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Procurement

When Should You Begin to Prepare for the End of an Outsourcing Contract?

Robert Joslin, Managing Director, Alsbridge

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 6-to-12 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: Internal Changing business direction Cost reduction requirements Access to new technology Change in service requirements Support of M&A activities Performance of current partner External Introduction of disruptive technologies Consolidation of suppliers Changing options for service locations Increase geopolitical risk Regulatory changes Entrants of new service providers 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.  

Under the Radar: A Look at Oft-Overshadowed ITO Trends

Outsourcing Center, Patti Putnicki, Business Writer

If information technology outsourcing (ITO) were a movie, cloud, analytics and mobility would be the headliners. Although this trendsetting triad is having a dramatic impact on how services are consumed and how companies operate, a number of other significant trends are emerging in the information technology outsourcing space. This article focuses on those unsung heroes and the impact they’ll have on the industry moving forward. Changing Expectations In a previous article, we talked about the coming demise of the long-term, single-provider contract. Today’s engagements are shorter, more specialized and far less relationship-based than we’ve seen in the past. Governance is less granular, focused more on results than day-to-day transactions. In almost every way, expectations have changed. “In the past, our clients wanted to know the number of incidents and problems that occurred and how many of these we resolved. That was the benchmark,” said Vijay Balasubramanian, vice president and global head of CPG and eCommerce for HCL Technologies. “Now our clients want to know how much value we added. Instead of just resolving incidents and problems, they rely on us to link the business processes to applications landscape and identify value. In the olden days of information technology outsourcing, the support person didn’t know the impact of the incident on a business process. Now, providers are starting to map business processes to applications and business structures, so front-line support personnel don’t just respond to issues but identify ways to solve these permanently. Instead of contracts built on service level agreements, companies are beginning to base these contracts on output. Innovation has also moved from a value-add buried in the depths of a proposal, into a position of prominence. “We used to spend six months explaining who we were and what we did. Now, customers care more about how providers do ITO; how they bring innovation and how quickly they can do it,” Balasubramanian said. “Innovation is now a critical component to any ITO engagement.” The innovation is in the HOW rather than in the “who” or “what.” A Surge in Desktop Virtualization Desktop virtualization is also on the rise, driven in part by increasing numbers of remote users and contract employees. Desktop virtualization gives these users secure, anytime, anywhere system access from any device they choose – from laptop to tablet to smartphone. “Desktop virtualization offers a number of benefits to companies and their users,” said Harish Krishnan, general manager and head of the End User Computing Services Practice at Wipro Technologies. “Because the data resides in a central location, it is much more secure than data housed on individual devices. The updates and patches can be easily done as the virtual desktops are in the data center as compared to geographically dispersed physical desktops. This lowers the management costs”. According to Krishnan, thin clients significantly reduce power consumption by as much as 80 percent. It also lowers refresh costs. “A thin client is cheaper and the refresh cycles are longer,” he said. “In a traditional environment, a refresh lasts three or four years, whereas a virtual refresh lasts six or seven years. Provisioning is easier as well, because you’re not working with a physical desktop.” Today, companies are recognizing that the real value of virtualization isn’t lowering cost. It’s more about the value virtual environments bring to the table. For similar price as a traditional environment, virtualization delivers increased security, availability, agility, flexibility and a better user experience. However, like cloud, virtualization isn’t an “all or nothing” proposition. “It’s important to note that it’s not feasible to virtualize everything. Companies need to segment users and virtualize what makes the most sense,” Krishnan said. “While power users on legacy systems aren’t strong candidates for virtualization, general office workers and contract workers are. It all comes down to the business case and so it is important to have the right virtualization solution based on the categorization of users.” Consolidating IT Support This new virtual environment has prompted companies and outsourcing providers to re-engineer the way they deliver support. Historically the desktop and service desk were combined functions. But in the last 10 years, these functions have largely been broken out, operating as separate units. “In the past, when someone called the help desk, 20 percent to 30 percent of the calls required someone to physically go to the device to correct the issue. Now, with the widespread adoption of high-performance desktop operating subsystems and remote monitoring capabilities, that’s no longer the case,” explained Chris Pattacini, director of benchmarking for Alsbridge’s benchmarking division. According to Pattacini, more companies are identifying the service desk as the source for problem resolution and desktop/help desk support for more “install, move, add or change” functions. “We’re seeing more organizations bringing these two functions back together and no longer treating them as separate functions,” he said. “As desktop virtualization adoption increases, this more centralized support structure will increase in popularity as well.” Converging Technologies Companies are also getting more innovative in how they promote their product and brand to the consumer market. For example, because of a promotion that involves music downloads, a large, U.S.-based soft drink manufacturer is now also the third-largest music distributor in the United Kingdom. “We’re seeing a huge convergence of media entertainment, consumer packaged goods and retail,” Balasubramanian said. “Instead of investing in television advertising, companies want to engage consumers through social media, music downloads, digital coupons and other digital media. They’re turning to outsourcing partners to take advantage of digitization.” More Complex Skill Sets The advent of cloud, the increase in virtualization and the transformation of IT in the digital age are all changing what a traditional IT department looks like, from the CIO on down. “Fifteen years ago, a CIO’s job was making sure the system worked. Since that time, the CIO’s role has changed as IT is now more closely mapped to business strategy,” Pattacini said. “With that evolution continuing and new delivery models increasing in significance, the CIO of the future will become an aggregator of suppliers and …

Less Haste, More Speed: Improving the ROI on Outsourcing Transactions

Linda Tuck Chapman, President, ONTALA Performance Solutions Ltd.

Despite quantum improvements to outsourcing deals and governance over the past 10 to 15 years, when it comes to achieving outsourcing process excellence there’s still plenty of opportunity. Part of the challenge is that once the decision is made to outsource or change providers, the clock starts ticking….fast. It takes real discipline to know when to slow down and what to do that will ultimately speed up the journey to outsourcing excellence. 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 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 for the Outsourcing Process 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 to Streamlining the Outsourcing Process 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, [email protected] or visit ONTALA Performance Solutions at www.ONTALA.com  

Procurement Outsourcing Is Hot — Even for Hybrid Strategies

Linda Tuck Chapman, President, ONTALA Performance Solutions Ltd.

Procurement outsourcing is the least understood but fastest-growing outsourcing story. The market is heating up and there is a lot to learn. What should you outsource? What should you retain — and why? If you decide to outsource, what should you do internally before outsourcing? How can you implement a hybrid strategy in your procurement process? How can you ensure outcomes create a competitive advantage? Direct procurement Direct spend typically represents 60 – 70 percent of total spend and consists of raw materials, production inputs, and transportation services necessary to manufacture and deliver a final product or a service. In manufacturing, retail, health care, pharmaceuticals, utilities, and consumer packaged goods there is a clear “line in the sand” between direct procurement and indirect procurement. The direct procurement team is horizontally integrated with production. The CPO has a “seat at the table;” the company expects him or her to drive measurable, bottom-line impact and a competitive advantage. Outcomes should create differentiation or competitive advantage. Therefore, the direct procurement team is a strategic corporate resource. If this is not the case or there are some important categories where they cannot generate top-tier results, consider outsourcing. Here are two real-life case studies of successful outsourcing direct procurement: A “best of breed” strategy: One of the largest spend categories for a newspaper is paper. This publicly traded commodity requires highly specialized procurement expertise. It may seem counter-intuitive to outsource procurement, but outsourcing to a recognized specialist is a good way to get access to top talent, targeted expertise, and plenty of buying power. A “top-tier provider” strategy: Healthcare procurement outsourcing is a large and rapidly growing specialty. In the United .States, companies outsource over 70 percent of direct procurement in healthcare to a third party. In Canada, this number is 12 percent but growing fast. In a recent large-scale healthcare procurement outsourcing project, ONTALA’s client cited access to top talent and the specialized expertise necessary to drive 12 – 17 percent cost savings as the catalyst for change. The buyer will achieve savings by leveraging the scale and scope of the provider. Indirect procurement Indirect spend in manufacturing, retail, healthcare, pharmaceuticals, utilities, and consumer packaged goods includes categories such as office equipment and supplies, facilities, technology and telecom, contingent labor, HR and finance transaction processing, commercial print, media buy, third-party legal, MRO, and travel. Indirect spend typically represents 30 – 40 percent of total spend, but investment in indirect, non-core procurement is often a fraction of the direct procurement organization. With 30 – 40 percent of total spend in scope, it is obvious that indirect procurement actually is important. The resource-starved indirect procurement team is often short of top talent and influence. Hmmm…this looks like a golden opportunity in the making. And what about services companies like banking and insurance, engineering, or marketing firms where virtually 100 percent of third-party spend is indirect goods and services? Or is it? Arguably 60 to 70 percent of total spend also consists of inputs necessary to produce services sold to customers. So doesn’t that mean that 60 – 70 percent of indirect procurement spend has strategic importance? Yes, most but not all. How much is your company willing to invest in attracting and retaining top talent internally? Objectively analyze the strategic importance of indirect spend categories. How do results compare with external benchmarks? Are these results sustainable? What is the outcome of a pragmatic analysis of internal procurement capabilities versus what is available externally? Have you done a comprehensive financial business case on a category-by-category basis and as a whole? Do you know if and which categories are candidates for procurement outsourcing? What is the payback — short and long term? Here are two real life case studies of successful outsourcing indirect procurement: A “hybrid” strategy: Sourcing technology and telecom in a financial services company is a good category to implement a hybrid strategy. There may be a mature sourcing organization that understands internal business drivers but only sources this category every three years. They will not have current benchmark data and best practices sourcing strategies. This may be a good case for hiring an advisor and/or purchasing benchmark data and research. A “top-tier provider” strategy: ONTALA recently developed an outsourcing strategy for indirect procurement for utilities sector companies. Indirect spend represented less than 20 percent of total third-party spend. There was a scarcity of top talent and obvious savings opportunities but insufficient capacity to effectively pursue. In short, indirect procurement was an under-resourced poor cousin to the strategically important direct procurement team in a rapidly changing industry. The solution was outsourcing indirect procurement. Some helpful tips: Determine whether, if done well, the spend category or categories could become a competitive advantage. Realistically identify important bona fide risks of outsourcing some or all procurement functions. Then do the math, ensuring financial benefits significantly outweigh risks. Objectively assess skills, capacity, capabilities, results, and the strategic importance of your company’s procurement organization. Look at this on a category-by-category basis and as a whole. To be strictly objective about the assessment, you may want to hire a qualified third party. Would outsourcing some or all categories drive greater value than maintaining status quo? Is the best approach a hybrid solution consisting of outsourcing and upgrading internal capabilities and/or hiring advisors on a case by case basis? Selectively outsource to a best-of-breed provider with a proven track record in the specific category and/or outsource to a top-tier provider, with deep, reference-able expertise in both the category and your industry. Develop a viable exit strategy, before you outsource. Conclusion: Proceed, with caution Linda Tuck Chapman and ONTALA Performance Solutions (www.ONTALA.com) are expert advisors in outsourcing, strategic cost management, and governance. Contact Linda at (416) 452-4635 or by e-mail at [email protected].  

Forces of Change Shaping Outsourcing Solutions

Outsourcing Center, Kathleen Goolsby, Senior Writer

Like a pre-storm sky, a look at the investments outsourcing solutions providers are currently undertaking presents evidence of tremendous change over the next five years. They’re mapping out a new course, and buyers of outsourcing services need to understand where providers are headed so they can make informed decisions. Outsourcing Center asked 12 leading ITO and BPO service providers about the forces driving their investments for solutions over the next five years. Market volatility, market differentiation, lack of investment capital, collaboration, globalization, and rethinking how work gets done are among the top business needs for which buyers are asking outsourcing providers for help. Speed is the theme that emerged in the interviewed providers’ descriptions of their investments in solutions addressing these forces. Here’s a rundown. Cloud technologies Wipro Technologies is establishing strong system integration capabilities in private clouds and in integration of public and private clouds. Rajan Kohli, CMO, says, “Our investments are geared at creating platform cloud solutions that successfully deliver business value to clients.” According to DonSchulman, General Manager for IBM’s global F&A and SCM business, IBM continues investing in its BPO Business Process as a Service (BPaaS) offerings. He says, “Our cloud-based BPO solutions are specifically designed to enable quick deployment of this technology in order to drive rapid benefits. This includes immediate cost-efficiencies, increased scalability, and easier access to technology innovation as well as sustainable performance improvements for client organizations.” Infosys BPO is investing in services for the cloud as well as services on the cloud “to help clients achieve faster process efficiency and effectiveness,” says Ritesh Idnani, COO. Joanne Olsen, Senior Vice President, Oracle Cloud Services, points out that “The economy may be officially out of a recession; but organizations have learned that, in the ‘new normal,’ extreme volatility and uncertainty will persist.” Making large capital investments without a fast return on investment is no longer an option; yet, given the uncertainty, organizations need to accelerate the pace of innovation and become more agile and responsive. “Flexibility and speed are the key attributes for any outsourcing solution for the foreseeable future,” predicts Olsen. Oracle has invested in cloud services to enable clients to achieve financial flexibility and business agility to adjust to changing market conditions and demands quickly and efficiently. With cloud services, they pay for what they use and move their capital expense to an operating expense. Allied Digital Services is also investing in the cloud delivery model to help companies move from the own-and-operate (cap-ex) model to a services-based (op-ex) model. Kevin Schatzle, President, refers to this as an “IT evolution” enabled by advances in virtualization technologies and the development of remote management tools. As part of the evolution, Allied Digital invested in an integrated delivery framework with customized best-in-breed infrastructure management tools integrated on a common platform that enables visibility to all critical components of an organization’s IT infrastructure. Partha Sakar, CEO at Hinduja Global Solutions, says “Cloud concepts certainly will disrupt the playing field, but success in many of the disciplines will continue and always require well-trained, compassionate, culturally compatible and, as appropriate, proximate resources.” Therefore, HGS is also investing in building more remote data centers in proximity to current and future growth markets. Industry-specific solutions / platforms / collaboration “Companies are looking for new ways to harmonize business processes on an end-to-end basis across their enterprises, so we’re responding to that and investing accordingly,” says IBM’s Schulman. “Our strategy has been to focus on a tighter linkage between F&A and SCM businesses to facilitate more cohesive end-to-end capabilities. Schulman says companies are increasingly recognizing the need to address both the outsourced and retained portions of their finance and procurement back-office processes in a more integrated, holistic fashion. This requires technology that enables visibility across all processes including non-outsourced scope. He says clients are also looking closely at creating vertical integration of their business to find new ways to interact with their vendors and customers in a consistent manner. “In fact, we now have the technology available to establish a shared platform that goes beyond individual processes,” says Schulman. “We are able to drive standardization across companies and even industries by connecting data from many disparate sources. Access to this kind of information enables companies to proactively identify and respond to emerging trends, both large and small, for enhanced business agility. At the same time, this technology will help clients innovate their processes in ways that differentiate their enterprise.” Gordon Coburn, Chief Financial & Operating Officer at Cognizant, says “Tectonic shifts in the economy, society, and technology are driving organizations to create an environment where work becomes a more fluid and intimate collaboration between employees, customers, suppliers, and other stakeholders, delivering continuous business value.” New virtualized platforms are enabling real-time collaboration within organizations and with external partners, leading to new ways of working, managing, and innovating. To achieve new ways of working, Cognizant is investing in frameworks and methodologies that help companies assess their ability to create more collaborative and virtual ways of working. Deepak Patel, CEO of Aditya Birla Minacs, also predicts “virtualization” of enterprise business models will accelerate business opportunities for the BPO industry. Aditya Birla Minacs is investing in robust process capabilities aligned to vertical domains. He says market forces are now providing outsourcing service providers with “a unique opportunity to dive deeper into the core processes of their clients and move up and across the value chain.” TCS is investing in building a strong pool of industry domain experts. It is also investing in acquisitions (such as Citigroup Global Services Ltd and Supervalu’s India captive) to gain vertical expertise. In addition, TCS continues to invest in building beyond its current seven vertical platform BPO services. These services deliver a process as a service, leveraging the cloud. “Over the next few years, we will invest in strengthening our platforms and increasing service coverage,” states V. K. Raman, Head, Domain Services, TCS BPO Services. Infosys BPO is investing in vertical domain competencies not only by lateral hiring but …

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 …

New Outsourcing Service: Independent Governance of the Relationship

Outsourcing Center, Kathleen Goolsby, Senior Writer

At Outsourcing Center, a frequent comment we hear from buyers of outsourcing services is: “If I had it to do all over again, I would put in place a more effective structure for managing the service provider and the relationship.” The problem is significant enough that it spawns many advice-oriented articles with titles such as: Why aren’t you happy with your service provider? Getting more value from managed services The IT management dashboard Next-generation IT management It also has spawned a new outsourcing service – independent relationship governance. Not implementing an effective governance structure is a common problem, no matter the size of the buyer, but especially manifests itself in companies that lack internal resources with adequate experience in managing outsourcing relationships. Tim Stacey, Managing Partner of Spice-ITSM.com, an independent provider of outsourcing governance services, points out the problem is broader than just designating roles/responsibilities and having an issue-escalation structure. “Buyers often lack the skills to manage their service provider once they’ve moved beyond the contract negotiation phase. They don’t understand how to get the provider’s buy-in for new situations that arise. They don’t know how to create a win-win atmosphere. Some even lack clear service definitions and an effective measurement process to make sure the service provider delivers what they require,” says Stacey, who has 17 years prior experience with UK-based service provider and telecom companies. The person in the buyer organization tasked with managing the outsourcing relationship is often the former senior manager of the process the company outsourced. Stacey reiterates what many organizations find out the hard way: “It’s a completely different kettle of fish – or a different ball game – to manage outsourced services than to manage in-house services,” he says. What does an independent relationship governance firm do? Simply put, the independent governance firm acts as a middleman between a customer and its outsourcing service provider in governing the relationship throughout its entire life cycle. However, not all firms providing such services are equal in their approach or the outcomes they achieve. Although there are only a few competitors today in this budding area of outsourcing services, there are enough to notice a difference. Most take a procurement cost-focused approach to managing the service provider on the customer’s behalf. In fact, their background is usually in providing procurement services or in developing software that monitors provider performance. In contrast, others such as Spice-IT take an operational and relationship-oriented approach. Stacey says his firm’s differentiation is due to the background of its management team, which has many years of experience in actually delivering outsourced services. “We understand the dynamics of both parties’ business interests, and we know how to create an atmosphere for interactions and decisions that are mutually beneficial.” Stacey adds, “Our approach to providing independent governance services is from a perspective of ensuring best service rather than just low cost. We focus on improving the relationship so that both the customer and service provider can get more value from it.” Benefits of outsourcing to an independent governance firm Faster realization of ROI. As with any outsourced service, the time to realization of benefits, plus the provider’s expertise, are the primary benefits of working with an independent governance firm. “Because we have the governance expertise and experience, our clients get immediate results and faster return on investment (ROI) from governance through our services compared to investing in training their relationship managers,” explains Stacey. Life-cycle approach to governance. Service offerings usually span the life cycle of a relationship and go to the extent to which a client is comfortable. Spice-IT, for example, provides services in four segments: service definition process at the beginning of the relationship, transition process, ongoing governance process, and the transformation-of-governance process (which aims to shift governance back to the buyer). The up-front definition process is an area where buyers without the requisite experience often make mistakes. Stacey explains an example of what can happen. “They often tell the provider what they want to buy; but if the provider doesn’t have that exact service, it often comes back and says, ‘Our service is not exactly that, but it will deliver the same as what you’re asking.” As an example of benefits in an effective ongoing governance process, the independent provider should be able to determine why a dashboard says the service provider’s services are green but the “noise” and other data coming from the customer organization indicates it should actually be orange. “We ensure the parties in a relationship don’t hide tensions that can result in disputes,” Stacey says. Face-to-face interactions between the parties. A problem that plagues many outsourcing relationships these days is the lack of opportunities for face-to-face interactions between providers and customers. The cost of regular travel to a distant provider’s facilities can be prohibitive for the buyer. And the lack of opportunities to promote enhanced services is problematic for many service providers. These relationship challenges are especially characteristic of companies that fit the ideal profile for independent relationship governance services. For Spice-IT, for instance, the ideal client has 150-1,000 full-time employees and a multi-vendor environment for its IT services. The independent governance provider solves both challenges in face-to-face interactions. A UK client of Spice-IT, for example, had multiple service providers in several countries spread throughout Europe and lacked the internal resources to have adequate face-to-face interaction with each of them. On the client’s behalf, Spice-IT attends meetings with each service provider and reports back to the client. The result is more frequent and regular contacts with the client’s service providers, which both parties appreciate. Spice-IT also travels to various providers’ facilities to observe the service performance in real time. “Initially, some service providers are concerned that they won’t get as much customer contact because of our involvement as a middleman,” comments Stacey. But in reality they find they get more feedback from their customer – through us – as opposed to less, or even not getting it all without us.” He adds that service providers like the …

How the PwC BPO Team Continues to Shape the BPO Market

Joseph Vales, Senior Partner, Vales Consulting Group

When someone writes the definitive book on the growth of the global outsourcing market, there will be a chapter on how the Pricewaterhouse Coopers (PwC) BPO group shaped and drove the BPO marketplace in the late 1990s. Started in 1996, the PwC BPO group grew to $520 million in annual revenue by the end of 2000 with an annual run rate of $710 million when the firm sold the North American business to IBM in 2001. In just five years, the PwC BPO team grew from a core group of 15 executives to several thousand. It’s no surprise that today PwC BPO alumni are in senior leadership positions at several top outsourcing firms such as Accenture, IBM, Capgemini, NorthgateArinso, Sutherland, ACS, Ceridian, WNS, OCE, and Wausau. Alumni are also financial and strategic consultants to many of the top providers and are leading breakthrough research programs across the globe. The industry considers them outsourcing industry influencers in North America, Western Europe, Eastern Europe, and Asia Pacific. They are board-level advisors to firms in both North America and Europe. It was and is a special group of professionals who have led the industry for over 15 years. PwC BPO was blessed with extraordinary leadership during its five-year run. Tom Beyer founded the group in 1996 with an ironclad vision that consulting firms needed to do more than just advise on strategies or implement systems. Beyer saw BPO as a new way for consulting firms to take responsibility for their recommendations by running operations and, in the process, redefine how corporations managed their businesses. He saw BPO as a revolutionary/radical approach to corporate management. Beyer brought together a leadership team that shared his vision. He convinced PwC management they needed to invest at least $50 million in the business and that the BPO group needed to be a separate service line of the firm — just as important as audit, tax, and consulting. This was an extraordinary accomplishment that gave the BPO group the freedom to invest in its success and create a special kind of organization. Beyer passionately drove the early growth of the business and then retired. But after Tom Beyer, there was a seamless transition to John Barnsley, the legendary head of the UK practice who, like Beyer, was a brilliant visionary. Barnsley was the type of leader that just about everyone would go through walls for. He led the explosive expansion of the BPO business with a series of breakthrough contracts that built the BPO market across the globe. He was a brilliant communicator who understood the power of thought leadership and the importance of working closely with the leading research firms and influencers. Today, Barnsley is a director on several boards in both the United States and Europe. He is special. I would do anything for John Barnsley. Prior to 1996, much of the focus of the outsourcing market was in ITO. Working closely with industry influencers, PwC BPO redefined the market to give BPO equal attention. But to succeed in the outsourcing market, PwC also needed to redefine the BPO market to mirror its strengths as a service provider. PwC built its business around a multi-process value proposition. It anchored its positioning with F&A and the claim that “F&A R Us.” We wanted PwC to be known for its finance and accounting excellence. We connected other processes to F&A in a hub/spoke delivery solution that no other service provider could match. It was brilliant positioning. Prior to PwC, the BPO market was mostly defined as a single process like payroll. PwC BPO redefined the market to focus on multiple processes bundled together. The corporate market led by transformational CEOs responded to the positioning and sought out the PwC big-bang approach to BPO. The big early deals of the BPO market followed this approach of bundling multi-HR or F&A processes together for an integrated solution. The size of contracts increased significantly, bringing more attention to the BPO market and helping PwC BPO land a series of ground-breaking contracts such as: The largest F&A contract in the history of outsourcing serving BP in multiple geographies The largest HRO deal on an annual basis with Nortel in Canada The large Equifax deal, which integrated HR and F&A The Delta deal that brought best practices to revenue accounting. It was the first deal that integrated F&A and procurement in Europe The integration of applications with processes that powered transformational change at BP The real estate outsourcing deals in Australia where PwC BPO was the dominant provider of government services The European deals that integrated F&A and procurement for the first time The many deals in the UK and Western and Eastern Europe that were the early proof points for outsourcing’s ROI Selling BPO contracts is always tough, but serving clients from scratch was even more difficult. PwC BPO took its $50 million war chest and invested heavily in building out its breakthrough Centers of Excellence in locations such as Rotterdam, the industry’s first Pan-European service center; Krakow, the industry’s first F&A center in Eastern Europe; and Tulsa, where we served BP and the energy industry with over 1,000 F&A professionals. We overcame political uncertainties and built world-class Centers of Excellence in Columbia and Venezuela. Our HRO team invested several million dollars developing the prototype for the industry’s first self-service portal. In F&A, we formed a consortium with BP and Oracle to develop a radical framework to transform F&A to take out 70 percent or more of F&A costs. The pace of change was breathtaking. We did this all in just five years. PwC also invested millions in thought leadership through not only its series of white papers in each of the process domain areas but also through sponsorships of outsourcing information portals such as the Outsourcing Center, industry and association conferences, and industry research. PwC also conceived and sponsored one of the industry’s first awards program) — The Outsourcing World Achievement Award. If there was a conference or event, PwC …

THE ROI for Strategic Change Management in Outsourcing

Laura Stone, CEO, Stone + Company

Why do outsourcing initiatives fail? I believe poor change management is to blame. Poor change management translates into: Slower speed of adoption Lower ultimate utilization Lower proficiency Together, they all hurt the “return on investment” (ROI) “in an outsourcing effort and are limited to a “past focused” thinking to do the same activities better, cheaper, faster. On the other hand, effectively managing the human side of change from a future-based approach can help you: Accelerate adoption Increase overall participation Improve the benefit employees realize from the change These three things increase outsourcing ROI. This is not just my experience. The reality is even starker. McKinsey Quarterly reported that projects that employed excellent change management delivered 143 percent of the expected ROI. Projects with poor change management only delivered 35 percent of the ROI. The math makes the case. I believe the industry needs a mindset shift in behavior. All too often, companies reduce change management to just training and communication. In the procurement process, I’ve observed change management is often the first to get cut during outsourcing negotiations. What’s left is transaction-based change management. The need for strategic change management in outsourcing Instead, companies need forward-looking strategic change management based on what a buyer and service provide can create together in the future that is far superior to what they have today. Strategic change management produces results for both the short and long term. It has a positive impact on the relationship between buyers and service providers. It helps both parties to the transaction create an outsourcing relationship while still serving the needs of their own companies. So, how do you change the mindset to strategic change management? Here’s the first step: have both parties participate in alignment planning. These sessions enable the tough conversations. They force the group to focus on the highest impact work. And they allow the leaders to address both strategy and team dynamics. This, of course, is not easy. Stuart McGuigan, CIO of CVS Caremark, described the process well when he said, “Part of creating change involved holding two incompatible ideas in your head at the same time and somehow still functioning. Being highly responsive to our business partners’ and customers’ needs and creating standardized processes and technology platforms can seem like conflicting goals. But doing both is key to maximizing value.” The reality is outsourcing buyers who engage strategically clearly understand the financial impact of change work. These are the buyers who achieve top performance for their companies. Lessons from the Outsourcing Journal: Outsourcing buyers who embrace strategic change management achieve top financial performance because their continuous actions accelerate adoption, increase overall participation, and improve employee benefits. It’s a mistake to reduce change management to just training and communication or cut it during outsourcing negotiations. Outsourcing partners can align their goals by doing alignment planning. These sessions enable the tough conversations, force the group to focus on the highest impact work, and allow the leaders to address both strategy and team dynamics. Laura Stone is CEO of Stone + Company, a strategic change management firm that helps leaders and their teams deliver results they can be proud of by transforming fragmented teams and/or strategies into a cohesive team with an aligned game plan for achieving superior performance and true team alignment FAST. To learn more, please visit: www.stoneandcompany.com.

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