Charlie Burns, Doug Pollei, Stanton Jones Research Alerts What is Happening? Our ongoing Cloud use research indicates two seemingly opposite trends occurring simultaneously: Accelerating increase in the use of public Cloud for enterprise infrastructure, while the number of public Cloud providers is contracting. ISG research programs confirm that the movement of traditional, on-premises infrastructure to […]
What is Happening?
Research and analysis in a new ISG Provider Lens™ report indicate that the Finance and Accounting Outsourcing (FAO) market, though traditional in nature, is emerging as an innovative and technology-driven service segment. We see more and more providers with diversified portfolios and capabilities catering to the expanding and varying needs of different enterprise clients in this space. However, rapidly-changing enterprise client needs make it increasingly difficult for service providers to build expertise and offer services around every aspect of F&A outsourcing.
Our new ISG Provider Lens Report: Finance and Accounting Outsourcing (FAO) Services builds on months of research focused on services, key service providers in this space, and the global range of buyer needs in order to address this. The report summarizes the relative capabilities of FAO services providers and their abilities to address the requirements of four typical, frequently-encountered categories of enterprise user types (“archetypes”). Each archetype represents a unique set of enterprise user business and technological needs and challenges. And the ability to satisfy the needs of these archetypes is what’s going to enable provider success in an increasingly-diverse FAO marketplace. Even then, experienced guidance will be required to optimize the alignment of provider and services with archetype needs.
Why is it Happening?
When we know what users plan to accomplish, how they want to accomplish it, and what capabilities they require to do so, then we can better identify and/or develop suitable and repeatable combinations of IT services, whether as in-house IT resources or as outside IT providers.
However, knowing how to apply and adapt archetypal characteristics will be key to success for both sides. This is due in large part to two core realities regarding the archetypes:
- The characteristics of each archetype are a moving target over time, because while the core requirements rarely change, the relative importance of different requirements can vary based on business and/or technological environment changes.
- Multiple archetypes tend to be present in most enterprises, especially in larger firms. As the requirements of each archetype evolve and adapt based on business and technological changes, so too do the presence and value of each archetype.
This gives CFOs, CIOs, IT procurement leaders, and decision makers a shifting series of choices when it comes to FAO services provider selection. Striking and maintaining the proper balance between archetype requirements and service provider capability is a mandate to achieve optimal business value. Within the ever-evolving outsourcing space, it will be hard to standardize client requirements and map them against one particular client archetype without anticipating future needs.
For example: The key characteristics of what we call the “Automation and Transformation-Oriented” archetype appear on the left side of Figure 1. Their core needs today revolve around digitization and optimization of Finance. These clients were once traditional outsourcers, but are now embracing innovation and optimizing processes through transformation. ISG sees them mostly as 3rd generation outsourcers who are looking forward to changing their IT ecosystem and creating a difference with automation and analytics.
On the right side of Figure 1 are what our advisors working with these types of clients see as four key capabilities needed to satisfy client-side requirements. The relative size of the “gears” in Figure 1 represent the relative typical need for each within this client archetype. We use providers’ ability and approaches to delivering these as a key means of evaluating provider and service suitability for this archetype.
Figure 1: Mapping Client Needs with Provider Capabilities. Source: ISG Inc.
All that being said, these are depictions of archetypes that do not apply completely and strictly to all clients with similar needs. Adaptation based on experience is required to best gauge and align specific client needs within this or any archetype. And as clients within each archetype progress and mature, their needs will change, and so the relative importance of provider capabilities will also change
Readers of this report will understand better how to strike and maintain the proper balance between their Finance and Accounting requirements and service provider capabilities – and be better able to achieve optimal business value. FAO needs, possibilities, and benefits will be (a) better understood, and (b) more readily accomplished.
Both services providers and enterprise CFOs (and other Finance leaders, as well as outsourcing/services procurement leaders) will be better able to understand each other’s capabilities and requirements, enabling more value for both. Key report findings to enable this include the following:
- Service providers need to have a complete understanding of the client’s internal technology landscape and outsourcing objectives. They should be able to relate to the client’s existing archetype and their future requirements. This will enable them to design solutions while providing insights, more as a consulting partner.
- Enterprise clients need to understand their organizational characteristics to lay out an effective outsourcing plan and do a suitability analysis and choose service providers based on their requirement.
This new report is available for immediate download by clients of the ISG Insights Sourcing and Procurement (SPS) research knowledge area. Clients may simply log in and download a PDF of the report. Non-clients may obtain copies of the report by contacting ISG Insights at http://insights.isg-one.com/learn-more/.
Note: This report presents services providers’ known capabilities in the context of user enterprises’ typical project needs (i.e., archetypes). This report is not meant to rank providers or to assert that there is one top provider whose abilities can meet the requirements of all clients who identify themselves with a particular archetype.
What is Happening?
Based on analysis of data from our latest global web survey on human resource (HR) and human capital management (HCM) technology usage and plans, the HR shift to SaaS is not an “if” but a “when.” We expect more than 50 percent of user enterprises to rely on SaaS and hybrid HR/HCM solutions by the end of 2020.
In large part because leading on-premises HR software vendors have shifted the bulk of their development efforts to the cloud,users of legacy, on-premises solutions have little choice but to plan for a significant shift to Cloud-based HR/HCM in the relatively near term.
While the trend is clear, how to make the shift – and how much to spend in making it – is still a muddied picture. Our newest research report, Industry Trends in Human Resources Technology and Service Delivery Survey, captures the latest thinking from more than 200 enterprise HR organizations, and explains the analysis that leads us to conclude that most enterprises will have to begin making the shift to SaaS within three years.
Why is it Happening?
One particular set of data from the survey provides a snapshot of the overall situation – and the pace of change that enterprises are experiencing. When we asked survey participants to tell us their plans for implementing SaaS/Cloud-based HR/HCM software by category/function, we found an already-strong adoption of – and a steady acceleration toward – SaaS/Cloud through 2019, at which point more than 75 percent of enterprises expect to be using at least some SaaS/Cloud HR/HCM management software in each category/function across their HR organization. The following figure illustrates this.
Figure: Shift to SaaS-based HR/HCM is Happening Across All Categories Source: ISG Inc., 2016 global Industry Trends in HR Technology and Service Delivery survey; n = 206
The Industry Trends in Human Resources Technology and Service Delivery Survey report digs more deeply into why HR SaaS adoption is growing across categories, and what it means for other factors and trends in Cloud-based HR/HCM management evolution and adoption. Findings include the following:
- In a variance from past survey results, this year’s survey found software and process management cost is now the primary benefit expected from HR SaaS. A wide range of enterprise-wide digital-business-related influences – including scalability of solutions, global reach, employee-user experience and access to innovative capabilities on an ongoing and automatic basis – are helping to accelerate adoption.
- While there is a shift underway, the data suggest that not everything is going wholly to Cloud right away. While 75% or more indicate at least some HR SaaS expected in place through 2020, only about one-third of survey participants indicate a wholly-SaaS-based model as their primary HR approach in the same timeframe.
- While HR organizations are still working to master analytics, the improved and ubiquitous analytic capabilities (and security features) of leading SaaS solutions and platforms will help increase HR analytics use. This is a trend that we predict will drive more adoption, and adaptation, of Cloud-based HR/HCM capabilities. Better data analytics enables better management of the organization’s human capital.
We see the move to SaaS as possibly the single biggest opportunity to transform HR service delivery in the enterprise, with benefits that range from improved talent targeting and employee engagement to increased data accuracy and compliance. Given the key trends revealed in the survey, enterprises that lag in deploying and integrating SaaS-based capabilities risk falling significantly behind in their ability to attract, develop and retain the talent necessary to compete in a rapidly evolving talent market.
Of course, such strategic shifts require strategic planning – and an enterprise-wide willingness and ability to execute. Organizations needs to develop and staff three- to five-year transition strategies as soon as possible. And these plans need to be based on relevant and supportable financial factors. Important considerations include support costs, transition vs. license renewal costs, IT and HR skills training, application rationalization and vendor selection. Administrative savings and added business value from improved HR capability should not be overlooked.
Finally, migration to SaaS/Cloud is not a once-and-done activity. Rather, it is an ongoing series of transformations. Plan for continuous and expanding change not only in solutions and providers, but also in how solutions are utilized in-house. Expect provider revisions and updates two to four times a year. And be aware of the kinds of changes that your chosen providers are likely to make and how they may affect the management of HR specific to your enterprise. Given the current and emerging trend toward digital business transformation in all markets, aligning provider business, solution change and enterprise business requirements will require ongoing, dedicated resources.
What is Happening?
The IT and business services market is an extraordinarily competitive and unforgiving marketplace for incumbent providers that are not meeting client expectations. According to ISG research, two out of every three ISG-advised contract renegotiations over the past two years resulted in the enterprise buyer inviting new service providers to compete with the incumbent provider, and, in nearly half of these cases, the incumbent lost all the scope. One-third of the time, the incumbent lost some scope to another provider. Only 14 percent of renegotiations resulted in the incumbent retaining the entire scope, and only 7 percent of the time the incumbent saw an increase in scope.
Why is it Happening?
When analyzing this trend at an individual deal level, price, performance and relationship appear to be the three primary drivers for the increase in competitive renegotiations:
- Price. In response to the massive competitive pressure to explore digital solutions across the business, enterprises are looking to take cost out of non-strategic areas and re-invest those savings into digital initiatives. Enterprises are looking to reduce costs by 20, 30 and 40 percent, even those in existing generation-one and two outsourcing deals.
- Performance. A general lack of performance (or the perception thereof) is a key driver for enterprises that decide they want to bring in fresh thinking. Outsourcing buyers that can measure or even simply perceive a lack of innovation, a lack of understanding of their core business, or too much focus on day-to-day problem resolution from a service provider that doesn’t understand or resolve underlying root causes increasingly are interested in the idea of a competitive renegotiation.
- Relationship. Complacency in the relationship was a key theme for incumbents. Providers that do not understand underlying client messages, are insensitive to concerns, don’t proactively build relationships with key leaders or don’t have a proactive relationship plan are driving buyers to re-evaluate existing relationships.
While it’s no surprise that enterprise buyers want more competition in contract renegotiations, what is even more interesting is the fact that the risk of change is not a primary deterrent for a client to move to another service provider. Figure 1 below shows that, in more than 60 percent of deals in which the incumbent lost some or all of the scope, the client viewed the risk of changing providers as either moderate or high.
Figure: Risk is not a Significant Deterrent to Changing Providers Source: ISG Research.
This willingness to take on provider switching risk may be a leading indicator of an even broader trend occurring in the market: the global economy is changing at a pace where it is now riskier not to take a risk. Digital Business is transforming entire industries in a matter of months – not years – which means that enterprises need to adapt faster than ever before. Therefore, one could argue that at a more strategic level, enterprises buyers are willing to take on a high level of switching risk in order to avoid the even greater risk of business stagnation.
Of course price, performance and relationship are important. But what we may be seeing here is a view that these areas are simply table stakes – services commodities. Further exacerbating this challenge for providers is the fact they themselves have matured their transition capabilities to a point where the cost, time and risk of switching seems acceptable to enterprise buyers, as compared to the risk of not changing their business to adapt to Digital Business opportunities.
This is a sobering assessment for large Western and Indian Heritage firms that are also under siege from hyper-scale clouds, innovative SaaS companies, smaller platform-based managed services companies and niche providers offering digital solutions that augment the work of humans. But fact remains: if a client is unhappy with your services, it’s highly likely they will invite new providers to bid on the work. When (and not if) this occurs, you have a 50/50 chance of losing all of the scope you own today to another provider.
So while focusing on price, performance and relationship are critical to keeping clients happy, it is continuous innovation that we believe will help service providers win and retain clients in the future. Continuous innovation focuses on helping clients adapt to rapid business change today, rather than solving to what an RFP indicated months or even years ago. However, this is much easier said than done, because continuous innovation is a two-way street. Providers will need to invest ahead of the curve in differentiated, vertical-specific IP, and buyers will need to standardize processes and leverage shared systems. Meeting somewhere in the middle is where the risk, and the opportunity, reside for both providers and buyers.
What is Happening?
Several ISG analysts and advisors participated in the Atos Analyst & Advisor 2017 Global Conference in Boston. The event was a comprehensive update on Atos’ business direction, portfolio and offering strategy, acquisition direction, and technology viewpoints. Clients of ISG Insights can look forward to a Briefing Note within the next week summarizing our take on all of this, followed by a series of deep-dives into specific segments of Atos’ service lines.
For this Research Alert, we want to focus on two larger-picture aspects that this event helped to crystallize for us: how providers’ digital strategies are shaped (and limited) by core ecosystems of customers and partners, and the intensity of the challenges that providers face while repositioning, reinventing, and improving themselves in order to enable and foster transformation for clients and partners.
Why is This Happening?
Presentations by and discussions with Atos leaders at the event shed some additional light on how IT providers in general are positioning themselves for the nascent digital opportunity, i.e., articulating digital-first direction and strategy that resonates within the existing customer and partner base; establishing offering foundations that utilize key existing technologies, offerings and partnerships as building blocks; and planning/announcing/executing acquisitions that layer on top of, or extend the footprint of, the foundation.
In Atos’ case, the company articulated a solid business strategy that leverages its existing capabilities into a Digital Transformation Platform – also referred to as a ”digital transformation factory” by company leaders during the event. The platform rests on four pillars consisting of or built from established Atos business: its Canopy Orchestrated Hybrid Cloud services; SAP HANA by Atos; the Atos Digital Workplace (including its year-old Unify acquisition); and Atos Codex data management and analytics – all supplemented with expanding cybersecurity and digital payment offerings. Each of these “pillars” in turn builds on and with Atos’ broader services mix.
What Atos has already in place is well-suited for enabling and delivering digital transformation capabilities. It is also shaped by what the company has and does right now, and what its customers and partners are capable of taking advantage of. Its portfolio, like most providers’, has developed and evolved on pace with the business IT changes being experienced by leading-edge clients, and company leadership has been strong and prescient enough to recognize the direction, rethink its strategy, reposition (and expand) the offering portfolio, and re-invent itself as needed overall.
But a substantial amount of work remains to be done. Atos leadership made it clear how enabling digital transformation for its enterprise clients requires ongoing and repeated rethinking and reinvention, down to developing more and better ways of finding, hiring, and retaining the right human talent in its own global workforce.
The reality of the digital transformation business for traditional providers was made clear when Atos reviewed its publicly-reported revenues. On one hand, in a market that has been largely challenging for most traditional IT service providers, the company looks to be healthy and growing. Among other statistics shared in presentations this week, Atos reported €11.7B revenue for FY2016 with an operating margin of 9.4%, along with a 5-year CAGR of over 15% through 2016.
On the other hand, while it is has been both reinventing itself and pushing hard to profit from digital transformation services, Atos leaders reported that only about 13% of current revenue actually comes from such offerings. We take that number at face value, given the difficulties in separating out digital-related business from traditional.
Given where they are today, Atos has set itself a substantial growth target for digital business: from 13% of revenue today to at least 40% by YE2019. As with many IT providers, Atos plans for some of that to come via acquisitions of digital-related providers, from infrastructure-related to transaction and digital payment-related capabilities (a la its Worldline acquisition). But the majority is expected to come through continual and recurring reinvention and adaptation/innovation of its existing service lines and partners.
This comes with significant challenges. Atos must invest effectively in innovation in how it does business and how its offerings can be applied and adapted, including in ways that are not currently envisioned. The company has earmarked an average of €300M annually for R&D spending, or about 2.5% of revenue. The most innovative established IT firms (e.g., Intel, Google, Microsoft, Amazon) spend more than 10% annually on R&D; innovative disruptors and digitally-native firms such as Facebook tend to spend as much as 20% annually. While €300M is not a small amount, 2.5% of revenue is relatively low for a company that must develop and improve multiple means of re-inventing and innovating across multiple lines of business.
Presentations and discussions at the event also helped to frame another critical need for IT providers like Atos: staffing. One of the greatest challenges that providers face as they gin up for digital business is a lack of qualified staff, especially in engineering, development, and associated management. Atos, for example, has about 100,000 engineers already on staff, and is hiring between 10,000 and 15,000 more per year just to keep pace with current business needs. Given that digital transformation requires an increasingly broad mix of traditional IT skills and new knowledge and expertise, providers (including Atos) are challenged to find more and better talent, quickly, with high rates of hiring and retention.
This is an area that requires not only provider business rethinking and reinvention, but also application and innovation of traditional and digital-first technologies and services. The cobbler must not only shoe his own children, but find and adopt more who can help him design and build new types of shoes. Atos is addressing this similarly to the ways that other providers are, including internal “university” training programs, using advanced analytics to develop and manage predictive hiring and retention programs, and fostering “digital communities” internally and with partners, utilizing Cloud-based knowledge sharing/collaboration platform capabilities.
Finally, one more consistent message was delivered by Atos leadership throughout the two days: Digital transformation, for Atos, its clients, and it partners, is an ongoing thing. It requires more than a one-time investment or a specific set or type of acquisitions. We see and hear similar messages from most traditional IT providers, and we see them working to balance the substantial investments required in balancing and managing simultaneous reinvention and extension of traditional business.
Interestingly, we do not hear much about this from Cloud-native/digital-native providers. For them, continual reinvention is part of their organizational, cultural, and technological DNA.
What is Happening?
ISG Americas president Todd Lavieri used his keynote presentation at the IAOP Outsourcing World Summit (OWS17) to highlight not only the changing state of outsourcing, but also its critical effects on user enterprise and IT provider digital transformation. His net message: There is more change underway than meets the eye, creating confusion and opportunity for enterprises and providers.
Lavieri used data and insights from the 57th Quarterly ISG Index (4Q16) to identify and reinforce three key factors shaping digital transformation trends as we move into and through 2017: Change, uncertainty, and speed. The key change is the shift in outsourcing away from traditional IT toward more “as-a-service” capabilities. This is not only reshaping providers’ business strategies and models, due in large part to user enterprises looking for rapid deployment of advanced capabilities as they pursue transformation initiatives. The uncertainty comes from enterprises’ often still-nascent digital transformation plans and initiatives, and the resulting provider-side uncertainty about which capabilities will be most valued – and therefore should be invested in. Finally, the speed aspect reflects the accelerating pace of digital business technology adoption, adaptation, and innovation, which spurs similar acceleration of even more digital business initiatives and expectation.
The results: As Lavieri highlighted in his talk, 65% of enterprise clients feel disrupted, and express substantial uncertainty about what to do, where to go, and how to do it. We see IT providers expressing similar uncertainty – even while leaders position themselves to create opportunity from the chaos.
Why is it Happening?
Digital business transformation implies new processes and new outcomes, enabled by new ways of using information technologies. It is a series of fundamental changes that may be approached incrementally or as “big bang” projects. In either case, we are seeing more and more enterprise business and IT leaders impatient for change. They fear not being able to find and take advantage of new opportunities; they worry about falling behind competitors. They seek ever-improving means of trialing new capabilities and either succeeding or “failing fast” with reduced risk to the business. They push for more rapid adoption of digital business capabilities.
Meanwhile, digital transformation is still early enough in most firms’ agendas to lack cohesive, coordinating strategy and management. And we are seeing absorption of more digital business transformation plans, initiatives, and spending into ongoing business organizations and operations. On the plus side, this implies that more and more, “digital business” is more and more becoming just “business.” On the negative side, this suggests that digital plans and initiatives may be being spread more widely, away from centralized, coordinating governance.
On the provider end of the spectrum, developing and delivering new technologies for new services that enable new enterprise-side capabilities – often for clients that do not yet know their long-term needs – is very different than providing mature services to knowledgeable clients was just 5 to 10 years ago. As noted above, enterprise clients are really still becoming aware of what can be done, and taking early steps toward translating that into longer-term business planning and strategy. And enterprise investments in “as-a-service” IT are helping to provide most of the growth in outsourcing business today, but the applications of these capabilities are far more likely to be point- or group-solution types with dynamic demand and utilization than more traditional, steady-state, division- and enterprise-wide IT services outsourcing. Couple this rapidly-evolving new IT consumption model with mid-term uncertainty about digital transformation, and the enterprise-side uncertainty quickly translates into provider-side uncertainty.
In evolutionary theory, it’s not the strongest species that survive, but those that adapt the best and most rapidly to their environments. In a business IT environment rife with uncertainty, change, and speed, enterprises and providers both need to enable adaptability in order to survive and prosper. Three key actions to do this are as follows:
1. Understand that “change” really means “improvement.” Digital is not about raw change; it is about improvement. And as there are always too many opportunities for improving business and IT, look for the most valuable business improvements feasible. A first place to look is where current systems most inhibit the improvement of business and IT operations.
2. Reduce and manage the uncertainty. Identifying and implementing changes that improve the ability of the firm to do business will significantly reduce uncertainty about what to do, how to do it, and when. This simple, first organizational step enables vision and planning based on a path of measurable, incremental improvements that lead to strategic transformation.
3. Adjust your speed accordingly. It’s easier to travel faster (and farther) on a long journey when you are not distracted by constantly repairing and fueling the vehicle. Improving operational efficiency is like improving fuel efficiency. Your vision down the road is much improved, and you can avoid more traffic problems and accidents, when you do not have to constantly monitor dashboard gauges and lights for problems. In short, you can go faster with fewer stops and reach your digital destination with more resources and ability.
Simplifying the change+uncertainty+speed problem in this way also enables enterprise IT and business leaders to better identify the most valuable IT providers and capabilities. As improvements occur over time, the mix of suitable providers and capabilities (and solutions) will change. Insights and guidance such as those in our 2016 i3 and 2017 Market Lens reports, our ongoing Automation Index and Cloud Comparison Index research, and associated research and briefing notes, will help to identify and manage these changes as they emerge and evolve.
Providers need to understand these changes because there is great opportunity in helping client enterprises understand and scope possible improvements. We see surging uptake of such services among user enterprises, and this will accelerate and grow through the next 24 months at least. Providers also need to understand their own need for speed. Enterprise-side IT business changes are occurring quarterly, or even faster. Awareness of client enterprise business change – and the flexibility to adapt to that change and its accelerating pace – will be key to the ability of IT providers to compete.
What is Happening?
Results from the latest IAOP State of the Industry survey, co-presented by ISG at the Outsourcing World Summit (OWS17) in San Antonio, TX last week, indicate that enterprises and providers alike are awash in uncertainty driven by disruption in technology and in business. And both the choice of dealing with, or managing, disruption.
The survey and the Summit centered on themes directly impacted by or have disruption at their core: Outsourcing Market Trends, Enabling the Digital Economy, Influences of New Business Models, The Rise of Robotics, and Impacts of Various Populist Elections. Key highlights include the following:
- The traditional outsourcing market is getting upended by the dramatic increase in IaaS and SaaS contracts, mostly led by the US market – but EMEA and APAC are showing signs of following suit.
- The success of digital innovation and transformation is demanding increased engagement from service providers.
- Enterprise clients are hungry to be “uberize” but are reliant on service providers to bring industry expertise and solutions to change their existing business models.
- Automation brings threats of job losses but also hope of new key roles for employees and providers.
- And finally, the geo-political environment has the greatest chance of disrupting the entire outsourcing eco-system that we’ve seen in the last 20 years. The anticipation of the unknown could be a bigger disruption than the actual policy changes.
Our conclusion: Disruption is needed to meet consumer demand, remain competitive and increase revenues. Avoiding disruption will not create stability and strengthen a firm’s position in the market, but will instead guarantee that they will lose market share and a segment of their customers.
Why is it Happening?
“Dealing with” vs. “managing” disruption is an important distinction. The response to this year’s survey was unique in that there was a record number of incomplete and abandoned surveys, and all were connected to the section on disruption. ISG and IAOP have speculated that this is symptomatic of what we are seeing in the market. Most clients admit that they don’t know what they will do, nor how they will react to many of the disruptions in their industries and in technology. They are being disrupted in multiple ways and are overwhelmed. This aligns with the top four disruptions that were identified by enterprise clients, service providers, and advisors in the survey, as shown in Figure 1.
Figure 1: Top Four Disruptions for Enterprises, Providers, and Advisors Source: 2017 IAOP State of the Industry survey.
Those enterprise clients who responded to the survey confirm that the impact of new government policies, different market demands, and changing consumer behavior is driving disruption. This in turn disrupts enterprise expectations and dependencies on service providers and third-party advisors. The need is no longer for “lift and shift” or “shift left” types of engagement. There are few if any within most enterprise client environments who have experience in dealing with the current level of business and technology disruption. So it isn’t surprising that, according to the survey results, the greatest dependency by enterprise clients on service providers is around both business and technology expertise and associated solutions.
Figure 2: “What are your disruption-related expectations for your service providers?” Source: 2017 IAOP State of the Industry survey.
Additionally, 89% of enterprise clients indicate that their top dependencies for third-party advisors is “Bring the Right Vendors,” and 84% said “Identify the Solutions that Drive Disruption.” This confirms the dilemma facing enterprise clients: how to manage disruption while also creating their own disruptions. Both require key partnerships with service providers and advisors – and ISG is finding that enterprises are impatient for solutions. Todd Lavieri, ISG President Americas, speaking about client expectations said in his keynote speech at OWS17, “They want to move faster, but they are cautious of the impacts to their various business lines. They are looking for service providers and vendors to react to their changing requirements – and to bring insights and innovation every quarter and quality every day.”
These survey results align with the advice that ISG and many others are giving to enterprise clients and providers as they deal with and manage disruption. Three key themes that stood out in the survey results, and reiterated throughout OWS17 presentations and breakout sessions, can be translated to three key actions to manage disruption as follows:
1. Embrace new business models. The survey indicates that 78% of enterprise clients feel that the adoption of new business models will be the key to their success. An audience poll conducted with the 300 attendees of the OWS17 keynote presentation asked “Are providers providing technologies which enable the new business models?” An average of 47% of enterprise clients and advisors indicated that “Providers are behind where we want them to be,” while 21% of the providers in that same audience poll said “We are completely ready” and 59% said “We are preparing and building competencies.” It appears that enterprises seeking to “uberizing” their business or embrace other key business models will rely heavily on themselves for the near term at least.
2. Remain flexible to best practices in digitization efforts. In the survey results, 66% of service providers indicated that the expectations of their clients around various digital initiatives is more complex due to relationships that are more directive vs. collaborative. And in response to another audience poll question, “Which disruption is impacting your business the most,” 40% of enterprise clients, providers, and advisors agreed that it was Technology Driven Disruptions. With most companies relying heavily on providers for technology-centric solutions, a trusted collaboration with key providers is critical.
3. Proactively plan for geo-political business impacts. Clients are banking on advancements in automation that will enable them to reduce dependencies on offshore resources and replace them with automated processes. Both enterprise clients and service providers are exploring new in-sourced and nearshore options as well as deferring their sourcing decisions pending policy changes. In an online poll that was conducted during the keynote presentation, the audience was asked, “Do you believe that the current global political environment will impact your sourcing strategy?” 66% said Yes, 20% said No, and 14% said Not Sure. We believe that “Not Sure“ is typically the best answer. Proactively planning for various contingencies is always a good approach, with speculations left to others.
Enterprise clients need to be willing to “show their hand” if they also hope to learn from others. Where the disruption creates competitive advantages, it’s obvious why some clients are keeping quiet. But most clients are entering a new frontier and a collective and collaborative approach will be the most effective way to get everyone to a solid foundation. At that point natural selection will separate the wheat from the chaff.
Providers need to be more prescriptive in how they’ve seen the consumption of the various disruptive technologies and business models happening in key industries, different regions and around the world. The uncertainty of enterprise clients engenders disruption but awareness of best practices and case studies will greatly reduce elements of the disruption.
What is Happening?
Several ISG advisors participated in the annual NRF Retail’s Big Show, January 15 to 17, 2017 in New York City. The conference showcased how retail technologies and innovations are core to the industry. The show also highlighted disruptions – not only technological but also political – and how they form a challenging environment for retailers. But it’s clear that customers are the source of the most disruption – they expect a connected, fun, consistent brand experience.
ISG came away from the NRF show with four main themes that retailers and their technology partners should consider, as follows:
- Retailers need customer-centric and integrated digital platforms;
- The store still matters (as long as it’s connected);
- Analytics must drive actionable insights; and
- Blockchain is significant beyond payments.
Why is it Happening?
Today’s customers need new ways of engaging with buying and digital technologies have raised the stakes for the customer experience. These pressures are driving change within retail business models, forcing retailers to create new customer-centric operating models, and make dramatic shifts to technology investment strategies. These strategies connect and cross customers, the supply chain, and retailer departments, forming a “Digital Fabric” (Figure 1).
Figure 1: ISG Digital Fabric. Source: ISG
1. Retailers need customer-centric and integrated digital platforms. While front-end digital user interfaces garnered much attention from their “cool” factor, there was less buzz around such “bright shiny objects” at this year’s show than in the past. Retailers and vendors all recognize what goes into the effort to implement an omni-channel digital platform: it requires implementing a customer-centric technology platform.
Intel’s introduction of its new Responsive Retail Platform (RRP) reflects the need for integrated digital platforms. At the show, Intel announced plans to invest more than $100 million over the next five years in RRP. The platform connects disparate islands of in-store technology and makes it easier to develop and deploy Internet of Things (IoT) software and services by bringing together retail hardware, software, APIs, and sensors.
2. The store still matters (as long as it’s connected). The continued growth of online purchasing at the expense of physical stores seems irreversible. But retailers are once again recognizing stores for what they can be – a valuable asset for differentiating their brands. The emphasis at the show was not about transforming the brand to become an online retailer, but rather about the convergence of the brick-and-mortar and the digital worlds and the breaking down of barriers between channels. To address that need, Samsung and SapientRazorfish introduced IoT tools to bridge online and in-store shopping activities.
We talked with many vendors showcasing facial recognition technology, interactive store applications, Augmented Reality (AR), Virtual Reality (VR), and wearables. ISG’s research shows that these solutions are gaining faster adoption in enterprise applications. But while these emerging technologies all fit into the category of capabilities that improve the consumer experience and employee productivity, retailers need to focus their investments on consumer engagement technologies that blend the physical and digital touch points along the customer journey.
3. Analytics must drive actionable insights. Session presentations and our other interactions at the show indicate that retailers are getting smarter about Big Data. Top priorities include better data management, improved and actionable analytics, and leveraging sensors to better engage consumers and improve productivity of employees and assets. But the deluge of data makes actionable insights difficult to obtain. We heard from many at the show that integrating artificial intelligence (AI) in systems is the next logical action for retailers looking to deliverable actionable insights and improve performance across customer engagement, omni-channel commerce, and supply chain. Some of the providers with predictive analytics and AI-based offerings for the Retail sector include BlueYonder, Jetlore, CognitiveScale, and r4 Technologies.
IBM via its Watson cognitive computing / AI suite continues to deepen its capabilities and extend them across its commerce, marketing, and supply-chain applications. Other companies also offer credible AI systems to market – and not just traditional software providers. For example, Cognizant’s Intelligent Process Automation Framework applied to its RetailMate, HCL DRYiCE, Infosys Mana, TCS Ignio, and Wipro HOLMES AI platforms are from the outsourcing community. AI also has a clear role in customer engagement (e.g. chatbots) and insight as well as in support of knowledge worker productivity and efficacy.
4. Blockchain is significant beyond payments. Blockchain has the potential of having a significant impact on the retail industry well beyond secure transactions. Today’s “always on” consumer brand loyalty is directly impacted by their appetite for information and a demand for transparency. Blockchain can enable this transparency, allowing all parties—supplier, manufacturer, retailer, and end consumer—to trace a product’s journey. In addition to traceability, connecting all members of a supply chain to the decentralized blockchain allows for a direct exchange of bill of lading documentation between parties, potentially solving one of the shipping industry’s largest problems. There are also applications in warranty claims and counterfeiting.
As an example of a potential use of Blockchain in retail, Microsoft hosted a solution from partner Mojix at its NRF booth. The Mojix RFID and IoT platform solution, based on Microsoft’s Azure Blockchain-as-a-service, automates a retailer’s supply chain enabled by blockchain-based smart contracts between the retailer, its suppliers, and logistics providers.
An integrated digital platform – for retailers can and must provide an integrated infrastructure, and a set of core digital business processes in which common tools, capabilities, and data are transparent and shared, not duplicated. Such a digital fabric for back-end services allows a retailer to create a digital consumer engagement seamlessly across all channels. But putting the pieces in place requires making sense of the many choices of platforms, tools, and services.
Blockchain’s chain-of-custody record will aid in tracking product journeys as well as reducing counterfeiting for luxury items. Goods can be certified with a Blockchain’s digital ledger record, to more easily identify stolen merchandise. But Blockchain is still poorly understood and not widely trusted. So we think broad market adoption is beyond 2017, but Blockchain’s future applications will sweep across many aspects of Retail. Clients of ISG’s subscription research services will see further analysis of business uses of Blockchain and examinations of leaders and disruptors in future research publications.
To varying degrees, the analytics vendors at the show demonstrated capabilities to understand varied content and then reason through disparate data to draw conclusions and recommendations, learn as they go, and interact with knowledge workers and customers. In upcoming research we will cover more about the importance of advanced customer analytics and the role of AI.
Lastly, retailers should make sure emerging technologies under consideration have staying power, and determine whether they fit within the strategy for an end-to-end customer-centric operating model. Instead of being about disconnected or loosely connected, as we discussed about the innovations showcased at the CES 2017 show, retail technologies are bellwethers of where user experience technology innovation is going, using the convergence of data, devices, immersive connectivity, and artificial intelligence to improve customer engagement. Look for additional ISG research about the digital fabric of retail business.
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What is Happening?
Conversations at the January ISG Executive Provider Summit with CEOs, CTOs and global product/service leaders of leading IT providers Cognizant, HCL, Hexaware, NTT DATA, Inc., and Softtek have helped us to crystallize core trends and market developments that we’re seeing in our work with enterprise and provider clients alike.
The net takeaway is this: Providers “get” Digital Transformation. They understand what enterprises are trying to accomplish, and the resulting need to change what they themselves do and how they do it.
But while providers are taking important steps in the right direction, each also faces substantial challenges in balancing their own and enterprise clients’ current interests and capabilities, versus what is in the best interests of both parties over the long term. It is a complex, costly, and potentially dangerous cycle wherein providers are re-inventing themselves and clients, while clients re-invent themselves and providers.
Why is it Happening?
Let’s start with an important position statement: IT providers demonstrate more digital transformational knowledge and technology leadership than the vast majority of enterprise business and IT leaders. They know how to “do digital” better than most of their clients. They understand the strategic point of view and the required planning and management. They are bringing to market a wealth of digital business consulting and planning capabilities, and improving on these through strategic acquisitions and partnerships.
Meanwhile, most enterprises want, and are trying to, develop and pursue key aspects of digital transformation on their own. Most also report initial success. However, we know from our research that these successes are mostly minor and fleeting, because of two factors. First, the vast majority of digital initiatives to date are tightly-focused, small in scale, developed without an integrative strategy, and not measured effectively. Second, digital is still so new that enterprises leaders lack the experience and knowledge required to develop effective, unifying strategies. And it is still rare to find the CEO and CIO who recognize that they cannot do it all themselves – that they need to be led. So, while we see more IT providers like Cognizant, HCL, Hexaware, NTT DATA, and Softtek developing and bringing to market a range of what can best be called “digital leadership” services, we don’t yet see a critical mass of enterprise leaders able or willing to take advantage of these.
Forward-looking IT providers understand this, and so continue to develop IP-led capabilities to address the more focused, tactical digital improvements that most enterprises are aware of and capable of benefiting from. This includes putting together IP based on existing technologies and weaving in more emerging technologies, really moving far beyond traditional IT services in more ways. So we see more providers investing in IP, especially for industry-specific digital business process improvement. And because enterprise clients today tend to focus on tightly-focused digital improvements, there is more interest in “outcome-based” contracting aligned with specific business or IT operations and processes. And we see increased and accelerating provider investment in market-specific knowledge and capabilities through partnering with and acquiring market-, operation-, and process-specific technology, software, and services providers.
The range of what enterprises want and require for digital transformation is increasingly complex. This is forcing re-invention of provider-side portfolios and business models well beyond the changes already being forced by evolving IT sourcing practices and patterns.
This is much more than weaving automation, analytics and autonomics into specific, digital-supportive solutions. It is an increasingly complex and shifting mix of provider- and client-side technologies, business models, and relationships. Things can quickly get more costly than anticipated. It is a real danger for providers, even those who “get” what digital means strategically while understanding and addressing typically tactical enterprise digital requests. We see a significant likelihood of providers’ stumbling on the digital journey, despite the current clarity of vision and intent.
That being said, the spreading scope of digital-driven business and IT complexity will give rise to one of the greatest long-term opportunities for both providers and enterprise clients: re-invented integration. To make digital business work in the long term, enterprises will need an integrative business+IT strategy and rapidly-improving and expanding integration capabilities across potentially thousands of digital project instances. Such strategic and integrative capabilities will be the purview of the re-invented IT providers as they shift toward:
- A broader systems integration role that focuses on more complex and comprehensive projects such as infrastructure transformation; and
- A business integration role that focuses on measurable enterprise business transformation and improvement over time.
Such a shift, or series of shifts more likely, raises further questions that we will continue to address for our subscription research and advisory clients, including the following:
- If, as part of their emerging digital transformation roles, IT providers take over more business IT planning, delivery, and leadership, what becomes of the CIO’s job?
- And if outsourced IT development, delivery, and execution are increasingly correlated to specific business outcomes, what becomes the primary value of the enterprise IT organization?
- What are the next critical changes that IT and services procurement leaders and organizations need to consider – and how quickly?
We’re not putting the cart before the horse. Anyone who spends any reasonable amount of time within or around enterprise IT understands the inherent, massive complexities that effectively limit the pace and amount of change that is possible in a given amount of time. We cannot forget or discount the traditional business of IT providers and the reasons for enterprise outsourcing. As one CIO now working in the sourcing industry recently told us, there is “still a ton of blocking and tackling and drudge work” going on, and that will remain the “meat and potatoes” of IT provider business for the near future. There is still a long, long way to go for most enterprises in transformation, and therefore also for IT providers. So providers will be tested as they remain in multiple cycles of re-invention that are developing at differing speeds. They face multiple, competing and overlapping business models, resource requirements, and timeframes. Success will come from balancing a focus on “point solution” enterprise transformation and modernization, typically of specific IT functions, operations, and outputs, while investing more over time in strategic, bespoke business and IT consulting capabilities. The greatest challenges will come in determining how much, and when, to shift investment from traditional business or tactical digital initiatives to tactical initiatives or strategic services.