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Sunday, November 21, 2004IBM and BPO Strategy -Part IIKnowledge@wharton has published a detailed analytical article about IBM's BPO strategy with offshoring and new expertise acquisitions.In Part 1 of the article, we covered IBM focus on software services and recent wins that IBM has notched in the BPO space. This part focusses on BPO market segmentation, challenges and opportunities that lay ahead for IBM. Part II - Excerpts: Yanking a process out of a firm and delivering outcomes back to that company - in the form of services - is by no means a commodity business. Processes that can be outsourced into three categories: - First, some processes are "foundational in nature", i.e., they account for most of the man-hours and have relatively high volumes and low value (such as transaction processing, claims administration in life insurance etc.) - Second, some processes are "value originators", since they require expertise in process execution and managing complexity (such as research support in investment banking, F&A and invoice management for large supply chain firms, financial statement analysis and so on). - Finally, some processes are "value differentiators", i.e., they have considerable strategic importance. Such services can only be outsourced to specialist firms, and they include services such as market research, pricing and customer analytics, risk management etc. IBM faces competition from overseas firms such as Wipro and HCL. Research show that Wipro and HCL have been able to re-engineer processes and deliver 15% to 30% productivity gains (reduced headcount) and improved quality of execution within a year of taking over the processes from the client. In order to compete with them, "IBM will have to find ways of automating the processes and migrating at least some parts of the process execution to off-shore locations to remain competitive in these segments. This is where the Daksh acquisition gives IBM a way of leveraging its traditional strengths," says analysts . He adds that competition in this segment will heat up as firms with an off-shore delivery capacity acquire consulting capabilities or partner with firms in the U.S. and Europe. Companies such as Infosys , Wipro, Satyam and HCL are already making inroads into this segment in the U.S. and Europe by offering a combination of off-shore, on-shore and near shore facilities. Research also points out that when firms outsource the second kind of processes (value originators) they do not necessarily look to an IT behemoth as a potential provider.. Indeed, for such processes, it is not clear that buyers will turn to firms like IBM or Accenture." Firms like OfficeTiger have a clear edge in this business. What's In a Name -IBM insists that it isn't just targeting BPO deals, Instead, IBM says it is pursuing a market for more comprehensive services - what Palmisano called business process transformational services. "It's about increasing a business's effectiveness and strengthening core competencies, It's not just a question of taking the cost out. It's about transforming the process, embedding the technology and integrating." With increasing process complexity and its strategic value to a client increases, "it is not clear that the usual re-engineering and consulting techniques work. Industry specific expertise and process-level specialization are often required to create significant value, It is easy to underestimate the importance of execution and the challenge of managing complexity and scaling up simultaneously. Companies may enter this market thinking that there are cookie-cutter solutions that once perfected can be rolled out in scale across multiple clients. This is generally not the case." Pitfalls Ahead - IBM's size can get in its way as it pursues business services deals. With more than 300,000 employees, IBM is not as nimble as small outfits can be in serving customers. Then there's the issue of IBM stepping into unknown territory. The company now effectively competes with specialist services firms such as Hewitt Associates, which concentrates on human resources outsourcing and consulting. IBM is adding to its payroll hundreds if not thousands of workers not versed in computer technology per se but in tasks such as benefits administration and accounts payable. To IBM, though, the business process services arena is a logical extension of the old IT world. The company says the BPTS market stems partly from the rise of open technological standards that allow data to move easily within businesses. Also a catalyst, IBM says, is the "ubiquity of the Internet" and web technologies, which lower the cost of transactions within and among businesses. If nothing else, IBM under Palmisano is on the move, rather than resting on its laurels as the biggest IT services provider. | |
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