MITSloan Management
Review
Magazine: Winter 2014
December 19, 2013
Outsourcing analytics can offer benefits — but requires a
carefully constructed relationship.
The surge of interest in big data has led to growing demand for
analytics teams. Having big data capabilities can help companies become more
efficient and improve overall competitiveness. Companies with superior data
analytics capabilities have found ways to build long-term advantages. FedEx
Corp., for example, has for years used its team of analytics professionals to
create and maintain a competitive advantage through enhanced revenues and lower
costs. One of the factors that has helped Wal-Mart Stores Inc. become one of
the world’s largest and most successful retailers is the strength of its
analytics.1
Assembling analytics teams, however, is difficult. For one
thing, many companies lack the in-house knowledge and experience needed to put
together an analytics team. What’s more, the labor market for analytics
professionals has grown increasingly tight. Fortune recently
reported, “Online help-wanted ads for data analysis mavens have shot up 46%
since April 2011, and 246% since April 2009, to over 31,000 openings now,
according to job-market trackers.”2 The shortage of
analysts — particularly those capable of developing and leading world-class
teams that can enable a company to create a competitive advantage from its data
and analytics — is driving organizations to consider outsourcing their
analytics activities. However, choosing analytics providers and structuring
effective working relationships that deliver value require managers to have a
clear understanding of what they’re looking for and the potential risks
involved.
Analytics is the latest in a string of activities companies are
outsourcing to business process organizations (BPOs). As the telecommunications
boom that began in the late 1990s led to improving communications with emerging
markets, Fortune 500 companies began shifting call centers offshore to
locations such as India and the Philippines to take advantage of less expensive
labor. India was especially attractive because of its large English-speaking
population and highly educated labor force.3 Once call centers were
established to handle customer service and telesales, companies began
identifying other activities that might be suitable for outsourcing or
offshoring: IT services, computer programming, legal research, application
processing and accounting.
Analytics was a late arrival to the business-process-outsourcing
menu of services. It was a natural for places like India, due to the country’s
traditional strengths in mathematical and statistical training. Many of the
offshore analytic BPOs started as captives of multinational companies that
already possessed infrastructure in emerging markets. While some remain as
captives (Dell Global Analytics is an India-based captive analytics division of
Dell Inc.), others were spun off or acquired by other companies and began to
offer services to third parties. By the turn of the 21st century, the birth of
the analytics BPO was firmly established. A number of well-known Fortune 500
companies outsource and offshore at least some of their analytics.
There has been very limited research on corporate use of
analytics BPOs, although there is, of course, an extensive research literature
on IT outsourcing and other BPO operations. Among other things that earlier
research on IT outsourcing and BPOs found is that, in a rapidly changing
market, offshoring allows organizations to increase flexibility by making fixed
costs variable, which in turn can boost other success factors. Researchers have
also reported that the success of BPO partnerships is dependent on such factors
as the geographic distance between onshore and offshore hubs, the existence of
adequate infrastructure and connectivity, adequate language and technical
skills and proper contingency planning. Potential customers need to conduct
thorough and appropriate research in advance of the project, and management
needs to fully communicate the important decisions to all affected parties.4 Customers must also be
careful not to lose their expertise or their core intellectual property (IP),
which suggests that companies should first do a thorough job of identifying
which capabilities are core and which could be better served by an offshore
provider.5
While these findings relate to the offshoring and outsourcing of
IT activities, there are some obvious similarities to outsourcing analytics —
such as the importance of care in making decisions that will affect IP
ownership and access. However, there are features of analytics outsourcing
where the comparison with IT is less obvious. For example, companies can create
a long-term competitive advantage from their use of analytics.6 What is the role of
analytics outsourcing in creating and maintaining that kind of competitive
advantage? And, while there are companies that have world-class in-house
domestic analytics functions, other companies are looking at analytics for the
first time. Should such companies approach outsourcing or offshoring analytics
differently?
Addressing Capability Gaps
We studied four multinational companies that used one or more
offshore analytics BPOs, as well as four offshore analytics BPOs operating in
India. Two of the client companies had skills that we judged to be
“analytically superior”; the other two client companies had skills we found
“analytically challenged.” (See “About the Research.”) The analytically
challenged companies saw analytics BPOs as a way to obtain the resources and
training needed to manage and execute their analytics and to gain quick access
to important insights. As an executive at an analytically challenged company
told us, “Investing in an in-house analytics team is always an attractive
proposition but is expensive and difficult to convince management to fund
without fully knowing the future benefits. Outsourcing is an easier way to get
capabilities quickly and at a low cost.”
The analytically challenged companies we studied had business
units in markets where it was difficult to obtain skilled knowledge workers
with quantitative skills. They recognized that they were deficient in analytics
and that it would be difficult to establish the necessary capability
internally: The cost of setting up their own analytics teams and the risk of
failure if they invested too little made setting up offshore analytics teams
appear too risky. As a result, they looked to the analytics BPO to provide
analytic resources and training for their own people. Outsourcing analytics was
seen as a way to achieve advantage over competitors. In some cases, they
selected an analytics BPO based on size, specific skills and domain knowledge.
As a manager at one of the client companies observed:
Some of
the larger BPO analytics firms are just body shops that just provide low-level
analytic services and not much in the way of innovation. However, some of the
smaller firms with founders from particular industries have unique skills and
knowledge that can really add value to our business. They are also very
interested in winning our business and competing with the big firms, so they go
out of their way to provide superior services.
At analytically challenged companies, competition between
in-house and external analysts seemed largely to be a non-issue: The client
companies themselves had few internal analysts, and the employees who were
involved in analytics seemed to welcome the professionalism of the offshore
analytics BPO. “We have too much work and not enough analysts to handle this,
so we welcome the help from our Indian offshore partners,” one employee of a
client company said.
We found little evidence of conflicts about intellectual
property ownership that we thought could be a source of tension between
analytically challenged companies and offshore BPOs. Analytics BPOs that have
developed successful applications with clients have an incentive to market
their knowledge and experience to other clients — even direct competitors; this
is particularly true when salespeople receive commissions for booking new
business. However, on issues of intellectual property ownership, managers of
analytically challenged companies said they lacked knowledge dealing with this
area; managers at both analytically challenged companies that we studied
indicated openness to sharing intellectual property with analytics vendors.
How Analytically Sophisticated Companies View Outsourcing
In contrast to analytically challenged companies, which are
usually happy to outsource their analytics requirements, analytically superior
companies wanted to expand their internal analytic capabilities. For the most
part, they used offshore BPOs to perform low-level analytics (for example,
reporting on automated tasks such as keeping track of maintenance programs) and
did not contemplate outsourcing all of their analytics to an offshore provider.
As one manager we interviewed explained:
We have to develop our own intellectual property and
capabilities in analytics because our competitors are doing the same. In this
business, those with the best analytical capabilities can capture market share
and run their business more efficiently. We cannot outsource this to our
offshore analytic partners due to the fact that this component is critical to
our competitiveness.
However,
having our offshore analytic partners helps us with the generic analytics and
reporting frees our internal analysts to be able to focus on the more advanced
techniques, which will allow us to stay ahead of the competition.
Many analytics-oriented BPOs, including those we studied, were
spun off from large corporations. As such, they combined features from the
original corporate culture with more innovative business practices. For
example, in an effort to serve clients in a more integrated way, one offshore
analytics company teamed local analysts with global representatives. A manager
at an analytically superior company told us that he and other managers have
been able to identify best practices in the course of working with an offshore
BPO that they can then apply more broadly throughout the organization. This
company was attempting to become more global by integrating its international
operations into two new business units made up of both U.S. and international
subsidiaries; the managers looked to the analytics BPO as a thought leader to
guide them through the transition. As one of the managers told us, “We have a
lot to learn from [the analytics BPO] about going global.”
Our interviews with offshore analytics BPOs working with
analytically superior multinational companies uncovered some potential points
of tension. Some of the BPO managers felt that their knowledge was not being
fully utilized: If only clients had more advanced internal capabilities, they
said, they could deliver more sophisticated services. Apparently, however, the
BPO analytics managers were overlooking the possibility that their clients
might consider their analytics to be intellectual property they did not want to
share with outside businesses. Indeed, there appears to be a potentially
serious point of conflict between companies and analytics BPOs over knowledge
transferability.
Analytics BPOs see their experience working in different
industries as an advantage that deepens the value of their knowledge. However,
paying clients aren’t always so happy to see their experience (and insights)
shared with other companies at a lower cost. One analytics BPO manager noted:
We know
we can add a lot more value to our customer’s analytics program if they came to
us with a more strategic outsourcing arrangement, where we could be responsible
for a certain aspect of their competitive analytics program that our
capabilities have shown to be superior. If we suggest this to our customers,
they usually become threatened, and this can put the overall relationship at
risk.
Offshore analytics BPO managers agreed that the services they
provide to their customers could be enhanced through more open relationships
between their organizations and those of clients. Typically, companies treat
analytics BPOs as vendors and analytics engagements as stand-alone projects
rather than as components of an overall strategy. As one analytics BPO manager
explained:
Even
though we do have better analytics than our competitors, it all usually comes
down to who can offer the generic service at the lowest cost. This
commoditization of offshore [analytics BPOs] leaves much white space in terms
of how we can work together strategically with our customers to help them build
excellent capabilities in analytics.
Based on the previous comment, which we found both surprising
and interesting, we did follow-up interviews with one of the analytically
superior multinational companies. Specifically, we asked how offshore analytics
BPOs might be able to improve the business of the analytically advanced
multinationals if given the opportunity to have closer, more strategic relationships.
One manager replied:
These
[offshore analytics] firms all say they want to be more innovative, but I just
don’t see it happening in practice. The statistical analysts they hire are
inexperienced and are usually right out of school, with great statistical
skills and training, but they just don’t know our business well enough to make
a more strategic contribution. Most of the time, we end up really training the
offshore analysts ourselves. … However, I will say that once told what to do,
they have done a fair job at innovating around existing properties. However, to
come to us with breakthrough ideas in analytics, it’s just not going to happen,
in my opinion.
In this case, the analytics BPO manager’s perception of what the
organization could contribute did not line up with what advanced multinational
customers saw. Indeed, multinational customers may have made up their minds
about whether the offshore analytics BPOs are able to contribute at a higher
level — in effect, creating a situation where the perception is the reality.
In addition, there are concerns about potential merger and
acquisition activity in the offshore analytics BPO industry.7 A carefully nurtured
strategic relationship between two parties could be blown apart in a merger,
and there is a risk that a client’s “strategic analytics” might then become
broadly available.
Creating Successful Analytics Partnerships
With analytically challenged companies, we found that companies
that perceive the need to grow their analytic capabilities can gain advantages
by using an offshore analytics BPO. By choosing the right analytics BPO to
match their culture and business requirements, such companies can develop
competitive and unique analytic capabilities that can lead to competitive
advantage. However, to achieve this result, companies need to be careful about
how they structure relationships with offshore analytics organizations. (See
“Six Questions to Ask an Analytics BPO.”) Among other things, they should try
to maintain a degree of control over the analytics BPO’s marketing efforts and
avoid giving the BPO too much credit for their joint work.
For analytically sophisticated companies, the equation is
different. The benefits of working with offshore analytics firms go beyond
receiving low-priced analytic services and tax advantages. An interesting
finding from our research was that these offshore analytics BPOs have something
additional to teach and provide, even to the more analytically sophisticated
clients. However, the analytically sophisticated companies we interviewed
either already had, or planned to establish, their own internal analytics teams
and had no desire to outsource all of their analytics to offshore providers. Of
course, one benefit of a company doing analytics internally is the ability to
develop and protect intellectual property.
For any company considering outsourcing analytics, accessing
high-level skills and knowledge from an analytics BPO company requires a
carefully constructed relationship that recognizes the different motivations of
the two parties and the possibilities of merger or takeover activities. The
negotiation and evolution of this relationship needs to clarify who does what,
who owns what, how each party can use the information it has and what happens
to the work, information and knowledge in the event of a merger or acquisition
of the analytics BPO company. With companies relying more and more on using
analytics to compete in the marketplace, these issues relating to intellectual
property ownership create an important consideration for both the clients and
the customers of analytics services — and they must converge on a solution that
benefits both groups.
About the Research
We
examined four offshore analytics business process organizations in India and
four multinational clients of these firms, following established case study
methods.i Two
of the four multinational companies using one or more of the offshore analytics
BPOs were deemed “analytically challenged.” The client companies in this study
were classified as being “analytically challenged” versus “analytically
superior” through a series of interview questions that allowed us to
qualitatively rank them according to a maturity model based on how they managed
their data, how they hired and managed their analytical talent, the overall
penetration and sophistication of the analytics they applied to their business
and the extent to which they incorporated analytics into their core business
strategies.
Data came from
multiple sources, including semistructured interviews, documentary materials
and field observation notes. Our interview protocol followed a range of
discussion questions on topics related to the central research goals of the
study and other areas of interest that may affect the central themes being
researched. Multiple sources of information were used to confirm the validity
of the findings. We also drew on our prior experience in developing this article;
one of the authors has more than 25 years’ experience in leading analytics
teams for Fortune 500 companies.
Although our
study was based on a small sample of companies, it highlighted where the
perspectives of the providers of offshore analytics services and their
customers are aligned and where there are differences. An interesting and
useful area of further research would be to study the different perspectives
and develop ideas for better alignment. Another interesting area for further
exploration would be to examine the risks of BPO mergers and acquisitions to
analytics clients.
Six Questions to Ask an Analytics BPO
Outsourcing
analytics requires a carefully constructed relationship, and the negotiation
and evolution of this relationship needs to clarify who does what, who owns
what and how each party can use the information it has. A few of the questions
to consider asking are:
1. What are the
unique analytics capabilities your company can provide our company that would
make us want to sign on with you rather than another analytics business process
outsourcing company or build or expand analytics capabilities in-house?
2. What processes
do you follow to protect our intellectual property?
3. How will you
firewall our data to ensure its confidentiality, integrity and security?
4. What is your
analyst retention rate? Do you monitor employee satisfaction measures such as
employee engagement?
5. Is it possible
to have analysts dedicated to our business? Is it possible to structure the
contract to bring the analytics resources in-house after a specified period of
time?
6. Describe your
business culture. How will your culture help make your company a productive
partner for us?
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