Should You Outsource Analytics?

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.