2024 Global Business Services Key Issues Research – Transcript

February 6, 2024
Season 5, Episode 12

Martijn Geerling:

For the long term, say, survival of a GBS model, it’s important that you deliver a great customer experience internally to your customers. Yes, the executive things – cost-efficiency is important – but for the day-to-day service, deliver the interaction to your internal customers. It’s not cost. It’s great quality of service. That’s the most important thing that GBS leaders shouldn’t lose sight of.

Announcer:

Welcome to The Hackett Group’s “Business Excelleration Podcast®.” Week after week, you’ll hear from top experts on how to avoid obstacles, manage detours and celebrate milestones on the journey to world-class performance.

Penny Weller:

Hello. I’m Penny Weller, your host for today’s session, and my guests today are Martijn Geerling, global leader of our GBS Advisory practice, and Vin Kumar, Digital Enablement and GBS Advisory practice leader for North America. In the fourth quarter every year, Hackett conducts a Key Issues Study to take the pulse of the business environment and understand GBS transformation priorities for the next year. Today, we’ll discuss the key findings of the 2024 installment of this study. I’ll be guiding the discussion and provide context as needed. Martijn, can you share how GBS leaders view the business environment and business context they operate in, and how this influences their priorities?

Martijn Geerling:

Yeah, certainly I can. Thanks, Penny, and great to be with this podcast again and with Vin today. We do this almost every year now to give our insight and share what we see both from the study and from working with our clients. So first of all, Vin, good to see you as well.

Vin Kumar:

Thank you, Penny and Martijn, looking forward to this discussion. It’s always great when we have this yearly kind of review into the future, and end of the year we do a session on how did the year turn out to be. So, it’ll be a really, really exciting year and looking forward to this podcast and sharing with you all.

Martijn Geerling:

So, to your point, right, what is on the agenda for GBS leaders? So we saw that during 2023, GBS was mainly preoccupied with things like rising cost of labor, labor shortage, access to critical talent. The economic outlook was such that we expected a recession, which globally didn’t happen neither in North America nor Europe where I sit. And so now as we look at 2024, the expectation is that we just might stick the economic landing and that we go into a lower inflation environment, and that business growth might be steady or even pick up. And some of that’s reflected in what GBS leaders see as actual priorities.

So, No. 1 is business partnering, No. 2 is retaining people, and No. 3, supporting enterprise growth. And so that last one – supporting enterprise growth – I think ties with economic circumstances. There’s a somewhat muted hope that we will stick the landing and that GBS organizations therefore have to support enterprise growth. We’ll come back later on to what it means in terms of budget availability for GBS, but that’s the kind of business context.

The other item is business partnering. So, we see, and this is new, that GBS organizations have moved up the value curve, so they’re delivering more valued business services. But that also means they have to do more for their business customers in terms of business relationship management, building services that are not just transactional in nature, but time much closer to actually delivering value to the enterprise. One thing that is back on the agenda, for example, is working capital management – for years, not so much a theme for organizations, but now it is.

The second item was retaining people. So the market pressure after COVID, which feels like a long time away, has gone away. So we went from people basically not moving jobs during COVID to a lot of catch-up turnover in the months past. And now it seems that in many markets where GBS operates, the attrition rates have gone down, but retaining people still is the theme that the profile of employees in GBS has changed over the years – from transactional to a lot of new skills also related to new technologies. So there’s a lot of pressure on scarce skills. So there’s an element of training people, attracting people and retaining those with those scarce skills. So that’s a bit of the business context and some of the priorities that we see for GBS in 2024.

Penny Weller:

Thank you. Vin, now what do you think about the GBS growth and its ability to spend in these uncertain environments?

Vin Kumar:

Penny, what’s interesting is this has kind of been a theme over the last couple of years. More and more work is coming into GBS, and GBS has delivered value for the organizations and enterprises, and they continue to move more work into GBS. And it is from two dimensions. One is new services that GBS can offer and also an increase in volume in transactions to do that. So if you compare from last year, again, there’s about 10% more work coming into GBS. When you’re looking from 2022 to ‘23, there was about 8% add, but when you look at ‘24, we are expecting more – about 10% more work coming into GBS.

However, if you look at the resources available for GBS to take in and absorb this new work, we have got only, I think, about 5.7% – 5% head count increase is what they’re expecting. So there’s a huge productivity gap that GBS needs to fill. From what the portfolio of services they had, they have to do it with less so they can absorb this new additional 10% coming in, knowing that there’s only 5% extra capacity – head count capacity they can add.

Given that, if you look at it from a budget perspective, we see that the budget has gone up – is going up for GBS by about 5% again, but it’s less than what happened in ‘23. In ‘23, it was almost a 6% increase in budget. So this year they expect only about a 5% increase in budget. And this is, I think, a reflection of both seeing the plateau in the wage inflation – not that it’s coming down, but at least the growth is reduced. So there is this efficiency gap they need to do. So an additional 10% work coming in, but from a funding perspective, they’ve got only a 5% increase to do that. So this gap has grown even further than what it was last year this time to do that.

And the third component is the spending on technology, and that kind of continues to grow. There’s a 10% increase in the spending on technology. Now at this stage, most GBS – maybe we would say stage two, stage three, stage four GBS – have what we call a technology stack for GBS, and they’re continuing to invest in this. It’s not just the operation cost going up, but there is new additional spend.

So it’s a very, again, it’s a Rubik’s Cube here atmosphere what the GBS leaders are dealing with. More work coming in, 10% head count increase, but only half that 5% increase in head count, 5% increase in budget, and then there’s a 10% increase in the spend on technology. So the expectation is continue to focus on productivity improvement and leverage, and accelerate and enable investing in technology to make up that gap in efficiency and effectiveness.

Penny Weller:

Well, and Vin, to take that a little bit further, we all saw huge major themes in 2023 on technology and in particular generative AI. What is the study findings in this area, and are we really investing in Gen AI now? Do you have any case examples?

Vin Kumar:

Penny, that’s a great point you say about Gen AI – the impact on Gen AI companies and GBS are expecting. The focus this year, what the study is saying is more about, “Hey, let us invest to identify point solutions – proof of concept. Let’s mobilize the team. Where can we use it? How can we use it?” That’s where the whole focus of GBS organizations is as they come into ‘24. The biggest areas, one is around customer service, be it in self-service that you provide, you’re seeing more and more Gen AI use cases coming up there. Second is more of either your end-user customers or internal customers that you’re supporting integrating with your other workflow tools. You’re seeing more and more Gen AI point solutions being evaluated by GBS organizations.

The second area we are seeing is more as a digital assistant. Can we go and complete, take our Visio diagrams that we had, can we convert it into SOPs, or if we had a SOX documentation and a standard operating procedures, can we use that to convert it into visual diagrams? So they’re using Gen AI as more as a digital assistant around the service management, continuous process improvement areas is where they’re using. But the biggest adoption that we are seeing so far in the GBS space is all around customer service – be it internal customer service, external customer service – increasing the use of self-service capabilities. That’s kind of where we are seeing from a use case perspective.

There is funding coming into GBS. GBS is able to tap into some of the enterprise funds that are coming in the Gen AI space that they’re using to identify POCs. That’s where we see more adoption funding coming in. The question now is a lot of GBS organization leaders are thinking about is this sort of a capability that we need to incubate within GBS, or is it something they are going to rely either in the chief digital officer’s enterprise or CIO officers, CIO’s organization, or is that an enterprise transformation? And a lot of GBS leaders are looking at the intelligent automation COEs that they built and invested. They’re the first point of contact looking at seeing how to use, what to use, and they are liaising with their counterparts and the rest of the enterprise on how do we use it and what to use it for.

Penny Weller:

Well, these are certainly exciting times. So let’s take a look now about the GBS model of the future. We talk a lot about digital is the lowest cost location, but what are we seeing from a shift in focus from labor arbitrage to digital innovation?

Martijn Geerling:

So, I think, Penny, what we see there is for all the reasons that Vin was just describing, so GBS is increasingly incorporating technologies in service delivery. They are increasing or getting more budget around technology. So there are a couple of ways to describe the GBS model, but I’ll take one that I think makes the options for GBS organizations clearest. So, in the past, we were thinking of GBS as a vehicle for labor arbitrage and for continuous improvement to drive gains over time. Now, we see, and yet two choices, basically, you can operate as an integrated GBS where you own and deliver those services and create that kind of value to the enterprise, or you can provide an infrastructure GBS, as we call it, sometimes called a hotel model, so basically you provide facilities and functions, come and say, “We want to move X type of services to your locations.”

That model still applies, but it goes further by using technology. So if you are a platform-centric or an infrastructure model, then you might provide a bit of that technology, and then usually that is more like IT workplace services, but you can also extend it further if you really own service delivery, and that’s what we call an aggregator GBS model. So we see GBS creating a COE – center of excellence for technology. GBS is owning certain technologies. Think of front-end customer interaction to a contact center model – Zendesk, ServiceNow, etc., those type of technologies. We’ll see, and the first examples was that maybe seven, 10 years ago with RPA, where typically GBS started to build these kind of center of excellence models.

So GBS uses more of that technology, and that changes the operating model. So the one version is basically the value proposition is you provide a platform, and as a platform, you facilitate a relationship between the users in the business and the functions. You say, “Come and play on my platform,” which is the center’s and maybe underlying technology infrastructure.

The other one, and that’s the more interesting variety, is you are the aggregator. You leverage access to users in the business, but you extract value from cross-functional synergies. So the idea is GBS is more than the sum of the parts. We are the one-stop shop for GBS. We provide a single platform for you to do master data management, and we provide the insight and access to the data from it. Those are some of the key ones, but you can extend that further. Most GBS are not one or the other. Actually, some will end up somewhere in the middle.

So, in some cases, you’ll say we are that multiplier of value. But one interesting thing that’s a halfway house is that functions come to GBS, and I’ll make one example from one of my clients that, “You are providing transactional finance services for us and you own it. You deliver it. We have our own EPM capabilities. We’d like to keep that and do it ourselves, but we’d love to plug it through the platform that you’ve built because the front end of your GBS service is a really good interaction model. We like that. We want to use that.”

So that’s the kind of discussion we did not have a couple of years ago, and it exemplifies how GBS is now leveraging technology. And as it goes, use of the technology changes the way that GBS operates – changes the way they build their organizational model. And actually, that point of technology integration is probably one of the biggest challenges at the moment for GBS organizations because it also poses the question, how does GBS interact with IT as a function because IT will say they have those technology capabilities as well. So there is a drive toward core technologies, ERP systems, HRIS, etc., those are owned by IT, but the layer around it – best-of-breed technologies, smart automation, intelligent automation – those increasingly are owned by GBS organizations.

Vin Kumar:

And Penny, if I can add also, you start seeing these offshoots in companies. They’re looking to rebrand some of their global delivery centers into global capability centers. So they’re changing as the focus moves from just being a transaction processing warehouse to more a capabilities, like to what Martijn is saying, “Hey, these are all capabilities that we have that we can do it for you. We can give it as a platform. We can help you leverage it.” So there are multiple ways of servicing that, but you see that brand changing, and there’s a trend that they’re calling themselves a little more – the delivery centers are calling themselves more as global capability centers rather than global delivery centers.

Penny Weller:

Yeah. And with all these new capabilities, does that put an end to labor arbitrage? Is that diminished in its importance?

Martijn Geerling:

No, I don’t think so. So we’ve seen in the past few years that inflation is eroding or wages are increasing because of inflation, but that’s happening both in North America and Western Europe, as well as India, Malaysia, Philippines and so on. So even though wages have been increasing and it makes it challenging from a GBS budgeting perspective, the gap is still there. We’ve been modeling that over the past decades, and all our forecasts in terms of when that wage gap will close – and we’ve been doing it for decades – have been frankly off. They’re wrong. That gap is closing much slower than we think it would. And that is driven for a large part, for example, by the vast amount of labor available in many locations in Asia, but also growth in capabilities. So the GPS model has matured, but also the industry has matured in terms of the capabilities that are there.

So no, labor arbitrage doesn’t go away. We don’t necessarily see that GBS organizations, for example, are reshoring. You see that type of discussion in manufacturing that companies choose a China+1, for example, which is China and Vietnam or other locations. Geopolitical risk is an issue for GBS organizations as well. GBS is looking carefully at their location strategy, and what they place where and how they, for example, create a delivery model that is globally robust, but the move of taking activities to offshore GBS that hasn’t gone away and won’t go away for the near and I think also a longer future.

Penny Weller:

Great. Well, how about obstacles? What’s standing in the way of GBS being all that we can be? Vin?

Vin Kumar:

Penny, I would say the top three – in fact, the top two have not changed even from last year, right? One is the organizational resistance to change. We are coming into a year where there’s continued pressure on head count increases and, in fact, pressure on head count reduction is there, and it was the same coming into ‘22. So you see that whenever you’re coming into that environment, a lot of the functions – the stakeholder control, what they can keep within the organization – not impacted less. So there is that what is GBS going to take? How can GBS provide an opportunity to improve? So you see this resistance to change becoming more stronger during times when there is more focus on margins and growth to see that. So that’s continuing there.

Now, you add in the mix of all the things that are happening on the digital transformation. Functions are really trying to understand what do they need to do. How do they need to transfer before working with GBS? And there, there’s a friction to see whether GBS is going to enable them or not – replace them. That tension is causing huge issues for GBS to execute on its kind of the future of GBS and the road map for GBS.

The second one is the perennial lack of funding and resources being allocated to GBS. Again, this is a period where there is more competition for resources, there is less resources, both in terms of FTEs and funding that is available within the organizations as they focus more, again, on the margins, and that’s a time where GBS is finding. So coming back to one of the themes that Martijn was saying about the labor arbitrage, that’s a big lever that GBS is trying to use to help them with their funding, help them with their FTE and resource requirement. So you just read, Martijn, that is continuing, and that’s, again, one of the challenges that GBS organizations are having – inadequate funding and resourcing.

The third one is a newer one, and again – I think Martijn touched on it – is access to technical resources. GBS, as they are transforming themselves to a more digital operation, they need more technical resources – be it within the GBS organization or outside of GBS organization, which predominantly sits in the IT organization in enterprises. And accessing that talent is a challenge – to building that talent within GBS, hiring it, changing the profile of the resources is challenging – but also accessing that within the IT organization is becoming a challenge.

So I would say these three are the biggest. The others are more about a lack of process ownership. There’s always a balance of who owns the process – does a function own, does GBS own – to kind of govern the design of the process, the digital transformation, the resiliency of the process. So that’s kind of a challenge, and kind of lack of critical skills in GBS. Be GBS, when we look at ourselves in our mirror, we find that our best performers are all focused on very structured work. The unstructured work is where we really don’t do well. We don’t know how to manage it at scale, and those critical skills are quiet for GBS, and that’s kind of, again, lack of that is hindering what GBS needs to do.

Penny Weller:

Well, that’s a lot, even for one year. So what do you think about the future? How about beyond 2024? Martijn?

Martijn Geerling:

Yeah, I think there are a couple of things that we asked this question in the study as well about what do you see beyond ‘24 as the major business disruptors? We’ve touched on a number of those already. So the impact of generative AI, there’s a lot of uncertainty about it, and nobody’s disputing that there’s going to be a major impact on businesses overall and GBS as well. So that’s something where companies or GBS leaders see that has a major business disruptor. The other one is geopolitical instability, I mentioned that as well, the threat or the development of the war between Russia and Ukraine and the instability in the Middle East. They do not touch on GBS in and of themselves, but it adds to the idea that we are in a process of deglobalization, and the idea that the world is flat may not be so flat anymore.

GBS organizations are built on the idea that the world is flat, that you can move activities to other geographies, that you can globally standardize and simplify because the regulatory environment is by and large the same. So that is perceived as a threat in the longer term. Interestingly, as well, competitive threats was mentioned by quite a few GBS leaders as a concern. You may think, why is that so high on the list? I think that’s for a couple of reasons. One is generally businesses and companies – there’s heightened competition. You see if you look at it in terms of the average tenure of companies has been getting shorter since the ‘80s or the ‘90s. So the company that GBS supports today may not be the company that you support next year – the years after.

So one thing that’s happening with several of my clients, they’re divesting part of their business. You see that in the pharmaceutical space. So from a GBS perspective, then you have to separate out the GBS organization with separate strategies, with temporary agreements, perhaps a new sourcing strategy. So for GBS, that is an equally major upset as it is for the business.

Similarly, technology trends may change the equation. Things like industry themselves – business models – are changed. You see that the Apples and the Amazons of the world are the ones that are winning big, but every industry business model’s being upset. That means margins may erode, and that means it’s both a threat and an opportunity for GBS. Typically, lower margin businesses are the ones where you build and grow your GBS, so it’s a big opportunity. But all those things – competitive threats – are something that GBS leaders also have to contend with and have to develop a strategy for the middle and longer term.

Penny Weller:

Well, final question for both of you and my personal favorite. We’ve been through this many times, all of us together, which finding in this study surprised you most and why? Martijn?

Martijn Geerling:

So the thing, maybe this is a topic that’s dear to my heart in terms of what GBS organizations should do over the longer term, and that is improving customer experience. Now, that drops because of all the things that we discussed today in terms of this is a priority, that’s a priority, improving customer experience dropped to lower on the list. I think for the long term, say, survival of a GBS model, it’s important that you deliver a great customer experience internally to your customers. Yes, the executive things – cost-efficiency is important – but for the day-to-day service delivery, the interaction to your internal customers, it’s not cost. It’s great quality of service. To me, that’s the most important thing that GBS leaders shouldn’t lose sight of. With all the grand strategies that we discussed that you deliver on a day-to-day basis – great service to your clients, pay on time, deliver payroll on time, create great insights from the data and analytics that you have – the list is endless.

Those are the things that GBS is there to deliver to the business and, therefore, focus on improving customer experience, despite all the things we talked about in terms of hurdles and obstacles, I think, is important. So that’s the thing that surprised me in terms of that it drops lower on the list. I can see with the plate of GBS leaders being full why that is, but I wouldn’t forget about it if I was a GBS leader.

Vin Kumar:

And Penny, from my side, I think what I found really surprising and very positive is GBS leaders, usually without any [inaudible 00:25:56], are slower to adopt new things, a little more less agile than we always wanted. And I think I’ve started seeing those green shoots of how quickly they’re willing to react. And we started seeing this second half of last year, all GBS leaders talking about, “OK, how will,” for example, “this new technology of Gen AI going to impact us?” They’re coming right before, even before sometimes the enterprises we’re trying to understand what it means in their SG&A functions or finance or HR, procurement or supply chain, GBS leaders were really interested in Gen AI and started talking about it.

And you look at the data – all of them want to dabble. They have given permission for some of their staff to go look at it and try to understand what does it mean for us, short term, long term? Is it an existential threat for GBS? Is it going to be really a productivity enabler for us? And the willingness for the GBS leaders to look at Gen AI from a very strategic perspective, and so quickly, even before the solution vendors started talking. There was no, even if you look at solutions that GBS use, things like ServiceNow, they started incorporating it, even the Microsofts of the world, started providing it for the GBS organizations probably end of last year is when it really started, and this year is where it’s available on a commercial basis.

GBS leaders were already on top of it, and we’ve got, I think, a couple of great examples of how companies have already started looking at it to provide customer service feedback – both internal customers and external customers support using that. So really heartened that the GBS leaders are looking at things that could be disruptive in a positive way or negative way, but they’re ahead of it rather than waiting for it to come or being asked from the executive office on what you’re doing. So that was a really good surprise for me that I saw in this year’s study, and I see that shift happening within the GBS leadership to – do we have to be digital first? Let’s look at it rather than be more process-specific.

Penny Weller:

Thank you, Martijn and Vin, for joining me today. Listeners can download our GBS Key Issues research from the Global Business Services Insights page of our website. We’ll also put a link to the download page in the show notes. Thank you all for listening. This concludes our podcast.

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