We talked with Mr. Dr. Dietz, from aproxito and former Siemens Manager about Market Development in Germany, IT Purchasing, Sourcing Strategies, Readiness of Internal Organization, Risk Evaluation, and Marketing for Service Providers.
Dr. Dietz, you know the perspective of all three sides – the buyer side from a large German concern, Siemens, the consulting side as well as the service provider side. Further you have been responsible for many different areas in IT, such as process management, quality management and strategic purchasing and so on.
Could you please give as your combined perspectives on the development of the market for outsourced services in Germany over the last couple of years?
At the beginning please let me thank you for giving me the opportunity to share some personal views based on my observations and learnings of the past more than fifteen years in the outsourcing and global shoring business.
Before I get into the details to answer your question, please let me remark that there are lots of different definitions of the term outsourcing which sometimes causes confusion. On one side there is “outsourcing” meaning the transfer of assets and own staff of the customer to an external provider, hence including “Transfer of an Undertaking”, in German “Betriebsübergang”. Obviously the staff can legally not be transferred to another country and hence this kind of outsourcing deal needs to be with a local service provider. On the opposite side there is something often called “Offshore Outsourcing” or “Offshore Outtasking” which basically means sourcing services from Offshore, which as per the wording includes as well nearshore and farshore, and is usually called offshoring. I personally like to call this model “Global Shoring” in order to differentiate from Global Sourcing of material goods on one side and from outplacing of own staff on the other side, and keeping in mind that there is – with few exceptions – no general reason to differentiate between nearshore and farshore.
At the end, the sourcing strategy depends on finding the right strategic decision regarding the location of the source which may be in onshore, nearshore or farshore. In the following I would like to focus on the global shoring perspective.
The initial drivers for the local transfer of the undertaking and for global shoring are somewhat different. But finally the major decision criteria are still primarily cost advantages respectively labor cost arbitrage. It is only now that I see the impact of the demographic changes really get a higher attention in the market. Therefore it helps to have a look at the demographic figures which are freely available from the UN. These figures show clearly that up till now more Germans have entered into what I call the window of professional occupation, meaning the age between 20/25 years for employment and the age of 60/65 for retirement, than left this window because of age. It is only now that the demographic situation really starts reducing the availability of skilled labor force in Germany. In addition, there has been some impact by political decisions regarding retirement at the age of 63. It is clearly visible that in the next couple of years the demographic challenges will increase dramatically.
During the past 15 years we have seen several so-called generations of outsourcing. The business focus has moved up the value chain and changed from pure staff augmentation to transformational outsourcing, consulting and adding competitive advantage by innovation. In total, the global shoring market has become much more mature and mainstream in more and more areas but still not yet everywhere. Some verticals such as German public administration are still almost completely German whereas for example the automotive domain is already mostly internationalized. And some customers in the automotive domain even request their suppliers to prove their cost reduction efforts by showing an offshore part in their offer.
In the meantime most of the big German companies have vendors in offshore or even captive delivery units. After IT the same has happened – and is still increasingly happening – in Engineering and BPO.
Similarly the market on vendor side has become much more mature as well. In particular, in the more mature regions a layer of competent and experienced middle management has grown which is more important for project success than the pure number of available people. When we defined a global shoring strategy more than 15 years ago we discussed several scenarios:
Will prices go up quickly because the competence level of the offshore vendors will improve or will prices go down because more skilled people are made available to the market? And will there really be a need for so many new IT resources? Today we see that it was not an “either-or” but both has happened: Today big offshore companies have evolved playing in the same league as the formerly established big names and all the big service providers offer offshore services, too. On the other hand we can source offshore services with the same or even better quality today at rates not higher than 15 years ago. This is supported by a price competition of new outsourcing locations entering into the market.
With reference to two authors of the past decade, the observation and learning is, the world is flat and outsourcing and global shoring work well. IT really does matter and in view of the demographic changes it will become more and more important to have the competence to work with skilled resources and vendors anywhere in the world.
From the strategic purchasing view, what are after your experiences the most important aspects for buyer organizations in Germany in order to develop and implement a sustainable sourcing strategy, specifically in the area of IT?
If a buyer organization wants to define a “sustainable” strategy, the strategy needs to work beyond just sourcing the best or cheapest services right now. What does this mean?
Firstly, it means that a sustainable sourcing strategy should help in sourcing even in a couple of years in future. Although it is definitely not possible to know how the world will look like in a couple of years, there are certain scenarios which should in good time be observed and prepared for.
There are country risk ratings publicly available which give a reasonable outlook and estimation of economic and political risks. For instance, Ukraine counted among the European countries with the most attractive prices for the past 10+ years, but it also had almost the highest possible risk ratings of Dun & Bradstreet. A sustainable sourcing strategy needs to find the right balance between such risks and short-term savings.
Another influence which I suggest observing is the demographic situation in the various global regions. From the numbers of the UN it becomes evident that in particular the typical nearshoring countries face the same demographic challenges as Germany. Even China will run into some demographic challenges in a couple of years. The only regions which have a surplus of young population in combination with broad and excellent technical education are some countries in Asia. This could even mean that nearshore providers may need to look at partnering with farshore companies in some future which would significantly change the marketing messages.
Secondly, the sourcing strategy should be linked to the business strategy and the question of own core competencies of the customer. It should help building or strengthening the own competence of utilizing globally available skills – regardless if high-expertise or cost-optimized. IT should be seen as a success factor and not only as a cost factor. Finally the customer should become able to utilize the best-suitable resources, regardless where in the world they are located. This requirement implies strengthening own process maturity, project management, vendor management, intercultural awareness and so on. In particular it means being able to work in a multi-cultural English-speaking environment.
I have heard in many discussions that still many German companies, in particular small and mid-size companies, see this as a challenge but I feel this is inevitable and a core success factor, if not a question of survival, for the future.
Thirdly, the word “sustainable” also has an ethical component. It is a very personal consideration up to which degree non-democratic structures are acceptable in the target regions of the sourcing strategy. I would not like to give a general answer to this question, so the decision needs to be an individual one.
Last but not least the success and sustainability of a sourcing strategy also depend on the thorough and professional implementation of the necessary tactical activities.
Which further suggestions do you have for German buyer organizations on the operational side when evaluating and running outsourcing projects?
There is no simple answer to this question because there is a huge bandwidth of different organizations and environments, with different experience and different requirements. So let me just give some observations.
Unfortunately, some purchasing organizations are focused primarily on efficiency and not so much on effectiveness. This means, they are mainly focused on pure cost savings – the incentives of many purchasing organizations are linked to savings only – and on reduction of procurement efforts and complexity by bundling the purchasing volumes and by reducing the number of vendors.
Therefore the purchasing goals should be clearly identified: Is it about procurement of an interchangeable commodity or is it about procurement of strategic services? Is there a strategic goal of global shoring and internationalization? Ongoing vendor management and regular vendor evaluations should be executed with respect to the defined strategic goals. But in any case it should be in the interest of a purchasing organization to increase the volume of global services because there are rarely any other “materials” with similar saving potentials.
Nevertheless, not everything is suited for outsourcing! I strongly suggest analyzing the own core competencies and then deciding what should not get outsourced in order to protect the own core competencies and Intellectual Property respectively what can get and what should get outsourced in order to strengthen the own core competencies and gain competitive advantages in the market.
For German customers starting into global shoring for the first time, it is more important to get started than to find the theoretically optimal service provider. After having gathered initial experience, vendor selection can be reassessed later again based on the deeper understanding of the own needs and the differences in the vendors’ profiles.
I always like the comparison with learning to swim: Global shoring is like swimming: You can’t learn it from reading, you cannot fully prepare by filling in huge excel analysis sheets. You have to get wet and build up your own experience. But get started! And you may prefer starting with an experienced partner and not at the deepest point of the water. Sometimes I see that companies, in particular German small and mid-size enterprises, are stuck in a vicious circle: They don’t dare starting because they don’t have experience and they don’t gather experience because they don’t start.
When starting, according to my experience, it is more important to start with the right people with an open mind on customer side than with the perfect project. The combination of a customer team which is really motivated and a vendor with good experience with German clients has a high probability of success. Whereas a customer team which wants to proof that this approach cannot work will also be successful in proofing this.
How do you evaluate the general process maturity and ultimately the readiness to outsourcing IT and business processes of German organizations in the mid-market segment (“Mittelstand”)?
The concept of process maturity has still by far not been adopted in Germany as widely as it has been adopted for instance in India. This applies in particular to the German Small and Mid-Size Enterprises, whereas most of the bigger companies already use CMMI and ITIL. The German approach is typically more focused on “competent people” instead of “mature processes”.
In Germany, the “competent people” approach means facing nearly no attrition in the company with highly-skilled employees having often more than 10 years of experience on the same job and hence the need for formally defined process maturity is not so evident. On the contrary, the approach of “mature processes” puts a focus on well-defined processes to make the results predictable and repeatable independently of the individuals. Many companies of German Mittelstand are hidden champions and world market leaders in their specific areas. Their necessary success factor is deep domain expertise which is built on highly qualified and trained employees with deep long-term experience.
Therefore, in terms of formal process maturity in IT, international service providers are usually more advanced than the German Mittelstand companies.
On the other hand, in the area of mechanical production the German Mittelstand companies usually count among the companies with the most mature and precise processes worldwide and they are extremely focused on optimizing the efficiency of their production processes. Moving towards a higher process maturity also in IT would help them strengthening their competitiveness in view of the present challenges of digitization, “Industry 4.0” and fast-moving digital innovations, which will require faster and more agile development in future. Moreover, many of the experienced employees are expected to retire in a couple of years.
Working with international service providers in a global shoring model is a good way to improve the own process maturity step by step – learning by doing – and this approach provides direct and immediate cost benefits in parallel. This is more than any other process improvement approach can deliver which usually mean significant upfront investment before earning any benefits. Some people say that the most important benefit of outsourcing and global shoring is the improvement of the own processes which in the long run will be more valuable than the direct cost savings from labor cost arbitrage.
Generally, I don’t think that an initial lack of process maturity is a real barrier to outsourcing. The real barriers which I sometimes find are more in mindset regarding global shoring. So far I know either companies where people say: “This cannot work for us or at least not now” and German language is considered as an absolute precondition which sometimes may be a pretext. And on the other side there are the companies saying: “Sure we have been doing this and we are still doing it. Where is the problem?”
Can you suggest a good way to build a short list of suitable service providers?
According to the previously mentioned thoughts about a sustainable sourcing strategy, the first step should always be to clearly identify the goals of the sourcing strategy and thereafter in a systematic top-down approach to map these goals with possible outsourcing locations – countries or regions – from which a set or long list of potential service providers can be pre-selected. For the selection of the outsourcing location it is important to find the appropriate balance between advantages and risks. As a thumb rule you can ask yourself: Assume you need to send somebody to vendor’s location – would you dare sending a member of your own team to this location for a couple of weeks or months in case of project need?
The whole selection process may even be iterative because the findings from the analysis of individual vendors may lead to a re-analysis of the potential sourcing locations and a re-assessment of the selection criteria. The selection process should also get repeated from time to time since markets keep changing and there will be learnings and improved experience from the own outsourcing projects and even the own core competencies may change.
The long list can then be reduced to a short list of suitable service providers. This reduction should be based as well on hard facts, such as named references beyond just sales slides, and on soft facts including a service provider’s business culture which may be difficult to be valued in an excel sheet and which may not appear that much important at the beginning of the selection process, but in fact it is.
To give an example: For a German mid-size company it may initially look attractive to work with one of the big international vendors because they have huge experience and plenty of references and show cases for the respective vertical and domain. But on the other hand, I have seen that many companies of German Mittelstand feel more comfortable dealing with vendor organizations of a similar size and mindset than dealing with the very big players.
So the right size is very important. As a thumb rule for the right size: It helps if a client has a potential outsourcing volume to be among the TOP10 customers or at least among the top 20% of the customers of the respective vendor in order to get the right top management attention. On the other hand, the vendor should be big enough to have the necessary scalability and expertise and not be completely dependent on this one client. Another criterion can be, if a personal contact can reasonably be established between the top management executives of the parties involved.
There should also be a good fit between the corporate cultures. Some vendors have a distinct culture of claiming and strong legal departments with the intention of closing a “complete contract” to exclude any risks for them. This is fully opposed to the mentality of closing a deal with a handshake which still exists to some extent especially in German SMEs.
A typical indicator of such a misfit of legal culture is if the vendor offers a contract which is completely one-sided and you need to fight with the legal team of the vendor for every balanced clause. Frankly, I would not recommend German SMEs to work with such vendors. But this recommendation holds both ways for customers and vendors. In particular I have seen that some vendors with a very strong success story in the US find it difficult to deal with the German business mentality.
Although I always suggest a systematic and strategic sourcing approach, finally the business is not between countries but between people and good personal relationships will help. Especially German SMEs often feel more comfortable if they have a German counterpart if not on a daily basis at least at the escalation level and with credible influence on decisions.
There are some more interesting approaches which can be utilized depending on the size and structure of the outsourcing deal. For instance I have seen how an e-bidding process was used to narrow down the number of vendors. Or in another case customer ran parallel pilot projects for half a year with two vendors before closing the main deal.
Which tools do German buyer organizations have in order to evaluate and asses the risks of outsourcing?
There are various tools, as well proprietary and open source, available in the market for clustering the various risks, entering values of the potential impacts, calculating priorities and tracking the necessary risk mitigation activities on different levels of abstraction.
Some of these tools are more suited for governance purposes on corporate level, others more for managing the risks of individual projects on a day to day basis. I would not like to recommend a specific tool. But it definitely makes sense to identify potential risks before starting any project, hence also before starting a global shoring project. In a first step even a simple Ishikawa diagram or mind map and a checklist can help to analyze and cluster potential risks and identify suitable risk mitigation actions.
Some of the typical risks have already been mentioned before, such as country risks and protection of own IP. In case of international contracts there is an additional challenge to make sure that legal agreements can be enforced in spite of different legal systems for which often specific arbitration agreements can help.
As always, the usual project management procedures should be utilized with a special focus on regular communication and early reporting and feedback mechanisms.
And finally what are the three suggestions you can give to service providers that would like to market their services in the German language markets?
The good old times of selling “We have Java programmers” is over. In spite of the lack of skilled resources this is not sufficient any more to meet the expectation level of German customers.
As a first suggestion I still like the concept of the “Ideal Customer” as introduced by Miller & Heiman long time ago. This means basically analyzing the own strengths by analyzing the success with the existing customer base. I suggest doing such analysis in particular with respect to domain experience, but also in terms of technical skills, impressing show cases and reliable references. The analysis of the own strengths should then get matched with the needs and demands in the German language markets and the specifics of potential customers.
Some domains in the German market are very advanced and international, whereas others are still very German as well in terms of specific German domain knowledge, German language and German business culture. In many cases, German partners can be a decisive success factor.
For example, the automotive vertical is generally very advanced with the advantage of being very open to international vendors and, on the other hand, with the challenge of being highly competitive, whereas on the other hand insurance and government may still be very German as well in their market and their customer expectations. Marketing and sales will be more successful if own strengths and success stories match with the requirements and demands of the market.
The second suggestion is to understand how a service provider can find his Ideal Customer best and how he can get found himself. The more the offerings are in a specific vertical or domain, the easier is it to identify specific exhibitions, fairs, conferences etc. from which participant lists can be obtained. Moreover, social media should be leveraged.
For the German speaking market it makes sense not only to look into LinkedIn but primarily into XING. This helps to identify target companies and to establish contacts to the right people. For getting found basically the same approaches apply vice versa. In addition it helps getting registered for instance in the members’ lists of the respective IT Associations of the home country – but preferably with keywords and offerings related to the sweet spot as identified by the Ideal Customer analysis. Such keywords should also be contained in the homepage in order to get found by search engines.
The third suggestion is actually trivial and results from my negative experience that it is sometimes very difficult to get in touch with potential vendors and to obtain the necessary information. I have experienced on several occasions – and even when I called in my purchasing role at a big German group – that calls to the telephone numbers given on the homepages were not picked up even during regular working hours or that promised call-backs never happened. Therefore I suggest that the homepages should provide current and working contact details and that somebody in the organization be put in charge of following up the calls to this number.
Finally let me wish the readers of this interview lots of success with their global shoring activities, either in sourcing or in delivering!
Thank you for this interview Dr. Dietz.
Dr. Ulrich Dietz has been working in outsourcing and offshoring both on buyer and vendor side for 20+ years. He started his professional life in software development, quality management and project management. Later he headed I&C infrastructures with outsourced services. Then he became responsible for strategic global sourcing of IT including market analyses, vendor selection, vendor evaluation and development of the sourcing strategy. Later he moved on to heading the German subsidiary of a TOP15 Indian software company. Today he works in a consulting, supporting and intermediary role, looking for near/offshore vendors with specialized expertise in SW, IT and engineering.
This interview was published in the Outsourcing Journal Special Edition “The Interview Edition”, which can be downloaded here free of charge: http://www.outsourcing-journal.org/Special-Editions/outsourcing-journal—interview-edition.html