EY Managed Services protect clients from the bleeding edge of regulatory change

EY views managed services as a ‘no regrets business’

Discussion of EY managed services strategy in context of EY’s overall operations kicked off the EY Managed Services Analyst Summit. EY Global Vice Chair – Markets Jay Nibbe touched on the rumors around the operating models with the cryptic statement that regardless of how EY looks from a financial reporting system, managed services will continue to be a strategic aspect of the EY business or businesses.

In Nibbe’s view, managed services are strategic to the pivot EY and its peers are making in the market. Nibbe described this shift as going from an advisory and compliance model to a report-advise-operate model. Data-driven insights are provided to clients, EY advises and assists with transformation and change management, and then EY operates the critical services through its ongoing managed services capabilities.

A $750 million investment underpins EY’s commitment to growing out its managed services portfolio, with more money to follow. Nibbe described managed services as a “no regrets business,” as in no regrets to continue investing in the space.

‘Managed services’ is an improper label for its portfolio, according to EY

Global Vice Chair – Managed Services Paul Clark re-enforced Nibbe’s commitment, saying EY managed services was currently 18% of its total revenue, with a $360 billion total available market estimate. Clark also called managed services “a broad church” and stated EY is not after traditional ITO or BPO engagements.

Therein lies EY’s branding challenge. Many view managed services as a new label for the labor arbitrage outsourcing services that rose to popularity at the turn of the century. These BPO services were colloquially described as “handling the mess for less” and do not accurately depict, EY believes, the value proposition of the new suite of services infused with AI and resting on top of a standard data platform such as EY Fabric. For example, EY equated legacy BPO offers to bookkeeping whereas its service is accounting.

Most EY managed services engagements start with an advisory engagement. Pandemic pressures held a mirror up to customers’ operations as they struggled to continue their legacy practices amid remote working. Further, the increasing volume of regulatory change across the globe makes it hard for multinational enterprises to keep pace, increasing their risk of being out of compliance.

Regulatory change and associated business risk results in greater boardroom attention to operations, with a focus on making sure the business processes work. Handling the mess for less, EY asserts, does not resonate with the board when the current operations leave the company open to risk and regulatory fines for noncompliance. Savvy managed service buyers want to know the process will better monitor outside-in changes to their business environment and will provide advice on impact to internal operations.

A global data platform, EY Fabric is EY’s distinctive accelerator for managed services

EY said little about infrastructure technology, and yet the value propositions discussed throughout the day repeatedly referenced EY Fabric. A cloud-based data lake infused with AI and machine learning, the critical distinction of EY Fabric is that it is one global operating model. A single global operating model requires a standard set of business rules and inordinate amounts of data wrangling before any analytics can be applied against the data for business insights.

For years technology vendor events have brought forth clients to share their operating horror stories of trying to get right the standard data model. That EY, a global partnership, was able to settle on one global data model internally, and then drive it out to market is a testament to the EY operating culture, and a boon to its managed services practice.

EY Fabric automates data wrangling for EY clients. It then extracts data from client systems, normalizes the data in EY’s data lake and runs proprietary algorithms against the data. Finally, EY Fabric reports fact-based insights and change management recommendations to the client. From those advisory engagements flows the managed services agreements, where EY “lands” by addressing the topmost set of operational pain points, and then “expands” through that proof of value into adjacent service modules.

Critical alliances link EY Fabric to customer instances and orchestrate the services

EY is quick to say it orchestrates and deploys popular commercial software applications rather than builds software. Partners SAP, Microsoft and ServiceNow joined EY on stage at the managed services event. SAP represents the legacy application layer housing most EY client data that must be extracted and run against EY algorithms for business insights. Microsoft underpins the cloud-first EY Fabric and co-innovates with EY on the hooks into customer data. ServiceNow provides the base workflow shell for many of the EY managed services workflows.

Other partners exist to provide necessary information feeds, but these three underpin the platform. In emerging technology, EY uses its overarching theme of “making sure it works” to explain why it is reticent to embed software from smaller companies into its services. It stated it will integrate and orchestrate such offerings on behalf of clients, but it does not intend to be on the technology bleeding edge. Its focus, in TBR’s view, is to protect its clients from the bleeding edge of regulatory change.

EY organizes its managed services into five broad categories

EY visually represents its managed services offerings as five suites that all revolve around data and AI, or the EY Fabric platform at the core. Some of the operational themes cut across suites, but how the portfolio is arranged is immaterial to the way in which EY pursues managed services.

For EY, the pursuit starts with determining the top pain points customers seek to address, then conducting a business assessment and presenting recommendations on how the EY managed services components can improve operational flows and reduce business risk in the process.

Each module has been written under the one global EY architecture in a cloud-first containerized fashion running on Microsoft Azure. As such, the mixing and matching of services integral to the “expand” element of a land-and-expand process becomes a function of activating new services, as proof of value has been displayed.

The core modular groupings of EY managed services are:

• Finance and Tax is by far the largest segment of EY’s managed service portfolio, as expected from an advisory firm with tax and audit lineage. EY Fabric brings the potential of moving to a continuous audit function based on the ongoing AI monitoring of the regulatory environment that is then mapped against the client’s business parameters to create a custom set of action items for the client. EY Virtual Internal Audit is at the core of the disruptive capability. These capabilities augment internal audit functions, enabling internal teams to shift focus in real-time based on the automated advisory notices EY algorithms generate from reviewing regulatory notices.
• Risk and Cyber grows in client importance with each passing data privacy law and well publicized security breach. Here EY relies on partnerships for threat monitoring to ingest into its AI engines to proactively push alerts and recommendations to its client base. EY claims its cyber practice is growing 30% year-to-year. EY sees the upside to these as cyber engagements continue converting to managed services clients.
• Talent is an area EY expects to grow rapidly. Accelerated by the pandemic, these EY services are aimed as much at managing the regulatory environment for payroll across multiple countries as they are at improving user experience. From its global platform, EY provides a set list of standard forms employees need for various work verification requirements for home loans, among other things. Additionally, EY talent customers can offer EY tax preparation services to their employees as well as access to EY education modules called EY Badges for ongoing professional development.
• Legal is a domain EY bolstered with the acquisitions of Pangea3 Legal Managed Services (part of Thomson Reuters) and Riverview Law. EY’s internal relationships with certain clients, including those more acquisitive in nature, allow the firm to lead itself into new engagements in an event-driven business. Leaning on its existing relationships and strengths around contract management and compliance, EY will create repeatable processes that help clients execute on legal managed services contracts.
• Sustainability is a hot topic industrywide. It is where the notion of evaluating risk for competitive advantage comes to the fore. In anticipating the regulatory change, EY clients can evaluate the upside and the risk of existing businesses against the anticipated back drop of sustainability regulations globally. Additionally, increased scrutiny around the measurement and reporting of environmental, social and governance (ESG) metrics aligns with EY’s auditing resources to secure data management and sharing, validate data, and prepare reports from a standardized perspective.

Like many managed services, EY’s services have evolving commercial constructs

Multienterprise business offers are in a state of commercial flux as legacy license models give way to “as a Service” models. Most commercial contracts are between EY, as the solution orchestrator, and the client. Its strategic partnerships with Microsoft, SAP and ServiceNow also mean it can negotiate terms with greater flexibility and cooperation than most partners of those firms.

With customers, the EY value proposition revolves around outcomes and cost avoidance. Similarly, the value proposition is not about labor arbitrage, rather real-time access and insight from EY’s domain experts that are baked into the offer through AI automation and expert pattern recognition. In this sense, EY’s value proposition is strategic staff augmentation rather than data entry staff augmentation.

The explanations and use case examples for this strategic staff augmentation were clear at the event. The regulatory environment is moving too fast for individual firms to hire the requisite number of domain experts to reduce risk. It is better to rely on the outside experts ahead of the audits to reduce risk exposure and better inform the accelerating strategy cycles.

Examples offered by EY of this point included:

• Over 57,000 regulatory alerts in 2021 and the $6 trillion cost of breaches; Virtual Internal Auditor handles those alerts in real time
• $537 billion cost to enterprise for data integration/data wrangling, which EY Fabric does, with two-thirds of the enterprises surveyed intending to spend more in the future
• A Talent entry point is to assume payroll responsibilities in the second-tier countries where enterprises operate, given EY has domain expertise in 160 countries under one global data model. Further, EY has a real-time chat bot that can answer strategic staffing queries for engaged leaders. EY claims this is the first of its kind in the talent management space.

One of the clients speaking on the panel exports products to 140 countries and has localized presence in 50, with only three tax specialists. The Group Tax, Customs and Insurance head summarizes its contract outlook thusly: “We are not after a discount; we want to get it right.”

According to this client, the EY value proposition was that EY would return twice the cost of the managed service back to them in savings and cost avoidance. They stated that, to date, EY has returned close to $900 million in savings to the company.

Market implications

Tax and audit firms are extremely well positioned in the IT industry writ large. Tax and audit firms are the final translation layer between business process and automated data flows. They translate business rules into the bits and bytes orchestrated by traditional technology vendors. EY has a distinct advantage and value proposition that focuses more on business risk and strategic planning rather than cost savings.

Lone enterprises cannot afford to keep human resources staff also knowledgeable of the rapidly shifting regulatory environment. With this in mind, EY aims to become the real-time advisor to these internal operations through automated delivery of curated EY IP based on its domain expertise.

While EY managed services might cost more than the in-house labor, the managed service will reduce the liability of noncompliance and likewise boost the strategic planning scenarios ahead of expected regulatory changes.

The implications to EY competitors are broad.

• India-centric vendors whose value proposition rests on labor arbitrage must show greater value in risk mitigation and domain expertise. Some are wisely partnering with EY in specific use cases where EY’s service provides an additional value layer to the India-centric client.
• Traditional ITO and BPO vendors face a similar threat. Can these vendors, through alliances or staff hires, provide the domain IP EY is capable of curating and rapidly scaling on the EY Fabric platform?
• Emerging technology vendors will be well served by entering discussions with EY on how they can integrate into the EY Fabric. While EY is selective, gaining the EY seal of approval would go a long way toward validating the long-term viability so critical to global enterprise decision makers.

Clark says the only thing holding EY back is more orchestrators. These orchestrators consist of project heads with the necessary domain expertise to curate client processes for ingestion into EY Fabric as well as orchestrator AI chat bots to be run against the increasing volume of regulatory changes flowing from the public sector as governments seek to keep up with the rate and pace of business change technology unleashes on the economy and environment itself.

Relative to peers, EY is better positioned to meet the challenge given the sound fundamentals it deployed in building out a single, global data platform to scale its managed services offerings.