Posted by Warwick Davies on Thu, Jul 09, 2009
by Phil Fersht, Research Director, Global Services & Outsourcing, AMR Research Inc.
Executives managing outsourcing relationships have never been faced with more challenges. With growing reliance on their vendors to deliver, a rapidly-evolving vendor marketplace, greater scrutiny by boards and their auditors, and increasing economic and competitive pressures driving change deep into organizations, executives governing outsourcing relationships have become a lightning rod for criticism.
The following recommendations provide a guide for today's corporate executive to avoid multiple landmines, when considering or managing outsourcing environments:
Make the board a stakeholder before outsourcing
Corporate Governance is on the mind of every CEO and board chairman. Audit committees are probing ever deeper into day-to-day operations and they are directing external auditors to increase scrutiny of controls. It would, therefore, seem ludicrous that senior executives fail to stakeholder board members before large outsourcing deals are executed, but many do.
Once you have developed a strong case for implementing an outsourcing initiative, getting board-level buy-in is normally a straight-forward process. Building advocacy of outsourcing long in advance of outsourcing a department, is a best practice because outsourcing is truly about acquiring core competencies and building competitive advantage in pursuit of the strategic corporate agenda. Asking for forgiveness from a board that is angry about being excluded is certainly a risky proposition.
Manage your customers
An outsourced department services internal customers, external customers, or both. Executives routinely fail to communicate outsourcing events effectively to key customers with sufficient detail to set and manage expectations. While it's certainly not always essential to manage all external customers' expectations, managing the expectations of large, strategic clients is vital. Almost as important, great executives remember that perception is reality and they check-in with key customers on a regular basis to ensure outsourcing has not degraded service.
Constantly measure your progress against the initial outsourcing objectives
Whether intentional or not, many executives fail to track results against outsourcing objectives. This could be the result of failing to have concrete, measurable goals, or simply avoiding the effort. Managing an outsourcing relationship to achieve accountable goals is a tremendously arduous challenge because many forces work against executives, namely, the following:
• Expensive change orders are often necessary adapt to new business processes;
• Vendors continuously seek opportunities to increase pricing;
• Companies become frighteningly reliant on vendors after knowledge capital has migrated to the vendor.
Successful executives have clear, measurable goals they regularly measure against the outsourcing relationship - and they manage to the goals. When goals need to be changed, you should have formal, documented procedures for managing this change, which frequently require you to build board or customer support (see above).
Hands-on vendor management is imperative
Many executives are comfortable managing employees. Senior executives are familiar with delegating responsibility to a subordinate whose own subordinates will work hard to achieve the stated business objectives. Progress against these tasks is easy to obtain and measure. Well, managing vendors is an entirely different, incredibly more complex proposition because the vendor, although they would suggest otherwise, works for itself and therefore has its own priorities which may not be identical to yours'. Changing priorities, which used to be so easy, now require change orders and lawyers. Progress cannot be easily measured and significant challenges exist in gauging compliance with contracts, because the vendor may operate from a foreign country.
Executives who fail to employ hands-on vendor management are likely to be surprised when service levels are not achieved, security lags, and objectives are not met. You must recognize the challenge and assemble a team of knowledgeable, experienced vendor managers whose sole objective is to ensure the vendors achieve their goals. And if you don't have the right people to do this for you, you must go out and hire them.
Be wary of the low-cost country bandwagon
The number of vendors and countries touting the "next great outsourcing destination" can become overwhelming. What started off in Canada moved to India and traveled to the Philippines and Costa Rica. Each country has experienced movement from "Tier 1" cities to "Tier 2" or even "Tier 3" cities as competition for low cost labor accelerates attrition and salaries. Argentina, Brazil, China, Eastern Europe, the Middle East, and a variety of developing companies now loudly tout their high unemployment, "skilled" labor, and tax incentives. Remember, they, too, will experience similar cost increases and migrations to lesser-known cities.
Constantly chasing incremental cost savings may be enticing, but the hidden costs of transitioning to new countries with the same or a different vendor have bitten many outsourcing executives in the past. In addition to start-up vendor fees, training costs, and travel expenses, service is likely to lag behind current levels due to learning curves. The costs of all these elements can often eliminate most of the first couple of years' of savings - at which point your new country may experience the same problems as your last country and price increases will eliminate your future savings.
Make sure you have obtained exhaustive client references and conducted diligent research over a period of time before moving services to new locations. And remember, outsourcing is a longer-term proposition, and not simply a series of quick cost-savings hits everytime a cheaper locale comes along.
Remind yourself everyday that your vendor is not really your partner
Yes, you have do develop deep relationships with them, but, like it or not, vendors are not partners. Developing a trusted long-term relationship is extremely important to the success of your outsourcing engagement, but ultimately their employees are loyal to their own management, not yours. Highly incentivized salespeople actively seek opportunities to deepen relationships in an attempt to head-off competitive RFPs by growing business "organically." Many vendors have dedicated contract negotiation teams and use specialized outside law firms in attempt to maximize their profitability and minimize their risk.
Ultimately, you are buying a service the vendor sells and a good executive never forgets that, no matter how well a vendor performs or ingratiates itself, the only thing that matters is the buyer is receiving consistently high quality service provided with a smile.
Negotiate contracts effectively and consider using a third-party advisor
Naïve executives fail to understand the complexity of outsourcing contracts. Under the pressure to "get the deal done", many executives focus on key price terms, but neglect most of the rest of the deal.
Vendors, on the other hand, negotiate outsourcing agreements for a living and their standard contracts (the ones they hand to you to start a relationship) are seldom written in the spirit of "partnership." Vendor sales executives are well-trained masters of creating negotiation leverage. Good sales teams actually mathematically predict the probability of winning a deal - that's how experienced vendors really are. Even more worrying, executives' procurement and legal teams are probably inexperienced with complex contract negotiations. Make sure you are properly equipped to negotiate these contracts.
Engage a third party advisor that specializes in negotiating complex outsourcing deals if you do not have the inhouse expertise or legal counsel to do this for you. Even if you are sole-sourcing an outsourcing engagement, a third-party advisor can help negotiation service levels that help drive quality, lower cost and higher performance into a contract, and not simply squeeze down the supplier's costs.
Focus on driving value from your vendor at every opportunity
While innovation is frequently a loosely-used term, outsourcing does provide an opportunity to develop an long-term training ground for your company to access and acquire new skills, access process acumen and better technology, in addition to driving out cost on an ongoing basis.
However, you must use the tools at your disposal to ensure your vendor is constantly keeping your costs at a minimum and adding real business value to your outsourced department by upgrading your technology regularly and adding rigor to your business processes. This includes guarantees that they will devote Six Sigma black belts to your engagement, focus on refining process flows over the duration of the contract, and working with your staff to drive out costs and eliminate inefficiencies. And ensure they are keeping your technology applications and tools upgraded on a regular basis. As mentioned above, this is not going to happen simply through the spirit of partnership.
Get Key People on board your Train across the Enterprise
The impact of outsourcing reaches all corners of your organization. However, in efforts to maintain the confidentiality of an outsourcing initiative, many executives fail to communicate to key internal teams, including IT departments, HR departments, corporate communications, and public affairs. The result is that these teams are frequently left with insufficient time to support the initiative. Experienced executives assemble a small team of key resources to manage media relations, communicate with government officials and agencies, and to determine legally defensible methods of selecting employees who will be impacted by outsourcing - and to manage their transition or severance packages. The best executives communicate with peers and key employees in order to seek opportunities to place key employees within other departments.
Take your time to get this right
There is little doubt that today's companies place a premium on achieving results quickly. Many outsourcing executives who seek quick cost saving opportunities will rush through the key assessment, vendor selection, negotiation, and implementation tasks. Invariably, implementations go awry and vendor relationships sour. The reason is simple: outsourcing is too complex, has too many stakeholders, and relies on too many resources within a company and the vendor to skip tasks or avoid detailed analysis, planning, and testing. Conducting a business case to find cost-savings is the easy part - executing on achieving this endstate a reality is another challenge altogether and it is your job to do that.
Phil Fersht is Research Director, Global Services & Outsourcing, for AMR Research Inc., and can be reached at pfersht@amrresearch.com
Posted by Warwick Davies on Thu, Jun 25, 2009
Phil Fersht
Director of Research, Global Services & Outsourcing, AMR
Founder & Author, Horses for Sources Blog
www.amrresearch.com
Most enterprises today are evaluating the potential business advantages of outsourcing entire processes to third-party providers - namely, whether they can reduce their general and administrative costs, and benefit from added process rigor and new technology upgrades in the process.
However, many enterprises have failed to get past Phase 1 - the Sourcing Evaluation phase - simply because they made some fundamental errors approaching the whole issue correctly. Enterprises which fail to develop a strong business case for outsourcing can reach insurmountable - and often costly - problems if they move into a vendor selection process without having conducted significant prior due diligence.
Figure 1 gives an overview of the typical phases enterprises go through when the evaluate their outsourcing options, beginning with this initial Sourcing Evaluation phase that will lead to Solution Design, Contracting and finally Transition and Governance towards an outsourced end-state..
Enterprises have the opportunity between each phase to terminate the process, but the toughest challenge is for them to get the initial Evaluation phase right in order to proceed.
The following issues are the most common mistakes many enterprises have (and still are) making when evaluating an outsourcing business case:
Poor communication to key staff
If a company is going to explore outsourcing its business or IT processes, it needs to evaluate how it is going to gather the information it needs to support its decision-making. If - as in most cases - it is going to bring in a consultant/adviser to develop a business case, then the advisor will need to talk with key staff to access data, conduct interviews etc. The instant staff get wind of the fact consultants are onsite discussing the "O" issue, panic will spread and all sorts of strange behavior can occur. The rumor mill, staff turnover, politicking... when staff start worrying about their jobs, all hell can break loose. You must identify which of your key staff is needed to conduct the business case, and be open with them from the get-go about what you are evaluating. Be open with your plans to evaluate outsourcing and seek their feedback - if they are kept in the dark, it often leads them often to assume the worst that their jobs are on the line, particularly if the economy is in a slowdown. You have to explain their jobs are not on the line, if you want their support. And you need their support because resistance from staff can destroy the process.
A major financial services firm recently investigated moving some of its finance processes to a third party provider, but failed to communicate with several middle-managers that is was merely exploring some opportunities for cost-optimization. As a result, several key managers left the firm in the space of a few weeks, even though the company had not even completed an initial evaluation. Staff will automatically assume the worst of they are not informed about plans to explore outsourcing - in fact, the simple fact that they are kept in the dark leads them often to assume the worst that their jobs are on the line.
Failing to weed out the dissenters
Many outsourcing evaluations have led to "no-go" decisions because some key people simply were not onboard with the process. If a function leader is highly resistant to the outsourcing, he / she will attempt to derail the process at every possible opportunity - and it will most likely fail. If you try and transition a function where no-one is playing ball, you are in serious trouble from the get-go. Constructive criticism and healthy discussion of the issues are important, but some people will be against change... and will never change. Have open and honest talks with key staff about outsourcing - many simply will not understand much about it. Having a group workshop - perhaps with an independent expert present - will be very helpful in educating your staff. Outsourcing is not rocket science and you will quickly understand who is onboard and who will never be. Then you can make whatever decision is needed to get over that hurdle. You may find your company simply does not have people who will allow this to happen - so why not save everyone's time and money and call a halt to the proceedings before a load of time and money is wasted?
For example, a company was recently very keen to move its application development processes over to an outsourcing provider. The manager in charge of this area was vehemently against the potential move and constantly lobbied against the process, attended vendor presentations and voiced serious criticism against outsourcing, despite not having a lot to base his concerns. The advisor and CIO made several attempts to educate the manager about the dynamics and business benefits of moving to an outsourced model, but the manager continued to voice dissent against the process. As a result, some suppliers withdrew from the shortlist, as they did not want to get involved in a negative outsourcing situation, leaving the firm with a limited choice of suppliers, and a worrying situation on how to set up an effective governance structure post-transaction.
Not involving HR from the get-go
Outsourcing is all about people, job roles, staff reductions, knowledge transfer, training and change-management... hmmm sounds like something with which HR should help. Too many companies get excited about the economic benefits about outsourcing and fail to devote enough time and resources towards dealing with the human capital issues regarding how they can execute. This involves acquiring / retaining key talent, avoidance of losing critical knowledge within your organization, facilitating cultural integration (especially where offshore staff are involved), and ensuring legal, SAS-70 and SARBOX compliance.
Not involving IT in business process outsourcing assessments
Business Process Outsourcing (BPO) always involves a varying extent of process re-design and standardization, and there are always critical issues with data security and privacy that need addressing. Any changes you need to make, will need to be supported by your existing technology platform and IT staff. This doesn't mean you have to engage in a major IT evaluation from stage 1, but having a firm understanding early on of the IT issues and opportunities a BPO engagement will create, can save many headaches down the road. Several enterprises are now exploring BPO as a result of all the work they have done rolling out new ERP software. When you need to invest so much money in re-designing process and re-training staff, wouldn't this pose the ideal time to look at outsourcing some of it?
Several companies have recently engaged in "multi-sourcing" engagements, where they outsourced business process like HR and finance to separate service providers, while transitioning application management and development services to alternative IT service providers. There was very little discussion between the business process leaders and the IT leaders, whereby the IT abd business process trackes were treated as entirely separate There are significant synergies when the application services can be tightly aligned with the relevant business processes, which means
Not seeking peer advice
"Best Practices" are formed through the experiences of firms innovating and trying out new ways of doing things. In reality, that means they will tell you where they went wrong, and give advice on how they got it right, and how they would do something differently a second-time around. Outsourcing is no exception; in fact, it is a shining example of how to learn from other enterprises' mistakes. Seek out peers in other enterprises which have gone through the outsourcing process - there are several peer forums you can attend to have these discussions. Good examples of peer groups where you can learn from other firms' experiences of outsourcing include Shared Services & Outsourcing Network and the Sourcing Interests Group . AMR Research also conducts a series of peer forums where senior executives discussion critical issues, such as outsourcing.
Not using a good advisor
You will likely need an advisor to help facilitate the various stages of the outsourcing process, especially if you do not have internal executives who have deep experience of outsourcing evaluation. Beware of any advisor which fails to tell you any of the points above. You must make sure you use one which is going to do more than merely facilitate a transaction, and can talk from experience about how to avoid making these types of mistakes. Get them to tell you how they can help you work through these issues, and ask them to share examples of their client work and research that highlight best practices for outsourcing evaluation.
Third-party advisors play a role in nearly all significant outsourcing transactions today. The AMR Research article "Choices Abound for Outsourcing Advisory Services" discusses the advisors in more detail.
And this is only the start of the journey
Remember, these potential pitfalls mentioned above are only the start of the outsourcing process. Once you get to the point of developing a business case, the issues become a lot more tactical until a transaction is reached, when a whole new set of challenges open up, which we will be discussing more in AMR Research's agenda this year.
Yes, outsourcing can offer firms cost savings and the opportunity to add rigor and standardization to their processes. However, if you don't go about evaluating it correctly, you may never get the chance to find out.
Posted by Warwick Davies on Tue, Jun 16, 2009
By Phil Fersht, Director of Global Business Services & Outsourcing Research, AMR Research & Authors of "Horses for Sources" http://www.horsesforsources.com
As analysts, it's easy to get excited with high-growth markets, but supply management BPO's different.
While the market has grown exponentially, and a 30% increased expenditure last year is eye-opening, the nature of these engagements doesn't give us confidence that this market will sustain its growth trajectory unless customers think beyond short-term labor arbitrage, and service providers introduce significant process and technology enhancements to the early adopters to help them optimize their delivery. This "lift and shift" model could well result in customers losing more than they save.
Why are we arriving at these conclusions?
Our research study of the supply management BPO market reveals the industry surpassed $1.2 Bn in expenditure for the first time in 2008, at an annual growth increase of 30%, with 47 new engagements signed. The core reason for this uptake is the increased availability of low-cost offshore services for procure-to-pay and strategic sourcing support, with 72% of services being delivered from India for largely North American and European organizations. This was barely 20% three years ago, which reflects the rapid change in this market toward an offshore-supported delivery model.
This low-cost labor arbitrage is enabling new contracts to be established with limited upfront costs. Several new engagements have been executed with immediate cost reduction, with the service provider streamlining the costs over the course of the contract. In past years, many enterprises evaluated supply management BPO options and were put off by the upfront investments in technology to optimize managed spend. But now firms interested in short-term savings can take the plunge without the price tag. While such myopic behavior can result in serious future ramifications, it's a reflection of today's corporate attitudes to slash costs immediately and delay longer term business optimization strategies, such as rolling out better procurement technology available in ERP systems and investing in lean process transformation.
Eighty percent of all current supply management BPO engagements (see figure below) are focused purely on service providers providing staff and rebadging customer employees to deliver process work, with no enablement of the underpinning supply management technology. While this can deliver some short-term savings to the customer through lower cost labor, it's challenging to transform a global process effectively without tying it to the underlying technology workflow. If the customer persists in a process-only global operating model, the chances are resulting inefficiencies through managing remote staff will eradicate these initial savings over time. Moreover, the service provider will struggle to develop delivery models it can use across multiple clients if it fails to develop its own technology-enabled supply management workflows. Like all types of people-centric BPO activities, if one service provider is only making money providing cheap labor, another will eventually come along and undercut the price even further.
Procurement Technology Strategy for Supplier Management BPO engagements
The key is for both companies and their service providers to develop their technology strategies and platforms at the same time they're developing their BPO strategies. This will enable the customer to develop more efficient process flows that are tied to the technology platform. Both are essential if customers are going to reap cost savings through better managed spending in the future. In more mature BPO areas, such as finance and HR, most of today's engagements now entail some degree of technology enablement to move the work into an externalized outsourced environment.
Even though companies may be saving a few dollars now through low-cost labor, these costs will sprout back if they fail to follow through with better processes and technology. We believe that if companies fail to follow this more diligent approach, this aggressive growth will quickly slowdown as too many buyers end up spending more than they hoped they would save. The reality is that once costs creep back in, the a trend to backsource supply management processes may begin.
I'd love to hear your views on how you see this space developing and what needs to happen to get beyond these teething problems: pfersht@amrresearch.com