Death of the back office

Its been some time since I stood back to smell the roses. Yesterday I had some intellectually stimulating conversation with Patrick, which got me thinking again. And here are my thoughts for the evening.

I think the whole story about offshore will go away!!
No, I don’t mean, offshore will not work anymore, but I believe, offshore will be yet another commodity within the next five years. The 500 of the Fortune 500, the 1000 of the Fortune 1000, businesses in the US, UK and continental Europe (the so called new offshore battleground) will have already offshored. What needs to be offshored, will have been offshored. Quantum leaps in bottomline growth via offshoring will have been factored in. Marginal bottomline gains will continue to be made via a mixture of

  1. Location: Which country to offshore ie. India, China, Poland etc
  2. Automation: Anything that can be automated, should be automated
  3. Project Delivery Pyramid and Efficiency gains: Flatten the delivery pyramid (more junior resources) and reduce the number of people via efficiency gains.
  4. Pricing Models: Service oriented pricing, output based pricing etc etc
  5. Business Process changes: Adopt industry best practices and install packages to implement them (chicken and egg story here)

Debates around choice of offshore location and level of automation will continue in the newer future – since these are the easiest parameters to tweak. However, I think cost reductions via pyramid and efficiency gains probably carry the highest risk in the new scheme of things. Similarly changes to pricing models will continue to tweak the bank balance.

However, points 1-4 will only deliver marginal gains to businesses which are currently outsourcing some or all their tasks. I believe the next few years will require businesses to swing the pendulum back to their front offices. It will come not thru taking more meat off the bone via cost cutting, but by changing the way we do business. Businesses will need to change by changing the way they address customers, the way they innovate products and services, they way they extend their brand.

Two companies equally admired (and loathed) by me, Dell and Apple are prime examples of this phenomenon. Both have taken major chunks of cost out of their bottomline. I am not even sure where their products are made these days – except that they arrive in the post 10 days after they are ordered. However, both companies are facing very diverging futures. While Dell continues to thrive in the sub-1000 GBP PC/laptop market, it still finds it difficult to break into the lucrative gaming PC/laptop market.. Why? – as I cannot see Michael Dell playing Halo 3 in his blue suit, similarly a green+black Dell gaming laptop does not appeal to me either. As Dell struggles to break the top end, it is getting a run for its money by Lenovo et al at the lower price bracket. Any guesses on it future is not worth making.

Apple on the other hand, has re-invented itself in the product innovation space. A company with no future less than a decade ago has been revived thanks to the iPod. An iPod is a simple laptop hard disk or a clumsy USB memory stick with a fancy cover. But it was Apple which reinvented a commodity product into a Christmas must have toy – and Steve Jobs has been laughing all the way to the bank. I believe, we will see more product innovations on the iPod rather than simple extensions on size (4, 8, 30, 60, 80GB.. what next – and what happens when a Chinese company comes out with a 300GB mp3 player?). iPhone is a good extension of the brand – but we need more. I believe, the only thing that will differentiate Apple and the 300GB Chinese company will be the customer experience. After all, a brand is nothing but an experience and this will be a new battleground after cost and commoditisation creates market shakeouts.

This is also a more difficult battle since, unlike offshoring, customer experience is ethereal and winds can change without notice. I am sure Apple did not expect the force of customer backlash when they dropped the price of the iPhone within weeks of the launch. The media has been awash with reports of customer feeling cheated. The $100 handouts by Apple may only go a small distance in getting back some of the lost goodwill.

As the service offshore industry matures, the battle will move back to the front office. The current credit crunch and looming recession will only accelerate the need for the fight for the customer. As any trained stock market punter will tell you, buy when the markets are low: Business will have to learn to attract more customers rather than just reduce costs. The pendulum is indeed swinging.

(This blog was part of my ‘Caught in the crossfire‘ blogs in 2007)

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