Most mature outsourced companies have created a concentrated multi-provider base, often with a handful of large sourcing vendors playing a major role in supporting the organization. These efforts have shifted business critical processes and value chain activities to outsourcing providers, creating new major provider relationships that are vital to operational continuity. Accelerated software delivery life cycles, vastly more sophisticated infrastructure virtualization, rapid pace of process and technology convergence, and the need to work seamlessly with offshore vendors have made effective vendor relationship management more demanding and more critical than ever before.

This paper describes the new vendor relationship management and service management environments, the challenges of extracting increased value through vendor management, and the vendor relationship management best practices leading edge companies are already applying in order to deliver maximum value from their multi-sourcing provider base.

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Hint: 12 Months Out is TOO Late

When should you start working on your next outsourcing contract? Many organizations do not address the end of a contract until the last year of its term. The notification period in the contract, typically six t-to12 months, usually triggers this discussion.

However I believe this is a mistake. Developing an end-of-term strategy for an outsourcing relationship is a complex task, because it is about much more than the contract. And the planning and effort involved is just as much, if not more, as the original outsourcing scope since you are now also including the complexities from the current outsourcing relationship as well as the market changes and internal learnings.

The approach that organizations take to address the next evolution of their outsourcing contracts and relationships should be based on adjusting to the constant changes in their businesses and the service delivery offerings that are available to address those needs. This industry is not new to change, but never before has it experienced the number and magnitude of changes we have seen over the last decade.

Developing an end-of-term strategy

Organizations experiencing an end-of-term event in the next 18-to-24 months must develop a detailed strategy that addresses not only the pending contract expiration but the internal and external pressures as well. They must complete an analysis to determine the correct direction. Some of the changes organizations face include:

External changes: The continual growth and expansion of technology across the globe has created a global infrastructure that continually increases the footprint of service delivery locations options for outsourcing service providers. This has fostered the introduction of highly-skilled and cost-effective labor, which has been a game changer in the outsourcing industry. This change has not only driven how service providers develop their offerings but also how buyers of the services want to consume them.

Internal pressures: Internal changes continue to drive pressures within organizations that impact what and how they procure outsourcing services. The fluctuating economy is requiring many organizations to move to a highly-variable model supporting both internal and external users. This flexible demand management model has changed how organizations look at services both in terms of what and how they procure them from the suppliers.

The pending end-of-term is often a catalyst forcing organizations to look deeply at the:

• Performance of the current supplier
• Cost-effectiveness of the relationship
• Competitiveness of the solution
• Alignment of services to requirement
• Target operating model for the next contract term (typically five years)
• Desired delivery model

Most organizations’ end-of-term strategy is to use a competitive procurement process to address their end-of-term event. Recompeting the services is significant as the switching cost from one supplier to another is often five-to-seven percent of the total contract value.

The key to success: start two years out

The key to successfully addressing an end-of-term event is to start developing the strategy early enough to address all the factors, both internal and external, that will impact the strategy. The window within an outsourcing agreement to develop this strategy is 24-to-30 months before the end of contract.

Why? There are various scenarios companies need to explore as a result of the current strategy these may lead to varying paths. For example, should the strategy be to restructure the existing relationship with the incumbent supplier? What if that renegotiation does not yield the desired results? The buyer now needs time to execute a market RFP for some or all of the services.

Too many organizations look at the end of contract as just a pricing exercise when it is really how an organization can realign the services it is currently receiving with its new requirements. That may be the time to continue to receive services from the incumbent as well as add new ones now available in the market. Only a proper assessment that is not rushed can determine the proper strategy.

The outsourcing market is experiencing a radical change from the first generation lift-and-shift paradigm to today’s business process solution model, according to Richard Jeffery, managing director, Active Operations Management International (AOMi). Adds Rahul Kanodia, CEO and vice chairman of Datamatics, “Today it’s no longer just about cost. Buyers want you to produce value from more complex transactions. In fact, BPOs need to scale up to the next level, which is knowledge process outsourcing and business process management, for demonstrating value adds to their customers.”

Here are the nine biggest trends that will affect the BPO world in the next 24 months.

1. The move away from headcount-based contracts

Jeffery says BPO buyers now no longer just want to move a chunk of their back offices. “Buyers are no longer happy with service based on headcount,” he says. Instead, they desire “a more complex platform and technology change.” He says the move away from scope has made the BPO proposition “more sophisticated and multi-layered.”

Kanodia agrees. “Technology and platforms are driving the second generation of BPO,” he observes. This makes taking over a process from end-to-end possible. “Buyers no longer want us to just take on a piece of work,” he continues.

Adds V K Raman, Head, domain services, BPO Services, TCS, the current  pressure for effective business operations means buyers “are increasingly looking at providers to not just save on the operational costs, but also to drive business excellence through transformation.”

Shantanu Ghosh, senior vice president and global head for practice solutions and transition for Genpact, adds that BPO 2.0 “will require a higher level of change management because it’s more intrusive.” He admits there are no easy answers when the change “requires a new way of thinking of how to run your business.” Efficacious change management is required because “the pain of change is only worth it if the change has a material impact on the business,” he explains.

2. Buyers want more transparency inside the BPO process

The AOMi executive says today buyers “are more sophisticated in what BPO should look like.” In the first generational model, buyers stipulated head counts and wrote SLAs. “That black box contracting model is increasingly dying,” observes Jeffery. Buyers no longer “take it on trust that their BPO is able to deliver the process. Clients themselves introduced industry standards for operations management which they expect and require their service providers to use,” he says.

Why? Because the buyer is still shouldering the productivity risk under a headcount contract. “Today buyers require operational transparency. They want to know how the provider is matching the headcount to the workload. With visibility the responsibility for productivity transfers from the customer to the service provider,” he reports.

Ten years ago the appeal of labor arbitrage meant “no one cared about seeing inside the operation,” continues Jeffery of AOMi. Today, however, it’s central to a strategic customer-service provider relationship. “This represents a 180-degree change for many Indian BPOs.”

Service providers who fail to adapt will lose business. Jeffery reports some of AOMi’s buyers are bringing the work back home or moving it away from India and Philippines. “They want a provider who either has an outcome-based pricing model or one that can offer a solution offering visibility over capacity and costs under a headcount model,” he explains.

3. Productivity matters

“There’s a lot of pressure on productivity. And you can also improve your costs by improving productivity through process automation,” Kanodia reports.

Jeffery says in the first generation model, Indian BPOs could just add an extra person to  get the job done. No more. “Today the productivity of the original team matters,” he says. “You don’t want to add additional people because now it affects your margins.”

He adds that for the first time BPO buyers are asking their service providers “about the how – they assure productivity. Historically, it never would have occurred to them that this was a useful thing to ask.” For example, buyers are now asking for details about team leader and management qualifications in operations management and capacity planning.

Outsourcing buyers locked into long-term contracts with a supplier are requiring a retrofit to achieve this standardization, Jeffery reports. Many Australian banks in particular “are requiring their service providers to standardize their processes for operational management control which aligns with the retained onshore teams.”

Ten years ago there were no standards for operational management practice, recalls Jeffery. Today, there are established international standards “which give clients much greater leverage when specifying and managing on-going performance,” the AOMi executive explains.

4. The rise of the BPO specialist

Today companies don’t want to hire an outsourcer that does everything. Instead, they prefer a BPO specialist, observes Ben Trowbridge, CEO of Alsbridge. The rise of knowledge process outsourcers is a good example.

Trowbridge adds this trend toward specialization does not auger well for second-tier service providers; he predicts they will either be acquired or pushed out because of these market forces. BPO buyers need to monitor this situation closely because they will have decisions to make if someone else acquires their service provider, he warns.

The Alsbridge CEO adds BPO buyers need to be sure the service providers they hire are indeed specialists in the process they claim to be. “Everybody says they are specialists but that’s just not the case,” he warns.

Ghosh notes the time has come “to separate the men from the boys. Service providers have to have a deep domain knowledge of their customers’ business at both the horizontal and process level.” He warns service providers: “You cannot  be everything to everybody. Pick your industries and understand them well.”

5. Offshore providers are doing more work onshore

“The conversation is shifting dramatically,” says Ghosh. He says Genpact’s buyers “are reengineering the business model” by doing some work nearshore, some work offshore and some work at home. Just sending work offshore to cut cost is now just a part of the conversation. Ghosh says today buyers want to streamline, integrate, standardize and optimize their business processes, which requires work to happen at home as well as abroad.

6. Regulatory pressure will continue to increase

Trowbridge predicts U.S. auditors will increase their scrutiny of BPO transactions. He suggests enterprises that outsource BPO processes will have to spend more time and money working with their BPO providers to accommodate the auditors.

Kholkar of TCS also sees evolving regulations on the horizon. “These will drive changes in the way many companies do business and necessitate their outsourcing partners to follow suit, he says. In addition, he believes certain industries like banking and insurance will experience increasingly stringent compliance. These will require additional investments to comply, he predicts.

As for service providers, Trowbridge warns them to “be careful what you agree to.”

Trowbridge says closer audits “will certainly not halt BPO adoption, but it will change the dynamics.”

7. Social media is a new biz op for BPO providers

“Social media is an increasingly relevant factor in the end-customer’s decision process,” says Raman of TCS. Increasingly, BPO providers are “capturing the data real-time, conducting analysis and providing critical insights to drive business agility. Managing the customer experience and responding to customer concerns have created a plethora of opportunities” for BPO service providers, he says.

8. Business Process as a Service (BPaaS) is catching on

Jeffery says buyers like the idea of paying as they go. But they also like buying the services behind it. “It’s like buying salesforce.com and the salespeople. Buyers like having the supplier put the different components together,” Jeffery explains.

Managing the customer experience and responding to customer concerns have created “a plethora of opportunities” for BPO service providers, he says. Kholkar of TCS says the “hype about cloud increased the acceptance and popularity of BPaaS models.” The fact that service providers are addressing data security and privacy law issues at a global level also helps.

9. Buyers are getting savvier

“That puts the service providers under pressure,” observes Kanodia of Datamatics.

The Datamatics executive says many of these trends are still nascent. “I predict the market dynamics will force more of them to happen…faster,” he says.

Empower the Project Team

There is often a big gulf between senior decision makers on the Project Steering Committee and the team leading the outsourcing process. Senior people determine their business objectives and set strategic direction but have limited knowledge about how service providers deliver services. The outsourcing project team works very hard to deliver what they believe senior executives want. The team may feel reluctant to propose alternatives to the Project Steering Committee if the alternatives aren’t exactly what senior management asked for. As a result, in their quest to deliver what the Project Steering Committee asked for, they may require customized processes that disregard the service provider’s proven processes. The project timeline stretches out while the service provider tries to develop customized processes or the project team spends unrecoverable time backtracking to redesign parts of the solution.

The best way to avoid this totally unnecessary slow down is to spend time up front establishing ground rules for the Steering Committee, project team and the service provider, building trust and empowering the team. Good leaders delegate real authority, actively listen and build trust. Senior leaders need to be aware of their positional power and ask the right questions, and the outsourcing team and the service provider need to feel comfortable raising issues and proposing solutions.

Do your Homework

The decisions made when establishing an outsourcing relationship have a long-term impact on your company.  Service delivery is the service provider’s core competence; time and again I’ve seen the buyer succumb to the temptation of letting a service provider guide their decisions regarding in-scope services and how those services will be delivered. This is particularly true when there is a pre-existing relationship or when the business development lead has exceptional relationship-building skills. This approach often seems like a great time saver because the service provider appears to have all the answers. When entering into any type of outsourcing relationship — large or small — it’s always a case of pay me now or pay me later.

The time you invest in external market research, emerging competitors and solutions, site visits to service providers’ customers and developing exit scenarios is time well spent. Internally, it will save you time and money if you invest in a detailed current state assessment, which includes baseline costs, systems and process documentation, service standards and performance data, employee profiles and so on. Investing in these two steps allows you to develop a fact-based point of view in the context of your organization. You will make better long-term decisions about which service provider is the best fit, which of the service provider’s capabilities and services you will evaluate, and which solution will help you achieve your goals. Your investment in market research and competitive intelligence ensures that your expectations and the provider’s ability to deliver are well aligned. In the long run, you’ll have realistic expectations and save both time and money. Travelling in a straight line is always the shortest route.

Invest in Governance

Transition and change management plans invariably lay out detailed plans and controls for orderly transition to new technology, processes and workflow. They include detailed internal communication strategies and user training. Intense discussions take place and energy is invested in developing detailed employee retention agreements and severance packages, followed by timed communications about job elimination. Typically, limited resources are invested in developing good governance and management practices and protocols. Sometimes this important work isn’t started until transition is underway.

While you can get by with weak governance processes, you are denying your organization and your service provider feedback. This minimizes the likelihood that you will ever reach high levels of performance and systematically engage in continuous improvement activities with your provider. The provider will invest their time and energy in those clients that have good practices and allow them to thrive and grow.

In the absence of thoughtful governance, you’re placing a whole lot of faith in the service provider to meet your sometimes changeable expectations. The only predictable route to excellence is investing in governance – the controls, tools, competencies and communication processes necessary for proficient supplier management and a healthy relationship with your service provider.

Conclusion

It may seem counter intuitive that you can shorten the timeline to achieving your outsourcing goals by spending more time in three key areas. Empowered project teams craft better solutions. Informed leaders make better decisions. And comprehensive governance programs ensure you and your service provider stay focused on all the right things.

Linda Tuck Chapman is a seasoned Outsourcing Advisor and Governance expert. You can reach Linda at (416) 452-4635, lindatuckchapman@ONTALA.com or visit ONTALA Performance Solutions at www.ONTALA.com

Sourcing change management guru Deborah Kops defines change management as, “A structured approach to transitioning stakeholders – organizations, teams and individuals – from one business model to another that incorporates shared services and/or outsourcing to third-party providers. The goal of sourcing change management is to efficiently assist stakeholders to change their ways of working, first adopting, then embracing and expanding the new model in order to deliver a business case.”

In his book “Devil’s Dictionary of Global Sourcing,” outsourcing attorney William Bierce defines it this way: “Change Management, n. 1) pre-agreed protocol for unlocking a stable process, agreeing on modifying it (including corresponding impacts on scope of work, roles and responsibilities, service levels, terms and pricing), and re-freezing the new process; 2) service provider’s toll booth for minting new nickels and dimes; 3) bureaucracy, delay and conflict; 4) trigger for relationship governance and dispute management.”

While Mr. Bierce’s description sounds more like change control than change management (and the entries in his book are to a large extent intended to be hugely entertaining), the reality is that many people use the two terms synonymously. This may in part be because change management in outsourcing is all about getting stakeholders to rapidly comply with the change of control of the outsourced processes.

Some people think it’s pretty PowerPoint presentations and clever communiqués (or posters, mugs and mouse pads, as Kops quipped), but there really are several critical components that define successful outsourcing change management:

• You must have a highly strategic, fully-fledged change management plan, not a tactical program comprised of warm and fuzzy emails from HR or an occasional proclamation written by marketing and delivered by a senior executive. Face it — outsourcing causes significant disruption throughout the organization, and you need to get to the hearts and minds of all, especially those directly impacted, to guard against derailing forces. Additionally, the plan must be constructed and implemented in symmetry within the organization’s corporate context.
• Change management must start on Day One, during initial formulation of the sourcing strategy and business case. If you initiate change management when the transition plan is being developed, at transition or when preparations are being made for the announcement of the outsourcing engagement, you’re heading for a rough ride of resistance and rebellion.
• Every individual on the sourcing team – client organization and service provider members alike – is a change manager. And every team member must be equipped with the knowledge and capabilities to strategize, influence, resolve, listen, intervene and respond to any situation that may arise.

Change management isn’t easy or glamorous. It’s misunderstood, and all too often mismanaged. It’s highly complex, and requires specialized skills and capabilities. But it is an absolute imperative to outsourcing success.

Based on the readiness of your organization these plans can vary between a ‘big-bang’ transfer of responsibility or a phased implementation by process or business unit. This white paper offers a structured and process-driven approach to transition management that will ensure your sourcing transition is cost effective and implemented in a seamless fashion.

Click here to download the free paper.

The participating CIO executives identified the six top issues to cloud adoption without regard to industry. The paper also discusses how to overcome these challenges using both internal and external resources.

Click here for the free paper by Alsbridge.

Outsourcing service providers servicing the midmarket (defined here as companies with $1billion to $3 billion in annual revenues) face challenges that differ from working with large corporate buyers. How do they provide the same type of services as they do for enterprises and stay profitable, especially when offshoring labor arbitrage is something they want to avoid?

The midmarket challenge

Midmarket firms feel “a greater sense of urgency” to remove general and administrative costs than the larger enterprises do,” observes Mike Atwood, an independent senior outsourcing consultant. A just-released FAO report from HfS Research found 90 percent of midmarket companies outsource to reduce cost, according to CEO Phil Fersht. (Fifty percent reported they outsourced to transform and reengineer processes.)

Atwood says there are two sources of opportunity:

1. Improve their process by consolidating or simplifying what they do or use technology more effectively
2. Do the work in a lower-cost location

Many consulting firms can help companies improve their processes, but these projects normally take significant investments in time and dollars and generally have a significant risk due to the change management required throughout the company, according to Atwood. Many midmarket companies are community-oriented, and moving the work to a lower labor-cost location seems unpatriotic and can cause labor unrest. So what is a company to do?

“Midmarket companies want the same things as the large enterprises do, but what they want more than anything else is ways to enable their growth,” says Rich Dobbs, Senior Managing Director, ACS Finance & Accounting, ACS, a Xerox Company. “They’re going to have much more upside from a growth standpoint than the large enterprises do. They want a solution that frees up their resources and takes infrastructure cost out of their business model so that they can invest more in growth opportunities,” he says.

Dan McCue, Senior Vice President, Finance and Accounting Services for Sutherland Global Services, agrees the midmarket expects to be treated like large enterprises. However, he says they “tend to be more risk averse and have less outsourcing experience. They often require expert financial skills like planning and analysis. The midmarket F&A solution approach must address these issues and provide uncompromising quality of standardized service.”

Mark Vengroff, CEO, Vengroff, Williams and Associates, sees three areas that challenge providers in reaching out to the midmarket:

1. Few providers with a global footprint are providing services into the midmarket, and many midsize companies are selling now on a worldwide basis. Inversely, providers that have a global footprint don’t necessarily sell into the midmarket. That becomes a prohibitor for a lot of these companies.
2. Servicing midmarket companies requires a high degree of customization.
3. Midsized businesses don’t have the infrastructure or staff to provide significant support around the IT.

The offshoring conundrum

Atwood says cost reduction in the midmarket arena is “about how you do the work and where you do it.” Unfortunately, he says the only way to maximize savings is to do both “or you leave money on the table.”

The challenge is offshoring may be less attractive to a prospective midmarket firm, according to Peter Ryan, Lead Analyst for Contact Center Outsourcing and BPO for Ovum. He says midmarket firms are “more likely to request that the service provider deliver the services from a more localized spot rather than doing the work offshore.”

Vengroff agrees that labor arbitrage in this specific market is more unpopular than in enterprise firms largely due to the business culture they operate in. “Their key customers dictate a lot of the special practices at these midmarket companies; they have to comply to keep that business. They don’t have as much luxury to dictate their own process or policy to those key customers. It really comes down to what providers can do to provide savings outside of labor,” he says.

Atwood says going offshore “is simple and quick and is an easy way to get back your investment.” In his experience, companies typically can reduce their costs by 30 percent within 14 months if they offshore. On the other hand, improving processes “can be risky because it’s messy. The people, process, even the business have to change.”

How some service providers are responding

“The service providers seem to be positive about this opportunity,” Ryan reports. “Equally, they’re realistic. They understand that in the current economic climate, outsourcing contracts have taken a hit. Many companies are not going to embark on any new projects until they start seeing signs of a robust recovery.”

Dobbs says midmarket FAO “is a much different value proposition. If I’m signing up a midmarket enterprise and taking on accounts payable, there are five to ten people in their accounts payable operation. I have to pool together several deals in that range to get the same scale I got from one company offering me 100.”

Providers have just one answer for organizations with business cultures resistant to offshoring: process expertise with state-of-the-art technology to improve efficiencies to drive cost savings. McCue agrees, saying the key for service providers is enhancing the IT ecosystems of the midmarket firms.

Atwood says some service providers have developed more standard packages that allow for larger leverage. Many have developed “process directories” that allow them to show a client what the best-in-class process is and how to implement it. These same providers have service centers scattered throughout the globe. This allows them to work with companies to improve processes and then move the work to a low-cost location when they are ready.

Outsourcing Center interviewed leading service providers about the risks they predict buyers will encounter from these developments. Their list of risks and advice for risk mitigation is a wealth of insights for buyers already in an outsourcing relationship as well as those considering future outsourcing initiatives.

Risk #1 – Service provider lock-in

“The risk of lock-in – being bound to one provider’s specialized products or services because the cost of change is too high – is a very real threat. This is especially important when it comes to data portability and long-term data preservation. It should be separable from any given software application or service. This will become particularly significant in a cloud-computing environment where the IT service provider stores a company’s data at a remote location. Other risks of lock-in include being weighed down by legacy systems and outdated applications that constrain the buyer from adapting to current business demands, as well as a rigid cost structure.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“Getting locked in with a service provider that is limited by geographic boundaries or that has limited capacity to invest or provide scalability would create business risk for large enterprises. Lock-in with a provider that is unable to comply with evolving regulations or one that lacks a demonstrated ability to work through disaster scenarios also puts the buyer at risk.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

Risk #2 – Multisourcing

“Using multiple providers is perhaps a good buying decision but not always a good business decision. Each provider demands time and attention. In addition, this results in many small outsourcing relationships that are very narrow in scope and often represent transactional functions rather than higher-value processes that could be outsourced to create far more value and impact enterprise-wide.” (Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact)

“A multisourcing approach opens the market to many smaller providers that previously lacked the capacity to compete and deliver on megadeals. However, many of these new entrants don’t understand the complexities and intricacies involved in satisfying enterprise requirements, which could lead to service disruptions and other continuity issues.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“The risk in taking the best-in-class route and selecting multiple providers is that some providers would end up with an incomplete view of and alignment to the buyer’s strategic objectives.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

“While a multi-provider approach can potentially lower costs, it adds significant complexity in compatibility of technologies and handling of many contracts (which would be shorter term and renewed more often).” (Charlie Bess, HP Fellow, HP Enterprise Services)

Risk #3 – Building the business case

“Building a proper business case is a buyer’s most important step to capture the value it wants to drive and the scope and cost of the services. A half-baked business case will lead to value erosion and post-purchases price adjustments, which will then lead to dissatisfaction.” (Rajan Kohli, CMO, Wipro Technologies)

“A lot of challenging deals have resulted from a business case with an extreme emphasis on cost. The focus should be on evaluating how cost of services impacts quality, value, relationship viability, scalability, sustainability of business value, and innovation – not just how it impacts the bottom line. In the current business environment, it is imperative that buyers make sourcing decisions based on a solid business case that includes increasing agility over the long term.” (Deepak Patel,CEO, Aditya Birla Minacs)

Risk #4 – Underestimating the complexity of managing a “hybrid” environment

“Managing a “hybrid” IT environment (which includes a mixture of in-house, shared, outsourced, and cloud services) demands new models for service level agreements, end-to-end operational accountability, service management, enterprise architecture, and IT portfolio management. Buyers will have to establish a new IT governance structure and develop a multi-year transformation road map.” (James Miller, HP Fellow, HP Enterprise Services)

Risk #5 – Disruptive technologies

“The proliferation and enhanced capability of mobile devices will present security, asset management, application, and end-user support challenges. Buyers must address these challenges in their IT outsourcing decisions.” (Kevin Schatzle, President, Allied Digital Services)

“Disruptive technologies such as cloud and mobility offer opportunities for business model transformation. Buyers will have to choose providers they trust to be independent in their advice and work with them to achieve the objectives they set. Since these technologies carry an element of risk, buyers will prefer a model that enables business outcome.” (Rajan Kohli, CMO, Wipro Technologies)

“Security considerations are crucial in considering cloud-delivered solutions. Buyers need to ensure their providers follow the ITIL process and approach all outsourcing business with an eye towards security. In addition, buyers should keep in mind over the next few years that service providers can easily provision cloud-based delivery of services in a pilot as a proof of concept.” (Kevin Schatzle, President, Allied Digital Services) (Also see Assessing the Coming Impact of Cloud Computing on Outsourced Solutions.)

Risk #6 – Governance mistakes

“Change management is a crucial element of outsourcing relationship governance. The key issue to tackle in change management is to set detailed guidelines on when a change has a financial impact on the deal, allowing the provider to charge additional fees or the customer to pay fewer fees. Failing to have effective change management methods often leads to protracted discussions (and most likely differences of opinion) as to whether any given change impacts the financials. These discussions will delay or possibly inhibit an implementation.” (Rajan Kohli, CMO, Wipro Technologies)

“The biggest mistake buyers currently make – and will continue to make – in their outsourcing arrangements is not prioritizing or investing in a formalized, end-to-end governance model and maintaining senior leadership involvement. Lack of investment in their own resources to partner with a provider is the number-one reason outsourcing relationships fail. Buyer investment from senior leadership and setting the tone for the organization to drive full partnership through governance drives consistent communication and a ‘one-team’ mentality.” (Gene Byrne, General Manager, F&A and SCM, North America, IBM)

Risk #7 – Service provider selection

“In reality, business changes so quickly these days that few organizations can accurately predict the full scope of their needs. Instead of selecting a partner that appears to have what the buyer needs today, a buyer should select a partner to match the flexibility it will need. Also important to the decision is cultural fit and relationship management. These capabilities will allow the outsourcing partnership to evolve and shift to meet the ever-changing needs of the buyer’s business.” (Angela Hills, Executive Vice President, Pinstripe)

“Enterprise buyers are increasingly looking for expert partners to add value to their overall business process and operations. Companies need to ensure that their service providers bring value to the table not only with their deep process, domain, and technology expertise but also with a ‘partnership’-based approach.” (Deepak Patel, CEO, Aditya Birla Minacs)

“Buyers should ensure that their service provider partners are able to view their processes on a truly end-to-end basis, at a granular level, including any portion of these that the buyer retains. This integrated approach is critical to truly understanding the client’s business and being able to effectively collaborate with them to optimize and commit to their business outcomes. An end-to-end approach not only accelerates transformation and provides transparency, but ensures seamless operation with few surprises. The provider also should be able to demonstrate functionality in support of the full F&A footprint to drive consistent, repeatable, scalable business outcomes.” (Don Schulman, General Manager, Global F&A and SCM, IBM)

“Exercising greater due diligence in selecting service providers is especially important when identifying appropriate candidates for early adoption of ‘as-a-service’ delivery. Decision-makers should focus on service portfolio management as the key capability to assure long-term success and should not hesitate to insist on pilots and proofs of concept.” (Russ Daniels, Chief Technology Officer, HP Enterprise Services)

“Some buyers rush into an outsourcing contract without carefully evaluating the provider’s culture and comparing it with their own. If the cultural mismatch is too strong, it will lead to miscommunication and misalignment of objectives.” (Abid Ali Neemuchwala, Global Head, TCS BPO Services)

“Buyers that outsource to IT service providers that primarily offer reduced labor costs will make a big mistake. They should look for providers that employ the latest technology for more efficient and pervasive management of the applications and infrastructure as well as reduced labor costs.” (Kevin Schatzle, President, Allied Digital Services)

“It is a mistake for buyers to be too narrow in their views about what functions and processes they could outsource. They need to base the decision on how to create significant competitive advantages in terms of cost, quality, productivity and impact on the overall business.” (Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact)

Risk #8 – Future orientation

“IT organizations need to shift their perspective. They need to start outsourcing and supporting their suite of applications as assets that enable them to meet their business objectives – not just expense items with costs that need to be cut or as someone else’s problem now that it is outsourced. Companies must re-value IT as an investment, not an expense. In addition, if they undertake an initiative that is not ‘integrate-able’ and is limited to the resources they have available today, it will limit their flexibility in the future. If an organization undertakes an initiative that is very fixed in structure and unable to change to meet the business needs of the future, it needs to closely scrutinize the return on investment.” (Charlie Bess, HP Fellow, HP Enterprise Services)

“Companies in existing outsourcing relationships today are at risk if they do not ensure that their current provider has a road map to migrate their outsourcing model from labor arbitrage to tools and services delivered from the cloud. Buyers need to hold their current providers accountable that they are re-tooling their offerings to recent advances in cloud-based software and services. Buyers should have a clear five-year road map to leverage the changing IT landscape.” (Kevin Schatzle, President, Allied Digital Services)

“Outsourcing buyers will increasingly need to address their ongoing leadership pipeline. In two generations, where will their leadership come from? Some of the most consistently outsourced roles today are those in transactional processing – the same roles that historically served as foundational positions for growth within many large organizations. Will talent in 15 years come through the outsourcing service providers? There’s an interesting conversation, particularly as outsourcing providers continue to invest heavily in ensuring their delivery teams are integrated into the businesses of the clients they serve, potentially setting the stage for a reverse transition of roles in the future.” (Gene Byrne, General Manager, F&A and SCM, North America, IBM)

Drivers for change

Several current trends as to service demands from buyers of outsourcing services will change service providers’ offerings and required expertise. Those demands will also necessitate a change in buyers’ approach to services decisions. ADP cites the following drivers for these demands:

1. Government-directed/mandated controls across the North American and EMEA markets in the areas of finance and data privacy
2. Government healthcare mandates, especially the U.S. Patient Protection and Affordable Care Act (PPACA)
3. Changes in workplace employment laws
4. Services that consolidate and standardize systems and processes across geographic boundaries (thus requiring that service providers have a core competence in managing regulatory requirements in and across markets from which they operate)
5. Changing workforce demographics and user expectations (for instance, a growing reliance on new technologies such as mobile applications/devices, social networking/collaboration, and 24/7 access increasing an anytime-anyplace approach to performing work)

One of those drivers stands taller than the others. “We believe that the industry’s ability to effectively respond to the changing global regulatory environment will be the most important change that service providers will need to respond to in the next five years,” says John A. Haslinger, Vice President, Product Marketing at ADP.

There will be consequences with these five market forces, whether from buyers’ demands or regulatory changes. Terrence McCrossan, Division Vice President, Marketing & Strategy at ADP, believes consequences will include:

• Increased emphasis on cost control, reporting/analytics, process efficiency, and flexibility
• Increased demand for improved decision-support tools to assist employees, managers, and executives in making informed choices regarding workforce management, employee development, employee engagement, cost management, and total cost of ownership
• Necessity (especially for large organizations) for thinking globally and solving productivity issues globally rather than taking region-specific approaches

Regarding the globalization demands in recruitment process outsourcing (RPO), Angela Hills, Executive Vice President at Pinstripe, says enterprise clients want a partner that can scale with them globally “even if they begin a partnership exclusively in one theatre of the world.”

She predicts the five market forces described above (especially changing workforce demographics), combined with economic uncertainty and slow recovery, will propel growth in RPO. Recruitment outsourcing also meets buyers’ demands for solutions that switch fixed costs to a variable-costs model.

The need to ramp up recruitment after the recession, combined with the tremendous unpredictability in workforce demand and need, will also drive growth in RPO.

Katrina Menzigian, Vice President, Research Relations at Everest Group, an advisory firm on global services, says service providers increasingly will face the need to drive true business value for clients. “In HR (and in other areas of outsourcing such as finance and accounting, IT, and procurement), providers already established their ability to successfully deliver operationally compelling solutions,” she says. “The source of competitive differentiation going forward will be linking outsourcing outcomes with a client’s overall business objectives. HR clients from first-generation deals continue pushing for more value, increased savings benefits, and outcome-based pricing models.”

Impact on HR outsourcing from U.S. healthcare reform mandates

ADP expects an increase in HR outsourcing, especially over the next two years, due to the U.S. healthcare legislation and the significant complexity and reporting requirements it creates. McCrossan predicts the increase will occur especially in payroll, HRMS, health and welfare benefit administration, time and attendance administration, and leave administration. The increase will come from companies of all sizes that are already outsourcing some HR functions as well as those that have not yet outsourced.

He adds that the effort to conform to the PPACA requirements will lead to employers standardizing HR policies, plans, and processes related to employee benefits and workforce management in order to facilitate reporting and compliance.

On the provider side, Haslinger says the market forces will cause a shift to pay-as-you-go as the predominant service model as providers seek to standardize services onto Software-as-a-Service (SaaS) platforms.

Six decision-making risks

What risks will buyers of outsourced HR services face in their decision-making over the next two years? Pinstripe and ADP cite the following risks:

1. Choosing the most effective model (standardization, customization, local or global, and single or multi-process scope)
2. Finding the domain expertise needed to manage change and drive consistency globally across an organization
3. Ending up with a payroll service provider with limited scale or expertise in a particular market or region
4. Being motivated to sign an RPO contract that places a higher premium on flexibility rather than on aligning the proper resources; focusing on flexibility can lead to ending up with a provider that has challenges in scaling to meet a buyer’s growing needs
5. Taking a “procurement” approach to an RPO decision; Hills warns this can lead to “devaluing the more subjective and ‘soft’ factors in decision making”
6. Missing the opportunity to create real process improvement when implementing the outsourced solution because of not giving enough attention to change management

Navigating the changing HR service provider landscape

Menzigian points out HR providers are entering and exiting the market due to increased demand on core competencies, broader sets of capabilities, and differentiation.

Hills expects that new leaders will emerge in the RPO space “as buyers’ growing sophistication causes buyers to shift which criteria they most value.” She also anticipates a lot of mergers, acquisitions, and exits in the space. Provider consolidation can cause declines in operational effectiveness when integrating acquisitions, she warns. To ensure effective service delivery, she says buyers should prepare for this possibility and maintain open communication and clear management of expectations.

Buyers need skills in understanding the factors that go into building outsourced solutions, or they will need to use consulting/advisory firms. “Solutions range in complexity, and understanding the factors is key for trying to make a multi-year buying decision,” says Hills. “Due to the large volume of firms that will enter the RPO space, we will see fragmentation in outsourcing solutions, making services more like traditional staffing augmentation than outsourcing.”

Key factors that buyers should include in their HR and RPO provider-selection criteria over the next five years include the following:

• Provider’s financial stability – is it enough to allow the provider to invest, grow, and compete?
• Global regulatory compliance expertise
• Domain expertise in the outsourced HR function enabling the provider to improve efficiency and quality, thereby lowering costs over the long term
• Proven long-term commitment to the HR space (consider the degree to which HR outsourcing is the core business of the provider)
• Organic growth as a cornerstone of an RPO provider’s growth strategy (this may provide the most dependable services to buyers as the provider landscape shifts)
• Integrated and consistent service delivery worldwide
• History of successfully delivering high-quality scalable solutions

Hills adds an insight unique to RPO provider-selection criteria. “Buyers should recognize what will truly drive success of a partnership and also what is unique and quirky about their organization and needs. Therefore, they should seek a partner that will be the best fit for that uniqueness and where the buyer wants to go. Sometimes the safest choice is not actually safe at all as the safe provider may not help the buyer stretch as an organization to fully achieve its potential.”

McCrossan at ADP advises buyers they should solicit the input of industry advisors and analysts that “have an informed view” of the HR outsourcing space. Buyers should also ensure an appropriate amount of time for discovery during the RFP process.