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Communication

Level of Trust Impacts Effectiveness of Outsourcing Communication

Outsourcing Center, Kathleen Goolsby, Senior Writer

Ask 10 buyers of outsourcing services for their keys to success in communicating with their service providers, and you’ll hear 10 different answers because, of course, the effectiveness of outsourcing communication depends on the individuals involved. Some will also say it depends on whether they’re communicating about day-to-day operations, conflicts or opportunities. Others will comment that it depends on their governance structure. While these aspects carry weight in communication success, there’s another factor that takes precedence: the stage in the relationship’s life cycle. Outsourcing Center has studied communication between buyers and providers in hundreds of relationships nominated over the past 14 years for the Center’s annual Outsourcing Excellence Awards program. In evaluating communication characteristics specifically around discussing opportunities, we found distinct attitudes influencing buyers’ outsourcing communication; and those attitudes change at various times in a relationship. One could characterize the buyers’ attitudes as the following: We want to make sure you’re aligned with our plans We’re a team You’re trying to sell us something we don’t need You’ve been great at delivering services so far, but it’s almost time to renew the contract, and we want you to do something different; if you say no, we won’t renew Looking at these attitudes and stages in depth reveals that how much the buyer trusts the provider determines the attitudes. Scenario #1: We want to make sure you’re aligned with our plans This attitude usually occurs in the beginning stages of a relationship. The buyer wants to trust the service provider, but they haven’t worked together long enough for much trust to build. The buyer moves forward in good faith that its trust is not misplaced, yet some doubts lurk. The buyer shares its roadmap and annual plans and communicates some of its opportunities without revealing all the details – just as much as the buyer thinks it’s necessary for the provider to know in order to align its resources with future needs. The buyer believes communication at this stage is critical in order to ensure the provider supports its needs adequately, and the buyer often asks the provider to help assess opportunities. The buyer is keen on expectation-setting as a prime goal in communication. Scenario #2: We’re a team At this stage, the relationship has survived the transition and has achieved some successes and objectives and often has also weathered some conflicts. The level of trust is high. Both parties are proactive in their communication. As one buyer described this phase, the parties “want everybody to be on board, work collectively, and compromise when we need to.” Another buyer described this phase as “always having a huge amount of discussion and information sharing about solutions and opportunities,” along with involving the provider in the very early stages of any planning. They communicate openly and frequently about what’s going on in their market and industry, and they help each other learn. They don’t just react to opportunities that occur; together, they seek mutually beneficial opportunities. And there are instances where the provider is very instrumental in helping the buyer take advantage of opportunities the buyer has in its market. Scenario #3: You’re trying to sell us something we don’t need Here, the buyer’s attitude often shifts when the service provider initiates conversations about innovation and continuous improvement. Some believe the provider is trying to charge Rolls-Royce prices when the buyer thinks it only needs Ford services. Scenario #4: You’ve been great at delivering services so far, but it’s almost time to renew the contract At this point, the buyer’s level of trust in the provider’s capabilities and services is high, but the level of trust in whether the provider will be willing to deliver more value – and sometimes at even lower cost – is not so high. The partner scenario There is another scenario: we’re partners. This attitude is especially prevalent in large-scale arrangements involving support for a rapidly growing business or for enabling large-scale business transformation. The level of trust is very high, and transparency is a key element in their communication. The buyer wants its partner to be a big part of any new opportunities, and both parties actively seek to leverage each other’s strengths in pursuing endeavors. Communication involves sharing information about each other’s strategic drivers. Even so, this attitude and level of trust can suffer hits when either of the parties feels it has to bear more of the financial impact than the other when investments become necessary. The trust factor Trusting that one’s outsourcing service provider will complete a task, ramp up, or deliver services at the expected level is different from trusting in the relationship or trusting that the provider really has the buyer’s best interests at heart. Where trust is lacking, there exists a sense of competition against each other rather than collaboration and brainstorming. Is it important that communication around opportunities evolve beyond expectation-setting and planning for resources? In the relationships Outsourcing Center studied, the buyers reported that it was crucial. Communication based on a high level of trust led to jointly creating ways to capture more value from the outsourcing arrangement. It takes time to build trust, and mutual trust also involves being trustworthy; but it’s one of the biggest keys to success in outsourcing. Assessing cultural fit with an outsourcing partner requires being prepared. Using these tips from my experience as a 15-year outsourcing professional, you’ll find it relatively easy to assess cultural fit. Linda Tuck Chapman, ONTALA Performance Solutions Ltd., welcomes your comments. She can be reached at [email protected] or 416.452.4635.  

Seven Examples of Resolving Financial Conflicts between Buyers and Providers of Outsourced Services

Outsourcing Center, Kathleen Goolsby, Senior Writer

At the point where outsourcing service providers or their customers have financial conflicts that will result in a monetary loss to either party, they’re walking a fine line. If they manage to resolve the issue with a mutually beneficial solution, their relationship will be even stronger than before the conflict. If not, the party that loses in the solution will harbor resentment, causing a rift in the relationship, which erodes the anticipated return on investment. Outsourcing Center studied 112 relationships among those nominated for its annual Outsourcing Excellence Awards program during the past three years, which provided information about how they resolved financial conflicts. We found a similar path to conflict resolution among relationships where the conflict – if unresolved – would have caused a financial loss to the service provider. The following examples describe the approach the parties took to arrive at an agreed-upon solution for their financial conflicts. Relationship #1: When they negotiated their contract and pricing model, the customer and service provider in this relationship established four “buckets” or types of services, with a predetermined number of hours annually in each bucket for free services around projects not anticipated at the beginning of the year. Their conflict arose when they disagreed on terminology (such as the difference between a system update and a system upgrade) as well as what kinds of projects actually qualified for the free hours. The conflict lasted eight months. In resolving the conflict, they reached a compromise, with each party bearing half the cost of the questionable hours and jointly clarifying the arrangement in their contract. Relationship #2: In this outsourcing relationship involving global services, the parties ran into a problem because of using multiple currencies, which created a tax liability they had not foreseen. While the liability was not large, it was significant. Seeking to resolve the issue without damaging their relationship, they decided to split the tax cost. Relationship #3: The financial services customer in a relationship became unhappy because the service provider did not implement newer technologies that were available. To do so would have blown the business case for the provider because of the way they had structured their contract five years earlier. After four months of conflict, the solution they reached involved restructuring their arrangement and adding incentives to their contract and pricing model that would ensure a win-win outcome from implementing newer technologies. Relationship #4: In another relationship with a conflict around implementing a new technology, the buyer requested the new solution and tried explaining the request from the perspective of a mutually beneficial opportunity around a new service that the technology would support. The service provider stated it didn’t agree that the new service was an opportunity and, although it didn’t refuse to implement the technology, it delayed committing to the investment for many months. The buyer then went to market with a Request for Proposal for the requested solution – but also invited the provider to bid. The service provider at that point recognized the opportunity, bid on the work, and was awarded the contract. Relationship #5: The customer in this large-scope outsourcing relationship for both IT and BPO services benchmarked the provider’s IT services a year before contract renewal time and confirmed its suspicions that the services were overpriced. At the negotiating table, the provider refused to lower its prices. However, the provider opened its books and in a very transparent manner shared its perspective – that it was not making a profit on a BPO service for the customer. Their conflict resolution involved negotiated lower rates for the IT services, a higher rate for the BPO service, and implementing improvements and labor arbitrage to another outsourced process to help make up for the provider’s previously lost margin and the customer’s future lost savings for the BPO service’s higher rate. Relationship #6: Here, the parties decided to implement a technology system to support added scope of services. The provider wanted the buyer to purchase the system the provider recommended, but the customer disagreed as it would have made it difficult to switch to a different provider if the relationship were not successful. In resolving their conflict, they jointly assessed various systems and ended up using the buyer’s existing infrastructure. This was a win for the buyer cost-wise, and the faster time to market brought new revenue to the provider sooner than they anticipated. Relationship #7: The gain-sharing incentive clause in the contract became a conflict in this relationship for BPO services. The service provider needed to outperform in order to achieve the gains that made its financial model work. However, the parties had a conflict regarding the clarity of the contract around the defined level of performance. The customer did not want to pay gain-share for what it perceived was not out-performing. It took seven months to resolve their conflict. They both came to the table with each giving the other something that benefited the other party but didn’t cause too much pain to give. By each giving on a couple of things and adding to the mix from other service areas, it helped them move to a compromise on the gain-share issue that both could live with. They also restructured the gain-sharing clause in their contract. Compromising The buyers in all seven cases stated that reaching agreement on a solution to their conflict involved the following four factors: Transparency of both parties regarding their financial position Level of mutual trust that the parties had developed prior to the conflict that was high enough to enable them to trust each other to work through the conflict in a manner that would not end up with one party losing and the other winning Willingness to seek to understand each other’s perspectives on the issue Approach to conflict resolution built on a strong desire for a mutually beneficial long-term relationship Factor 2 above was especially crucial, according to the seven buyers in the relationships Outsourcing Center studied. They explained that, until the issue is resolved, …

What Happens When the Outsourcing Business Case Stops Working?

Outsourcing Center, Kathleen Goolsby, Senior Writer

Organizations that turn to outsourcing to achieve their business objectives first develop a business case that includes such components as cost savings and avoidance objectives, business value benefits, and risk assessment of potential negative impacts. But what happens when the initial business case stops working because of unanticipated impacts? Both a Deloitte Consulting study and a PricewaterhouseCoopers study of several hundred executives found that more than 80 percent stated their outsourcing projects achieved their anticipated return on investment (ROI).* For the other 20 percent in each study, one or more components in the business case changed and the parties had to work through the issues or the buyer transferred the work to a different service provider or brought the work back in house. Outsourcing Center studied how service providers and their clients work through the issues when the business case stops working. The 140 relationships in the study were successful outsourcing deals participating in Outsourcing Center’s annual Outsourcing Excellence Awards program. The study focused on these relationships because their origins began before the global economic crisis of the past three years and, presumably, the buyer and/or service provider’s economic situation changed during the three years, thus impacting the original business case for one or both parties. Factors that led to the business case not working and how to resolve the issues Outsourcing Center found six factors that led to the business case not working. In some cases, it was due to mistaken assumptions at the outset of a relationship; in others, the impact arose from unexpected external events. Here are the factors and how some of the study participants resolved the issues and got back on track with their business case. 1. Resource allocation. The provider did not allocate enough resources to perform at required service levels because the buyer and provider underestimated the workload. This resulted in challenges around the provider being able to deliver the necessary volume of work. In other cases, the parties agreed up front that they wouldn’t know the work volume for a period of several months, which might cause them to end up with unit pricing that was too low or too high. Solutions: Discuss – in a constructive, non-blaming manner – how they could have done things differently on both sides to avoid the problem, and agree on how to manage such situations going forward Change the contract and pricing model so the business case works for the service provider to add more resources while still making its necessary margins Compromise in the current situation and split the cost of adding resources to get the work backlog caught up Agree up front (when work volume/resource allocation is unknown at the outset) to preserve the principles of the business case and contract when the time comes to adjust unit pricing 2. The buyer’s business model changed. In industries undergoing rapid change (especially healthcare, telecommunications, energy, and financial services), the buyer may need to change its business model in order to stay competitive. Likewise, during difficult economic times, companies often revise their business model, sometimes discontinuing business units, products, and services. To reduce costs when an economy downslides, some relationships also look at process redesign, removing “value-add” components. Solutions: Make sure the contract (up front, or in renegotiation at the point of the business case not working) is structured for flexibility around discontinuing or moving processes (or components/functions) in and out of scope. Make sure the governance structure enables quick access to top executives with the capability to revise the deal so the business case numbers work again and the relationship is still based on a win-win approach. Make sure the top priority in delivering services in the altered scope does not negatively impact customer satisfaction among the buyer’s customers. 3. Multisourcing environment. When some components of a process are outsourced to other vendors, the provider’s costs can increase due to not having control over those components when problems arise; and the provider passes the additional costs on to the buyer. Solution: The buyer needs to remove the obstacles in communication and accountability among the various vendors and providers, allocating ultimate accountability to one provider. 4. Attrition. Attrition among the service provider’s ranks can cause cost increases for both the provider and buyer as well as impacts to service level performance. Solution: The parties need to jointly conduct a root-cause analysis to understand the reasons for the attrition and determine strategies for combating those situations. The solution may involve salary adjustments and different career-path remedies, and the parties need to discuss how to allocate the costs of the solution. 5. Changes to the pricing model. If both the provider and buyer’s fiscal years do not match at starting/ending months, changes to the relationship pricing model can impact the provider’s compensation and bonus structure. Solution: Both parties need to collaborate on how to address the issue in a manner that does not hurt either in their fiscal-year results. 6. Changes in IT business-case assumptions. With today’s pace of technology development and the impact of disruptive technologies, it is not unusual for the parties to agree up front on the IT systems the outsourcing company will provide but then the buyer change its mind within a matter of months. This obviously has major negative impacts on the provider’s business case. Solution: The parties need to renegotiate their contract, with both being fair and using an open-book and win-win approach. The trust factor The Outsourcing Center study also found participants cited mutual trust as being the basis for their ability to restructure their contracts, scope, and pricing model to align to the changed business case. As one study participant stated: “We had to first know we can trust each other before we could discuss things like service line termination without being concerned about the discussion negatively impacting the health and long-term intents for the partnership.” Where that level of mutual trust existed, several participants reported it enabled them to achieve the renegotiation in less time than they …

Start-up Healthcare Company Overcomes Risks and Captures Success in Outsourced R&D

Outsourcing Center, Kathleen Goolsby, Senior Writer

Innovation is the lifeblood of entrepreneurial companies such as Inherited Health™, an online resource for information about health risks, but it’s also imperative that such companies deliver new products to the market in a short time frame and at the lowest cost. Those were the business challenges – along with having only a handful of part-time IT staff in house – that drove Inherited Health to outsource its R&D to Core Objects (since acquired by Symphony Services), an offshore service provider. “We had three choices: interview and hire a team in house that could build what we needed, outsource it in the United States, or outsource it offshore. It was too difficult for us to find the right resources, vet those resources, and have the ability to swap resources with the right skills in and out of the project as needed. And that resource flexibility was too expensive in the United States. So that was a strong case for exploring offshore. When we compared it on a cost basis, it was really a no-brainer – the offshore solution was half the cost of a U.S. solution,” says Lee Essner, CEO. Although it’s common for companies of all sizes to outsource R&D or product engineering, success is not guaranteed. There is always the risk of expanded time line and costs. There are also intellectual property risks, communication risks if the product development team is offshore, and these days there’s a significant likelihood of a merger or acquisition occurring in the midst of an R&D initiative. Inherited Health overcame all these issues and also structured its outsourcing relationship to ensure collaboration and a partnering approach. Essner shares his company’s experience and insights into successful R&D outsourcing. Choosing a service provider “A partnering approach is absolutely vital in R&D. But there are so many service providers out there, and finding a true partner is a challenge,” states Essner. Inherited Health started out as AccessDNA, a basic online genetic health screening process to help consumers identify their risks of inherited diseases. In January 2010, after talking with consumers to learn more about their needs and what they were interested in knowing about their family health, the company rebranded as Inherited Health and shifted its focus to improving its product and services in three aspects: Expanding the intake process of collecting information about clients’ family health Expanding the output to provide more disease risk assessment and follow-on information about the risks Adding a viral functionality to easily enable people to collaborate with their family to find out who had diseases in order to build a more comprehensive family health history. The company outsourced the building of those three functionalities into its system to Core Objects. Essner had known the CEO of Core Objects from the LA software start-up community and liked his aggressive approach. When the provider’s CEO met with the Inherited Health team, they were impressed at how well he understood their business and their concerns, which convinced them that the provider would take a partnering and flexible approach. And the provider demonstrated that approach right away. Inherited Health’s system was built on .Net. “We had to decide whether to throw away our system, build on it, or go for open source,” says Essner. The service provider did an assessment and decided to build on our existing system because it was the most cost-effective route for Inherited Health. “It would have been easy for them to throw it out and start from scratch. I applaud them for not doing that,” says Essner. “Any project will have its hiccup moments,” says Essner. That’s when the partnering, or lack of it, really becomes evident. Inherited Health’s product development had a very quick time frame for launch, so the company requested that no resources be allocated to the project that were not the most capable among the provider’s resources. But the quality of work produced by one of the resources was poor and resulted in the need to redo a piece. “They pulled in three to five extra resources to fix this problem, and they stopped billing us,” recalls Essner. “They took accountability. Only partners do that, not vendors.” “So we had fears when our partner got acquired nine months later,” he adds. But Symphony Services walked them through the acquisition and also kept the same people on the team who had been doing the work before the acquisition. “Even though we are an extremely small client for them, Symphony showed us they would be our partner and made it clear that they wanted to work with us.” The provider’s healthcare domain expertise was also a decision factor. Wayne Irwin, Executive Vice President and General Manager of Embedded & Telecom at Symphony Services, comments that companies have shifted away from basic outsourced development activities and now look for providers that have specific industry knowledge. For instance, in healthcare, the provider needs to understand the regulations and necessary certifications and how to integrate payment systems. The provider also needs to understand specific use of technology expertise within an industry. “As an example, our customers not only want to know if we have the appropriate number of engineers who have wireless LAN expertise but also if those wireless LAN experts have expertise in the healthcare domain,” says Irwin. Collaboration and flexibility Irwin explains that Symphony Services, an outsourced product development company providing end-to-end services through the product development life cycle, always prefers to take a collaborative approach to product development. “Inherited Health came to us with ideas on where they wanted to go with enhancing their product, but they didn’t have a roadmap of how they were going to get there. We collaborated with them on how to develop it.” He says that most of Symphony’s clients expect collaborative activity and some push back from the provider on some ideas, as there are a lot of different ways to do something. Essner states there were “definitely moments where Symphony had suggestions of better ways to skin the cat …

Upcoming Changes Point to Need for Buyers of Outsourcing Services to Alter their Way of Thinking

Outsourcing Center, Kathleen Goolsby, Senior Writer

Outsourcing Center asked leading outsourcing service providers about their predictions as to the biggest changes that will impact outsourcing buyers over the next five years. Their answers clearly point to a need for buyers to alter their thinking about how, when, and why they engage with providers of outsourced services. Extreme performance requires elasticity Joanne Olsen, SVP, Oracle Cloud Services, believes the biggest change will be the “introduction of complete systems as opposed to a myriad of components that companies must integrate, yielding a complex, brittle architecture that just won’t stand up to the requirements of the ‘new normal.’” That “normal” necessitates that outsourcing solutions bring speed and flexibility. Olsen comments that, in some ways, not much has changed from the way it was over the last five years – organizations still need to try to do more with less. However, the competitive field for solutions that address this need is changing due to new cloud solutions. She says that during the next five years buyers will need to look for hardware and software solutions that have been engineered to work together in a manner that facilitates “extreme performance, reliability, and scalability, enabling companies to consolidate tens, hundreds, or even thousands of servers and applications onto a single, consistent, elastic cloud foundation.” In a nutshell, it’s much higher performance at a lower cost plus the assurance of less risk than if clients were to try to achieve these objectives on their own. (Also read Assessing the Coming Impact of Cloud Computing on Outsourced Solutions.) New risks from mixed delivery models Russ Daniels, Chief Technology Officer for HP Enterprise Services, says “the very structure of our industry is changing. The vision of ‘Everything as a Service’ is solidifying into new market offerings that will both satisfy and generate new demands for technology-enabled services.” As buyers of outsourcing services opt for these new offerings, their expectations need to change. Daniels says that, more often than not, buyers’ business models, operational models, and even company cultures will change as they move to a highly automated, standardized, configure-to-order delivery model. He predicts this will lead to an increase in organizations seeking consulting expertise to guide them through this paradigm shift. Daniels points out that CIOs already have contradictory advice and pressure. “While many sources say a move to the cloud and investments in new technologies are imperatives for success, there is still operational pressure to control costs by sticking with current, traditional systems.” Daniels says the answer to navigating the paradigm shift is adopting a combination of choices based on the unique needs of the individual organization. Buyers should look at options that blend current systems and processes with emerging options. And they will need a “hybrid” IT environment – a mixture of in-house, shared, outsourced, cloud, Web-based, and mobile services. Each has different economics, and each will facilitate a different way of doing business that was previously cost prohibitive. With this vast increase in service-delivery options, buyers will need discernment in the complexity of selecting the optimal source for each service. They also will need to know when to shift from one source to another in order to assure services meet their evolving business requirements. Ritesh Idnani, COO, Infosys BPO, warns that outsourcing choices are inherently complex – and becoming more so. It’s no longer a simple matter of choosing between a strategic partner and a cost-effective provider; companies will need both characteristics in the same provider in order to stay innovative and enhance their business effectiveness. “Given complexities and risks, companies will no longer be able to compare service providers on an ‘apples-to-apples’ basis,” says Idnani. “They will need to take a longer-term perspective and consider all the strategic sources of business value that a provider can deliver in helping them on their transformational journey.” Abid Ali Neemuchwala, Global Head, TCS Business Process Services, says that the emergence of providers with multifunction expertise will lead to buyers “increasingly wanting to build a symbiotic relation with one or a limited group of providers that can meet their business requirements and also provide services on tap.” Robert Pryor, Executive Vice President of Sales, Business Development and Marketing at Genpact, ties it all together: He advises that “Companies should change their mindset and start viewing their service providers much more strategically in terms of innovation and transformation. They will need to look for providers that will take a more proactive approach to driving step-fold improvements across an enterprise rather than incremental increases in individual areas.” Stepping away from limited thinking around costs Cognizant’s Chief Financial & Operating Officer, Gordon Coburn, says the single most important change in the next five years will be the focus on intellectual arbitrage. “Outsourcing’s value equation is moving to a new phase beyond simply improving existing outcomes or making them cheaper,” he states. Gene Byrne, General Manager, F&A & SCM Solutions, North America, IBM, says the market is shifting to a focus on delivering higher, sustainable value on an end-to-end basis. Over the next five years the BPO industry will have to address a value proposition with limited labor arbitrage. Organizations that were early adopters of BPO are now asking: “How do we maximize the benefits of outsourcing beyond labor arbitrage?” and “How do we drive innovation in our outsourced business processes?” The mindset for the two value equations is different. Coburn says companies that are in a labor-arbitrage frame of mind ask: “How can we achieve the same outcome for a lower cost?” In contrast, companies thinking about intellectual arbitrage ask: “For the same cost per transaction that we incur today, can we produce a dramatically different outcome?” For intellectual arbitrage, business executives should step back and ask: “Why are we doing business this way? Can we do things very differently and achieve a very different experience for our customers if we have access to skills, expertise, and talent at price points that were not possible previously?” If so, Coburn explains, they can enable new services or capabilities …

Eight Biggest Areas of Risk for Buyers of Outsourcing Services

Outsourcing Center, Kathleen Goolsby, Senior Writer

New delivery models, new pricing models, service providers’ new marketing strategies, moving up the value chain to intellectual arbitrage, new technologies, real-time customer interaction, globalization, and new standards and regulations – these factors set the stage for risks for buyers of outsourcing services in the next two to five years. (Read Forces of Change Shaping Outsourcing Solutions and Upcoming Changes Point to Need for Buyers to Alter Their Way of Thinking for more information on these factors driving change.) 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 …

Decision-Making Insights for Companies Outsourcing HR Functions

Outsourcing Center, Kathleen Goolsby, Senior Writer

Outsourcing HR went through a shake-out over the past two years due to the continual issues around scope and other challenges that buyers and service providers encountered over the past decade. The dust has settled from the revamping efforts, but there are new challenges on the horizon. Here’s what your company needs to know for decisions in HR outsourcing through the next five years. 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: Government-directed/mandated controls across the North American and EMEA markets in the areas of finance and data privacy Government healthcare mandates, especially the U.S. Patient Protection and Affordable Care Act (PPACA) Changes in workplace employment laws 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) 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: Choosing the most effective model (standardization, customization, local or global, and single or multi-process scope) Finding the domain expertise needed to manage change and drive consistency globally across an organization Ending up with a payroll service provider with limited scale or expertise in a particular market or region 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 Taking a “procurement” approach to an RPO decision; Hills warns this can lead to “devaluing the more subjective and ‘soft’ factors in decision making” 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 …

100 Lessons Learned – Mistakes and Successes of Outsourcing Buyers

Outsourcing Center, Kathleen Goolsby, Senior Writer

As GE’s Jack Welch states, mistakes can often be as good a teacher as success. In studying outsourcing relationships through Outsourcing Center’s annual Outsourcing Excellence Awards program since 1996, Outsourcing Center has aggregated and analyzed the lessons learned – mistakes and successes – by hundreds of buyers and providers of outsourcing services. These lessons learned create a valuable body of knowledge and insights gained by real-world experience as to what worked and didn’t work in outsourcing relationships. You can apply these lessons learned in your relationship to help ensure your success in achieving anticipated outcomes. We’re now making available to you a report on 100 Lessons Learned by Buyers of Outsourcing Services, which has not been included in any of the previously published articles and white papers on our site or in our Best Practices white paper series.  These 100 lessons learned focus on issues related to each phase in the outsourcing life cycle – provider selection, contract negotiation, structuring governance, transition, ongoing services, and contract exit or renewal. Click here for free access to the 100 Lessons Learned.  

Seven Action Areas to Strengthen an Outsourcing Relationship

Outsourcing Center, Kathleen Goolsby, Senior Writer

An outsourcing provider’s quality of services and the achievement of the agreed-upon mutually beneficial objectives are essential to success. But there are additional actions that service providers and buyers can take to boost the return on investment and increase the life expectancy of their relationships, that is, strengthen outsourcing relationships. To identify these relationship-strengthening actions, Outsourcing Center conducted a survey among 66 of the buyers and providers participating in its Outsourcing Excellence Awards program. We asked the providers to list the actions their customers took, which resulted in strengthening their relationship. We asked the customers to identify their own actions that they believed boosted the effectiveness of the relationship as well as the things their providers did to deepen the relationship. They identified the following seven types of actions to strengthen outsourcing relationships. At the heart of each is a mindset that focuses on looking out for each other’s best interests. 1. Testimonials One hundred percent of the service providers stated that the most valuable action of their clients was testimonials. Sixty-five percent most appreciated their clients providing testimonials in the form of references to the providers’ prospective customers. Thirty-five percent said their clients’ testimonials in participating in conferences, seminars, client forums, webinars, awards programs, and articles was the most effective action. Eight percent of the surveyed customers said they appreciated their provider’s invitations to participate in testimonials at industry events as it gave them an opportunity for their peers to see them as leaders in their industry. 2. Increasing business An overwhelming majority (68 percent) of both buyers and providers stated that increasing the scope of service demonstrated long-term commitment and was one of the most important ways to strengthen their relationship. This action includes: Adding scope to reward the provider for excellent service or to compensate for process improvements that reduce the buyer’s cost but also reduce the provider’s margin Raising the bar and giving the provider more challenging work higher up on the value chain Providing opportunities for other business units (or government entities) to consider the provider for outsourcing initiatives Providing opportunities for the buyer’s external customers to consider the provider for outsourcing services Renewing a contract 3. Skin in the game Although gain-sharing or other financial incentive programs often are the “skin in the game” in outsourcing relationships, the surveyed participants discussed a different kind of action that demonstrates commitment and strengthens a relationship. Examples of such actions are as follows: A provider invested in a Black Belt program for both the provider’s and customers’ teams supporting the contract. A provider kept its employees’ salary increases low during an economic crisis to help ensure the buyer could continue to do business with the provider. When a buyer informed its provider of a large budget cut due to the economy, the provider (voluntarily cutting into its margin) came back with a proposal that fit the buyer’s new budget yet delivered high-quality services. Buyers also put skin in the game in order to strengthen a relationship. For instance, a surveyed provider stated that its customer developed an incentive / bonus system to enlist the buyer’s staff’s proactive transfer of more tasks to the provider. Another provider cited its customer’s actions in sponsoring financial incentives for the provider’s top performer and long-tenured employees. 4. Increasing expertise This action is a mutual undertaking and takes shape in several ways. Buyers do the following activities: Help the provider gain capabilities in applications and technology platforms that the provider can then take to its other customers. This occurs either with the buyer’s proprietary technologies or through the buyer (as a pilot user) providing feedback on technologies the provider is developing Help deepen and broaden the provider’s domain knowledge of the buyer’s industry and keeping the provider apprised of trends Make sure the provider has visibility into the buyer’s IT strategic road map From the provider’s side, actions include bringing in outside experts to help the buyer in an area of interest, regarding what worked or didn’t work elsewhere. (New healthcare legislation in the United States is an example). The surveyed buyers reported that their providers frequently provide these resources at no cost. Similarly, some outsourcers provided extra resources upon request for special initiatives and did so at great risk since no agreement or statement of work was signed for the initiatives. Buyers also stated that it strengthened the relationship when providers proactively kept them advised as to new technologies. 5. Crisis management Buyers include in these types of actions the provider’s effort to continually minimize impacts to the buyer’s business as well as spending extra money or going outside the realms of the contract (at the provider’s cost) in order to deliver services on time – even if the delay in services is not the provider’s fault. Another action buyers said strengthens a relationship is the provider being flexible regarding issues that arise because something was not clearly stated in the contract. Providers, on the other hand, said it deepened their relationship when their customers proactively brought an issue to their attention for discussion without waiting for a scheduled formal governance meeting. One survey participant described an incident where it grossly underestimated the effort it would take to implement its solution in a particular geographic region. Negotiations were all the more difficult because there was employee resistance to the outsourcing initiative in that region. The provider stated that the buyer demonstrated its commitment to deepening the relationship by being flexible and understanding the financial constraints facing the provider because of the miscalculation. The buyer was flexible enough to get the negotiations out of deadlock and begin moving the project toward a mutually acceptable resolution. 6. Relationship management Other actions to cement a relationship include a customer’s effort to improve its management of the relationship. Examples of such actions that the survey participants cited include: Learning how to prioritize projects given to the service provider Adding an experienced outsourcing manager (instead of just a project manager or the former manager of …

What do Buyers of Outsourcing Services Need to Understand about Diversity Management?

Outsourcing Center, Kathleen Goolsby, Senior Writer

Organizations are recognizing that diversity management in outsourcing makes a measurable difference in the potential return on investment (ROI). The diversity issue extends beyond a differing culture where offshore resources are involved. And it goes beyond ensuring that an organization employs a workforce of multiple races and ethnicities. In outsourcing, managing diversity focuses on getting the best results out of the varied collections of people. Even people of the same ethnicity and culture are diverse. Managing diversity is a huge opportunity but also a huge challenge. Joe Santana, Senior Director of Diversity at Siemens USA, says, “One of the biggest vulnerabilities that an outsourcer faces when taking on a new client is rapidly understanding and managing similarities and differences of experiences represented within the client’s culture.” He adds that poor management of diversity can lead to “total disaster” and failure in an outsourcing relationship. Read more of Santana’s insights about effective diversity management in Outsourcing Buzz Blog. The blog interview also discusses how to start a diversity management program to address the challenges and opportunities.  

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