PRESS &
NEWS RELEASE

Forbes: HCL takes outsourcing to new levels

May 12, 2009

In recent weeks, the JargonSpy has run across two companies, RightNow Technologies and HCL Technologies, that take the concept of outsourcing to new levels. Instead of just providing a low-cost team or streamlining a well-defined process, RightNow and HCL take responsibility for a much larger chunk of a company’s operations with the goal of achieving a major transformation or a specific return on investment.

RightNow, founded in 1997, offers a suite of software products and a methodology focused on improving customer service. When a company contracts with RightNow, an eight-step process of improvement begins. The steps involve empowering customers to meet their own needs, offering customers a choice of channels to receive service and measuring everything as part of a six-sigma style continuous improvement process.

As part of this process, RightNow brings more than 30 software applications to bear at different points in the process. The company does not provide outsourced call center staff, but instead recommends and trains the staff of large providers. From the point of view of the company hiring RightNow, what is being purchased is business transformation.

“Everyone we meet with says, ‘I’ve got to maintain my customer experience, and I’ve got to cut costs,'” says Greg Gianforte, CEO and founder of RightNow. “With our enabling technology, we’re actually able to do what used to be thought of as impossible by actually improving the experience and reducing cost at the same time. The eight-step process allows us to break the transformation process into digestible pieces.”

Is this an open-ended consulting engagement that might not work? No, in most cases costs drop and customer satisfaction goes up. RightNow is priced like software-as-a-service; pricing depends on the number of seats and the volume of customer interactions (as a rule of thumb, software-as-a-service costs 80% less than installed software). In March, RightNow added a money-back guarantee to its offer. If uptime is lower than 99.9%, customers can request a refund of a portion of their subscription fee.

HCL, a professional services firm based in India and founded in 1999, takes this approach a step further and actually does deals based on guarantees of business results. HCL recognized that customers are impressed when a vendor accepts and manages risk, so it created six different service offerings that involve taking on some of the risk based on the investment the customer is making.

For example, HCL develops, maintains and manages a product line for a larger enterprise software vendor and guarantees that the vendor will receive 35% of the product’s gross sales. This means that HCL is taking the risk that it can develop and maintain the software and make its own profit for 65% of the gross revenue. HCL recently made this an official program in view of the current economic crisis, but the company has been doing deals like this, when they make sense for the customer, over the last three to five years.

Other deals are structured so that HCL gets paid on reducing information technology cost per employee, essentially a “success fee” for cost-cutting. Another structure involves removing the risk of a large software deployment. In this type of deal, a customer may want to reduce its application footprint from 400 applications to 40 by implementing SAP ERP. But the customer may be hesitant to take the risk and pay the cost, which for a large, global rollout may run to $40 million or more. In this case, HCL will offer to guarantee the success of the rollout for a fee of $6 million a year over eight years (the numbers given here are representative of such deals, according to HCL). What HCL is doing is taking on the risk and financing the deal for a longer term reward. Companies are strongly attracted to such offers because of the reduced risk and implicit financing.

What RightNow and HCL are doing represents the natural evolution of software from an automation tool to a cost-cutting and management tool. Not every business function will lend itself to this kind of outsourcing deal, but as the combination of process knowledge and technology automation becomes a unit with well-defined boundaries, vendors likely will make business guarantees with increased frequency and confidence.

The nightmares in this model will come in the second wave of vendors who offer such deals before they are ready. Still, the first wave of companies seems set to change the menu for enterprise computing.