For at least a decade, an outsourcing industry undercurrent has been that companies, wittingly or unwittingly, undermine outsourcing’s long-term value by pursuing short-term savings. A May 2013 survey by Consero Group LLC quantifies that perception.
Consero’s “2013 Shared Services & Outsourcing Data Survey: Facts & Analysis” study found a majority of shared services and outsourcing executives report that their companies may undermine long-term value by pursuing short-term savings from their outsourcing service providers.
Finding No. 1: Short-term goals can undermine long-term improvement goals
Specifically, 57 percent of the 42 executives who participated in Consero’s shared services and outsourcing conference indicated that their companies “often” or “sometimes” undermine opportunities to create long-term savings or other value in order to obtain short-term savings from their providers.
“Pursuing quick-fix solutions for urgent problems, instead of taking a long-term approach, is a tendency that arises in every industry. Shared services professionals, who are under ever-intensifying pressure to achieve growth and cut costs, are certainly not immune to this temptation,” explains Paul Mandell, founder and CEO of Consero.
In the outsourcing context, this phenomenon manifests itself when large companies opt to rely on a lowest-cost provider to reduce expense in the short term. In some cases, the companies knowingly forego the up-front investment in partnerships with more sophisticated providers that could yield transformative cost-saving changes (such as the transition of major functions out of the company altogether).
Mandell adds that in a challenging fiscal environment like the recent recession, “there is endless pressure to take any means necessary to boost the bottom line.” The pressure is certainly intense for publicly traded companies or private corporations with quarterly targets. “Unfortunately, sometimes these cuts result in the delay or abandonment of investments in technology or process improvements that would provide a more sustained or impactful benefit to the bottom line,” he explains.
Consero Group creates industry-specific events for senior-level executives. The goal is to help them improve their performance through intimate, invitation-only programs in a sophisticated learning environment with high-level content. The results of the study came from its recent shared services and outsourcing summit.
Finding No. 2: Companies rely on competitive pressure to manage provider cost
In addition, the study found companies often rely on competitive pressure to manage their outsourcing costs. The study reports 43 percent of the executives stated their companies use competitive pressure in order to get maximum value from their service providers.
This reliance generally takes the form of RFPs and reverse auctions that require providers to participate in a bidding process against each other. Everyone understands that pricing is the primary determinant of who wins the business.
This practice can be good and bad. Mandell says this strategy works well in the procurement of commodity products and services that do not vary in any material way from one provider to the next. However, he posits this strategy “tends to work less well where providers offer different levels of quality or products and services that are substantively distinct.”
Finding No. 3: Current budgets are too small to meet expectations
The study found budgets expanded marginally; the median growth rate was less than five percent. Nearly a third of respondents felt this issue left their departments insufficiently equipped to meet expectations. At least department staff sizes of surveyed participants held steady from 2012 to 2013, exhibiting almost no growth or decline in personnel.
“It is clear that shared services and outsourcing professionals face complex financial, logistical and ethical challenges, and the stagnation in budget and department size may be compounding these challenges,” says Mandell.
Finding No. 4: Ethics are important
In today’s world of constant corporate scandals, an overwhelming number of respondents, 93 percent, said that it was “extremely” important for their company to work with ethical providers.
Over the years, the volume of regulations in the US and abroad that focus on curbing bribery and other forms of corruption have increased dramatically. With the proliferation of those regulations have come many expensive and otherwise painful enforcement actions, Mandell points out. “To be sure, the stakes for the bottom line are extremely high, given the size of enforcement fines, not to mention the financial impact of lost clients due to a public scandal,” he says.
The Consero CEO says pursuing an ethical corporate culture has a variety of benefits to today’s large companies. “The pursuit of ethical behavior and relationships with ethical partners have pragmatic benefits to global businesses,” he posits.
For example, companies have a strong incentive to instill a culture of ethics in order to avoid the embarrassment and financial impact of violating the US Foreign Corrupt Practices Act and the UK Bribery Act, among others. “And they have an equally strong incentive to ensure that they work with partners that will minimize their exposure to enforcement actions and other problems resulting from guilt by association,” Mandell points out.
Finding No. 5: Executives in the retained organization are nicely compensated
The Consero study found these professionals are generally well-paid. Over 60 percent reported a salary of over $200,000 and nearly a quarter reporting a salary over $300,000.
Do your short-term goals and focus on cost undermine your long-term goals? How?
How the study was done: The 2013 Shared Services & Outsourcing Data Survey posed 17 questions to all Fortune 1000 shared services and outsourcing executives who attended Consero’s invitation-only event in February 2013. A total of 42 responses were provided.