail sector. And within the manufacturing sector, CMS activity strengthened in both the high-tech sector and the pharmaceuticals sector.

At the global level, the last 12-months have shown a strengthening in HR outsourcing and procurement, with a strengthening in procurement outsourcing in Europe, and a significant strengthening in both HR outsourcing and F&A outsourcing in North America.

The top three places in the league table for BPO TCV over the past 12-months remain unchanged, with Serco and Capita at the top of the table. Behind these companies, Sopra Steria remains unchanged in 8th place, with the remainder of the top ten: Capgemini, State Street, Infosys, SAIC, WNS, and Wipro all moving up the table relative to the prior 12-month period.

Serco is continuing to do well in CMS in the retail industry, particularly in fashion, adding a contract with JD Williams, while in Q1 2015, Capita’s government business was back on song with contracts with Sheffield City Council and DEFRA while its acquisition of government assets continues. Capgemini had 12-months of solid F&A BPO contract wins announcing a contract expansion with Office Depot in Q1. Infosys has also had a very solid Q1, winning not just F&A BPO contracts, including a contract expansion with AkzoNobel, but also several insurance BPO contracts, and a supply chain management BPO contract.

The NelsonHall BPO Index is complemented by the NelsonHall Self-Service Market Forecast Tool, which covers 78 BPO service lines, 30 geographies, and 33 industry sectors. This gives highly accurate and granular views of the market, and complements the NelsonHall BPO Index which gives quarterly snapshots of big deal momentum. To use the NelsonHall Self-Service Market Forecast Tool, click here.

If you would like to register for the next BPO Index webcast, scheduled for the 2nd July, 2015, you can do so here.

The objectives of the quarterly “BPS Confidence Index” are to identify:

• Whether the demand for business process services has strengthened or softened in the past quarter
• Expectations of how the relative demand for business process services will change over the coming year
• The factors that are influencing change in demand
• The characteristics of contracts that are showing relatively high and low acceptance
• To produce a “Business Process Services Index of Confidence” that will be widely reported and used in reference to the business process services market.

The survey is open to all BPS service providers and participation is free-of-charge. To participate, please contact Paul Connolly.

The NelsonHall BPS Confidence Index score for Q1 2015 is 156 (out of 200), reflecting strong supplier confidence in BPS in 2015 relative to 2014.

Overall, the current economic climate is in general assisting the BPS market by maintaining a significant level of cost pressure, while the combination of cost pressure and technological advance is increasingly encouraging companies to look outside their own boundaries for new business models.

Accordingly, while emphasis on cost reduction remains high, BPS is increasingly being driven by organizations seeking to achieve transformation and to achieve revenue protection and growth. However, the geographic focus of these initiatives has switched back to company's core economies, with support for growth in emerging economies becoming a much less important driver of BPS adoption.

Nonetheless, despite this increasing optimism, frozen decision-making and business uncertainty are still significant inhibitors to adoption of BPS services, with the proportion of global clients and prospects whose sourcing decision-making is frozen reported to be 26% and clients and prospects are continuing to seek aggressive cost reductions, which can act as an impediment to deal completion.

By service line, F&A BPS was reported as exhibiting above average growth in Q4 2014, ahead of HR BPS and contact center services, as were the related and emerging areas of procurement BPS and supply chain management and this pattern is broadly expected to be repeated during the remainder of 2015.

By sector, BPS vendors continue to have very high expectations of the healthcare sector, across both healthcare providers and healthcare payers. Expectations are also high for the manufacturing sector, particularly in those sub-sectors strongly impacted by new technology such as high-tech, pharmaceuticals, and automotive.

By geography, growth expectations are particularly high for North America relative to Europe where expectations are relatively muted as is the case for Latin America. Growth expectations are moderate for Asia Pacific, with the exception of an expectation of high growth in Australia.

Contract scope and value is reported as increasing over the past 12-months, as contractts become for end-to-end and support for high-end decision-making increases, though contract lengths remain largely unchanged.

If you would like to register for the next BPO Index webcast, scheduled for the 2nd July, 2015, you can do so here.

U.K. Will Continue to Outperform Other Sopra Steria Geographies in 2015

Sopra Steria U.K. had phenomenal growth in 2014 (+18.2% organically) to ~€859m. Profitability was high (adjusted EBITDA margin of 9.9%, up 80 bps). The revenue growth results from the SSCL series of contracts, including extensions to MoJ and Home Office contracts (€400m in TCV). U.K. public sector should keep on growing in 2015, albeit at a lower growth rate. The company is being cautious about the potential impact of the May 2015 U.K. general elections. The intention is to expand in the commercial sector, with financial services as a priority, potentially based on selling Sopra Banking Software products bundled with BPS.

Profitability at the former Steria U.K. will, however, be lower in 2015 than in 2014, largely due to investment in sales and further capex investments in its SSCL venture for building new applications and on-boarding the new MoJ and Home Office contracts.

Turning Around Legacy Steria France Will Take Time

Steria France was impacted in 2014 in terms of revenue growth and profitability by the termination of the Ecotaxe contract (truck toll collect) in H2 2014, merger distractions, losses in its Infrastructure Management (IM) unit, as well as high restructuring costs. Going forward, Sopra Steria is expecting its new size to help it reach contracts of higher TCV. C&SI for the whole of Sopra Steria should be growing modestly in 2015.

Sopra Steria Likely to Divest IM in France?

Sopra Steria is expecting IM only to improve slowly in France, with a gradual return to break even profitability. At the same time, the company is increasing its level of cross-selling internally for its software products and for C&SI, and is driving more coordination between C&SI and IM around cybersecurity and infrastructure professional services. Meanwhile, the reason why Sopra Steria has carved out its French IM business remains unknown. In our opinion, a sale is likely given the size and net margin of the unit (€220m in revenues and a net loss of €14m).

Turning Around Germany Will Also Take Time

Steria has suffered in Germany from its transformation from a consulting-led systems integration business towards a more resilient business. Revenues declined with the economic conditions. The management has changed, and attrition has increased. Revenues in Germany were €212m and net loss was -€9.5m. Meanwhile, Sopra Germany is also a business under stress, with revenues of €14m, down 30%, and adjusted EBITDA margin negative 50%! Sopra has suffered from Airbus reducing its R&D service spend in the country, impacting small suppliers.

In NelsonHall's view, performance in Germany is likely to be flat for the legacy Sopra. Steria Germany will remain impacted by a lower number of consultants. Fixing such a consulting business will not be easy.

Scandinavia: Mediocre Profitability a Surprise

Steria in Scandinavia, and in particular Norway, has been a solid growth driver over recent years, growing frequently by 10% organically. Performance in 2014 was solid in terms of revenue growth (+13.8% organically). The surprise was that the adjusted EBITDA margin has been low in 2013 and 2014 (4.2% and 3.6% respectively) and declining due to a higher level of subcontractors. This is news to us as we expected Steria to achieve high margins on the back of its Norwegian public sector contracts. In all likelihood, Sopra Steria will selectively revisit contracts and look at SG&As. Lowered growth in Scandinavia is very likely.

Expanding Vertical Focus to Defense & Homeland Security

Sopra Steria is also changing its vertical focus somewhat. In the past the company was particularly active in the service industries, including financial services, public sector, transport and utilities, and manufacturing (largely for Airbus). It will maintain its focus on financial services and public sector. However, it is expanding in aerospace, defense and homeland security. Transport & utilities, telecom & media and distribution are becoming less important in the short-term.

The approach is fairly traditional for IT service vendors, focusing on key accounts. What is new here is that while Airbus is the largest client of the group, it has not traditionally been involved in defense & security outside the U.K. Sopra Steria is aiming to expand its service offering in France with the planned acquisition of CIMPA (2014 revenues of €100m), a subsidiary of Airbus. The acquisition raises question marks, given the growth prospects of French R&D service spending currently.

Changes at the Top Confirm Merger was a Take-Over by Sopra

Francois Enaud, long-time CEO of Steria and CEO of Sopra Steria for just six months, departed during Q1 2015. He is replaced by Vincent Paris, Sopra’s former Deputy CEO, with John Torrie as Deputy CEO. The departure of Mr. Enaud was expected, as Head of the Supervisory Board Pierre Pasquier maintains a strong grip on the group’s destiny. Unsurprisingly, this confirms that Sopra acquired Steria and is rolling out its model across Steria.

Software Products Remain a Priority in the Mid-Term

Software products now represent 13% of revenues and Sopra Steria wants to reach 20% to 25% in the mid-term. This will come from acquisitions, as organic growth will not be sufficient to bring ~€300m in additional revenues.

In the short term, the company is accepting lower profitability for investing in the development of its software products. 2014 saw good levels of license sales, but at this point the company has no visibility of how license sales will behave in 2015.

No Mention of BPS or Acceleration of Indian Offshoring

Importantly, Sopra Steria did not mention how it is going to use Steria’s competitive advantage – its large BPS unit (€471m in revenues in 2014) –  and spread its usage across Continental Europe. There’s also a question mark over how Sopra Steria will accelerate adoption of Indian offshoring. To a large degree, Steria had been a success story until its Xansa acquisition in 2007. However, outside of the U.K., evidence of contract wins has been low, suggesting that the company hasn’t made the most of its twin assets of BPS and a 5k personnel presence in India.

At this point, Sopra Steria has a similar profile to that of legacy Steria: reliance on U.K. operations, mild growth prospects in its domestic country, and mixed successes in its other European subsidiaries. What Sopra Steria has that Steria standalone did not have is its sizeable software product business. Software products can bring high margins but they are also cyclical and depend on fourth quarter performance. 

Sooner than later we would like Sopra Steria to show a clearer roadmap, and in particular its intentions regarding BPS.

See also NelsonHall’s blog from April 2014 at the time of Sopra’s acquisition of Steria.

The acquisition will enhance Accenture’s digital capabilities in analytics, cloud and mobility for federal agencies. It also will add agile delivery expertise. Agilex brings in capabilities in agile software development for digital solutions. The company currently serves a number of federal departments and independent agencies, such as the VA, DoD, DHS, and Department of Commerce.  Commercial sector clients have included Amtrak.

Agilex was founded in 2007 by the late Robert La Rose (who had previously founded Advanced Technology Inc. and Integic, both of which were subsequently acquired), Jay Nussbaum (ex. Citibank and Oracle) and John Gall and quickly attracted senior talent to its leadership. The company offers services around

• Mobile applications for activities such as field inspection, emergency response management, performance dashboards, biometric identification, asset management, case management, personal productivity, etc.
• Healthcare IT - for example Agilex was involved in the deployment of the NHIN CONNECT Gateway. Also m-health - for example in May 2014 it was awarded a contract by the VA to develop and implement an enterprise web and mobile application image viewing solution
• CRM solutions.

Agilex has grown from 20 employees in 2007 to about 800 today. Nussbaum and Gall will leave when then acquisition closes, while the company’s leadership team will be integrated into AFS.

So why the acquisition? 

• AFS is already one of the largest U.S. federal systems integrators – this is about continuing to evolve its capabilities to be at the forefront of newer areas of demand; quite simply, Agilex brings in capabilities around digital technologies – and digital is clearly among the top priorities of the government sector
• And governments, not just in the U.S., are looking with much more interest in agile delivery as they move away from massive monolothic projects (for example, agile delivery has been a key element in the U.K. in the development of a new Universal Credit system for the DWP)

Accenture’s 2013 acquisition of ASM Research expanded its presence in the military healthcare market (DoD and VA) - and Accenture has worked alongside Agilex in projects at the VA. 

However, IBM is in the midst of a major adjustment of its portfolio. In line with this, the company is reporting $25bn in revenues (and 16% revenue growth) in 2014 (out of a total of $92.8bn) from its "strategic imperatives". IBM's acquisition of Softlayer, where it continues to invest strongly, appears to be delivering $3.5bn annual "as-a-service" run rate and IBM reports that its "Cloud" business had 2014 revenues of $7bn and 60% revenue growth (this includes hardware, software and services),

The revenue growth reported from IBM's other "strategic initiatives" were:

• Analytics +7% (2014 revenue approx $17Bn)
• Security +19%
• Mobile >200%.

Maintaining a high mix of software remains important to IBM but its strategy is now much more nuanced than the simplistic "software good" strategy the company sometimes appeared to adopt in earlier years, with the company rediscovering success in IT infrastructure management. Indeed IBM's acquisition of SoftLayer and its ongoing investment in Cloud infrastructure including in additional in-country SoftLayer data centers and cloud enablers such as security and its Bluemix cloud development platform is arguably having more impact on its signings than any of its investments outside Watson and analytics. In Q4, IBM's cloud infrastructure business moved way beyond the standard fare of IaaS contracts with start-ups to facilitating major infrastructure transformation contracts with values of a $1bn+ with the likes of Lufthansa and WPP.

Indeed, while the impact of SoftLayer was insufficient to lead to material growth in IBM's outsourcing revenues in Q4 2014, its impact is certain to be felt on outsourcing revenue growth  in 2015 as a result of these and additional major transformations to cloud infrastructure. Led by these deals, IBM's outsourcing signings transformed in Q4 2014, up 31% (in constant currency and adjusted for disposals). IBM now just needs its application management business, which is continuing to decline under competitive pressure, to undergo a similar transformation.

In its early days, BPO was a linear and lengthy process with knowledge transfer followed by labor arbitrage, followed by process improvement and standardization, followed by application of tools and automation. This process typically took years, often the full lifetime of the initial contract. More recently, BPO has speeded up with standard global process models, supported by elements of automation, being implemented in conjunction with the initial transition and deployment of global delivery. This timescale for “time to value” is now being speeded up further to enable a full range of transformation to be applied in months rather than years. Overall, BPO is moving from a slow-moving mechanism for transformation to High Velocity BPO. Why take years when months will do?

Some of key characteristics of High Velocity BPO are shown in the chart below:

As a start point, High Velocity BPO no longer focuses on process excellence targeted at a narrow process scope. Its ambitions are much greater, namely to help the client achieve business success faster, and to help the purchaser contribute not just to their own department but to the wider business goals of the organization, driven by monitoring against end-to-end KPIs, increasingly within a GBS operating framework.

However, this doesn’t mean that the need for cost reduction has gone away. It hasn’t. In fact the need for cost reduction is now greater and faster than ever. And in terms of delivery frameworks, the mish-mash of third-party tools and enablers is increasingly likely to be replaced by an integrated combination of proprietary software components, probably built on Open Source software, with built in process roadmaps, real-time reporting and analytics, and supercharged with RPA.

Furthermore, the role of analytics will no longer be reactive process improvement but predictive and driving real business actions, while compliance will also become even more important.

But let’s get back to the disruptive forces impacting BPO. What forms will the resulting disruption take in both the short-term and the long-term?

Well robotics is here now and moving at speed and giving a short-term impact of around 35% cost reduction where applied. It is also fundamentally changing the underlying commercial models away from FTE-based pricing. However, robotics does not involve change in process models or underlying systems and technology and so is largely short-term in its impact and is a cost play.

Digital and analytics are much more strategic and longer lasting in their impact enabling vendors to become more strategic partners by delivering higher value services and driving next best actions and operational business decisions with very high levels of revenue impact.

BPO services around the Internet of Things will be a relatively slow burn in comparison but with the potential to multiply the market for industry-specific BPO services many times over and to enable BPO to move into critical services with real life or death implications.

So what is the overall impact of these disruptive forces on BPO? Well while two of the seven listed above have the potential to reduce BPO revenues in the short-term, the other five have the potential to make BPO more strategic in the eyes of buyers and significantly increase the size and scope of the global BPO market.

Part 1 The Robots are Coming - Is this the end of BPO?

Part 2 Analytics is becoming all-pervasive and increasingly predictive

Part 3 Labor arbitrage is dead - long live labor arbitrage

Part 4 Digital renews opportunities in customer management services

Part 5 Will Software Destroy the BPO Industry? Or Will BPO Abandon the Software Industry in Favor of Platform Components?

Part 6 The Internet of Things: Is this a New Beginning for Industry-Specific BPO?

However, BPO vendors have often tended to use their own proprietary tools in key areas such as workflow, which has had the advantage of enabling them to offer a lower price point than via COTS workflow and also enabled them to achieve more integrated real-time reporting and analytics. This approach to develop pre-assembled components is being further accelerated in conjunction with cloud-based provisioning.

Now, BPO vendors are starting to take this logic a step further and pre-assemble large numbers of BPO platform components as an alternative to COTS software. This approach potentially enables them to retain the IP in-house, an important factor in areas like robotics and AI, reduce their cost to serve by eliminating the cost of third-party licences, and achieve a much more tightly integrated and coherent combination of pre-built processes, dashboards and analytics supported by underlying best practice process models.

It also potentially enables them to offer true BPaaS for the first time and to begin to move to a wider range of utility offerings - the Nirvana for vendors.

Coming next: The Internet of Things – Is this a new beginning for industry-specific BPO

Previous blogs in this series:

Part 1 The Robots are Coming - Is this the end of BPO?

Part 2 Analytics is becoming all-pervasive and increasingly predictive

Part 3 Labor arbitrage is dead - long live labor arbitrage

Part 4 Digital renews opportunities in customer management services

However, the impact of digital is such that it increases the need for voice and data convergence. A common misconception in customer service is that the number of transactions is going down. It isn’t, it is increasing. So while the majority of interactions will be handled by digital rather than voice within three years, voice will not disappear. Indeed, one disruptive impact of digital is that it increases the importance of voice calls, and with voice calls now more complex and emotional, voice agents need to be up-skilled to meet this challenge. So the voice aspect of customer service is no longer focused on cost reduction. It is now focused on adding value to complex and high value transactions, with digital largely responsible for delivering the cost reduction element.

So what are the implications for BPO vendors supporting the front-office. Essentially vendors now need a strong combination of digital, consulting, automation, and voice capability and:

• Need to be able to provide a single view of the customer & linked multi-channel delivery
• Need to able to analyse and optimize customer journeys
• Need the analytics to be able to recommend next best actions both to agents and through digital channels.

On the people side, agent recruiting, training, and motivation become more important than ever before, now complicated by the fact that differing channels need different agent skills and characteristics. For example, the recruiting criteria for web chat agents are very different from those for voice agents. In addition, the web site is now a critical part of customer service delivery, and self-serve and web forms, traditionally outside the mandate of customer management services vendors, are a disruptive force that now needs to be integrated with both voice and other digital channels to provide a seamless end-to-end customer journey regard. This remains an organizational challenge for both organizations and their suppliers.

Coming next – the impact of the move to platform components

Disruptive Forces and Their Impact on BPO - previous articles in series

Part 1 The Robots are Coming - Is this the end of BPO?

Part 2 Analytics is becoming all-pervasive and increasingly predictive

Part 3 Labor arbitrage is dead - long live labor arbitrage

One side of labor arbitrage within labor arbitrage is relatively defensive, but in spite of automation and robotics, mature “International BPO” services are now being transferred to tier-n cities. Here labor arbitrage within labor arbitrage offers lower price points, reduced attrition, and business continuity. The downside is that travel to these locations might be slightly more challenging than some clients are used to, Nonetheless tier-n locations are an increasingly important part of the global delivery mix even for major outsources centered around mature geographies such as North America and Europe. And even more important as doing business in emerging markets becomes evermore business critical to these multinationals.

However, there’s also a non-defensive side to use of tier-n cities, which is to support growth in domestic markets in emerging markets, which will be an increasingly important part of the BPO market over the coming years. Lots of activity of this type is already underway in India, but let’s take South Africa as an example where cities such as Port Elizabeth and Jo’berg are emerging as highly appropriate for supporting local markets cost-effectively in local languages.So, just when you thought all BPO activity had centralized in a couple of major hubs, the spokes are fighting back and becoming more strategic.

But let’s get back to a sexier topic than labor arbitrage. The next blog looks at the impact of Digital.

Part 1 The Robots are Coming - Is this the end of BPO?

Part 2 Analytics is becoming all-pervasive and increasingly predictive

However, analytics is now becoming much more pervasive, much more embedded in processes, and much more predictive & forward-looking in terms of recommending immediate business actions and not just process improvements as shown  below 

Indeed, it’s increasingly important that real-time, drill down dashboards are built into all services, and what-if modelling is becoming increasingly common here in support of for example supply chain optimization.

Analytics is also helping BPO to move up the value chain and open up new areas of possibility such as marketing operations, where traditional areas like store performance reporting are now being supplemented by real-time predictive analytics in support of identifying the most appropriate campaign messaging and the most effective media, or mix of media, for issuing this messaging. So while analytics is still being used in traditional areas such as spend analytics to drive down costs, it is increasingly helping organizations take real-time decisions that have high impact on the top-line. Much more strategic and impactful.

The next disruptive force to be covered is less obvious - labor arbitrage within labor arbitrage.

Part 1 The Robots are Coming - Is this the end of BPO?

Analytics  becoming all-pervasive and increasingly predictive

Labor arbitrage is dead – long live labor arbitrage

Digital renews opportunities in customer management services

Will Software Destroy the BPO Industry? Or Will BPO Abandon the Software Industry in Favor of Platform Components?

The Internet of Things: Is this a New Beginning for Industry-Specific BPO?

The final blog will evaluate the short- and long-term impact of each of these disruptive forces individually and collectively and their potential to deliver “High Velocity BPO” – What the Client Always Wanted.

Let’s start at the beginning. 

Some of the common misconceptions about BPO are that it’s traditionally only been about people and not about innovation. Sorry, it’s always been about both. Another misconception is that BPO used to be about cost reduction but that is no longer the case and it’s now about other types of value. Well even in its infancy, BPO was always as much about service improvement as cost reduction, and to be honest one tends to go with the other anyway. There’s a huge correlation here.

Having said that, client needs do tend to become more focused over time, so let’s take a quick look at how BPO client needs are evolving. Then at six of the potential disruptive forces impacting BPO. Probably should be in a Porter analysis but let’s be less formal. Finally let’s take a look at what this means for BPO going forward. We’ve coined this as “High-Velocity BPO”. A bit of plagiarism here but I think it does the trick.

Clearly, what BPO buyers want varies considerably from service type to service type. But let’s start with the example of a very mature and conservative back-office process. In this area, organizations tend to start by asking for two things:

• Can you get my organization into the top quartile in terms of cost?
• Can you help my organization improve my processes? I’m not quite sure what that means but you are the experts, show me.

Within this desire for process improvement, standardization is often a key element, as is a desire for improved business agility. Then, by the time organizations get to second or third generation BPO, they have generally sorted out the first level of process standardization, have implemented lots of global delivery, and want to build on these. So they still want nirvana but they are starting to understand what nirvana looks like. So they are increasingly thinking about business outcomes on an end-to-end basis, & global process owners, & integration into, or setting up, GBS organizations. Also they’ve done labor arbitrage, so are increasingly thinking about increased automation, and controls & compliance are becoming even more important. Above all, they are looking for a process vision to support them in their business vision. Clients have always wanted nirvana, but it takes them time to work out what it might look like & how to get there.

It’s no longer about cost reduction, is it? Well ultimately, there are only three business outcomes that matter:

• Can I grow my top line?
• Can I increase my margin?
• Can I do both of these while maintaining a healthy cash flow and not going bankrupt?

So the need for cost reduction is as strong as ever. Arguably the new factor here in recent years is the increased need for business agility, which increasingly demands some form of transactional pricing and a willingness to support reduced volumes as well as increased volumes. That can be a real differentiator.

BPO has always worked best when the agenda has been driven by a small number of high level business outcomes; the difficulty has been in managing and making changes to the end-to-end value chain. Certainly disruptions such as GBS should help here, providing an end-to-end process view and a single process owner.

So what are some of the disruptive forces impacting BPO?

Well the robots are coming; is this the end of BPO? One potentially disruptive force is RPA, which is certainly receiving headlines as a BPO killer. So where is RPA currently being used and what are the implications for BPO? Initially, the main usage of robotics is for getting data from one or more applications to another, making intelligent deductions & matching in support of data enrichment and filling in missing fields. A bit like macros on steroids. Loosely coupled with existing systems rather than changing them. The advantage of RPA is that it seems to be achieving a 30% plus cost take-out where employed and very quickly. Implementation times seem to be taking 1-3 months, with a further 3-month period for change management. So RPA is quick and easy.

So where vendors have sometimes been slow to implement the wider process change they knew was possible, due to potential impact on FTE-based revenues, robotics has been making vendors act fast. So partly about getting to their clients before anyone else, including their internal IT department, does. Also robotics has probably been the biggest single driver of pricing changes from FTE-based to fixed price and transactional based. No supplier wants to be caught implementing robotics with a FTE-based pricing model still in place. So robotics has probably generated a bigger change in renegotiation of pricing mechanisms than many years of process cost benchmarking.

Robotics also generates additional challenges for BPO vendors beyond service pricing, including whether to make or buy the underlying robotics tools. If as a vendor you want to develop your own IP and not share it with your competitors, then you might want to develop your own form of robotics rather than use third-party software, and indeed a number of vendors are doing just this.

The next disruptive force, which I will consider in tomorrow's blog, is analytics. 

TriZetto has a headcount of 3.7k (Cognizant at end of H1 2014: 187k.4). In its last 12 months, TriZetto had $711m in revenues and a non-GAAP operating margin of 18.4% (Cognizant in 2013: 20.6%).

TriZetto LTM revenues breakdown by service/product line is:

• Payer software: 40% (~$277m)
• Consulting: 23% (~$164m)
• Hosting: 13% (~$92m)
• BPO: 5% (~$36m). BPO services are provided on the Payer side
• Provider SaaS: 20% (~$142m).

Cognizant has higlighted the acquistion of TriZetto as an important step in the company's history:

• Towards a non-linear growth business. TriZetto is obiously an ISV business and has higher revenue per head (~$190k) than Cognizant (~$50k). Howevever, Cognizant is not buying a provider of plartforms: TriZetto is essentially a traditional ISV selling on premise perpetual licenses, where applications are implemented and customized by the client
  - SaaS revenues represent 20% of revenues, BPO services 5% only
• As a revenue generator with planned $1.5bn in additional revenues over 5 years. TriZetto has been a flat growth vendor overall in spite of M&As. In addition, the additional $1.5bn in additional revenues does not mean that Cognizant will triple revenues of TriZetto. Taking an assumption of revenue synergies happening towards the endof this 5-year period, TriZetto could reach sales of ~$1.3bn, up from $700m currenly. This is nice but hardly exponential for the company of the quality of Cognizant
• TriZetto with its software product business has high margins. Yet, TriZetto has lower operating margins than Cognizant. In addition, TriZetto under the ownershipby Apax Partners, offers little cost synergies. This means that under Cognizant, which will be focusing on revenue growth and investment in sales and products, the operating margin of TriZetto is likely to go down.

This lack of growth raises the question of price. Cognizant has not provided detailed information regarding its net profitability. Yet $2.7bn in cash for a company with flat revenues at best, a net profit likely to be  in the $70m-$100m range and no cost synergies expected seems a bit expensive. However the market seems comfortable with the price Cognizant paid for TriZetto: Cognizant's share price was relatively flat after the annoucement.

This acquistion will put on hold any other significant M&A for Cognizant for while as the company will be focusing on small tuck-in acquistions to strengthen specific capabilities and focus on share buy-backs.

The ISS Group (2013 revenues of DKK 78,056m, ~$14.5bn, EBIT margin of 4.3%) is highly decentralized, with multiple subsidiaries across different geographies. The Nordics is its second largest region, accounting for 21% of global revenue and one of its most mature; it is also one of the group's most profitable regions. So why was the region the first to select F&A BPO as a sourcing strategy? Global F&A initiatives tend to start with smaller, less mature regions. The answer is it started as a regional rather than a global initiative. During 2013, the Nordics management reviewed the region’s organizational structures and also the capabilities and focus of the support functions with a few to a more lean and cost-efficient cost structure.

Cognizant is about two thirds of its way through shifting F&A processes to its COE (there is no personnel transfer involved), having completed the transition in the following country order: Sweden, Norway, Finland and Denmark. Outsourced sub- processes across P2P, O2C & R2R are equally distributed with a significant opportunity within A/P to reduce the labor intensive stream of invoice processing. Once transition is complete, the focus will shift to process standardization and leveraging enabling tools to generate process efficiencies.

While this contract was instigated at regional rather than group level, there is a real opportunity for Cognizant to expand to relationship to other regions in the ISS Group. The largest region at ISS Group is Western Europe (51% of overall revenues). The decision is likely to be locally led and thus depend on local readiness to outsource F&A services and agree with chosen best practices after seeing the cost savings achieved by the Nordics division. A more global contract would enable Cognizant to better serve ISS’ business as a whole and generate benefits beyond the standard Lift & Shift cost savings that exist within this contract from more global standardization in F&A processes and reporting. 

There is no significant change in contract scope or direction in the renewal, largely a recognition that Philips and Infosys are part way through a major program of change in the way that Philips carries out its finance and accounting operations, including a major change in Philips' system landscape with simpler IT platforms and a simpler master data structure underpinning all IT platforms. Accordingly continuity is very important to Philips.

Overall, the number of personnel in Philips' finance & accounting function is split 50:50 between Philips in-house and Infosys, with the split for operational activities being approximately 2:1 in favor of Infosys. Infosys' service employs 2,800 personnel, uses eight delivery centers and is based on three major hubs: two in India and one in the Philippines. The scope of the contract covering purchase-to-pay, order-to-cash (mainly cash application), and record-to-report will remain unchanged on contract renewal.

The nature of the governance is clearly very important to Philips, with the implementation of joint objectives and a single leadership team across Philips and Infosys. Philips' finance operations have moved from a geographically based organization structure to a process-based organization structure, with the emphasis on each party holding the other accountable. To this end:

• End-to-end common dashboards are used to monitor finance operations
• Global process owners within the Philips team are mirrored by global process owners within the Infosys team
• Infosys is accountable for the end-to-end KPIs and the analytics used to identify scope for improvement.

The goal in five years' time is to have very standard processes that are easy for Infosys to operate, and Philips has approximately 20 process improvement projects planned over the next 2-3 years to improve process effectiveness and efficiency. These are relatively evenly spread across the major processes areas with an emphasis within P2P, for example, on increased automation, e.g. through use of e-invoicing.

As in many mature F&A BPO contracts, there has been a move from FTE-based pricing to transaction-based pricing, with the latter regarded by Philips as the ideal end-point. Currently approximately three-quarters of the contract is priced on a per transaction basis with a quarter of activity (in areas such as compliance) still FTE-based. In addition, there are bonuses and penalties, each around 5% , associated with targeted improvements in end-to-end KPIs. Philips has set improvement targets for six key indicators, tasked Infosys with identifying the three main factors for underperformance in each KPI, and also baked efficiency targets into the contract.

This is the second signifcant contract win for Capita driven by the Cedar HR acquisition. The other was in May 2012, an award by Leicestershire, Nottinghamshire and Derbyshire police forces to share back office services under a collaborative agreement. The deal involved Capita deploying Origin to manage all three forces’ data for HR, training, duty management, and health and safety under a contract worth £2.3m over 5 years.

More opportunities are to be expected in the U.K. polic sector, as forces deal with further budget cuts.

Wipro’s Energy and Utilities unit, boosted several years ago by the June 2011 SAIC unit acquisition , continues to be a major revenue growth engine: E&U contributed an estimated 31.5% of the y/y growth this quarter. Wipro’s Healthcare and Life Sciences unit has also delivered two quarters of double digit growth.

BFSI continues to contribute around 20% of the y/y revenue growth, but it has been two years since BFSI, Wipro's largest industry group, achieved double digit growth. There will be some revenue contribution to BFSI in Q4 FY 2014 from the imminent acquisition of mortgage origination and servicing specialist Opus CMC. Optus will boost Wipro's BPO revenues in FY 2015, also expanding its onshore delivery presence in the U.S. Wipro is looking to leverage Optus to build an end-to-end mortgage BPO offering introducing more automation and increasing the application of analytics.

While Wipro’s telecoms business continues to be soft (the company does a lot of R&D work in the telecoms sector), it has now had two consecutive quarters of positive growth and appears to have bottomed out after seven quarters of negative growth.

If we look at service line performance, IT infrastructure services and Business Application Services between them contributed $81m of the $101m incremental y/y growth for Wipro. Its Analytics & Information Management is not the growth engine it was in FYs 2012 and 2013; it is now regularly delivering quarterly revenues of around $120m.

Where Wipro is underperforming, in particular compared to TCS, is in bread-and-butter ADM services. For TCS, ADM delivered an estimated $173m in additional revenue this quarter, more than Wipro achieved across all its service lines ($173m in incremental revenue for Wipro would have meant a growth of 10.8% for the company). In contrast, Wipro’s ADM business has now had six quarters of negative growth. Infosys has been focusing on getting back to basics and is now seeing a recovery in its ADM business: we imagine Wipro is looking to do likewise (though in its service line reporting, ADM is just 20% of its business).

With headcount down 814 sequentially and y/y growth trailing topline growth, expect to see utilization improve next quarter. Attrition in both the IT services and BPO businesses continues to increase, to a level that is possibly of concern.

To finish on a positive note, we have been keeping an eye on y/y revenue growth from Wipro’s top 10 clients; its efforts to strengthen key account management continue to pay off, with these accounts growing faster than Wipro overall.

If we look at where the growth is coming from:

• The more established ADM services (where Infosys took its eye of the ball in FY 13) contributed an estimated $173m in additional revenue, or 35.4% of the y/y growth of $490m. (Infosys achieved $53m growth in its ADM businesses). Enterprise solutions contributed over 19% of the growth. Assurance services and IT infrastructure services both continue to enjoy very strong growth and between them contributed over 27% of the y/y growth. IT infrastructure services and BPO both crossed the $400m revenue mark this quarter. The only service line not delivering double digit topline growth is the software business (TCS BanCs), for which the market is soft
• By vertical, the y/y growth is dominated by BFSI, which contributed an impressive $200m (nearly 45 of overall growth) in incremental revenues this quarter: full FY 2014 revenues are likely to approach $5.8bn. TCS is confident of sustaining ongoing growth in this vertical. In two other verticals, the difference between TCS and Infosys is marked:
  • Telecoms: Infosys continues to experience negative growth (down 10% in Q3 FY 14) and says its client budgets for next year are down. In contrast, TCS saw accelerated revenue growth this quarter (17.8% estimated, or $50m)
  • Life sciences & healthcare, which Infosys indicated a few years back was a new target market but now considers is soft.  TCS, in contrast, is enjoying over 30% growth, again with $50m in additional revenues.

These data points, are, of course, simplifications, but they do expose significant gaps between the two.

Among the regions, y/y revenue growth, unsurprisingly, continues to be dominated by North America (an estimated $232m in additional revenue. But Continental Europe contributed an impressive $122m in additional revenue. If anyone is in any doubt about its penetration of Continental Europe, TCS is likely to achieve over $1.5bn in revenue in the region this FY, with the U.K. delivering around $2.3bn. It is a major player in EMEA, and by far the largest IOSP.

Looking ahead, TCS is very bullish about prospects for FY 2015. CEO N Chandra commented on expecting FY 2015 to be a "much stronger" year than FY 2014. With 16.5% topline growth in FY 2014 nine months year-to-date, that indicates very aggressive targets for next fiscal. Should we expect some acquisition activity for IP-based capabilities, to boost efforts to drive non-linear growth?

This is the third quarter of improved topline growth. Management has raised revenue guidance for full FY 2014 to growth of 11.5-12% (up from prior guidance of 9-10%, and double the level of growth achieved in FY 2013). This would mean Infosys is getting back to Indian IT services market growth rates (NASSCOM predicted 12-14% for FY 2014).

So where has the growth come from this quarter? It is the last quarter of acquisitive growth from Lodestone (acquired Oct 2012) contributing 41% of the y/y growth (55% last quarter).  Infosys’ traditional areas of ADM (which underperformed for much of FY 2013) contributed a healthy 28% of the overall growth. This indicates the effectiveness of the recent drive at Infosys to go back to basics; its BITS businesses overall contributed 55% of the overall growth this quarter. Management commentary on client budgets emphasized their ongoing focus on initiatives cost optimization, is where Infosys BITS service lines play.

In terms of service lines, BFS and Manufacturing continue to be the growth engines. But Telecoms continues to be a major drag (down an estimated 9.6% y/y): it has declined from contributing 12.9% of revenue in FY 2011 to 7.9% this quarter.

The revised FY 2014 revenue guidance implies anticipated y/y growth in Q4 of between 8 and 9.9%, thus H2 overall will deliver slower growth than was achieved in H1. Accenture also saw a slowdown in its quarter ended November 30: the indications from these two bellwethers are of slower revenue growth in Q4 CY 2013: we shall know more next week when more results are published.

The operating margin of 25.0% is up 322 bps sequentially (up 150 bps excluding the one-time visa provision last quarter). Infosys has been stripping out costs by offshoring both billable (where relevant, depending on service type) and non-billable roles (notably in marketing: sales & marketing expense is 5.0% of revenue, down from 5.8% last quarter, with management referring to increased investment in sales). Narayanan Murthy commented on ensuring that “all jobs that can be done in lower cost locations are done in lower cost locations”. Increased pricing also contribute to the sequential margin improvement. Nevertheless, this is the sixth consecutive quarter when operating margin is down y/y.

Another factor contributing to the sequential improvement in margin is the 1.1% q/q decline in headcount (the last time this happened was four and a half years ago, in the June 2009 quarter), or 1,823 employees.

Infosys has been looking to get utilization up to its 78% to 82% target range, but it has again declined sequentially to 76.9% (from 77.5% last quarter).

Attrition continues to increase, to 18.1%; this may be part of the drive to weed out underperformers, but is also possibly indicates a trend in employee morale, in spite of the wage hikes from July 2013. There has been a string of departures of senior execs in the last six months (since the return of N.R. Narayana Murthy) and this is likely to have caused some short-term disruption.

As part of a reshuffle at the top, B. G. Srinivas and Pravin Rao have been appointed as Presidents, with B. G. Srinivas focusing on global markets and Pravin Rao focusing on global delivery and service innovation, on top of their existing portfolios. These are clearly the two front runners for the next CEO after S D Shibulal retires in May next year, unless Infosys elects to go for an external hire. One indication of the level of rethinking that is going on at Infosys is that just a couple of months ago it significantly expanded its Executive Council. That same Council is being disbanded from April 1 with the two new Presidents being given responsibility to put in place “appropriate governance sectors for their respective areas”. Historically, Infosys was a company where any major changes tended to focus on its long-term vision and were planned in detail beforehand; today it appears to be focusing on shorter term imperatives.

Infosys continues to enjoy a very strong balance sheet, ending the quarter with $4,236m in cash, up from $4,130m in the prior quarter.

Looking ahead, management shared its outlook for FY 2015 client IT spending; the tone was cautious, referring to “a mixed bag” across segments.

So what should we expect from Infosys in FY 2015? The company is clearly making progress on getting back to basics with its BITS offerings and it continues to enjoy the boost from the Lodestone operation; next quarter will indicate whether Lodestone is helping drive organic growth in its consulting business. It is still too early to tell whether the newer PPS offerings, on which Infosys places so much store, will pick up steam this year and begin to approach, even outstrip overall company growth. PPS businesses currently contribute 5.3% of company revenue, down from 7.1% back in FY 2012. PPS is key to Infosys' long-term vision, but two years on it is hardly a success story. Indian media is speculating on setting up a separate subsidiary for PPS; we would expect to see some inorganic growth in the next year. Meanwhile, there are several new key roles still to be appointed including a global Head of Sales. Infosys is looking in a better shape now than it was three quarters ago but it going through an unsettling period.

NelsonHall will be publishing an updated comprehensive Key Vendor Assessment of Infosys within the next few days. For details, contact [email protected]

Capgemini first developed a BPO capability in Brazil through the transfer back in May 2008 of a Unilever shared service center in São Paulo as part of a multi-process F&A BPO contract (which also involved the transfer of a SSC in Santiago). We were keen to see what has happened in the last five and a half years: has Capgemini succeeded in transforming a client SSC to a multi-client operation?

The first thing of note is the level of expansion: from an initial 250, Capgemini BPO Brazil’s headcount has quadrupled to nearly 1,050 FTEs, representing 7.5% of Capgemini’s global BPO delivery capability. This expansion has come from providing, mostly F&A, services in the Portuguese language to both multi-national and local clients. Since 2008, Capgemini BPO is servicing an additional eight clients out of Brazil, and also providing support to Capgemini group: a total of ten clients. In most cases, Capgemini is servicing the Brazilian operations of multi-national clients such as Syngenta, Avon and Nokia Siemens Networks (the latter for supply chain operation services). Capgemini BPO won its first domestic deal in Brazil in 2011: a 13-year multi-tower contract with conglomerate Grupo Algar covering F&A, HR and supply chain operations. Capgemini was tasked with standardizing processes across two Algar business units and nine companies covering agribusiness, aviation, security, technology and media, with a remit to increase productivity by over 45%. Earlier this year, Capgemini won its second domestic client: White Martins Gases Industriais Ltda (the Latin American subsidiary of Praxair).

This headcount growth has been accompanied by an evolution in the delivery location strategy. Soon after winning the Unilever Brazil contract, Capgemini opened a center in Campinas (a lower cost location than São Paulo), to which around 250 positions relocated. Then in January 2010, Capgemini acquired Sonda Procwork's BPO facility in Gaspar, Santa Catarina state, which had ~200 employees providing F&A and HR support to clients such as Bunge; Capgemini bought the assets to service Bunge, with whom it had secured an F&A deal in 2009. That center is no longer being actively used by Capgemini for BPO delivery.

The Campinas operation has seen signifcant growth; in 2010 Capgemini opened a new office within the Technopark campus, and it now has nearly 700 employees in the center. Campinas has a well-educated labor market (for example, Campinas University is one of the most prestigious in Latin America) - but it is also the 10th richest city in Brazil and there are many other cheaper locations in the country. Having sought a suitable cheaper location, in 2012 Capgemini opened a site in Blumenau, in the south west of the country, in a €2.2m investment to expand its BPO delivery capabilities in Brazil.  The Blumenau site currently houses nearly 350 employees and has the capacity for ~600; it also offers the potential for further expansion. With Blumenau, Capgemini can offer clients in Brazil a lower-cost alternative delivery location to Campinas.

In addition to this evolution in its location strategy, Capgemini BPO Brazil is also working on portfolio development, with an offering specifically for the Brazilian market: tax management.

This is an offering that meets a real local need. The Brazilian fiscal environment is notoriously complex - the World Bank claims Brazil's tax code is the most complex in the world. Companies have to comply with a plethora of federal, state and municipal taxes, some of them overlapping, plus new taxes being introduced, and existing ones regularly being changed – all this makes accounting errors easy. This year Brazil’s federal government has increased its focus on corporate tax collections because of reduced tax revenues (the economy grew less than 1% in 2012, less than the government had budgeted). Non-compliance can be very expensive, as companies like mining firm MMX (faced a fine of R$3.8bn, ~US$1.87bn, equivalent to around 80% of its market value at that time) and cosmetics producer Natura (fined ~$380m) have found out. Other companies targeted by Brazil’s federal tax agency have included pulp producer Fibria, logistics firm Santos Brasil Participações (fined R$2bn in total), even partly government-owned mining company Vale and state-run Petrobras. Even if fines are successfully protested, the damage, to share price, management disruption, can be considerable, and legal fees expensive. And tax processing consumes resources: Capgemini Brazil estimates that in some of its F&A BPO accounts, around 30% of the delivery staff are deployed on tax processing.

Capgemini’s new offering, about to be piloted by a major account, combines preventive controls (for example, checking the right filings and obligations are being done on time and documented), with detective controls, checking compliance at the transactional level, such as the results of calculations. Capgemini is partnering with a local software vendor for the software for the detective control elements. Expect to see this launched as a formal offering in 2014.

Capgemini shared its ambition is to double its Brazilian BPO operation by end 2016, with expansion focused on Blumenau.

Clearly the new tax management service, which it will offer on a standalone basis, will drive part of this growth, presenting new opportunities in the local market. As before, Capgemini will continue to target is multi-national F&A BPO clients that have operations in Brazil: it has just signed such a contract with one of its oldest clients. We also expect to see a new focus on cross-selling with the client base of the former CPM Braxis, acquired by Capgemini in 2010; this will mean an increased focus on the financial services sector.

And finally, more client acquisition activity is a possibility.
 

Business rationalization and expansion will be a tougher nut to crack. Organic growth cannot deliver the overall growth required to grow revenues and margin at acceptable rates. Xerox will need to acquire, but any large acquisition program will incur failed acquisitions. Xerox intends to keep the damage down by acquiring businesses at low prices, which is likely to cause it to miss big wins, but avoid big losses.

Finally, culling businesses (such as the student loan processing business, which is shrinking fast and reducing margins because overhead has not shrunk as fast as revenue) will be necessary for Xerox services to focus on its winning businesses. It is not clear anyone would want to buy the student loan processing business, making a cull impossible, and downsizing the only option. Xerox will need to focus on segments of its financial services BPO business that can be grown rapidly to offset the shrink in the student loan part of the financial services business. Other sunset businesses will have to be handled the same way if there are no bidders.

Xerox will succeed at bring its services operational performance up to its operational expectations, but it will take 3 years to accomplish.

Zurich is a key insurance sector client for Accenture, for a range of consulting and application services; for example in 2010 it was awarded a ten-year, $50m contract to build and maintain a core insurance system and provide underwriting, policy administration and claims management support for Zurich’s P&C business in LATAM. Accenture did not win several back-office BPO contracts at Zurich; for example it lost a major procurement contract against Procurian – a competitor which it is now in the process of acquiring – and lost in an F&A BPO award against Capgemini (initial contract was renewed for five years in Q3 2012).

So why is Accenture announcing this 2012 contract with Zurich now? The emphasis in today’s press release is the extent to which Accenture is involved in and knowledgeable of Zurich’s finance IT processes through its work in this initiative to help Zurich better align its finance IT function to support its business objectives and reduce costs. There are some clear benefits of having one service provider for finance AM and for F&A BPO. Is this a statement of intent by Accenture that it remains interested in also providing some F&A processing as well?

(NelsonHall recently published an updated comprehensive Key Vendor Assessment on Accenture, available to subscribers of the KVA Program)

Looking firstly at the HP group-wide picture, turnaround measures till now have included restructuring, retooling, and reducing costs.  Successes so far include:

• Outlook given during the Q3 earnings call is above the midpoint of the full-year outlook that the company announced at the 2012 Securities Analyst Meeting
• Cashflow was $7bn during the first three quarters of fiscal year 2013, ahead of guidance for the full year
• In Q3 cash conversion cycles have been reduced to just 18 days, lower than initial target of 24-26 days
• Operating net debt, excluding the debt associated with the financing business, was lower by $8bn
• HP is on target with its restructuring plan to get costs in line with its revenue trajectory; to reduced run rate of labor costs by >$3bn in 2014
• Reduced costs and during the first three quarters of fiscal 2013, an operating margin at the high end of the outlook given last year.

At HP Enterprise Services (HP ES), the program so far has resulted in:

• The elimination of red or underperforming accounts: this is almost complete
• Headcount reduction:  average headcount in the first three quarters of 2013 is down by 9% versus a revenue erosion of < 7% in constant currency
• Growth in the “new style of IT” business: HP ES is focusing on growing its “new style of IT” services business which largely includes cloud, mobile and big data. It estimates that the total addressable market is $131bn and growing, compared with the traditional IT services segment which is $410bn and declining. HP ES claims “new style” currently represents about 7% of overall signings. It sees plenty of opportunity for growth in the “new style of IT” which it expects to grow to represent ~25% of the market in 2016, at about $179bn
• Focusing on transitioning clients to the new-style of IT has helped with increasing renewal rate to > 90% in FY13.

The turnaround program is now in full swing, and the initial steps to rebuild the company have already started to deliver results.

HP ES has also started to extend the scope of its strategic measures in its multi-year turnaround program to include:

• Flattening the labor pyramid, in terms of both skill sets and locations: currently HP ES is weighted towards high-cost location with over-skilled personnel in relation to their duties. In future it will take more advantage of its  global delivery centers including those in Bangalore, Manila, Sofia, and Costa Rica
• Focus on getting better at taking contracts away from competitors: in FY 2013, ~ 4% of HP ES’ sales force has been deployed on proactive new logo wins. In FY 2014, this is going to increase to 29%, with a clear focus on new business and selling the new style of IT
• Build-up HP ES’ advisory offerings, to put itself in a stronger position to shape the transformation activity that comes from advisory work
• Build client road maps in every area to help clients go from the traditional to the “new style of IT” e.g. for workforce or workplace mobility with the addition of advanced analytics and integrating multiple devices with enterprise applications.

Each of these measures is a logical evolution, given HP ES capabilities and broader market dynamics.

Building its advisory services is key for HP ES to shape the transformation programs that it undertakes for its clients. This will enable HP ES to expand its customer interactions well beyond CIOs, to include heads of business units that are becoming increasingly influential in IT decision-making and who want agility and speed to market. HP ES’ cloud capabilities are already a good fit to this changing market. The advisory and transformation services should dovetail into them and so substantiating HP ES' mantra of advise, transform and manage.

The roadmaps for transformation to the new style of IT make up a strong addition to the portfolio. We expect to see more such offerings in the future, more focused on verticals. These will also increase HP ES’ ability to interact with the new IT decision-influencers.

HP ES is increasingly facing direct competition from Indian-centric vendors, e.g. it recently lost a major IT infrastructure outsourcing contract at Anglo American to HCL. HP ES needs to pull all the cost levers that it can and so it is increasing delivery from off-shore and lowering cost of transformation for its clients with pre-built road-maps. Increasing its portfolio of vertical offerings can help reduce costs further.

Costs continue to dominate ITO decisions and in the IaaS market in particular, where companies such as Amazon have established a strong presence. While HP has always competed on the added value enterprise ticket, this might not stand the test of time and an acquisition or two may be necessary.

Overall, HP ES is completely on track. It is quietly reinventing itself within its turnaround program and should not be underestimated.

Related article: HP Updates Analysts on Its Turnaround Strategy: Revitalization of HP Enterprise Services.

It is not possible to determine the precise level of organic growth (excluding Lodestone) as Infosys is folding some of its consulting capabilities into Lodestone Consulting: this has happened already in the U.K. and is occurring now in the U.S. and Germany; the incremental $20m in revenue contributed by Lodestone this quarter ($90m, up from $70m last quarter) also includes a benefit from a change in accounting policy for revenue recognition. Nevertheless, we estimate organic revenue growth is around 9%, making it Infosys’ best quarter since Q4 FY 2012. Infosys management referred on several occasions to being ‘cautiously optimistic’ for FY 2014, though maintaining the 6% to 10% revenue growth guidance. We expect this guidance to be refined slightly by end fiscal H1

Looking at some of the service lines:

• Both applications development and application management have had their best quarter of topline growth for a year, though still far short of the double digit growth that Infosys used to enjoy
• Testing and infrastructure services continue to see double digit growth but at 15% of group revenue are not the growth engines, accounting for just 20% of the y/y growth this quarter
• Over 60% of the growth was from consulting and systems integration, mainly due to Lodestone, though revenues are also starting to come through from the 12 month $49.5m contract to build a health exchange for the District of Columbia. Management incidentally commented that there is likely to be less opportunity than it had anticipated for similar work to support other states’ health exchanges because of states opting for the federal exchange
• It is pleasing to see BPO back to growth; last quarter’s negative growth appears to have been a blip.

In terms of geographies, the U.S. continues to outperform Europe, which, excluding Lodestone, is achieving minimal y/y growth (we estimate under 2%) and was down 3% sequentially. This is attributed to being a consequence of some projects coming to an end, though clearly bookings to replace these fell short. Lodestone will clearly bring revenue synergy opportunities to Infosys and should ultimately boost the European business in those countries in which it operates. In the U.K., where Lodestone does not have a presence, and where Infosys has folded its consulting business into Lodestone, it will take longer for this type of benefit to be seen. The recent (from May 1) 8% wage hike for the global sales force was an important boost: when Infosys recruits a new global head of sales, it will be interesting to see what the geographic priorities are.

Management highlighted both some of the uncertainties, e.g. currency volatility, that led to the decision not to provide margin guidance, also the various levers being applied to offset impacts such as wage rises, price sensitivity in rebids, costs in the ramp up stages of large outsourcing deals, and also to drive margin growth. Key among these is improving utilization to the 78% to 82% target range, which Infosys seems confident of achieving.  Slightly less was made by management of improving productivity through increased automation and reuse, though Infosys is working on this in its BITS service lines.

TTM attrition is the highest it has been for over two years; presumably the wage hikes from July 1 will go some way to address this.

This is a plug the gap acquisition for Xerox, bringing in IP to help it better manage the end to end O2C process, especially in the collections domain. With CVG already attracting attention from other BPO providers including Infosys and EXL, the acquisition can be seen as both an offensive and defensive play. In June, Xerox signed an ~200 FTE MP FAO contract with a Swiss headquartered CPG manufacturer, beating the incumbent, Genpact. Half of the services in scope are related to O2C (order management, MDM, collections and cash application) - and the platform used to support those processes was the CVG Value+ platform.

CVG will continue to operate from its London office.

As part of the agreement, Accenture will create a new business service,  Accenture Hospitality Services (AHS), built in part around the operations and capabilities coming from Marriott’s MBS unit, including also Accenture software and analytics capabilities for the hospitality sector. Services to be offered by AHS to the hospitality sector will include management consulting, technology and BPO services.

MBS was set up in 2001.  The intention is that Accenture will not only enhance MBS’ operations but also attract new clients in the leisure and hospitality sector.

The acquisition of MBS' operations is a further evolution of Accenture’s relationship with Marriott International that has seen Accenture provide a number of services over the years including:

• Management consulting, including on process initiatives
• A range of IT projects, for example around the marriott.com website platform
• Enterprise applications services: for example Accenture implemented Marriott's Oracle-based accounting platform. The relationship around financial processes and systems goes back to around 2002.

The Louisville center has ~560 employees currently, and will provide Accenture with another sizeable rural onshore U.S. BPO capability. But this is more than the transfer of an onshore captive to a BPO provider, a known and trusted partner for other services, who then proceeds to offshore part of the operation in a standard F&A outsource. The stated rationale is to commercialize the transferred operation and potentially build an integrated services offering for the hospitality sector that could also include industry-specific HR, business analytics and procurement services. This is a well trodden path for Accenture with examples in F&A dating back to its acquisition of BP's accounting centers in the 1990's in order to serve the oil & gas sector.

This is not Accenture's first attempt to build a back-office BPO business in the U.S. hospitality sector: anyone remember its acquisition of Savista back in 2006?

Accenture has had a long history of providing FAO services to manufacturing companies in the Scandinavian market including Finnish steel manufacturer Outo Kumpu. Other clients have included Yara and Volvo. NelsonHall is seeing increased interest by organizations for multi-tower outsourcing, in particular that spans F&A and procurement, especially by organizations such as SSAB (a $6bn group that is currently loss-making) that urgently need to strip out costs.

SSAB is headquartered in Stockholm, and employs ~9,000 FTEs in 45 countries. The Scandinavian market, which the scope of this contract covers, accounts for ~70% (6,500 FTEs) of the workforce and 38% of global revenues.

Weakening of steel markets globally, following reduced demand from China, has led to pricing pressures, and the European market is also challenged with over-capacity. SSAB has gone from being one of the more profitable steel manufacturers in the world to reporting significant operating losses since H2 2012.

In 2012 SSAB introduced an efficiency program for its EMEA operations targeting annual cost savings of SEK 800m from 2014. The program is also intended to increase flexibility to better address market fluctuations. Outsourcing is clearly seen as the lever needed to help address both these challenges: to strip costs and to increase flexibility.

Accenture, like IBM and Capgemini are one of very few organizations globally that have the capability to provide all the three BPO service areas in scope in this contract. The appetite for multi-process outsourcing deals, including in northern Europe, remains undiminished.