Digital Transformation » Becoming digital – realising Industry 4.0

Becoming digital - realising Industry 4.0

The 'digital enterprise' is often referred to as Industry 4.0. In fact, there are quite a few definitions that more or less point back to the same thing; the creation of a more digital business. Here we use Industry 4.0 as our anchor definition, which is in part underpinned by BPO 4.0; smarter, technology-enabled Business Process Outsourcing or digitalisation of the back office.

“BPO has changed out of sight compared with the early ‘bums on seats’ deals which typically resulted in the same mess for less. Today, taking out cost whilst delivering the ‘as is’ operations is a given. But beyond cost take out, customers are increasingly looking for their BPO providers to work with them collaboratively with a focus on areas such as speed of transformation, user experience, value share and revenue growth. In other words, the basic block and tackling remains, but BPO relationships, and the outsourcing contracts which underpin them, must now deliver much, much more than before.”

Tim Wright, Fladgate

The ‘digital enterprise’ is often referred to as Industry 4.0. In fact, there are quite a few definitions that more or less point back to the same thing; the creation of a more digital business. Here we use Industry 4.0 as our anchor definition, which is in part underpinned by BPO 4.0; smarter, technology-enabled Business Process Outsourcing or digitalisation of the back office.

Suppliers (consultancies, analysts, software, and automation houses) are aggressively promoting digital as a ‘must-do’ and key enabler of business success. BPO 4.0 creates competitive advantage and it is a key enabler for enhancing sales, improving customer service, and driving a more efficient and sustainable cost base. However, despite the hype and prominence on the board agenda, thinking is nascent and it is yet to be adopted in the mainstream.

There are use cases and success stories, but there are also plenty of instances where actual benefits have fallen short of perceived benefits. Research suggests that the majority of “digital transformations fail”, meaning digital is a must-do, but also a problem child.

In this article, we give a view on key considerations as you design your next (or in some circumstances, first) generation BPO deal.

A new, digital dawn for BPO

According to Everest’s 2018 market report, the traditional BPO market is in decline and has been over the last few years. The market has seen consolidation, pricing and margin pressure, and now the emergence of digital services (and different supply options).

Traditional, ‘people-led’ BPO models typically feature service providers, captives (or blends) operating out of low cost/well-skilled locations to deliver business processes. Buyers have found that after initial gains, continuous operational improvements have often been marginal. Providers are juggling long term contracts and inflation caps against rising labour costs, stunting impetus and investment in service innovation.

The buyer perspective

In the 2019 HFS Smart Analytics Study, 70% of Laggards were prioritising bottom-line efficiency and cost-saving over the top-line data and organisational improvement coveted by 69% of Leaders. It’s a different mentality as well as a different approach.

Digital not only offers buyers this next cost improvement opportunity, but also speed and quality leaps, and data. Lots of data which can be used for creative and constructive ways to improve businesses. This is the real BPO 4.0.

However, for many first time buyers, the business case for digital focuses on the initial cost arbitrage of automation alone, rather than the benefits of ‘being digital’. This is important as it may also define what goes into business cases, sourcing strategies, and ultimately the outcomes delivered.

Regardless, many of the established providers are wrestling with how they manage a legacy business in decline, and at the same time drive capability and adoption of new digital services. Without change, the legacy BPO suppliers are giant people-powered organisations with large revenues and small margins, operating in a marketplace where customers now demand constant innovation. According to HFS, more and more organisations are not only seeking to migrate to digital, but many are going ‘straight to digital’ as a first move, bypassing people-driven BPO altogether.

So what does this mean for buyers? It means that a service that we had commoditised into factory format is now a key to cost and quality improvements as well as unlocking our new gold – data. It means that there is fierce competition for talent, and new and emerging suppliers to research and understand. It means that there are more complex ‘make or buy’ decisions to be made. Finally, it means that the process of selecting, contracting, and managing suppliers has changed.

Basically its complex market, which when coupled with volatile macroeconomic times, can prompt short term risk aversion and procrastination.

Starting out – not all organisations are equal

Whilst this all makes BPO4.0 sound difficult, Procurement should be supporting or driving the change, creating positive and innovative digital partnerships. How they go about this will depend upon the relative maturity of an organisation and their starting point:

For each type of buyer, there is a different starting point, reflecting the relative maturity of:

  • Data and processes – being a key building block for digital ops
  • Internal readiness – how accustomed to partnerships and change the organisation is
  • Commercial attitude – from vested relationship models to cost-plus deals

The end game and deal structure may be the same, but the buyer journey must take into account what is required to create a successful specification, strategy, and transformation plan. The more immature, the more likely that change management will be the critical success factor.

Business Case – think digitally, BPO 4.0 is different

It is difficult to predict the future. But for BPO 4.0 consider how the mobile telecoms industry has transformed from being about network capacity and coverage to the delivery of content, access, and connectivity. This next generation of BPO is making a similar shift; providers are using digital workers to enable data-driven outcomes. For digital workers (read – technology) used to standardise, execute processes, collect and analyse, and generate a new sort of value. It works faster and creates more insights than ever before.

There are, therefore, new and important considerations for the business case:

  • Time – Buyers of the next generation of deals may need to accept that BPO 4.0 is still relatively young, and transformation may take anywhere from two to five years to complete. Transformation doesn’t happen overnight.
  • Value – BPO 4.0 redefines value, adding data, insights, and agility to savings. But they take time in contrast to traditional BPO savings which land quickly and trickle-down thereafter.
  • Risk – The real risk is that inertia kills. These benefits will enable faster and smarter decisions to be made that will critically differentiate between the ‘haves’ and the ‘have nots’. It may be that the risks of doing nothing far outweigh the risks of acting.
  • Skills – organisations will need to invest in skills (or suppliers) to run the sourcing exercise, implement change, and operate in the new world. This might mean new knowledge and skills like sourcing, platform optimisation, and deep data expertise

It’s also important that business cases consider the new supply market dynamics and how they have changed. Buyers of BPO 4.0 are faced with options ranging from working with established BPO providers through to knitting together and managing a best of breed supplier ecosystem.

Deal shape – a platform for collaboration

Digital deals will require a more collegiate, collaborative, and vested model, based on joint transformation and delivery of value. The types of deals are similar to some of those we see emerging in Information Technology (ITO), Integrated Real Estate and Facilities Management (REFM) and 3PL / 4PL deals. These deals focus on driving cultural alignment, outcome-based commercials, and promote openness and honesty about each party’s objectives and motivators. They also seek to reduce perverse incentive models that often drive unintended behaviors and de-rail benefits realisation.

Future deal shapes are more about collaboration than buyer/supplier relationships. As such, there are different design principles to consider and promote within the deal shape:

  • Clear and defined outcomes of both the transformation and the in-life delivery in recognition of there being two different behaviors to instil within the overall deal lifetime.
  • Realistic definitions and timelines for value delivery, and an associated glide path during development and release of solutions and features.
  • Joint investment mechanisms built into the commercial models. For example, a quasi-agile approach may be taken whereby funding from initial savings may be held in investment pots then re-invested to support delivery of additional step-change performance improvements (that unlock greater value).
  • Performance measures that emphasise collaboration and transformation. These are not the same as for pure, large scale labour arbitrage deals of the past.
  • Finally, dynamic decision making and governance should hold the commercial and operational arrangements together.

Sourcing – Embedding a Customer-Centric vision in sourcing and change

The procurement process to source these fourth-generation deals also has distinct considerations when compared to sourcing more traditional BPO. Most importantly, additional focus is needed to stress-test and validate the capability and capacity of the proposed supplier ecosystem or supply chain. The market is young, as are collaboration models, which typically means more focus on project and change management. Buyers should be wary of lean and cheaper.

Further, and learning from Agile practices, joint solution-design sprints should be incorporated into the selection process to allow providers access to the right internal stakeholders and partner organisations. By embedding collaboration from the start, the program lead can encourage alignment of outcomes and expectations as the competition progresses, embedding customer-centric principles into solution design.

Finally, Procurement teams themselves should collaborate with their management, peers, and customers on developing problem statements, key outcomes, targets, experience, and relationship principles. Many digital programs fail because they are designed with the technology in mind rather than the customer. So when changes to working practices are necessary, having a common understanding of the journey/outcomes is key; expectations can be managed, progress can be made, and transformation is more successful.

Considerations for Novices and Pros

    • RPA is not the end game, it’s a digital worker to deliver outcomes
    • The real value comes from data, fluidity, connectivity and what you do with it
    • It all starts with process standardisation, investment needs to be made here first
    • The bigger the leap the more investment in leadership and change management
    • Businesses need to collaborate and be open to working differently
    • The market is in its infancy and supply markets will develop and or converge
    • The choice of deliver models and suppliers is wide and should be investigated

Buying digital is not the same as becoming digital

A common criticism of failed digital initiatives is that organisations focussed on buying digital rather than becoming digital. The distinction may be as simple as making the leap from “using technology do what you do today better”, into going on a journey to see how digital can help you to continuously innovate and push the boundaries of what you thought was possible.

Innovation comes from becoming digital as fast and as ‘well’ as possible, using the resulting data, agility, and fluidity to drive a new type of insight-led and agile business model.

Expect the BPO market to fight back stronger, expect talent shortages for those able to architect and manage a next generation BPO, but, but most of all, expect the worst if you do nothing.

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