Outsourcing is now a well-established option for companies seeking help in developing or running their complex IT applications. Many organisations even feel comfortable enough with the concept to consider a supplier based overseas.
But despite years of experience – and some notable successes – too often these partnership contracts fail to deliver.
To examine how best to utilise the services on offer, and gain insight into what happens when outsourcing goes wrong, Conspectus invited four industry experts to give their views on current trends in the market.
We spoke to Raman Roy, CEO of Wipro Spectramind; Ryan Powell, an analyst at Datamonitor; Ross Harling, managing director of consultancy firm Atticus; and Jonathon Hogg, a member of the management group at PA Consulting.
Success factors
We began by asking our panel to reflect on what recent years have taught companies about how to handle outsourcing successfully.
In Ross Harling’s view, few organisations have grasped more than the most basic lessons. “Outsourcing experience is certainly teaching us how to avoid repeating mistakes in procedural and contractual terms, but we are still on the learning curve as far as handling processes, people and business outcomes are concerned,” he said.
“Even though outsourcing has grown very big, very quickly, I question whether one can yet describe it as a ‘mature’ market. This is particularly true when judged by the amount of contract litigation, disappointed customers and business executives who tell us that ‘better uptime availability’ is doing nothing for their bottom line.”
Part of the reason for this, according to Ryan Powell who covers this market for research firm Datamonitor, is that a number of firms have lately adopted a ‘me too’ approach to outsourcing. Because they have seen it work for a competitor, they think it will be equally successful in curing their particular woes.
Powell says it is vital for users to look before leaping into outsourcing. While it can certainly deliver significant benefits to the business in the form of labour arbitrage and economies of scale, it is simply not suitable for everyone.
Powell also warns against outsourcing core competencies. Companies should weigh up carefully which functions and processes they can realistically place with an external agency, making sure not to outsource anything that represents critical and value-added services within their organisation.
“Finally, companies need to seek to genuinely partner with their provider. Frequently, outsourcers tell Datamonitor that they are not interested in running ‘your mess for less’ operations. They prefer to bring real value to the table in terms of their delivery expertise and industry knowledge,” Powell said.
To do this, both parties have to think hard about what should be outsourced and how.
Jonathon Hogg – who specialises in advising companies on sourcing strategy, conducting market soundings and managing the procurement process – believes this must start with an early declaration of mutually agreed objectives, so both the outsource provider and the customer organization have a stake in the other’s success.
This is key to adopting an approach which fosters and sustains a partnership relationship. Reward mechanisms can then be aligned with the desired partnership ‘behaviour’ to provide incentives for all parties. There also need to be clear and detailed service level and operating level agreements.
Most importantly, not all the work should fall on the shoulders of the outsourcing supplier. Hogg emphasises that the client needs to establish a dedicated service management organisation (SMO), responsible for managing the provider relationship professionally.
“The client will also require the ability to manage cultural and behavioural change within their organisation, in order to take advantage of the technology on offer. Companies who outsource have to accept loss of end-to-end control of processes,” Hogg said. Achieving this calls for excellent change control procedures, so that decision making is transparent and staff are clear about what is happening.
This requirement is particularly important if the outsourcing provider is based at a remote location, perhaps several thousands of miles away overseas.
Offshoring
Raman Roy has many years’ experience of providing ‘offshore’ outsourcing services from India, where he has been a pioneer of business process outsourcing (BPO).
He says companies considering this option should think carefully about how to handle the knowledge and cultural gaps involved. “The most elementary needs should be identified and addressed so that the service provided is, at the minimum, up to the same level as the domestic inhouse service of the company who is outsourcing in terms of competence and capability. To do that usually requires looking at the variations between the home country and the offshore service
so as to be able to fulfil the needs of the UK market,” Roy explained.
These variations are likely to be both practical and cultural. For example, a UK company seeking support for a real-time service clearly needs to be sure the offshore supplier will have staff available to cover out-of hours working and transport available to bring them in.
Again, cultural concepts and nuances which are taken for granted in the UK may need to be re-interpreted or explained to staff based overseas. To date, the most common use of offshore services has been to provide call centre support. But Roy, who was involved in a major offshore deal for General Electric which has no such element, points to other opportunities.
“For real-time work like call centres, you have to educate staff on the nuance of the process. But for work which doesn’t require real-time delivery, the training needs are lower, and given the high calibre of staff, their job is easier if it is non-voice related work. We are seeing growth in areas such as financial services transactions, general accounting and payroll where there is no direct customer interaction, but plenty of paper pushing,” Roy said.
His view strikes a chord with Hogg, who also believes offshoring is most appropriate for repetitive transactional processing where both technical skills and technology are brought to bear.
“It’s already heavily used by financial services for back-office transaction processing, and we will see more and more BPO offshoring within HR and finance, including HR payroll administration, and employee, training and recruitment administration,” Hogg predicted.
Harling is equally enthusiastic about the prospects, foreseeing a time when location will become largely irrelevant in providing outsourcing services. “Offshore software development and data processing have been available for some time. However, the recent expansion of cheap, high-capacity global networks means many other IT and business operations will become location and time independent,”
Harling said. “Setting aside security and geo-political factors, choosing an operational location in the future will depend more on its available skills, technology links and cost structure than anything else.”
Powell recognises that call centres are easier to offshore than some other choices because the services are relatively standardised. As a result, call centre outsourcing has become a commodity business in recent times.
Industry-specific back-office processing is a more complex challenge, he said, but ultimately more rewarding for client and supplier alike. “A number of offshore markets have world-class solutions in place that have invariably been developed by domestic providers that are now looking to get a share of the global offshore outsourcing pie for themselves,” Powell commented.
BPO
Many of these solutions will embrace business process outsourcing – a concept which divides our panel.
Hogg pointed to a recent BPO world conference in New York which suggested that HR process outsourcing is still in the early adopter phase, although financial BPO is further up the experience curve. “It’s not a risky concept, but it does require organisations to realise where their core competencies lie – and to enter into outsourcing with their eyes open and to accept that they might require help from those more experienced to guide them through the outsourcing process,” Hogg said.
“Objectivity over advice is important as there is lots of partisan advice around. Even some of the auditors have alliances with outsourcing vendors.” Companies who opt for BPO deals also need to recognize they may need to modify the rest of their business processes, in order to align them with the outsourced element. That could call for major changes within the newly-shaped organisation, Hogg said.
In contrast, Powell maintains that BPO is taking off rapidly. “Many people count call centre outsourcing as one element of BPO. Certain industries are more disposed to BPO, whereas others are constrained either by regulations or by sensitivity to risk. The idea of getting another company to run parts of the operation that involve complex technologies and highly skilled staff turns some organizations off,” he said.
For Harling, many of the problems with BPO can be traced to a lack of understanding about how the theory will work in practice. He makes the point that within manufacturing, it is now taken for granted that the company which designs and markets a product can be entirely separate from the one which makes it. Indeed, they may not even be on the same side of the world. “For business and service industry processes, this horizontal specialisation is more difficult to achieve successfully. For some time, we have been working with a number of companies to develop new methods and technologies that can deliver the benefits of this approach to a wide range of business and services processes,” Harling said.
“As well as cost savings, this generates a much clearer focus for all parties. It means that infuture certain organisations will excel by determining the propositions and processes that best attract and delight customers. Others will succeed through specialist management in the quality, cost and productivity of business process operations,” he added.
Roy believes this will be an evolutionary process, where companies experiment with a number of approaches before settling on BPO as the solution to their needs.
He likens the situation to the early days of the automotive industry, when suppliers like Ford grew their own trees to provide the right wood for manufacturing car dashboards. “Today no manufacturer would dream of trying to do everything required in that way – they would concentrate on their own strengths. That early approach has led to specialisation and to the development of discrete processes which can be taken over by third parties,” Roy said.
“I believe it will be a similar process with BPO, as long as suppliers can demonstrate they are still able to deliver the same level of quality as the inhouse service provider. Companies will start by handing over discrete applications or small elements of a process as they go through a phase of testing the concept. Ultimately, however, they will graduate to end-to-end processes.”
Benefits
The growing interest in BPO is a recognition of the more subtle benefits which outsourcing can deliver.
Traditionally, companies have focused on potential improvements such as cost savings and guaranteed service levels, but our panel suggest that their thinking is now focused on more ambitious goals.
“Cost is likely to initiate the drive towards transactional outsourcing – companies are looking to find a low-cost, high value solution. It’s similar to the process whereby a lot of manufacturing has moved to China. So long as the quality is good, the lower cost base is attractive. And there are also cases where skills are not available locally,” Roy said.
But simply carrying out the same activity at a cheaper rate, while obviously appealing, is by no means the whole story. Companies achieve early gains from such an approach, but are less likely to secure longer-term wins.
“Even the biggest IT department’s spend is relatively small in the total corporate balance sheet. Cost savings in one or two IT activities do not make a major overall difference. What business managers are looking for is service providers who can also help them deliver better business outcomes, identify new market opportunities and reduce total operational costs” Harling said.
This may be easier said than done, since both the customer and provider must have considerable organisational maturity and be able to define and operate strategic partnerships.
For the moment, Harling reckons these kinds of business alliances are far more widespread and successful in Japan and the US than they are in the UK or Europe.
Hogg also feels there is a potential discrepancy between companies’ ambitions for outsourcing and the reality of their experience. He sees the key motive for outsourcing transactional or non-core activities (such as HR, finance or IT) as being able to focus those functions on where they can add most value to the business, rather than their traditional administrative role.
Meanwhile, outsourcing vendors tend to drive change hard and fast, and are often prepared to tackle issues that the client organisation might shy away from.
And while few individual HR functions, for example, can afford to buy and implement a global PeopleSoft or SAP HR package, by outsourcing they can gain access to this technology, with all associated costs spread over the X years of the contract. This ability to amortise change and draw on the outsourcer’s systems investment is a powerful argument for many.
“However, outsourcing implies a significant change in culture, and the acquisition of new skills and competencies by those functions which have had activities outsourced. With the administrative elements taken away, HR or finance has to find a way to transform the left behind organisation into a more strategically aligned
contributor,” Hogg said.
For some organisations, this could be a step too far. They may be content with the more tangible benefits of outsourcing, as outlined by Powell: “Outsourcing moves the organisation from a capital expenditure model to an operational expenditure model, thus making costs much more transparent.
“Other benefits include gaining access to multi-lingual staff, if the outsource provider has operations overseas; being able to leverage leading-edge technology that would cost too much to buy inhouse; being able to take advantage of tax breaks and government subsidies that are available in some countries; and, finally, the opportunity to deliver 24x customer service and back office operations.”
Avoiding failure
Translating this potential into real success can prove difficult. Recent corporate history is populated with examples of outsourcing deals that have gone sour – with government and the public sector providing some particularly spectacular failures.
For Roy, the problems lie not with the basic concept, but in deciding how to execute it. “It’s usually a case of choosing the wrong activity to outsource or the wrong partner to handle the service. Bad planning is another difficulty – there should be good communication between the outsource provider and the client so that problems are picked up early,” he said.
Harling says the root cause of any trouble is “mismatched understandings and expectations”. Often the policies, practices, processes and business customs which a company has habitually employed for years are never codified, and so are left vague and unclear to any outsourcing provider.
This can be especially challenging in the public sector, where misunderstandings are compounded when strategic management objectives become embroiled in short-term political, economic or social agendas.
“Unrealistic expectations are also a factor. For example, management can believe that the technological skill, promised efficiencies and commercial pragmatism of their chosen outsourcer will simply ‘rub-off’ on their colleagues to produce some kind of transformational change throughout the remainder of the organisation,” Harling said.
“The final and most important reason for failure is the approach taken to the people involved,” he said. “Without suitable change diagnostic and support tools, too many managers still rely on ‘sheep-dip’ change methods and pray that a free project coffee mug or T-shirt will assuage all the concerns of the workforce.”
Hogg too identifies the inability to manage cultural and behavioural change as a key factor in outsourcing disasters, along with a failure to set up an internal service management organisation to control the relationship with the outsourcing provider.
Many difficulties can be traced back to the early stages of any deal, Hogg commented – poor and adversarial negotiations can produce win lose contracts, plus failure to develop clear pricing schedules and change control processes.
“Control over the outsourcer is a prerequisite for success, while failure to adequately define responsibilities and the allocation of risk and reward will lead to tensions. Companies also have to consider how they will change their own competencies in order to drive value-adding activity once certain processes have been outsourced,” Hogg said.
Powell believes companies can rush too quickly into outsourcing, with some projects ill-conceived and poorly defined and many contracts badly managed.
These general pitfalls can be compounded by the special circumstances facing public sector organisations. “Working with the public sector does present particular challenges – there is a cultural disconnect between vendors and the bureaucracy of government, and the public sector is especially risk-averse.
People panic excessively when things start to look like going wrong,” Powell said. However, although some initiatives may become derailed along the way, our panel agree that for many companies outsourcing now offers a route to substantial benefits.
However, although some initiatives may become derailed along the way, our panel agree that for many companies outsourcing offers a route to substantial benefits.
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