Boom time in Outsourcing’s Fourth Dimension

Boom time in Outsourcing’s Fourth Dimension

The Outsourcing industry and related media is obsessed with reporting on the global Tier One players like IBM, CSC, HP and Accenture; the wannabes who are Tier Two’s, but who argue that they are global, all lack some critical element(s) to be a true Tier One’s – BTGS, CapGemini, Atos, Logica, HCL, TCS and the like; the Tier Three’s who are essentially local and limited, but certainly on the way up, like Capita, Serco, et al.

However there are literally tens of Tier Four’s in most countries that all go virtually unreported and unnoticed by commentators, journalists and indeed intermediaries. Specialist and agile these companies usually are spin-outs from a large company with their ex-parent as their bed-rock client. They sell spare capacity and are surprisingly well funded for growth. This is Outsourcing’s hidden fourth dimension, and it is experiencing an unprecedented boom whilst those in the other “dimensions” are suffering severely from the post 2008 economic fallout, government cut-back, internal executive indecision, inertia from the end-client, lack of M&A activity, etc.

So against this background why are the Tier Four’s booming? Importantly, axing and replacing CEO’s in HP, CSC and IBM and senior executive changes in Accenture have left these global players in a position of inertia far worse than most commentators can discern and certainly report. Here are two Tier One examples:

Case One – a worldwide employment ban has left one supplier to incur £1.7m of penalties for not fulfilling their head count obligations and the subsequent knock on effects to a large pan-European ERP implementation. With no end in-sight for the cessation of the moratorium on new employees, the client account manager built a business case based on risk to sub-contract the key element of the project to a Tier Four who scooped a £32m contract and added about 29% annual revenue growth in a single deal. So client happy, account manager happy, risk compliance officer happy, Tier Four supplier extremely happy, Tier One CEO contained his/her precious ratios to satisfy Wall Street, so was equally happy (actually the CEO was never even aware!). If investors were aware, would they be happy?

Case Two – Large existing UK Government project with a very large discretionary spend which usually goes out to only to the existing framework suppliers (ie restricted competitive tender). The prime Tier One supplier faces so many internal approval processes and decision gates on risk, profitability etc, that they seldom win on price and often the tender process finishes before they gain approval to bid! Presales cost go through the roof and criticism soon follows. So, two senior Tier One managers decide to use a number of specialist Tier Four suppliers to handle “some of the riskier aspects” of future bids. These agile suppliers respond rapidly and remove the roadblocks around risk and even profitability; the Tier One effectively supplies the management envelope and secures the business. So client happy, happy account manager, risk compliance officer happy, Tier Four supplier very happy (again). This leaves HQ and the investors totally unaware of the cancer creeping into a key account.

Tier One’s and Two’s are lucky to get positive single digit growth these days and some do not even achieve that. Burnt Oak is tracking Tier Four companies with growth in excess of 20%, even up to 42%, growth per annum.

The consolidation drums are beating again … feel the rhythm!

Posted in Outsourcing Comments: one


One Response to Boom time in Outsourcing’s Fourth Dimension

  1. Sir Roger of Aldershot says:

    It was forever thus with the smaller niche providers too frequently being left out of a reasonable share of the sourcing cake “simply” by virtue of size and / specialisation and the then business positioning of tier one players that “we can deliver everything ourselves” and “I look down on them because they are from the third tier” as it were

    This was especially the case in supplying services to the public sector where such “third and fourth dimension” providers were inhibited from bidding for opportunities because of the sheer bureaucracy of bidding and the almost in-bred government fear of “all small or specialist companies are high risk”.

    A consultancy company I worked for worked extremely hard to secure government contracts and was very successful in that sector.

    However when it came to being incorporated in the various “catalogues” – the governmental procurement bibles – it was unable to satisfy all of the 1001 selection criteria even though its abilities and credibility were recognised internationally.

    It is fortunate for those in the sourcing profession that the world financial dynamics are forcing the tier one providers to seek support from smaller providers and that works to the benefit of all stakeholders – except those in some tier one managements who sill believe that “we can do everything for everybody”.

    For many years I was of the opinion that joint working by several companies on the provision of sourced services was the most beneficial solution – assuming that the management of the solution delivery was seamless and transparent as far as the customer was concerned.

    In the early days of such delivery models, the governance required in both the customer and the providers was overwhelming and counter-productive.

    Now via economic and staffing forces and sheer common sense, the governance of multi supplier services can be made manageable, affordable and effective.

    Let us hope that the multi-dimensional model survives the current economic drivers and is sustained for a long time to come.

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