Mitigating Outsourcing’s Biggest Risks for 2006 | Article

pitfalls of outsourcingBy all accounts, both BPO and ITO will continue to grow in 2006 in the number of deals and size of contracts. But the complexities involved in today’s deals set the stage for ever-increasing risks.

We spoke with some of the world’s leading industry experts to get their insight into pitfalls that await buyers in 2006. They identified four primary areas of risk along with strategic and practical recommendations for ensuring success despite risks.

Risk Area #1: Multisourcing

Nearly everything takes a back seat to the risks enveloped in multi-sourced environments. For any outsourcing relationship to be successful, the buyer and service provider must ensure their interests are continually aligned. Alignment is never a natural happenstance; it must be crafted and nurtured. In a scenario where there are multiple providers, alignment is even more difficult to achieve. Each provider has separate interests and risk aversions; and they differ in their attitudes toward how to handle change, let alone their methodologies for decision-making.

For buyers, multisourcing adds a level of complexity in making sure everybody plays nice and ensuring consistent, end-to-end process support and anticipated results.

Buyers that manage the challenges in a multi-sourced environment achieve greater benefits from their outsourcing investments, not only because of the best-of-breed approach toward service delivery, but also because of the synergy that the providers can forge. But the inability to manage the increased complexities in a multi-sourced approach to services will prevent many buyers from being able to optimize their environment and can actually cause multiple relationships to fail.

As Joe Hogan, Vice President of Managed Services at HP, explains, “If the buyer is outsourcing to achieve an end-to-end solution and because the company really wants to be agile, multisourcing can achieve that but also makes the opportunity more complex. Not understanding that complexity is a big risk. Not understanding the necessary skill sets and processes they need to manage multiple outsourcing partners is also a big risk.”

Donny Cross, Vice President, Solution Architecture at ACS, stresses that multisourcing requires sophisticated models and more metrics. In addition, it necessitates increased overhead in terms of increased staffing to manage the relationships and the overall environment as well as increased meetings and status discussions. “Multisourcing requires another layer of governance,” he states. “The smarter clients know this and choose one methodology for governance and utilize it across multiple suppliers.”

In many enterprises, the individual who ran the IT shop prior to outsourcing (we’ll call him Fred for this article) is the person selected to manage the new relationship. The enterprise is comfortable with Fred and his IT skills. But unless he has a very high-level set of management skills and a great deal of experience with outsourcing relationships, having Fred manage an outsourcing relationship in a multi-sourced environment is a limiting factor.

Hogan advises, “In a multi-sourced environment, Fred should transition to the outsourcing partner, or he should be transferred elsewhere in the buyer enterprise. Fred needs to be replaced with someone who has the requisite multisourcing skills or, at a minimum, the company needs to invest in training Fred to think and operate in a different way.”

Chuck Pol, BT’s Americas President, says an enterprise needs to be consistent in managing its various suppliers. Even more important, he underscores the need for buyers to ensure that, where there is any overlap among the suppliers–that is, when they are pulled from one particular tower into another supplier’s tower–the overlap is specifically managed in processes, procedures, and programs. “Sometimes the overlap isn’t taken into account, and it results in finger pointing,” he says.

Phil Smith, Vice President of Portfolio Management for Global Outsourcing and Infrastructure Services at Unisys, agrees. His firm uses a methodology called 3D Visible Enterprise, which is basically a three-dimensional view of the business vision and operations model that encompasses strategy, processes, applications, and infrastructure. “We use the 3D-VE approach to help clients build their strategy and key measures, then use it to identify what the integration points are. If you don’t identify these elements and what they are going to look like on input and output, you won’t get clear visibility into business outcomes. In the multi-sourced world, there are always shades of gray; the more black and white you make it, the better off you are.”

Risk Area #2: Moving Offshore

The upshot of our discussions with experts is that global service delivery is now a fact of life, a tool that enterprises must use to accomplish many of their goals. However, most buyers are still not certain about how to use the tool to ensure the anticipated return on investment.

It starts with asking: What could we do if we move work offshore? What is the vision? Then it narrows down. Kevin Campbell, Global Managing Director, BPO Businesses at Accenture, says buyers should handle offshore arrangements in phases. “Start with an ambitious program, but do it in pieces so you can do formal lessons learned and take advantage of that. Gain experience as you go and get advice along the way,” he says.

Cross at ACS cites a key risk: enterprises underestimate the effort required to move work offshore. “Often, they don’t consider and map the entire workflow around the business process or function they’re moving offshore. That puts them at risk of breakdowns in the process.”

Mike O’Hara, Senior Vice President and Senior Managing Director of IT Services at ACS, adds that the lack of process mapping is especially crucial if there is process reengineering going on at the original domestic site of the function. “Without a map, this would offset any savings they might achieve by moving the work offshore in the first place,” warns O’Hara.

Moreover, cost savings are at risk without the process reengineering. “You really need to try to eliminate more work than you move offshore for an arbitrage standpoint,” he advises. ACS’ methodology, “Lean Six Sigma,” helps its clients knock out unnecessary steps in a process to make it as efficient as possible and focus on quality and eliminating process failures. Lean Six Sigma combines Lean Thinking practices with Six Sigma techniques to gain continuous improvement.

Noting challenges clients have had with offshored processes before turning them over to ACS, Cross says failing to analyze and test all the interfaces before moving work offshore is a significant risk. “All interfaces going back to the help desk, common tools, the scheduling group and DBAs, for example, has to be seamless.” Inadequate training of the offshore staff is another risk, but is easily mitigated by bringing them to the domestic side for training on the processes and tools.

Even so, ongoing communications are crucial. The people who have done the best at this over time have learned it takes place through the phone, videoconferences, and regular scheduled meetings. But it’s a risk to assume these can substitute for visits back and forth to both shores.

It’s also a risk to not recognize that managing by phone and videoconferences requires different skills and different types of communication. Campbell at Accenture discloses a rule of thumb. “We advise our clients in videoconferences and in personal visits to make sure they keep explaining what’s happening in their business and what the issues are. The key to quality is end-to-end understanding and tracing what’s happening back to what’s important to the client.”

Risk Area #3: Structuring the Deal

“The reasons to outsource today are changing, and buyers need to make sure they are aware of them,” Hogan at HP points out. “If you’re just doing it for costs, you are not going to be able to stay up with what’s going on.” Chief among the reasons to outsource today is transformation in order to drive business growth, according to Pol at BT. “Focusing on costs drives away innovation,” states Pol.

“Buyers need to be savvy about what they buy and consider a broader view of performance outcomes than just costs. There is risk if they fail to do that,” claims Don Richards, Managing Director, Application Outsourcing at Accenture.

On the surface, pointers on how to structure an outsourcing arrangement might seem basic and deserving of attention from only “newbies” to outsourcing. Not so. Today’s deals are increasingly complex in the value opportunity that can be won . . . or easily lost if not approached wisely.

Not managing expectations around the benefits and goals is a major risk. ACS’ O’Hara explains that looking at what is truly achievable will eventually require involvement, contribution, and risk on the part of the client’s business units. For example, server consolidation is one tactic toward achieving IT cost savings. But true consolidation will involve looking at applications and “turning things off to achieve the maximum consolidation and savings.” There is a risk for setting artificially high expectations if the client doesn’t fully realize it will need to participate downstream in planning efforts at the business unit level at some point in time.

Pol at BT says inadequate governance is a big risk and suggests buyers track and measure success measured around expectations.

But it’s easy for expectations to go askew. More and more deals are being structured by a negotiation team and transition team on the client side–who then go away and turn things over to a governance team. “In reality at that point, it’s like wiping the slate clean,” comments Cross at ACS. “The challenge and risk is, the new team doesn’t understand the deal the way it was architected up to that point. And unless you have a really tight contract, there will be a lot of things open and subject to interpretation.”

Risk Area #4: Choosing the Right Partner

Traditional methods of mitigating risks in outsourcing always include due diligence as to the other party. That has not changed, but the need for it has increased. “It’s a very crowded marketplace. There is a lot of ambiguity and a lot of service providers saying the same things,” warns Paul Jameson, Vice President of Marketing and Strategy at Getronics. Buyers need to check references and loyalty ratings (the percent of non-renewed contracts).

There is always a reason for turnover rates more significant than, perhaps, five percent. Why did the clients leave, even if the supplier achieved the contracted cost savings? It’s more than just some outsourcers seeking to be the low bid–but at the sacrifice of quality.

Mike Jones, President and CEO of (i)Structure (currently pending acquisition by InfoCrossing), says one root cause of this phenomenon is that clients using niche providers, who trust the providers and like doing business with them, have been asking them to help with other projects that “are not their sweet spot. Every time their customers need something new done, they turn to these companies to help them. A niche provider doing maintenance, for example, was asked to do a desktop rollout, and they had to turn to us to help them.” Asking a provider to perform services beyond its core competencies is a big risk.

In outsourcing, buyers can not ignore quality and expertise. “If you only pay a nickel for your car, but it can’t start in the morning and get you to work, that’s a bad situation,” says Jameson.

High on all our experts’ lists of potential risks is the effort to establish a true relationship. “The better you’re tied in on a partner basis, the better you can anticipate what the on-going risks are going to be and deflect any potential issues that are going to come up,” claims Smith of Unisys.

Bottom Line

Ultimately, effective risk management goes hand-in-hand with outsourcing ROI. Even though outsourcing has been a business tool for many decades, the risks (but also the rewards) are higher than ever. Planning ahead and building a sound outsourcing strategy for the complexities at every step of the way is critical to success.

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