Twelve Best Practices to Create a World-Class Outsourcing Case | Article

Best Practice Ahead road signYou’ve been in this meeting, haven’t you? Outsourcing options are on the table and everyone’s got concerns. The chief information officer already has too much to do and not enough people. Finance doesn’t see enough savings. Sales wants differentiators. Risk and compliance people chime in about service levels, reporting and penalties.

It doesn’t help when, as Chris Niccolls of Bear Sterns reported in the Project Management Association’s Journal in 2011, as many as half of all outsourcing agreements fail because of inadequate planning and analysis. This happens because sometimes companies incorrectly identify a process as a non-core competency. Or, an organization may fail to understand the change in resources and talents needed internally. Executives may have set incorrect goals or misinterpreted performance measures. Without question, failures have also occurred due to selecting the wrong provider.

Those risks are reflected in the five most common objections to outsourcing, which include:

  • Increased costs to manage the outsourced processes
  • Transportation and logistics
  • Loss of control
  • The creation of future competition
  • A negative impact on employees

Here’s how to deal with these objections and create a world-class outsourcing business plan.

Overcoming objections, avoiding risks

Step 1: Create the scenario analysis. Overcoming objections and avoiding risks is a process that begins with a scenario analysis. You must conduct research and make reasonable, educated assumptions to clearly present the anticipated benefits associated with the outsourcing project. While you may know factual, real data (number of employees, quantities manufactured, production costs per item, shipping costs and even benchmarks of top performers), you must make allowances for potential variation. Sensitivity to these variances allows you to more thoroughly analyze the possible results of the outsourcing initiative.

An analysis must clearly explain how each characteristic contributes to a specific operational effect. You must define the term benefit to create a great outsourcing business case that can positively affect the bottom line.

Step 2: Know the best and worst case scenarios. This awareness of not only the most likely results but also the best-case and worst-case scenarios is a crucial element in creating a world-class business case that is respected, objective and compelling. With this information, CEOs can more easily determine whether the entire solution (or even a single component) is worth the full investment, even if all worst-case scenarios actually happen. (Not accounting for the worst-case scenarios can leave companies with substantial losses and cause everyone to question how an outsourcing project with a great projected ROI failed to meet expectations.)

Step 3: Include details. A great outsourcing business case also includes details supporting each benefit — factual data, educated and reasonable assumptions, operational performance indicators, timeframes, etc.  Then, the business case inserts each element into a quantifiable formula to arrive at the anticipated financial impact (typically dollars per year and capital deployment targets).

If a CEO questions the purpose of a particular outsourcing benefit, the business-case builder must quickly and accurately justify its impact on the company’s bottom line. Without a clear explanation of each cause-and-effect relationship, executives may discard key benefits of outsourcing, which can greatly affect the credibility of the proposed solution.

Step 4: Determine the operational performance indicators. The operational performance indicator or OPI (sometimes called key performance indicators or KPIs), is that factor whose delta (the difference between real current state costs and the envisioned costs) ultimately demonstrates the positive impact of the potential solution. This is the key factor to use to construct a specific benefit formula. Without credible detail and clear definition, the OPI can quickly become lost in the assumptions used in the formula of any one outsourcing benefit. And without clearly identified OPIs, CEOs will not have the ability to determine the validity of a specific outsourcing benefit or measure the progress of an implemented initiative.

Identifying precisely which factor measures the success of a particular benefit is crucial to understanding the business case. For example, outsourcing the accounts receivable function can drastically reduce the staff needed to maintain your current AR infrastructure. But what is the OPI? It could be the number of hours staff spent maintaining posting and credit memo reconciliation levels annually. But it could be something else.

Step 5: Determine the cultural factors. Each company has a favored approach to business cases and capital deployment targets and even a season when the organization is open to such conversations. These are not soft components; they are serious cultural factors any excellent business analyst must factor into the timing, socialization and approach of a world-class business case.

Step 6: Calculate the costs. Almost any outsourcing discussion will eventually turn to upfront costs, as more than 96 percent of outsourcing initiatives require initial investment, according to benchmarking data reviews with over 200 participants in the UNC Chapel Hill’s Treasury Executive Series conducted in the spring of 2012. “Spend money to make money” has been the hallmark of high-yielding outsourcing and co-sourcing projects. Even with initiatives that spread costs over time, there is always an investment in time and training, which can be significant. There may even be capital outlays.

These upfront costs may prevent significant savings in the short term. Savings do come, including:

  • Increased throughput (a result of the economies of scale gained from outsourcing to a larger third-party)
  • Improved timeliness
  • Reduced errors
  • Enhanced and faster customer service

Still, it’s undeniable that while outsourcing makes money, it takes money.

Step 7: Figure out the risk of no investment. Often overlooked, but just as critical in developing a great outsourcing business case, is the “risk of no investment” outcome. Speak up! Demand to consider the risk of no investment. If the company doesn’t make this investment, what could happen to the company’s bottom line? Could the company lose customers? Market share? Could it avoid some future costs if it made the investment today?

To clearly explain all the potential risks, a great outsourcing business case must not only include the possible risks of moving forward but also the economic risks of not investing. These risks can include a lost opportunity to gain a competitive advantage over a competitor, resultant fines from failing to comply with new regulations and increased operational and manufacturing costs.

Step 8: Makes sure the solutions aligns with company strategy. Good business cases provide a simple justification of a particular initiative, often resulting in a positive return on investment. However, if the proposed solution does not align with the company’s strategic goals, the ROI becomes irrelevant. In order for the CEO to deem a potential outsourcing solution viable, it must be aligned with the company’s and the business unit’s strategic goals.

Step 9: Understand your in-house operation. Don’t overlook a vitally important element: an outsourced process is only as effective as the in-house operation it replicates. When a BPO provider “handles your mess for less,” your savings are limited to those created by simple labor arbitrage. To be truly effective, BPO has to go beyond moving work from one locale to another, the “lift-and-shift.”

Step 10: Optimize the business process. BPO providers with experience in a wide range of industries have the ability to analyze and optimize clients’ business processes. Providers can become trusted consultants; when that happens, outsourcing is no longer simply a commodity. Companies that address the root causes of process inefficiency can make changes to yield improvements that enrich profitability for the long term. This is when the sought-after value add occurs. This is you reach Gartner’s Magic Quadrant.

An assessment of a client’s business process should include an analysis of existing operations and identification of all document streams within and across departments. It examines all bottlenecks and redundant activities. Newly designed processes should address the needs of all affected teams and departments but not be hindered by the inefficiencies of departmental silos. Don’t be afraid to ask the tough questions, such as whether you could eliminate a “required” activity.

Step 11: Get buy in from everyone. For the new process to move forward, you need approvals beyond the procurement team. You must gather cross-functional feedback and buy in. The actual transition to the improved process can be tricky; you must map the entire process. Confidentiality, security, compliance and attention to detail are critical. For some, the transition to a fully-optimized process is immediate; others implement improvements gradually.

Step 12: Create systems for on-going management. The final step is to put systems in place to manage ongoing process improvement efforts. The team must monitor activity and share frequent reports, reviewing performance indicators on a set basis to yield a transparent view of the improved process. This way, employees can suggest enhancements that the company can implement quickly.

A great outsourcing business case goes beyond ROI: It clearly explains how an outsourcing solution is aligned with both the business unit’s technology and business strategies. It demonstrates how this alignment will further the entire company’s ability to attain short- and long-term business goals.

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