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2009 - New year, new challenges, new opportunities

Chris Nuttall
PA Consulting Group
Inside Sourcing
1 January 2009

With a global recession biting, the environment for shared services/outsourced operations and services, both as buyer and provider, remains tough. Yet, failing to diagnose the challenges or proactively exploit the opportunities will exacerbate the effects of recession. How can organizations correctly diagnose their challenges and exploit the opportunities to emerge from recession fitter and smarter?

Diagnosing the key challenges

Customer focus/service. Many shared services organizations face significant challenges in maintaining appropriate customer focus, expectations and service. Often, customer surveys fail to pinpoint key pain points, and customer sophistication is increasing rapidly. Many providers have grown too fast, struggling to maintain service standards. Customers have not always been vigilant in managing to agreed service levels.

Financials. Cash flow challenges – operating, investing and financing – remain front of mind, especially defining levels and timing of desired cash flows and managing the right cash flow mix. Budgets are lower, and the key challenge is not just managing with less cash but balancing cash inflows and outflows effectively.

Capabilities. Managing shared services and outsourced organizations requires specialist skills, knowledge and experience. Many organizations struggle to identify the right talent, and/or under-invest in training and development to create a high performance team of skilled, experienced and motivated people with up-to-date knowledge and the right capabilities. Many providers face resource and skill crunches, and continue to experience capability churn.

Knowledge management. Long-term outsourcing and shared services arrangements result in a loss of institutional knowledge: buyers lose knowledge, and providers may not share it, thus eroding customers' and providers' abilities to effectively manage their relationships.

Market. As the number of large service providers decreases, market power is shifting to the largest providers. A proliferation of smaller, viable, providers is creating challenges around provider discovery and governance.

Governance. In a single-provider environment, identifying the responsibility for a service outage, process deficiency or software bug is straightforward. In a multi-provider environment, this remains challenging. Many customers and providers have difficulty in teaming and developing appropriate inter-relationships and trust to deliver a joint business outcome.

Enterprise-wide and portfolio. Executive management can be uninterested in outsourcing and shared services, especially if enterprise benefits, costs and risks or strategic alignment are not clear. Many initiatives are managed as one-off arrangements, rather than as a portfolio, resulting in lost synergies and increased risk.

Exploiting the key opportunities

Protect cash outflows, go beyond cost savings. Executives focus on reducing working capital and delaying investment. But they also seek greater value such as access to great talent, service excellence, innovation, vertical expertise, process maturity and contractual flexibility. Opportunities to enhance revenue, improve capital deployment and improve overall cash flows will convince business leaders of the case for change.

Increase workload scope/complexity. In addition to horizontal business processes (e.g. IT, HR, F&A), there are significant benefits in leveraging outsourcing and shared services for complex, specialized and vertical business processes (e.g. R&D, customer/market analytics, engineering, product development, manufacturing and sales support). Many offshore operations handle low-volume, knowledge- and policy-based services, not just high-volume low-cost transactions.

Bring service delivery closer to the customer. Although remote delivery and offshoring continues to see rapid growth for back-office functions, key services are being brought closer to the customer, thereby improving customer awareness, service and loyalty.

Institutionalize a hybrid operating model. Hybrid models use an optimized combination of flexible delivery options including in- and out-sourced services delivery, captives and third-parties, with the ability to direct work to any delivery center at will, without a painful change process. A majority of outsourcing initiatives include on, near and offshore delivery to take advantage of lowest cost and access to expertise at an appropriate risk.

Leverage multiple service providers. By distributing work among multiple providers, customers can create a competitive supply-side dynamic, managed through robust governance. A consequence of more competition is smaller (in size) and shorter (in time) initiatives/deals as customers focus on business-specific, rather than enterprise-wide, processes.

Develop more strategic business partnering relationships. Many providers focus on strategic account management to make increased relationship-specific customer investments. Many customers seek new commercial models to engage with providers more strategically.

Enhance buy-side competency and capability. Many organizations are implementing their second, third or fourth generation of outsourcing and shared services strategies. Buyers and providers can enhance their competency and capability through "learning-by-doing", running pilots/trials that can ramp up rapidly, if successful. 

Chris Nuttall is a Member of PA's Management Group and a Leader in Sourcing and Shared Services.

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