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Governance

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, …

Action Plans for Managing Attrition in an Outsourcing Service Provider’s Resources

Outsourcing Center, Kathleen Goolsby, Senior Writer

Change sometimes brings unintended consequences. When outsourcing relationships several years ago took on the characteristic of delivering services from one or more offshore locations, an unintended consequence was “talent wars” and attrition. Not managing attrition among a provider’s ranks leads to unsatisfactory service delivery and higher costs. How can the parties manage this dilemma? Should they both bear the cost of resolving the attrition problem? Outsourcing Center studied 74 outsourcing relationships to determine how service providers and their clients work through the issues surrounding attrition on the provider’s team. The 74 relationships were successful outsourcing deals with all or a portion of services delivered from one or more offshore locations; each participated in Outsourcing Center’s annual Outsourcing Excellence Awards program. The 74 relationships include both BPO and ITO and cover multiple industries and SMBs as well as large enterprises. The study revealed remedial actions they took in addressing their attrition challenges. Buyers participating in the study also discussed their perspectives on which party is responsible for costs incurred in the solution. Managing attrition: the triggers In each case, addressing the attrition problem began when the buyer cited the problem in a governance meeting reviewing service performance and delivery issues. The next step was to conduct a root-cause analysis to determine the causes of the attrition. In some cases, the parties agreed to conduct the analysis jointly; in others, the provider was already aware of the attrition drivers. Developing a solution usually involved a two-pronged approach in the studied relationships. First they looked at opportunities to aggressively and immediately stop the leak and put in place retention strategies aimed at keeping the current people. The other prong involved discussions with the provider’s employees to gain an understanding of what would motivate them to stay and not leave to work for a competitor. Attrition triggers uncovered in those discussions centered around employee satisfaction in areas such as compensation, benefits programs, career path opportunities, working conditions, and perception of value. Examples of situations the studied relationships encountered include: The provider’s employees did not feel they were valued as an extension of the buyer’s team. The buyer and provider spent a lot of time and effort in training the team the provider was building to deliver services, but a competitor offered new hires more money as soon as they were trained. The buyer added scope to its existing arrangement; the new scope was a process in which the provider had no expertise and it was too complex for the employees to be successful in their responsibilities. Employees disliked their boss/manager or disliked the commute to work. Addressing the attrition problem For efficiently managing attrition, we need to understand its causes. The most frequently cited examples of addressing the root-cause analysis for attrition among the studied relationships include: Implement discussions with the buyer’s managers and other personnel who interface with the provider’s employees to bring visibility to the provider’s excellent service and encourage them to be demonstrative in recognizing the value of the provider’s team. Implement a system with flow charts and work instructions capturing detailed knowledge of the outsourced process, which replacement employees can use to lower the learning curve when others suddenly depart. Conduct the root-cause analysis of attrition triggers not only when the problem first needs attention but also on an ongoing basis. By monitoring it continually, the buyer and provider will not only uncover new causes of attrition but also will be able to measure the success of strategies they implement to lower the attrition rate. Determine the required skills and experience level for the work as well as a profile with the necessary behaviors to ensure the people the provider recruits to build the team are the right quality. Ensure the provider selects managers with good management skills for motivating, encouraging, and developing employees rather than bossing them. Conduct exit interviews to understand the reasons why employees leave. Review the data periodically to determine if the attrition triggers are different at different points in time and whether there are strategies to put in place that specifically address those periodic differences. When adding scope to an existing arrangement, make sure the provider’s ramp-up effort for the new scope doesn’t “rob” talent from the prior scope, leading to the same type of situation as attrition to competitors. Implement compensation and/or bonus plans that motivate employees to stay on the job for a certain period of time. The buyers’ involvement in these actions plans varied. Most are involved in helping with the recruitment efforts to replace employees lost to attrition, and some are also involved in helping select managers over the teams delivering services to the buyer. Many buyers collaborated with their provider partner to develop attractive career-path, compensation, and reward/bonus plans. Six of the buyers help fund the rewards/bonuses; each of them stated the benefits they reaped from the strategy were well worth the cost of partial funding. They also stated this strategy was particularly helpful in strengthening not only the individual performance levels but also the overall outsourcing relationship. Several participants in the Outsourcing Center study commented that the level and pace of attrition generally improved during the past two years, as fewer employees left their jobs during the global economic crisis. However, buyers and providers alike need to recognize that attrition could quickly rise again as the world economies improve. The action plans discussed in this article are best practices that will help in managing attrition levels.  

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 …

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].  

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 …

Outsourcing Experts Discuss New Flexible Pricing Models

Outsourcing Center, Kathleen Goolsby, Senior Writer

Outsourcing Center assembled a panel of industry experts to discuss the changes in outsourcing contracts and pricing models over the next two to five years. Their insights reveal buyers and providers will approach outsourcing initiatives differently than in the past. Q. Outsourcing pricing models and contract vehicles have evolved over the past few years. How much change will we encounter in contracts and pricing models in the next few years? Partha D. Sakar, Global CEO, Hinduja Global Solutions: Over the next five years, it’s likely that traditional outsourcing/sourcing models, services delineation, governance and, most importantly, the expectations of clients will look far different than what we’ve become accustomed to. In fact, we believe new words and concepts will arise in the global sourcing lexicon. These will reframe the discussion, reframe the client/provider relationship, and reframe the idea of what being a good and valuable partner truly means. Abid Ali Neemuchwala, Global Head, TCS BPO Services: Service providers will have to become strategic partners, or they will fall by the wayside. Strategic partners will start delivering in truly flexible pay-per-use models, leveraging IT and PO synergies from best-in-class technology and processes bundled together. Coupled with this, strategic partners will increasingly need to provide business analytics and insights that buyers can leverage to grow their business. Angela Hills, Executive Vice President, Pinstripe: We predict that flexible pricing models will become more standard and accepted over the next two years. With the new technologies that providers are developing on a consistent basis (such as the rapid change in the marketplace for social media and related technology tools), BPO providers won’t be able to predict pricing for 12 months out, and buyers will have to be open to considering flexible pricing models. The mindset will have to move from one of a fixed 12-month pricing model to one that is revisited twice a year or perhaps even once a quarter to ensure that clients remain nimble enough to meet changing market conditions. Q: What is driving the change in pricing and contract models? Is it due more to economics or to the need for agility? Joanne Olsen, SVP, Oracle Cloud Services: There will continue to be pressure on the providers for lower cost and more flexible pricing contracts as companies come out of the recession. Gene Byrne, General Manager, F&A and SCM Solutions, North America, IBM: Long-term economics will drive decisions outsourcing buyers make over the next two years. However, buyers signing five- to seven-year agreements need to approach their outsourcing engagements with the consideration of continuous improvement over the term of the contract. The tendency to focus on short-term cost savings and labor arbitrage certainly helps satisfy the immediate need, but a balanced approach that includes an eye toward innovation will deliver considerable additional value over time. Sharad Sheth, Director, BPO Capabilities and Enterprise Administration Services Leader, HP Enterprise Services: The change in models is due to market conditions that increasingly pressure companies to contain costs and protect capital. As service providers, we need to offer more buying options with greater visibility and control over expenses. Q. Please describe an example of such an option. Sheth, HP Enterprise Services: In applications, for example, pricing options for tiered levels of service give companies more control over costs. These flexible pricing models enable them to choose higher service levels for critical applications and lower service levels for less-strategic applications. Prices for these scalable services are predictable. This also extends to infrastructure. A suite of managed services, for example, delivers modular, standard packages with predictable pricing and rapid implementation for a faster return on investment. Joanne Olsen, SVP, Oracle Cloud Services: Another example is the on-demand model. It provides flexibility through annual options to terminate a contract without any termination penalties. This model usually also offers different service/pricing levels from which companies can choose. A service provider with this model can also offer flexibility for scaling up and down the scope of services (such as adding or subtracting compute or storage capacity) or moving between deployment models (such as to remote management of a data center). Kevin Schatzle, President, Allied Digital Services: Ultimate flexibility in pricing will come with the cloud model. With op-ex monthly subscription-based models, companies can adjust services up or down to respond to their growth and shrinkage. This model also makes it easier to assign costs to the appropriate internal department. Virtualization, remote management tools, and Software as a Service (SaaS) licensing models will drive the change from cap-ex models to cloud-based delivery. Q. What other possible changes in contracts and pricing will we likely see over the next few years? Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact: Organizations will continue demanding more flexibility in terms of resource and pricing variability as well as minimum resource planning and forecasting. They will also demand no/low minimum commitments and easy and low-cost exits from long-term agreements. In essence, service providers will need to address the demand for the pricing and other advantages of long-term arrangements with the ease and flexibility of short-term contracts. Don Schulman, General Manager, Global F&A and SCM, IBM: In addition to cloud-based platforms and the move toward transaction-based pricing, industry benchmarking for standard pricing will enable additional transparency and add greater flexibility to BPO contracts overall. Q. Benchmarking to be sure that an existing deal aligns with market offerings is an important activity. Are there enough benchmark data yet on outcome-based pricing and offerings? Gene Byrne, General Manager, F&A and SCM, North America, IBM: A large portion of the early adopters of outsourcing are coming up for renewal in their existing contracts. These companies, along with new outsourcing buyers, need to spend the time to understand their current cost drivers and how far the outsourcing market has evolved. These organizations need to recognize that the landscape has changed significantly over the last five years and that many of the drivers and objectives have evolved, especially due to the recent economic climate. Benchmarking at a granular …

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 …

Hot Spots for Growth in Outsourcing

Outsourcing Center, Kathleen Goolsby, Senior Writer

Which industries will experience growth in outsourcing in the next few years, and what risks will buyers of those services face? Are there business processes or functions that will begin turning to outsourcing in the next two to five years? What value opportunities and risks will they bring? In what geographic regions will companies begin adopting the outsourcing model? Outsourcing Center asked leading service providers for their predictions about these hot spots for growth in outsourcing. Here’s what they shared with us. Nearshore, offshore, onshore, best shore Although “nearshore” is a favorite model and buzz term bandied about in outsourcing news and advisories today, it will soon fall by the wayside. First of all, it’s a misnomer. “Nearshore” to Japan, for example, is China or Vietnam; but those two service delivery locations to U.S. and European businesses are “offshore.” Brazil is a nearshore provider but also a large onshore provider. Genpact predicts nearshore service delivery centers will likely continue to grow, but not as significantly in dollars or percentages as the offshore centers. According to Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, we’ll likely see an increase in the use of onshore centers. “Federal, state, and local governments will drive this growth in terms of the attractiveness of incentives they create to stimulate domestic job growth.” Deepak Patel, CEO, Aditya Birla Minacs, says the decision between nearshore, onshore, or offshore is “not so much about achieving scale but, rather, is about delivering the right value to companies by providing the ideal mix of the right delivery destination and the right knowledge set available. In the coming years, newer geographies will emerge, but smart outsourcers will choose the destination that brings the most value.” John A. Haslinger, Vice President, Product Marketing at ADP, says, over time, he expects labor arbitrage advantages will remain but increasingly companies will balance them against the need for particular skill sets. In HR, for instance, “companies will balance labor arbitrage with the service provider’s ability to foster long-term relationships.” Allied Digital Services’ President, Kevin Schatzle, believes nearshoring will increase over the next two years because outsourcing in general will increase. He predicts that in five years, as the industry matures, Canadian pricing will start to approach U.S. costs. Gordon Coburn, Chief Financial & Operating Officer at Cognizant says globalization initiatives are evolving “from a point-to-point delivery model to a many-to-many model where the provider delivers from many locations in the world to a client’s locations in many other parts of the world.” Rajan Kohli, CMO, Wipro Technologies, adds that “best shore is the way to go. That may mean a combination of nearshore and offshore, or it may mean just offshore. Buyers will need to make decisions based on cost, business value, and business availability.” Ritesh Idnani, COO, Infosys BPO, says “the trend of nearshoring will continue to gather steam. But the global economic landscape has definitely mooted the call to a more protectionist outlook by countries, and that trend will continue in the short term. They will, however, have to bear the brunt of continuous monitoring to ensure they continue to be cost effective and build in efficiencies. The ‘offshore train’ left the station several years back; hence, offshore will continue to grow in volume and market share.” Dina Kholkar, Head, BFSI, TCS BPO Services, predicts that the definitions of onshore, nearshore, and offshore will blur over the next couple of years because providers “will increasingly expand their base to build a global network delivery model to address the diverse demands. There will also be an increasing creation of Centers of Excellence by function,” she states. The future shift from focusing on nearshore / offshore / onshore debates is nowhere more evident than at HP where there is now a “Best Shore Services” division. Even so, Jeff Womack, Vice President Global Enablement, HP Best Shore Services, says HP believes that nearshoring will “continue to have a seat at the global delivery table because companies – especially in the European Union region – will want the cultural affinities and languages as well as aspects of data privacy.” Womack also points out that some nearshore locations are already maturing to the point that they no longer meet the requirements to qualify as a true nearshore location because costs begin to reach parity with major markets such as the United States, Western Europe, and Japan. Yugal Joshi, Senior Analyst, Everest Group, says that, “with offshore suppliers seeing their tax exemptions going away, the cost-effectiveness of their large offshore centers will reduce significantly, which will prompt them to go nearshore.” Don Schulman, General Manager, Global F&A and SCM, IBM, predicts nearshoring will grow in the short term because organizations will continue to perform high-level activities (such as budgeting and corporate tax) discretely and locally – regardless of whether shared services or outsourcers are doing the work. “This is less about nearshoring and more about growth due to more complex work moving into a shared-services environment,” Schulman explains. “Success in outsourcing has led to this kind of work moving to a centralized environment. Organizations are beginning to look at their shared-services strategy as a hybrid model. It is not an either/or decision but, instead, a multi-dimensional approach that leverages both internal shared services and outsourcing.” Industries with increasing growth in outsourcing Nearly all of the service providers whom we tapped for insights anticipate that the U.S. healthcare industry will experience a dramatic increase in outsourcing over the next two to five years. Pryor at Genpact says the significant cost pressure and large number of additional people that will need coverage will require that the industry adapt rapidly in leveraging technology, outsourcing, and reengineering to change business models and cost structures. Most of the executives we interviewed also predict a large uptick in government outsourcing in the next few years. Schatzle at Allied Digital Services says government and education will migrate to outsourcing for IT support and “will receive great benefits of modern approaches.” He advises …

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.  

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