GBS and Inflation
The Hackett Group Senior Director, GBS Advisory Penny Weller talks with Principal and Global GBS Advisory Practice Leader Martijn Geerling about the impact of inflation on global business services and shared services operations.
Welcome to The Hackett Group’s Business Excelleration Podcast, where – week after week – we hear from experts on how to avoid obstacles, manage detours, and celebrate milestones on the journey to world-class performance. Today’s episode is hosted by Penny Weller, Senior Director of Global Business Services at The Hackett Group. Her guest is Martijn Geerling, Global Practice Leader for GBS Advisory at Hackett. The focus of today’s discussion is the impact of inflation on GBS operations.
North America and Europe have risen markedly in the last year. This conflict, especially in the Ukraine area, is accelerating inflation with energy and food prices. While some of the inflation is transient, we actually found that it is on the rise and here to stay for longer than we initially thought. To begin, Martijn explains why inflation is important and why it matters from a GBS perspective. The main concern for GBS leaders, he reveals, is around labor costs. Consumer prices across most rich countries, like the U.S. and Europe, are up at least 8%. Aside from labor costs, other concerns for GBS leaders are turnover and outsourcing costs. Operationally, it has an impact on things like management and working capital. Cost of labor is one thing, but the cost of capital for organizations is also increasing.
Then, they focus on the point of the impact of inflation on outsourcing contracts. This is something which is really top of mind for many organizations today. In the U.S., the great resignation is a major theme. Rates in offshore locations have gone up and many GBS organizations have experienced at least 8-10% inflation. In our annual GBS study, we see that rates in Western Europe average about 10%, while offshore locations report rates of 15-19%. This raises anxiety around the impact of the rising cost of labor and living on salaries. Some organizations are offering higher rates to attract people to their organization. In places like India, what we’ve seen is that working from home has changed the equation. If you recruit, labor goes up and there are those extra fees by hiring fees, training and more.
Looking at the type of process GBS organizations are using (purchase-to-pay, order-to-cash, cash management), they are not necessarily new. There are a number of best practices which organizations need to focus on. This includes things like implementing supplier payment policy, payment clocks, payment term optimization and looking at pricing and analytics. This is where GBS organizations can support the enterprise. Right now, there should be a focus on reviewing technology spent and examining cost categories in GBS. This includes determining whether there is a budget for salary increases. Cost of hiring and training needs to be reset in alignment with new assumptions around inflation. Another area impacted is in outsourcing agreements. Some organizations, if they haven’t looked into this, may be in for an unpleasant surprise.
As the episode draws to a close, Martijn shares his predictions for what GBS leaders can expect in terms of inflation in the near future. The inflation is not transient and will not be going away this year, or perhaps next. Some drivers are pandemic-related, supply chains are completely out of whack. What unfortunately isn’t going away is the impact of the next crisis, the global war in Ukraine. We are all aware of the price hikes of oil and gas. Martijn expects that the cost of food and fertilizer will begin to rise even more and have a significant impact on the cost of living. Inflation will be running high into 2023. With these kinds of things, forecasting is always about the assumptions.
- 00:47 – Welcome to this episode, hosted by Penny Weller.
- 01:58 – Why inflation is important for GBS leaders.
- 03:42 – The inflation impact on outsourcing contracts.
- 06:50 – The impact on working capital.
- 07:47 – Specific actions for GBS to consider and address.
- 08:44 – Outsourcing agreements.
- 09:52 – Predictions for the future.
- 12:09 – Thank you Martijn for joining us today.