KPMG recently released the results of its global 4Q11 Sourcing Advisory Pulse Survey. The Pulse surveys provide insights into trends and projections in end-user organizations’ usage of global business services (GBS). The learnings are gleaned from KPMG firms’ advisers, who are working closely with enterprises that are actively exploring or undertaking GBS initiatives, as well as from leading global business and IT service providers. This quarter’s Pulse analyzed general market GBS market activity, trends, and global sourcing in 4Q11, and offered top business trends and predictions for 2012.

The providers polled this quarter were, as in 3Q11, less bullish regarding new deal pipeline growth projections (see figure below).

Figure: Service Providers: Business and IT Services Pipeline Growth, KPMG 4Q11 Sourcing Advisory Pulse Survey

• Sixty-one percent of service providers cited pipeline growth over the past quarter, a drop of 15 percent from 3Q11. It is important to note that the Pulse surveys measure change in pipeline growth levels, not absolute pipeline size or revenue levels.
• Only forty-five percent of providers expected the pace of customer demand for business and IT services to increase over the next one to two quarters, a drop of 14 percent from last quarter and 29 percent from 2Q11. This is indicative of a slow start to 2012 for both outsourcing demand and related business and IT services demand.

The challenge with interpreting these results is understanding what is in the pipeline and, indeed, even what is being defined as “outsourcing.” While there is general consensus that demand growth for third-party services has slowed, especially for traditional, horizontal BPO and for project-based consulting, outsourcing remains a core component of buyers’ GBS strategies and portfolios. But the nature of typical outsourcing deals is changing, often becoming more focused and strategic as well as including new(er) delivery models such as cloud. While buyers have become less aggressive in pursuing broad scale global outsourcing deals, the overall pace of adoption remains brisk.

The growth in outsourcing demand has not followed the same path and trajectory that it did when the global economy was coming out of the last recession in the 2003–2004 time frame, a period in which both BPO and offshore outsourcing growth was significant. There are several reasons for this:

• the market and its buyers are more mature
• more low-hanging outsourcing fruit (e.g., bloated IT organizations, legacy homegrown IT environments, and excessive cost models) has been picked
• there are more alternative service delivery options (e.g., cloud and BPO point solutions) from which buyers can choose
• economic uncertainty continues to make longer-term, broader-scale planning (and outsourcing) challenging for many buyers.

Quick and big wins via outsourcing are fewer and farther between, and buyers and providers are smarter, more experienced, and less likely to enter into larger and more risky deals.

This is not a bad thing. Executive buyer focus today is how to get more strategic value and innovation from outsourcing via more collaborative outsourcing relationships that are more akin to business alliances rather than client/vendor relationships. Commoditized outsourcing focused on cost savings is still occurring in large volumes, but the greater emphasis and focus is on strategic outsourcing that targets more narrow and value-added activities and is part of an integrated GBS effort, above and beyond commoditized services, though often with the same service provider(s).  

The challenge for providers is to become more strategic partners and step up to the challenge of delivering cost-effective innovation. The challenge for buyers is to define what innovation they need, map what they need to do internally to achieve it and what they seek from outsourcing, then execute, manage, and govern the effort successfully (the hard part). The bottom line is that the outsourcing market is alive and well, at least for those buyers and providers that can successfully move up the strategic value chain.

For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

KPMG Management Consulting recently completed a market study assessing how North American-based medical device firms are approaching efforts to improve to global business services (GBS). Other KPMG research conducted across multiple industries typically finds firms employing a mix of shared services and outsourcing efforts, along focusing on improving efforts already in the field, as the top means to achieve these goals.

While shared services and outsourcing are tools being employed in the medical device industry, the more traditional approaches of internal process improvement or process re-engineering was the top means cited both to improve service delivery as well as reduce service delivery costs (see figure below).

Top Means to Improve Service Delivery/Reduce Costs

KPMG research and client experience has found that many organizations feel that process improvement efforts can only take them so far. Often more radical change, in the form of shared services or outsourcing, is required to take efforts to the next level. It is possible that for participants in this research study greater use of shared services or outsourcing could result from the process improvement efforts. Or it could be that medical device firms place less value on shared services or outsourcing, though the study did find satisfaction levels with outsourcing for those firms that had undertaken it in line with other research findings.

For many adopters, shared services have delivered early gains but then improvement efforts have slowed or stagnated and outsourcing efforts have hardly been the panacea envisioned by some of its adopters. This being said the use of shared services and outsourcing continues to grow. Recent research conducted by HfS Research found that across major industry groups more than 70 percent of firms currently using outsourcing plan to expand efforts in the next three years and more than 50 percent of shared services users plan to increase those efforts. It’s these growth levels that create the foundation for and drive the maturation of global business services.

The best means to improve business services delivery and improve cost levels will vary across different industry groups as well as geographies and economies. It is important, however, that organizations assess all available options and tools as their disposal, recognizing the best solution is often likely a complex mix of multiple means and methods.

For more from KPMG on shared services and outsourcing, visit the Shared Services and Outsourcing Institute. For KPMG’s latest thinking in the Healthcare industry, visit the Healthcare and Pharmaceutical Institute.

Research on the subject of emerging trends in cloud computing usage for KPMG’s global cloud Pulse survey looked at what is driving the adoption of cloud computing by end-user organizations. A primary driver typically cited in the market today is reducing IT costs and this was supported by these research findings. This goal has of course had particular appeal to organizations during the difficult economic times that have pervaded western markets over the past four years.

KPMG firms’ consultants in the global cloud Pulse were asked to rank on a one-to-five scale, where one represents very unimportant and five very important, the importance of four sets of drivers for cloud adoption. These factors were:

• Economic (e.g. cost savings, shift capital expenditures to operational expenditures)
• Functional (e.g. speed to solution, functional capabilities, everywhere accessibility)
• Technical (e.g. flexibility, scalability, simplicity, security, advanced technology)
• Strategic factors (e.g. business process transformation, linkage to business partners, speed to market, focus on core competencies)

Drivers for Cloud Adoption

All four factors were ranked relatively equally (as they have been in other KPMG supported research). While it is good that, in the view of KPMG consultants, buyers have a well-rounded set of drivers for their cloud efforts, it is also important to determine and understand if any of the elements of the drivers are conflicting or contradictory. Typically, for example, it is harder to improve process performance while simultaneously reducing process costs than it is to simply cut cost; or specifically to the cloud, a functional factor such as everywhere accessible may challenge a technical driver such as security.

Results are based on surveys and interviews with over 400 of KPMG’s consultants across our global network of member firms from the Management Consulting and Risk Consulting service lines. Further information about the drivers of cloud computing adoption and other areas of cloud computing such as functional areas of adoption and end-user cloud skills and capabilities are available in the full cloud Pulse report.

The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available here.

For more on Cloud, visit www.equaterra.com/cloud.

Over 400 of KPMG’s consultants across our global network of member firms have provided their insights from the ‘front lines’ of cloud computing usage for the inaugural KPMG global cloud Pulse survey. On the subject of cloud adoption levels globally, it was interesting to see that just seven percent of KPMG firms’ consultants indicated that their prospect and client accounts currently had no material interest in or activity around cloud computing – a strong endorsement for the view that cloud usage has become commonplace.

In addition, 57 percent of consultants indicated that client organizations were actively deploying or had already launched one or more cloud computing efforts. Another 33 percent of consultants responded that clients had an interest in cloud computing but had no material activity underway.

Cloud Adoption Levels

Key to interpreting the results on this point is the emphasis on the level of cloud activity being ‘material’. For example, if employees’ access to personal cloud-based e-mail constitutes cloud adoption, virtually all organizations are cloud users. The emphasis of this cloud Pulse, however, is on usage by larger sized organizations of core business and IT applications that historically were provided in a client-server or mainframe model, either by the client organization or by a third-party outsourcer.

Results from the cloud Pulse are based on surveys and interviews with advisors globally in KPMG member firms’ Management Consulting and Risk Consulting service lines.  The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available at equaterra.com/pulse.

Karl Flinders of Computer Weekly makes an interesting observation on his blog on the subject of the adoption of cloud services when he writes, “A year ago everybody was talking about the cloud. But there was not much context to what they were saying. But this year…I can see things have really moved on.”

KPMG firms’ advisors around the world are also seeing client organisations increasingly focus on cloud computing and their insights have been captured in KPMG’s inaugural global cloud Pulse survey. The conversations around cloud in the market have moved on from a strong technology bias to a more balanced discussion between IT and the business. As the market matures and overall consumer take up moves from experimental to implementing business function point solutions and wider, increasingly the discussion is more around the transformational benefits of cloud adoption and not just potential cost savings. Yes, cost is clearly a driver for cloud adoption in many consumers, but businesses are looking to the agility of the cloud-enabled IT platform, offering the potential to reduce the time to market for new products and services, enhancing competitiveness and thereby increasing shareholder value.

Results from the cloud Pulse are based on surveys and interviews with advisors globally in KPMG member firms’ Management Consulting and Risk Consulting service lines.  The cloud Pulse complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights. Further information about Pulse surveys is available at equaterra.com/pulse.

KPMG recently released a comprehensive global market study on cloud computing adoption and usage.  On November 15th, I will be leading a webcast discussion related to the study.  An initial analysis of the results identifies some interesting findings.  One of them is the disparity of cloud services adoption rates among businesses across major geographies.

Organizations in Asia Pac (51 percent of respondents from China, and the balance from Japan, Australia and India) are adopting cloud computing services at a faster pace than their peers in North America (US 82 percent, and the balance from Canada and Mexico) or Western Europe.  Thirty-one percent of Asia Pac respondents (198 out of a total of a total sample size of 806 end-users) indicated that their organizations have fully implemented a cloud environment compared to 23 percent in Western Europe and just 20 percent in North America.

And it is not as if the higher adoption rate is fueled by throwing money at cloud aspirations.  Eighty-six percent of Asia Pac respondents indicated that cost reductions and/or savings are a necessary prerequisite for their organizations to move to a cloud environment.  This compares to seventy-two percent of Western European and seventy-one percent of North American respondents.  Additionally, a higher percentage of  Asia Pac firms than North American or Western European indicated that required costs savings need to be in the 11-25 percent range (vs. 1-10 percent).

Asia Pac organizations are utilizing all cloud computing models (e.g., private, hybrid, public) to drive deployment.  In each of these three categories, a higher percentage of Asia Pac respondents than North American or Western European cited use or intent to use each of these cloud computing models.

There are several potential reasons why Asia Pac organizations are more rapidly adopting cloud computing.  One is that firms, especially in rapidly growing markets such as China, have more discretionary funds to invest in cloud computing services.   They have the need to support quickly expanding market requirements and are rapidly innovating their delivery models and support systems.  These same organizations, especially in China and India are less likely to have the legacy IT baggage (e.g., homegrown IT systems, dated and bloated commercial enterprise software systems) that slows and complicates many Western firms cloud adoption plans.

Regardless of the drivers, assuming there are true benefits to end-user organizations of adopting cloud computing, these adoption trends are advantageous to Asia Pac organizations and, if they continue, could potentially create or expand competitive advantage against Western peers.  More aggressive use of cloud computing services could enable Asia Pac firms to more rapidly catch-up and even some (many?) could surpass Western peers’ IT and business services capabilities.

This is not to imply that Western firms must more rampantly or haphazardly rush into cloud computing.  Rather it highlights (yet another) dimension of business where Asia Pac countries and firms are becoming much more aggressive against their Western-based competition and against which that competition must formulate and execute a response.

For more on Cloud computing, visit equaterra.com/cloud or the KPMG Shared Services and Outsourcing Institute Cloud Computing topic page.

KPMG will release the first edition of its global cloud Pulse survey via a webcast on November 15^th.  The cloud Pulse survey is modeled after the sourcing advisory Pulse family of research studies.  Results are based on surveys and interviews with advisors globally in KPMG member firms’ Management Consulting and Risk Consulting service lines.  The cloud Pulse survey complements and extends research findings from the cloud market study KPMG conducted with Forbes Insights.

KPMG research has found general consensus regarding the top impacts that cloud computing will have on adopters’ business models and operations.  This topic was explored in both the Insights cloud market study and the global cloud Pulse survey.  End-users and KPMG advisors were asked to the select the top impacts from a list of six that cloud adoption can be expected to drive (see figure below).

• The top impact cited by 50 percent of end-users and 77 percent of advisors was “It will reduce costs.” The average end-user respondent selected two impacts while the average advisor selected 2.5, leading to higher average percentage scores for most advisor selections, though ranking order was for the most part the same between the two groups.
• Ranked second by advisors was “It will accelerate time to market” and a close third was “It will change how organizations interact with customers and suppliers.” The ranking of these two impacts was reversed by end-users. “It will fundamentally change organizations’ business model; enable true business transformation” was selected by 46 percent of advisors and 32 percent of end-users.

KPMG believes that the biggest potential benefit from cloud adoption is true (vs. superficial) business transformation.  Results from the cited research show this is less of a priority for typical end-users.  Taking a more tactical, cost cutting focus in the short term is understandable.

In the longer run, however, if users do not take a more strategic approach to cloud – for example viewing it as a key enabler of the extended global enterprise – they risk limiting the extent to which cloud can transform business operations and are likely to suffer competitively as a result.

Transformation is not the easiest, quickest, or most straightforward goal to achieve but it is one that organizations should strive for in their cloud efforts.  This transformation is enabled through a combination of process improvement, cost reduction, and greater connectivity between organizations and their partners, customers, and other key constituents.  Cloud does not inherently enable transformation but is an enabler and accelerator when used in concert with other change agents (e.g., process redesign, globalization, outsourcing, new market penetration).  As one of KPMG’s firm advisors noted, “If the business is educated and truly understands the potential benefits of cloud, the project is no longer an IT project, but instead a business transformation project enabled by a great technology evolution – cloud.  If, on the other hand, cloud is seen as an IT cost-cutting project, the organization will only be able to achieve a fancy, and most likely, expensive outsourcing project.”

Key to achieving transformation is to study and determine what it means to specific business processes and activities and what role cloud can play in enabling this.  Transformation at the organizational level is conceptual but execution is required in the context of specific business processes and needs.  It is also important for organizations to identify and account for any new or changed risk and compliance requirements that this transformation change will bring.

For more on Cloud, visit www.equaterra.com/cloud.

KPMG recently released the results of its inaugural real estate and facilities management (REFM) outsourcing Pulse survey.   This survey is the newest additional to the Pulse family of research studies.  Results from the REFM Pulse are based on surveys and interviews with more than 200 end-user organizations and REFM service providers globally.

The traditional REFM service delivery model was to perform all activities using internal resources.  Over time outsourcing has become more common with leading organizations today focusing on how to enable integrated facilities management programs, often on a global scale.  Most end-user organizations that outsource REFM services prefer to have in-house staff perform most of the more strategic and management-related activities.  This is changing, however, as a growing number of service providers are demonstrating advanced capabilities enabling them to move up the value chain in terms of services offered.  They are becoming better able to integrate into existing business operations to provide more high-value and strategic services (e.g. portfolio strategy planning).

Exploring the trend, KPMG polled REFM outsourcing buyers and service providers on changes to demand and preferences for a range of outsourcing delivery and management model options.  The emphasis was on to what degree are buyers moving towards a more holistic and integrated management model across the totality of their REFM outsourcing efforts.  The issue tested was whether buyers, as they become more sophisticated and their REFM outsourcing efforts more complex, will move towards a more portfolio-based approach to managing their outsourcing efforts.

Addressing this point, REFM Pulse respondents ranked changes in service delivery model preference on a one-to-five scale, where one represents significant decrease in preference or demand and five represents significant decrease in preference or demand (see figure below).

There was general consensus between buyers and service providers on the direction of change in demand for various REFM sourcing models.  Scored highest by buyers at 3.27 on the one-to-five scale was bundle increasing number of individually contracted services, but retain internal control over high-level management functions of services. Service providers scored this approach even higher at 3.57.   Ranked a close second by buyers at 3.23 was bundle and outsource increasing number of individually contracted services, and outsource key management functions of services in a model such as Integrated Facilities Management (IFM), including transfer of personnel to provider.  Providers ranked this approach at a 3.87.  Ranking on the lower end of the scale were trends of continuing to manage multiple services with individual contracts and reversing REFM outsourcing investments by insourcing services currently provided by service providers.

These results support the trend towards more bundling of REFM deals as well as the growing acceptance among buyers to have service providers perform key management functions over those outsourced activities.  This is not to imply this is the best course of action for all buyer organizations, but rather highlight the increasing sophistication of both the buyer side and the sell side in the REFM outsourcing marketplace and illustrate what is being pursued in more sophisticated scenarios.

For more from KPMG on REFM, including the full REFM Pulse survey report, visit our library.  Be sure and read our related blog, Taking a Pulse on the REFM Outsourcing Market.

KPMG LLP (US) and KPMG Holdings Limited (UK) recently released the results of its inaugural Real Estate and Facilities Management (REFM) Pulse survey.   This survey is the newest addition to the Pulse family of research studies.  Similar to the other KPMG Pulse surveys, this study assessed current REFM outsourcing market trends and conditions, deal drivers, challenges and service delivery models, global REFM sourcing trends, and REFM outsourcing deal attributes.  Results are based on surveys and interviews with over 60 end-user organizations undertaking REFM outsourcing efforts and over 130 REFM service providers.

The challenging business climate that exists is exerting great pressure on end-user organizations to reduce REFM costs and improve their process performance and their global delivery and operating models.  For many organizations, REFM costs are the second largest cost behind personnel.  Outsourcing REFM services has become a compelling solution for many firms that can potentially reap annual savings from outsourcing of 7 percent to 20 percent off of pre-outsourcing levels (based on EquaTerra* and KPMG member firm client engagement experiences).

The growth of REFM outsourcing is part of a larger trend of how organizations deliver and manage core operating systems (e.g., REFM, IT, F&A, HR, customer care) globally. Leading organizations today employ a broad range of service delivery models and techniques, including alternative delivery models such as shared services centers (SSCs), offshore captive operations, and IT and business process outsourcing (ITO/BPO).  KPMG member firms have developed a model labeled the Extended Global Enterprise (EGE) that provides a framework to design, build, deploy, and manage service delivery globally.

The traditional REFM model was to perform all of its activities using internal resources.  Over time it has evolved from out-tasking, outsourcing (bundling of services), and integrated facilities management to a global integrated facilities management model—an REFM instantiation of the general EGE framework.  Most end-user organizations today still prefer to outsource REFM tactical services and have in-house staff perform most of the strategic activities.  However, a growing number of service providers are demonstrating advanced capabilities enabling them to move up the value chain in terms of services offered.  They are becoming better able to integrate into existing business operations to provide more high-value and strategic services (e.g. portfolio strategy planning).

These trends are reflected in the bullish position REFM service providers are taking on near and especially longer term demand for REFM outsourcing.  Service providers polled in the REFM Pulse were asked about their projections on buyer demand for REFM outsourcing over the next 12 months (see figure below).  While 21 percent of service providers expect demand levels to increase over the next one-to-two quarters and an equal number expected demand levels to decrease, longer-term expectations are stronger.  The number of service providers expecting REFM outsourcing demand levels to grow increased for both three-to-four quarters and 12+ months out.

Higher, longer-term demand projections from service providers were tied to expectations for an improving economy in 2012 and less economic uncertainty among buyer organizations, a factor cited as slowing deal flow.  Recent market events, including the equity market crashes of early August, bring this position into question but the longer term trending for increased REFM outsourcing seems clear.

For more from KPMG on REFM, including the full REFM Pulse survey report, visit our library.

Information technology outsourcing (ITO) continues to push the capabilities of service delivery to buyers using more efficient and seamless interfaces. Cloud computing services begin to take the next step by attempting to hide the entire infrastructure and allowing you to simply pay for what you use on a unit of measure, for example, cost per email account.

Pricing structures have matured, but are not new or inherently different. What is different is the dedicated or shared set up of the infrastructure supporting the service. In the past, many buyers were reluctant to use shared environments due to data privacy or internal security issues. With some of these concerns decreasing over the years, service providers have gained the ability to offer larger savings due to the leverage of infrastructure shared across multiple clients, which is a fundamental advantage of cloud computing.

‘Paying by the drink’ is appealing to many buyers. But before you jump into any cloud computing initiative and its related pricing structure, you must understand not only your main business drivers but also what you are really paying for.  Establishing an appropriate and well considered pricing structure will help ensure your company gets its cloud initiatives right.

For further insights on this subject, including details of what buyers should look for in a cloud-based pricing structure, read my paper “Can Cloud Pricing Really Bring a Shower of Savings?’.