Posted , in Business model
Outsourcing companies move (back) into consulting, but do they have the right business model?
Organisations’ attitudes to core and non-core business functions are changing. As we noted in a recent article on this blog, many previously non-core activities (technology is the big one) are now viewed as being integral to most organisations. But at the same time, there’s a recognition that a combination of greater automation and the need for diverse and fast-changing skills will mean greater reliance on external support—and that’s a complete volte-face on the past, when core functions were kept in-house.
So, good news for outsourcing companies? Maybe, maybe not. Their problem, as most are aware, is that clients aren’t looking for 10-year deals in which entire business functions transfer to the outsourcer, who then—in theory—has the time to design a service that’s both better and cheaper for the client, and profitable for the supplier. I say “in theory” because, as everyone also knows, the reality was often different: Opportunities to think creatively about how people work were constrained by legacy technology and by contractual relationships that discouraged investment. Yes, there’s huge client interest in a new generation of “managed services”, but the name shouldn’t delude anyone into thinking that the future takes us back to the past. Clients want to combine the deep expertise they associate with experienced consultants, with software tools and data that can do more routine work faster and better. Projects may span a few years, as consultants and technology replace processes done by clients themselves, but the arrangement is less rigid and, because the supply-side investment has taken place before it starts, more expensive than traditional outsourcing.
The key to success here comes back to something we’ve discussed elsewhere on this blog—the extent to which the professional services sector is splitting in two, with low-cost (familiar, repeatable, rules-based) work on one side, and high-value (unfamiliar, think-on-your-feet-style) work on the other. All large-scale transformation projects require a combination of the two, which means that suppliers, irrespective of their commercial heritage, need to straddle both sides of the divide. For consulting firms, the challenge is how best to build and leverage data-rich software assets; for outsourcing companies, it’s how best to stretch into the high-value space.
We’ve been here before, of course: Periodically over the last 30 years, outsourcers have created, and then dismantled, consulting businesses. And the irony is that this is the mirror image of clients’ core/non-core debate. Most outsourcing companies haven’t seen consulting as core to their business: If consulting has been important, it’s usually because it’s been a channel to market, a means of winning more outsourcing work, not because it was a stand-alone business. In the new world order, however, consulting will be a core function. Expertise is a central component of the new “managed services” but trying to build and retain these skills in-house is difficult for an outsourcing company because they’re too far removed from the latter’s “core” skillset and come at a different and irritatingly much higher price point. Moreover, outsourcing companies won’t want these skills in-house any more than a client will because they know that the skills needed in the future will be different. Like their clients, outsourcing companies will have to trust some of their consulting work to third parties.
That word—“some”—is crucial. Just as a client organisation will probably aim to have a small, in-house technology team, capable of managing a host of different relationships, an outsourcing company will need a team of people who can see things from the client’s perspective, who can design solutions that meet clients’ needs, and who can select and manage specialist consulting firms as well as leverage the outsourcing company’s in-house assets. Success won’t simply depend on (re)building in-house consulting capabilities, but on recognising that consultants are architects rather than salespeople and that the solutions they design (the service they sell) will be delivered by third parties as much as by in-house resources. Outsourcers will also outsource.