Exigen Group comes up to market with a new sourcing model - Business Process Utility - how to reduce operating costs for companies. To explain Business Process Utility model that is mentioned later in the text frequently, hereinafter are given definitions for already known sourcing initiatives, and the new one sourcing initiative - Business Process Utility model:
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IT Outsourcing - company-specific specific IT functions are moved outside of an organization to an outsourcer who provides them at lower cost;
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IT Utility- business-driving IT functions are provided in an on-demand fashion to multiple companies using a shared, scaled infrastructure;
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Business Process Outsourcing - an entire company-specific discreet service business process, including personnel and supporting infrastructure, is removed from an organization and operated by an outsourcer at lower cost;
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Business Process Utility- an industry-standard process is shared by many companies within an industry to deliver cost leadership through scale.
External Analysis
Five Forces Model
The Porter’s five forces model focuses on five forces that shape competition within an industry:
- the risks of new entry by potential competitors;
- the degree of rivalry among established companies;
- the bargaining power of buyers;
- the bargaining power of suppliers;
- the threat of substitute products.
The risks of new entry by potential competitors
Process automation solutions, managed services and application outsourcing are services provided by many companies, therefore competition is cutthroat and new strong incomers now appear much rare than before IT bubble had exploded. Differently is by business process utility solution that is new approach how to serve customer needs. It is unknown by customers and therefore in business process utilities business there is almost no competition. Large IT service companies (e.g. IBM, EDS, HP and CSC) are keeping an eye on this direction very carefully. If the growth of business process utility (BPU) business will be successful, many large IT service companies will enter this new market.
Rivalry among established companies
Process automation solution, managed services and application outsourcing are services provided by many companies, therefore competition is cutthroat and there appears price wars to get a customer.
When BPU business will come out of embryonic stage and customers will be familiar with this new concept, competition will become high that will push down prices and the profit will be smaller for companies. IT industry is fragmented and therefore entry barriers are lower than in consolidated industries, that facilitate new incomers, which makes excess capacity and call for a price war and bankruptcies.
Bargaining power of buyers
Again we can break down our analysis into two directions:
- Process automation solution, managed services and application outsourcing
- BPU
In the first case we can say that buyers could be powerful, because of such reasons:
- In the industry there are many, different size suppliers;
- It is not very complicated to switch to other suppliers (switching cost – low);
- It is possible for a buyer to make a vertical integration and do not buy a product of IT companies.
On the other hand, with BPU solutions is a bit different. On the one hand, buyers could be powerful, but on the other hand not so much.
Those factors that make buyers powerful:
- This is new type of product and suppliers are more interested to introduce potential buyers with it and makes pilot projects with a discount price;
- The supplier need success stories to persuade others, therefore they are ready to work with everyone, who is ready to do that – in such situation buyer again can ask for a discount price.
The factors that make supplier much stronger:
- This is completely new and unique type of products – therefore customers could be ready to pay higher price in order to use this product and lower operating costs faster than competitors;
- The market is growing and competition is not very strong.
Bargaining power of suppliers
Exigen group at the moment does not have a great bargaining power over buyers, because of such factors:
- In process automation solutions, managed services and application outsourcing there is high competition;
- For customer switching costs are low
- Customer could integrate vertically to make these products on their own;
- Due to big competition in IT industry, often customer can find different solutions for different costs.
- BPU is new type of products, customers are not enough educated and thereby not enough motivated to apply this model of lowering costs on a large scale.
But if a customer starts to use supplier’s services, switching costs usually are high. Therefore in communications with already existing customers bargaining power of suppliers can be strong.
Threat of substitute products
For IT industry the interesting point is that many solution made by engineers at some extent could solve the problem stated by customer. Of course, some of products do it better, some not so good, but anyway customer has a great chance to choose. On the other hand, if a solution for a customer is tailor made, usually there are almost no substitute products that could serve all individual need of the customer.
Changes in the Microenvironment
During the nineties IT industry has developed very rapidly and stock prices of IT companies were one of the highest that have ever been, but in years 2000 and 2001 IT bubble exploded and fast development slowed down. The explosion of the bubble proved that IT market cannot grow separately from traditional market rules and microenvironment. Currently growth of all economy is slowing down (or even facing recession), many previous and potential customers of IT companies are facing serious financial problems. There is a trend that companies decrease their budgets for IT-related expenditures. IT companies offer many ways how to reduce operating costs, but potential customers are eager to use these solutions (including PBU approach), because anyway it requires some initial investment and involves risk (experience shows that many IT projects fail).
Strategic Groups in the Industry
Roughly the industry can be divided in 4 strategic groups:
- Developers of mass utility products – like Microsoft develops its products MS Word, MS Access, MS Project;
- Suppliers of tailor made solutions;
- Suppliers of outsourcing services.
Companies in the first strategic group invest big resources in marketing and sales, and, when developing their products, make boards between easy and simple usability of the products, and enough sophisticated functionality to serve individual needs of different customers. Competition in this quite tough, however because of high entry and market development costs the biggest players in this group at some extent can dictate product prices and rules – some kind of oligopoly.
Companies in the second strategic group in general are niche players. They develop expertise in definite market segments (e.g. accounting, document flow, internet portals), develop tools and semi-products that can be used to create number of similar tailor made solutions efficiently and fast. Companies in this group competes with their ability to get and develop most appropriate expertise, tools and semi-products to be able to serve customer needs at lower costs. This group is very fragmented, and completion there is very tough.
The reasons why companies (potential customers) consider outsourcing are the following:
- Reduce and control operating costs
- Improve company focus
- Access to world-class capabilities
- Free internal resources for other purposes
- Resources not available internally
- Accelerate re-engineering benefits
- Share risk
Although there are many reasons why to consider outsourcing, main (and often the only one) motivating driver of customers is the first reason - reduce and control operating costs. Companies that provide outsourcing services can lower costs mostly by location economies – job is performed by workers in countries where salaries level is lover. Outsourcing companies compete with each other by ability to provide lower production/ service costs and at the same time provide the service at high quality. E.g. outsourcing companies in Asia can provide lower production costs, but rivals in Eastern Europe can out-compete their Asian competitors with higher output quality. The quality also includes quality and ease of communications between supplier and customer.
Dynamics of the Industry
Despites the IT bubble explosion IT industry stays dynamic, because of such factors:
- Quite low entry barriers;
- New IT solutions can be created quite easily and fast;
- IT companies pay great effort to create new innovations frequently in order to compete with each other.
Previously, when customers were ready to pay big money for dizzy technologically innovative products, IT companies concentrated their R&D efforts on that kind of solutions. Currently, because of microenvironment financial situation of potential customers in general is weak, therefore many IT companies try to create innovative solutions how to lower costs of customers. This is new approach of doing business and new challenge for IT industry.
Industry’s Stage of Life Cycle
The industry life cycle model is a used tool for analyzing the effects of industry evolution on competitive forces. We can identify five industry environments, each linked to a distinct stage of an industry’s evolution:
- an embryonic industry environment
- a growth industry environment
- a shakeout environment
- a mature industry environment
- a declining industry environment.
Exigen Group is situated somewhere in the first, second and third cycles: the embryonic, growth and shakeout stages, because some of services provided by Exigen are in growth or shakeout stages, but the other one only in the embryonic stage. Process automation solution, managed services and application outsourcing are services already known by customers, the competition is quite high, some of competitors left the market due to inability to stay competitive and finally there appears price wars in a market. But at the same time Exigen has developed completely new approach to reduce operating costs – BPU. This solution obviously lies in the embryonic stage, because it is quite new service, buyers are unfamiliar with a solution and therefore growth rate is low. At the moment Exigen spends a lot of time to educate potential customers about BPU. Exigen develops several pilot projects to get success stories to persuade others about BPU suitableness.
“If business process utilities were to succeed in the marketplace, that would provide a large growth potential to technology service providers and would enable their customers to greatly improve operating efficiency.”
Internal Analysis
Competitive Advantage/ Disadvantage
Competitive advantage is defined as: a profit rate higher than the average for the industry.
Unfortunately the company is in a start-up period thus company still is investing heavily and return on capital is not comparable to the industry. However there are other aspects that can be assessed and the competitive advantage potential can be measured. Those criteria are costs and product design – value created.
Company has high quality product compared to the industry standards largely due to highly skilled programmers from Eastern Europe. To sustain and increase the Exigen’s intellectual power the company has entered into agreement with several technical universities of these regions with aim of locating, developing and recruiting the top talent.
High quality of personnel and cultural similarity with the end users (Western Europe and North America) gives the company an advantage over the cheaper but less qualitative competitors from South Asia, because the end-users assign higher value to the reliability of the product and easier communication.
Products are designed to add as much value as possible, company has a philosophy that Exigen is earning a small proportion of the money companies save on the service delivery operation improvements by Exigen. Thus value adding is a core activity and Exigen strives to excel in it by building process-backbone expertise.
24-hour product development speeds the delivery of the product to the customers thus increasing the customer satisfaction and reducing the costs by shortening the project’s life cycles, which reduce inventories and frees the personnel sooner for the next projects. This is possible due to fact that Exigen has its presence in Europe, North America and Australia, despite the fact that each of locations provides different services, still project as the whole is developing faster.
Second component of competitive advantage cost is also well managed by location economies. Most of the labor intensive and technical work is performed in Eastern Europe where the labor costs are low and production quality very high. Rest of locations provide the best performance to cost services, thus creating the maximum value with moderate to low costs – competitive advantage which in the long run will result in the higher than average return on capital in the industry.
Four Generic Building Blocks
Efficiency: as already mentioned before company has established its presence in Europe, North America and Australia to realize the location economies and to attain best value to cost ratio. This presence also allows penetrating these different markets more easily. Thus basically North America and Australia together with Western Europe are the main markets and presence there deals with the marketing and service issues while Eastern Europe is the R&D hub and each of them performs their project parts very efficiently compared in terms of outputs/inputs. To be more specific programmers of Eastern Europe create high quality products for relatively low salaries = efficiency = outputs/inputs. Marketing and market people do their parts well due to closeness to the client, which results in customer responsiveness and good understanding of the markets and needs of the customers. Thus again although this is expensive there is no better solution than being present in those expensive locations to contact and contract clients and maintain customer service on high level = efficiency = outputs/inputs.
Quality: is an essential part of the success of Exigen and very important for the future of the company, since its generic strategy is the one of the differentiation. Employees are highly skilled and project quality control systems are in place to make sure there are as few flaws as possible. The feedback loop is well designed (market representatives and call center) to keep in touch with the customers thus all flaws are reported on and continuous process improvement program is operated to identify source and to eliminate the possibility of the reoccurrence in the future.
Innovation: is the very essence of the Exigen company, the very idea and business opportunity stems from the innovative approach to the work breakdown structure - reengineering service operations to uncover the latent value and cope with the problems. Thus innovation is the key success factor and is the most important generic building block. Together with the great chance of the Exigen to take the first movers advantage in their niche which should result in large share of the specific service market comes the great burden of market education about the need for the particular service. This is very costly and may result in long-term cash flow problems unless the company manages to sell the concept and use the existing customers as their messengers to the market.
Customer responsiveness: company must be customer responsive to slowly build the market share and establish itself as a differentiator. The main attributes of the customer responsiveness are ability to identify customer needs and satisfying them by adding more value for the customer. This aspect is exactly in the core of the Exigen Company business, company identifies the inefficiencies in the customers service operations and offers the solution and ads more value to the customer. Second aspect of responsiveness is innovation and achieving the superior quality; as I mentioned above these two aspects are well designed and in place at Exigen. Customization of the products is logical for the Exigen since it designs the individual solution for a specific company, with minor exceptions when a previously used solution (for other customer) of the problem is available and fits well. Other important feature of responsiveness is customer response time and as mentioned above company has a well designed project work flow and well chosen locations so that project is processed 24h a day and delivery is significantly improved. The last factor is the after sales service which is taken care off at Exigen by well maintained feedback with the clients in the market by local representatives and a client call service central in Canada.
Thus summing up company has all customer responsiveness critical features, high product quality, efficiency and innovation, which is a very strong ground to build a generic strategy of differentiation and establish well in the market.
Distinctive Competencies of the Company
From the resource side the company has the access to the top programming specialists in the North Easter Europe and Moscow via close cooperation with the top technical schools of the region, which enables the company to have top quality low cost programmers – a very important source of competitive advantage in the market, due to fact that programming is the most costly part of the projects and the quality of the output is crucial. Other competitive advantage is the very concept of the Exigen business and the unique experience in the process cycle breakdown and analysis. Thus company has a unique business concept and top quality, low cost labor to manage its operations and build the value for the customers. Soon company should have established in the market and built its market share and have longer presence in the market which will build Exigen a brand name. At this point company will have a very strong position, however company should keep building its distinctive competencies because once this business will prove to be interesting others will enter. Low cost top quality labor is relatively easy to copy, while business concept will be broken down and analyzed by rivals, thus brand name establishment and ongoing innovation, superb customer responsiveness and efficiency will be very crucial for the success of Exigen in the longer run. Company has the potential, resources and the right corporate culture for that.
Strategy
Generic business-level strategy
Exigen Group pursues cost leadership and differentiation strategy. Cost leadership strategy can be applied because engineering force is located in relatively low cost countries – Russia, Latvia and Lithuania. Compared with companies located in North America, Australia, Western Europe (market of Exigen) Exigen’s employees are very skilled and their work efficiency is very high.
Product differentiation can be achieved in three principal ways: quality, innovation, and responsiveness to customers. Exigen’s provided Business Process Utility model is differentiated from other models of lowering operating costs by innovation. Exigen Group is the first IT company who provides to customers such a model. In the business of process automation solutions, managed services, and application outsourcing Exigen differentiates itself by quality and responsiveness to customers. Work quality of Exigen’s engineering in Eastern Europe is high, thereby the company can compete with its Asian rivals very well. Exigen’s sale force and product management is located close to customers, thereby the company understands and serve customers’ needs better and communication between the company and customers is more effective.
Advantages and disadvantages of the business-level strategy
Disadvantages
Competing for customers in the business of process automation solutions, managed services, and application outsourcing there will appear competitors whose production costs are lower than Exigen has. It is easier for companies in India to compete on prices, and they can also much easier quickly recruit big number of employees with specific skills if necessary. Often it is difficult for Exigen to persuade customers that quality of Exigen’s services will be reasonably higher to out-compete lower-price offers provided by Indians.
Sometimes in application outsourcing business need for specific technology skills cannot be forecasted. A big customer decides to outsource work for several hundreds of employees with very specific skills and sends request for proposal to different outsourcing companies, including Exigen Group. Competition for engineers in Eastern Europe is higher than in India, therefore it is difficult for Exigen to recruit necessary number of employees to get the outsourcing project. Thus Exigen’s strategy to offer only high quality engineers from Eastern Europe can weaken the company’s position in competing for customers.
Advantages
Through local recognizable top management, marketing and sales people Exigen position itself as a USA, Western company. It means reliability, high quality, and responsiveness to customers. That creates good attitude to Exigen from the side of customers. At the same time Exigen can offer to its customers high-quality services for much lower prices than many other competitors. This dual power puts Exigen in a favorable position when talking to potential customers.
Innovative Business Process Utility idea helps to attract customers attention to such a new company as Exigen as well as media also are interested in the new approach and thereby they help with additional publicity. With the innovative business idea Exigen also gets possibility to experience first mover advantages in the future.
Indication of source
- EDS press release, EDS and Exigen group team up to deliver business process utility, November 14, 2001
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Martorelli Bill, Exigen group targets emerging “business process utility” market, September 6, 2002
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Terry Wright, Bell Canada Uses Exigen to Cost Manage Broadband Internet Customer Services
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Efstathiou Andy, First business process utility launched, E-business market review, November 28, 2002
- Scholl Rebecca, Users of BPO report high satisfaction with existing relationship”, Gartnet, October 7, 2002.
- Different Exigen group presentation and internal materials.
http://www.exigengroup.com/about/
Efstathiou Andy, First business process utility launched, E-business market review, 11.28.2001.