Businesses today are looking critically at their companies to understand what is strategic in their organizations. “That is what they need to manage to insure their future success. Everything else is peripheral and should go to an outsourcing supplier in the commodity marketplace,” says Richard Nichols, managing consultant for Compass Management Consulting Ltd., an outsourcing consultancy in London, England. The company is part of the global consulting group Compass America Inc. which has offices in Chicago, San Francisco and Washington D.C.
In Europe, the first business processes to be widely outsourced were security, catering and building maintenance. Today, with the rise of the Internet, BPO outsourcing “is moving up the value stack,” observes the analyst.
Back office is a popular area to outsource nowadays. Banks in Europe are outsourcing back office functions because of the cost savings. Nichols says 10 years ago European banks “just had to open their doors to make millions.” That’s not true today. Bankers have to know where every penny goes because competition is now global instead of local.
In addition, companies are outsourcing back office functions because their new† international customers are sophisticated shoppers who are demanding better customer service. “Some of the older companies can’t provide the level of service that is expected, so they turn to outsourcing as a solution,” says Nichols.
Lowering Costs While Improving Customer Service
Worries about lowering cost and improving customer service are also plaguing insurance companies on the Continent. They view outsourcing as a way to control costs so they can afford to compete in an international marketplace. Nichols says now there is government pressure for the insurance companies to provide better customer service to their policy holders after a series of widely publicized problems with outsourcing providers.
Companies are beginning to outsource their finance departments after determining they don’t add great value to their businesses. Nichols says outsourcing the day to day details of the finance department gives the chief financial officer time to focus on the company’s important issues that propel it forward in the marketplace.
European companies are also routinely outsourcing their human resources (HR) departments. Once again outsourcing allows HR directors to focus on their real job of determining what and who is important to the organization since they no longer have to concentrate on managing masses of people.
Government organizations in Europe are also moving to BPO outsourcing as an effective way to bring competitive performance into the public sector. Nichols says government agencies are outsourcing large chunks to global players like EDS and Siemens. Government ministers realized they would have to change their internal culture to incorporate competition. “Outsourcing short circuits that,” says Nichols.
Companies in Europe are facing an interesting conundrum when selecting an outsourcing supplier, notes Nichols. One option is to outsource non-core functions to a competitor who clearly understands the industry and who is doing well with the function in question. Firms leery about sharing their secrets with the enemy can join a consortium.
These newly emerging consortiums consist of several players. They include a venture capitalist who supplies the seed money, a software company that writes the applications to automate the process, and a management consulting firm that can institute the changes and perform the process on an on-going basis.
Nichols says while outsourcing is a powerful solution to the challenge of global competition, it is not a panacea. Companies new to outsourcing often have unreal expectations, the analyst observes. Nichols says paying attention to the basics of outsourcing will keep a company from entering a supplier relationship that is doomed to failure. He points out that a sizable portion of his consulting business includes working with buyers “who are unhappy with what they are getting from their suppliers.”
Nichols offers some straightforward solutions. First, buyers should only sign a contract they can live with. The two parties have to agree how their management teams will govern the relationship. Service level agreements are important to insure the supplier is delivering as promised.
The Importance of Risk Management
Many outsourcing contracts ignore risk management. This includes managing cost and quality as well as preparing for natural disasters. Nichols says Compass, while reviewing a major outsourcing contract, unearthed a “significant hole in disaster recovery.” This outsourcing contract was based on technology that lacked the recovery necessary† in case of fire or flood. Nichols says it is crucial that buyers insist on adequate protection† in case the unthinkable happens.
Outsourcing is not a trivial experience. “Outsourcing negotiations are not just about getting the right price or the right quality. It’s also about making sure the outsourcer can do nothing to damage your business,” says Nichols.
Lessons from the Outsourcing Primer:
- Outsourcing non-core processes allows executives in the outsourced areas to concentrate on the strategic goals of the company.
- Newly emerging outsourcing consortiums include a venture capitalist, a software provider and a management consultant firm.
- Globalization of the marketplace is forcing European companies to focus on cost savings and the need for better customer service. Older firms are turning to outsourcing to be able to compete.
- Don’t forget disaster recovery and risk management when negotiating an outsourcing contract.