Digital transformation and consulting/outsourcing firms

Changing technologies, client expectations, competition and an evolving market environment have forced business process outsourcers to adapt. Here's what you need to know.
Written by Michael Krigsman, Contributor

As part of an ongoing examination of digital transformation, I plan to discuss how different industries are evolving in the face of changing customer expectations, competition and technology. Today, let’s look at the IT outsourcing and professional services industry.

To examine the impact of digital transformation on the consulting business, I looked at research from independent analyst firm HFS Research, which covers "Business Process Outsourcing and IT Services."

Research reports from HFS show several interesting conclusions that explain what’s happening with consulting in regards to digital transformation.

Client expectations have evolved

A fundamental driver of change in the consulting business is the reality that cost savings alone are no longer sufficient to satisfy outsourcing clients.

Historically, consulting clients wanted to reduce cost and increase efficiency, both of which were satisfactory goals. Today, these customers want consulting partners to help with innovating and improving processes. Automation and efficiency without improvement are no longer sufficient goals.

Largely, this shift mirrors what’s happening with IT in general. Simply reducing IT spend by a percent or two does not add strategic value to an organization; that benefit only happens when IT drives real business change and improvement.

Also read: CIO strategy workshop: Intel’s IT leadership and transformation pyramid:

This chart, from an HFS report, clearly presents the growing importance of transformational improvement to clients:

BPO client expectations

Realizing innovation goals

Despite the desire to innovate, research from HFS concludes that clients recognize they need support in making changes, as shown below:

Clients need assistance with innovation

Together, the two HFS charts show that BPO clients want to incorporate data, analytics, cloud and other technologies in a creative mix that will improve their business. However, they view this as something for the future and do not possess sufficient in-house expertise to make it happen.

Services firms must keep up

The research shows that clients expect their service provider to help them innovate and push transformational change. For consulting firms, this is the crux of the challenge — to help your clients evolve, you must do it first.

As a result, services providers must adopt their own transformation efforts to keep up with client expectations. These internal efforts center on using cloud, social, mobile and data (analytics) to drive change in both the operations and business models. At the same time, we should recognize that digital transformation today is a buzzword; more than anything, it describes a future state or set of goals. In other words, it’s still early days for digital transformation.

In a report called the Digital Transformation Services Blueprint, HFS presents five implications about digital transformation and services firms:

  1. Digital Transformation will rewrite the underlying economics for services firms.
  2. Digital Transformation will become embedded in every conversation
  3. Digital Transformation requires us to fix many of our old problems before we can realize its promise.
  4. Digital Transformation requires us to look beyond the obvious in what new technologies offer.
  5. Digital transformation requires us to look for new insight among existing processes and tools.

So, how did HFS rank the services providers in this “emerging Digital Transformation services landscape”? In their analysis, the top firms are Accenture, IBM, Cognizant, TCS and Infosys, as shown below:

HFS services firm rankings on digital transformation

I asked the CEO of HFS Research, Phil Fersht, to summarize why consulting needs to adapt:

The services industry is going through a secular change and it will never be like it was, where trillions of dollars were spent maintaining dysfunctional systems and funding huge armies of staff to fumble their way through managing non-standard and often obsolete processes. Those days are fading fast and that pie is shrinking for providers and consultants still feeding off the legacy enterprise operations beast.

Operations leaders don’t have the luxury of ten-year improvement programs anymore – corporate leadership expects to see tangible results in much shorter time frames. You only have to look at the growing number of unemployed CIOs to understand what happens when functions become overly operational and limited value and innovation is achieved.

It’s the same for CFOs, CPOs, supply chain heads and other function leaders – most are under a renewed pressure to continue driving out costs, while delivering ongoing improvements to data quality and having greater alignment with front-office activities. The old “we need to fix our ERP first” excuse just isn’t cutting it as much these days.

This is why 49 percent of today’s enterprise buyers expect to move to a “wide-scale transformation of business processes enabled by new technology tools/platforms” in just two years. Yes, this may be a pipe-dream for some enterprises, but what’s clear is that many of those operations leaders failing to steer their enterprise away from legacy delivery models will get cast aside quickly in today’s tolerance-diminishing business environment.

What’s been exciting about Digital is much of the technology is already available, and it’s the digitization of business processes to enable plug-and-play services, more meaningful data and more seamless business models designed for mobile and cloud business environments.

Digital is not really about digitizing the way we’ve always done things, it’s about digitizing the way things need to be done to be more competitive and effective in the future. Digital is also about progressing our talent to operate with digital mindsets, by adopting analytical, creative approaches to help their enterprises progress from creaking, legacy business practices.

Digital Transformation creates opportunities for new forms of information and insight to be gleaned from the traditional ways we already conduct business today. For example, email trails are being mined via sophisticated analytics to determine patterns of communication that may indicate future problems among partners. Sensors are now being deployed on physical objects to allow them to become part of information context that was impossible before. Smart enterprise buyers are waking up to the possibilities and those services firms failing to come up with solutions are going to fall away fast.

Before concluding, I must note the quality of research from HFS — their full report describes research methodology, breakdown of respondents, and other relevant information. As someone who consumes lots of research, I can say this transparency inspires confidence in the results.

Also read:

Business transformation and the digital CIO

Enterprise social media: New battleground for CIO influence

McKinsey research: IT needs a kick in the keister

Saving the dry, lifeless soul of enterprise software

Research: CIOs and the ‘digitalization’ of business

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