BCG's Outsourcing Recipe

Last time I blogged about a McKinsey article focusing on the need to properly identify and allocate IT costs if IT managers want to recover those costs and also gain support for IT services from other groups in the organization.

Another slant on hidden IT costs is provided by a February 2005 article, written by Boston Consuting Group's Tatjana Colsman, Ralf Dreischmeier, Dr. Rainer Minz, and Harold L. Sirkin. It's title: "Achieving Success in Business Process Outsourcing and Offshoring."

When evaluating an outsourcing deal, companies must factor in costs for transition, management and termination.

The authors advise not to take cost savings of any outsourcing deal at face value. Companies often make the mistake of not benchmarking value against industry best practices. To truly gauge what that value is, companies must also factor in costs for transition, management and termination. Compared to real asset costs (the focus of the McKinsey report we referenced last time), these costs are a lot more squishy. And I am wondering how you go about really measuring them like you would, say, the rental on a VPN circuit.

Nevertheless, reading both articles together provided an interesting perspective on how much value IT organizations stand to gain -- on both the buy and sell side -- if they really do their cost homework.

IT Heal Thyself

A McKinsey Quarter web exclusive for August is titled "Unraveling the Mystery of IT Costs," by Andrew M. Appel, Neeru Arora, and Raymnd Zenkich. The message is that the IT organization needs to make its costs transparent to its internal customers so they can make smarter decisions about how to use those services -- and so IT can fully recover what it spends.



But what are those costs? As the article states: "A large IT organization might support thousands of applications, dozens of physical sites, and tens of thousands of end users. Tracking all assets in use at any given time. . . is a major challenge."

But it's even more complex than the authors say. You also have to identify cost dependencies and maintain dependency relationships over time as things get shuffled around. That's why you would use budgeting applications specifically designed for that purpose. (See my Centage white paper for more on how to do this.) The authors are making the point that IT is like any business and IT services are like any other service -- you need to understand fully their cost components before you can market these products effectively. Okay, so why can't IT just apply the same solutions it would recommend for any business unit with complex and dynamic cost dependencies? What's the big deal?

Apple's iPod Phone Strategy

On its homepage, Mercer Management Consulting is posting an article written by two of its staff, John Hanson and Mark Teitell, for Wireless Week (5/1/05) on the prospects of an iPod phone. More recent articles on the same subject have appeared in Fortune (David Ewait on 7/8/05) and ZDnet (John Carroll on 7/11/05). All three mention the emergence of MVNOs (mobile virtual network operators) as a possible strategy for Apple to defeat carriers' resistance to the idea of an iPod phone. Carriers don't like it that iPod users get to download music for 99 cents off iTunes rather than pay two or three times that much to download songs over a cellular service.

People are not going to give up paying 99 cents a song (or less).

MVNOs, like Virgin, buy service wholesale from carriers (like Sprint, in Virgin's case) and sell it retail under their own brands. It's a model that has worked great for Virgin, but also for Sprint since it means Sprint gets to benefit from Virgin's brand relationship with its customers (think much less customer churn and acquisition costs).

This means Apple launching a new business -- like it did when it launched iTunes. At least going the MVNO route would not require reinventing an entire industry's distribution model, like Apple had to when it started iTunes. This strategy would also let Apple subsidize the cost of the devices for consumers and still make money, just like the carriers subsidize the cost of high-end cell phones now.

Mercer also mentions WiFi as a potential strategy. They should have also mentioned WiMax, which is sort of like WiFi on steroids. Someday people will have wireless VoIP just like they have landline VoIP now, but that's probably still a ways off. Note, however, that cellular companies (Sprint, for example) have implemented on a case-by-case basis VPNs where users can take their wireless laptops from a WiFi service area to a cellular service area and back again transparently -- i.e., without needing to re-establish the connection.

So, I agree with Mercer. It's just a matter of time. People are not going to give up paying 99 cents a song (or less). And the market for iPod-enabled cell phones is obviously huge.

I think the biggest issue here is branding. Does Apple want to position itself as a cell phone provider? Or to put it another way: Is being a cell phone vendor cool? The three million Virgin subscribers must think so. On the other hand, does Apple want to concede to traditional cell phone companies the responsibility of saying how iPods should be presented to customers in the type of saturation (and discount dominated) advertising for which phone companies are famous? I don't think so.

Above all else, Apple is about the quality of the end-user experience. That's the single core issue that will drive how they inevitably enter the cell phone market.

Why CEOs Don't Buy Enterprise Architecture

DiamondCluster International, Inc. is 500-professional management consulting firm based in Chicago with one foot firmly planted in the world of strategy and the other in IT. David Baker is the firm’s chief architect and a knowledge leader in enterprise architecture (EA). Michael Janiszewski is a consultant with experience in technology-related strategy and EA. Together they wrote an article for Enterprise Architecture (6/8/05), entitled the “7 Essential Elements of EA.”

EA is not something you do first and sell to the CEO second.

I highly recommend the article to anyone looking for an overview on how to make EA work. One reason I like it is the way it’s written. I always like the structure: “The 10 keys to this . . .” or “The 5 steps to that . . . “ It’s an effective and easy way to organize thoughts, tell the reader were you’re headed, and make the topic relevant. If you ever have writer’s block when asked to write an article for a business or technical journal, this may be a good way to go.

By the way, another good organizing device is “lifecycle” -- an idea the authors actually mention in the fifth paragraph, but don’t develop.

But what really should get your attention is the motive behind the article -- which is to encourage and assist IT professionals to engage senior managers. The article starts out by saying that many CEOs and CIOs question the need for an EA. That’s an amazing premise, given the fact that the EA is supposed to be the combination dashboard and blueprint of the organization’s central nervous system. What could be more relevant to senior managers? Why don’t most CEOs already know that? The authors blame bad communications and in particular poorly framed concepts.

The article’s seven essential elements cover everything from EA guiding principles, to EA blueprints, to EA management, to EA metrics -- all good fundamental management stuff. (In fact, replace “EA” with almost any IT term – like, say, “infosec” or “virtual supply chain” or “content management” and you have an outline for another very good article on a different topic.) But focusing too much on the mechanics risks missing the heart of the message: EA is not something you do first and sell to the CEO second. It is always a work in progress that you do in partnership with the CEO. Politically, this makes sense because that would give the CEO some ownership.

IT loves to talk about silos. I think the problem getting EA buy-in is that the CEO is in one silo and IT is in another. Until that ceases to be true, even a supposedly joint mission as important as EA will founder.

When Does Tech Advantage Become Strategic?

Most of the articles you'll read in this blog talk about strategy, as defined by the leading experts in the field, regardless of whether tech is involved.

So when does tech advantage become strategic advantage? Here's a clear case: Virtual computing.

Virtual computing, also known as grid computing, is when you divide up a task so that pieces of it run on several little computers rather than having the whole task run on just one big machine. Computers are allocated to tasks dynamically based on the size of the tasks and their number. That's extremely efficient, but the real advantage is that even smaller, more cash-strapped organizations can play "Wal-Mart style" retailing or "Fidelity style" brokerage without making anything close to their levels of IT investment.

One example is the privately owned financial exchanges that operate like "real" markets worldwide 27/7 but without the official title or the heavy infrastructure. FXall is one.

This isn't just faster, cheaper, better. This is flattening the playing field.

I just wrote a case on how grid computing works at a consumer products retailer in Argentina facing 300% inflation. If they can do it, anyone can. That's like saying anyone can have a strategic advantage.

Bain Wants You To Decide

Bain is promoting a paper on its home page called "The Decision-Driven Organization" by Paul Rogers, head of Bain's worldwide Organization practice, and Marcia Blenko, who leads Bain's Organization practice in North America.

In high-tech we value non-hierarchical structures and informal information sharing. But ultimately someone has to take charge.

The authors conducted a survey of senior executives at 356 companies comparing "top performers" to "all others" on how much they credit decision-making for their business success (or lack to it). The study found that a 90% of the executives surveyed in the top performing companies believed that their companies had the ability to make and carry out effective decisions. Only half of the executives in the "all others" category believed the same about their own organizations. In other words, in successful companies decision-making is a conscious act that needs to be taken seriously and developed. Top performers do that in five specific ways, the paper says. Specifically, they strive for:

• Strong leadership
• Clear accountability
• Talented people
• Outstanding frontline execution
• A performance culture

The paper drills down in each of the five areas with examples and lessons from the top performers. My question is: Why don't more companies get good at this? The paper mentions complacency as one reason, but it doesn't really go much further. I think that would make a good area for a follow-up study. Technology, in particular, is a decision-rich environment, since on any given day even a "no decision: decision can quickly put you on the fast track to oblivion. Having been in countless market campaign planning sessions let me offer some of my own observations.

10 Reasons Why Decisions Don't Happen

• You can be wrong. Making a bad decision puts a target on your back.
  
  
• Decisions are not PC. You can't please everyone in every meeting, and in some cultures consensus and compromise are more highly valued than risk and results
  
  
• Alternatives are not clear. To make a decision, you have to know exactly what it is you are deciding, and sometimes that is not always brought to the surface.
  
  
• No one knows who's supposed to decide. A decision is an intellectual product, not simply an intellectual exercise, and someone must be tasked with the deliverable.
  
  
• Time limits are not clear. If you ask someone for a decision, you also have to say by when.
  
  
• Decisions don't stick. If you decide today to do something and then next week not to do it, that's called letting events take over.
  
  
• People don't know what a decision is. It is the intent to take a deliberate action by someone within a specific period of time.
  
  
• No follow-up. Whether the decision ultimately works or not, someone has to be held accountable for doing what they agreed to do.
  
  
• Power is to too distributed. In high-tech we value non-hierarchical structures and informal information sharing. But ultimately someone has to take charge.
  
  
• Great decisions are not celebrated. People need to recognize that good results rarely happen by accident. They should hear a bell ring when a great decision happens.

Bain's recommendations are about how to build effective decision making into an organization. These are 10 things you might want think about first.

Mercer Sees CRM Limits

Mercer Management Consulting has a section on its "How We Help" page called "Featured Capability." The feature today is "Targeting Customers for Profit" -- the gist of which is that you should segment your customers and sell harder (or smarter) the ones that are the most profitable. In other words, pick the best low hanging fruit first.

Pick the best low hanging fruit first.

Most readers already know that, of course, so what's the point of telling them? Like saying overweight people should eat less and exercise more, the real point is attacking the reasons it's just not happening. In the case of customer targeting, I can think of several:

• This is harder than it looks
• CRM systems are not set up properly
• Companies ask the wrong questions
• Data is wrong or insufficient
• There's inconsistent follow-through by frontline staff
• There's a cultural disconnect between "what's really happening out there" and senior management

Mercer hints at a few remedies on its web page and links to an HBR article with more. For example, a company can look at what's worked in the past; and it can also look at the market and see what's likely to work in the future, based on trends. But again, how many companies are really going to do that if they're not already doing it now?

Going back to the weight loss analogy; it strikes me that the real answer is that you need both good equipment and a good trainer (or at least a good workout partner). Of course, the better the coaching, the less good the equipment needs to be. A really great trainer can get you a good workout even in your hotel room (and eat right too, even in airports!). Great coaches don't need good equipment, but it helps. On the other hand, buying that really expensive treadmill doesn't help if it just sits in the bedroom. Apparently, that's equivalent to how many companies are using (or not using) CRM.

Here's one message I see for CRM technology providers: Get good partnering relationships with CRM consultants -- not just to promote the use of the technology but also to promote good CRM exercise.

The One Mistake Banks Can't Make Is the Second

A.T. Kearney's Financial Services practice published a study showing which financial services firms are in the best position to grow their retail banking businesses from operations rather than just by acquisitions. (No surprise -- the study also found that companies that do well organically are in the best position to also grow by acquisition.) Overall, 31 institutions were ranked on various parameters, creating what the consulting firm calls its Organic Growth Index. You can read more about it here.

Make a second mistake and a customer is 35% more likely to leave.

The study found that one of the biggest indicators of whether a bank will keep and add customers is number of service errors. The study also found that big institutions are more likely than smaller ones to make mistakes with a customer -- despite the larger institutions' obvious advantages in infrastructure like call centers, ATM networks, and back office consolidations -- in other words, all the economies of scale typically cited as reasons banks should merge.

And their customers are not very forgiving either. The tipping point seems to be only a single mistake a year. Make a second mistake and a customer is 35% more likely to leave. Make it three, and the attrition rate doubles.

Clearly, big providers still have problems acting like small providers (when it counts) in retail banking. I would guess that this is also still a problem as well for a lot of other customer-facing services that are technology intensive.

Booz Allen Hamilton on Virtual Scale

The Resilience Report is a monthly update on business complexity and strategy-based transformation, from Booz Allen Hamilton. It's part of the consulting firm's monthly online magazine called Business + Strategy. To see a list of current reports you can click here.

It's a difficult enough task just managing suppliers -- and you're actually paying them to work for you.

The August 1st report drew my attention because it speaks to a topic that has to be among the top five that are most on the minds of high tech marketers: scale. Almost every high tech white paper ever written talks about advantages of scale. That's what standards are for. That's what middleware and Internet services are for. That's what virtualization is for. That's what globalization is for. That's what supply chain management is for. And so on. It's also why most high tech founders (and their VC backers) hope to grow their companies large enough so they will be acquired. Prove the concept then cash out.

The title of the Booz Allen article is "Virtual Scale: Alliances for Leverage." The point it makes is that you don't have to be big in order to achieve advantages of scale. You can partner with other firms. You can share marketing, procurement, manufacturing, logistics, back office operations -- almost anything. The authors say that you can increase revenues 14% and profits 7% if you do it right.

You can even partner with competitors, the authors say, by sharing things that have no relevance to your marketplace positioning (like high-volume sourcing of commodity parts).

Of course, in high tech, almost all companies are small -- which helps explain the obsession with scale. High tech companies also tend to be very idiosyncratic -- an issue the Booz Allen authors don't touch on. Entrepreneurial firms like to do things their way. Scale matters but so does nuance. That's why the scale up methods of choice are 1) make your product scalable; and 2) merge. Both options let you focus on "hard" technology and financial skills without getting into "soft" areas like ongoing partnerships. It's a difficult enough task just managing suppliers -- and you're actually paying them to work for you.

Bottom line: I think most high tech firms are absolutely interested in achieving advantages of scale. I just don't think they will ever adopt alliances on any large scale as a way to get them.

McKinsey On Outsourcing Intellectual Capital

Depending on your point of view, the threat or opportunity from outsourcing may not be as big as you think. A McKinsey & Company study pegs the growth in the number of college graduates in developing countries at more than five times that of developed nations (5.5%, versus 1%). And low-wage countries are growing from a bigger base. There are right now 33 million young professionals in low wage countries versus 15 million for high wage (7.7 million in the U.S.).

There are other ways to move intellectual capital as well -- for example across application domains . . .

But tapping into that excess talent might not be as easy as those numbers suggest. McKinsey interviewed 100 HR managers in companies that actually outsource labor to those low wage countries. The HR managers said that only 13% of those professionals are "suitable." The three biggest barriers: lack of language skills, a emphasis on the theoretical in educational background instead of the practical, and a cultural mismatch. Cultural mismatch means, for example, that workers might be more accustomed to a consensus management style versus the hierarchical organizations in place at most multinationals.

Companies themselves are also complicit in factors that mitigate against a wholesale transfer of jobs overseas. For example, companies tend to outsource operations to the same places -- which tends to push up both wages and attrition in those locales. Then again, these also tend to be where the infrastructure has been more developed, the tax structure is more investor-friendly, and the talent pool is more experienced.

There is a lot more in the McKinsey study, but you get the idea. You can't move intellectual capital across international boundaries as easily as you can other kinds of capital -- especially in its more concentrated forms, like innovation and cultural sensitivities. And this is just in a geographic context. There are other ways to move intellectual capital as well -- for example across application domains, which is something technology companies do all the time. A study into how companies can (or can't) do that would be very interesting as well.

Boston Consulting Group's Hard Question

The Boston Consulting Group is promoting a book on its homepage called, Hardball: Are You Playing to Play or Playing to Win? (Harvard Business School Press, 2004). You can download a summary from the BCG website, entitled A “Hardball Manifesto.”

"Sometimes you have to break a few eggs to make an omelet."

Several reviews (including The Wall Street Journal) have asked: What’s the difference between playing hardball, and just playing an effective game? That’s what I want to talk about here.

The answer, I think, boils down to attitude. And in that regard the attitude sounds a lot like what we’ve heard before in other contexts -- all the way from Michael Hammer (“obliterate the organization”) to Steve Jobs (“insanely great products”).

The authors criticize what they see as the business world’s current preoccupation with “soft” subjects – like corporate culture and customer relationships. They say you have to create discomfort in others and yourself in order to succeed. Or as a building contractor I knew once told me: Sometimes you have to break a few eggs to make an omelet.

Of course it’s that very willingness to be a little over-the-top that has also gotten a lot of business leaders into trouble. You need to be more than just pumped, a point the BCG authors repeatedly make. You also have to be right, on a lot of different levels.

So, what’s the answer? Where’s the essential magic in “hardball” play? That’s a fair question, given how much the authors stress that you should focus on the core essentials of whatever your particular game happens to be.

I think the answer is a passion for doing what works -- in other words, a passion for finding what’s true. The truth is almost always the thing that creates the most discomfort in others and ourselves.

Playing “hard” is not about breaking eggs. It’s about making great omelets. Start there.