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Required Reading on the Realities of Business Transformational Outsourcing

Success Principles for BTO Relationships

When we began unraveling (see Part 1 of this series) the threads of what is currently referred to in the marketplace as “business transformational outsourcing” (BTO), we concluded that BTO is not an outsourcing model. It is a type of outsourcing relationship. Unlike traditional outsourcing, BTO requires the buyer to significantly change the way they traditionally have worked with outsourcing providers.

Starry-eyed buyers who overlook this essential underpinning — of the relationship itself as being key to the outcomes achieved in BTO agreements — may find themselves marinating in expensive, long-term contractual obligations not resulting in the desired transformational outcomes.

This concluding article of the series shines light on BTO’s future path and its service providers’ value propositions and also provides buyers with principles in structuring for success.

Principle #1: Don’t Gloss Over the Risk

While outsourcing relationships have evolved over the past three years to making an effort to approach the relationship with an attitude of “we,” (rather than “us” and “them” or “vendor and client”), BTO relationships require a tighter interface – like a shirt with every button buttoned, not just the top or bottom ones.

This involves a deep level of mutual trust – not just trust in each other’s capabilities and ethics but, rather, the trust that grows from a continual demonstration of mutual commitment to each other’s best interests. This level of trust involves mutual open, direct communication on a continual basis (both informal, day-to-day operational communications as well as formalized executive-level communications) as to where the relationship is headed and how it’s doing in getting there. It often involves sharing proprietary information or intellectual property.

At IBM Global Services, Cynthia Erdman, global strategy leader, Business Transformation Outsourcing, Business Consulting Services (BSC), points out BTO clients want the benefit of continuous strategic change and innovation. That requires not only the provider’s investment in innovation and expertise in effecting change, but also a collaborative manner of working together.

Collaboration is crucial, both in developing the trust in each other and forging a true partnership approach to the relationship. Without this approach, successfully achieving continual high-quality, transformational outcomes are knocked down from the start.

Mike Jones, CEO of (i)Structure, says BTO collaboration starts in the discussions of an approach to the solutions. “Buyers tell us, ‘Here’s where we are, and here’s where our business is going. What do you think our issues are going to be, and how can we go about dealing with them?'” says Jones.

Structure the relationship and pricing for speed of change. Reducing the time needed to achieve business outcomes is one of the distinguishing characteristics of transformation in BTO initiatives. “A lot of our clients want a first-mover advantage,” states Joseph W. McGrath, corporate executive vice president and president, Enterprise Transformation Services at Unisys.

“Speed is everything,” says Michael Whitacre, senior client executive, Acxiom Corporation. “The Internet has been a disruptive technology for consumer-focused companies, and consumers now have a myriad of choices. Companies that offer superior customer experiences will reap loyalty and be able to create highly profitable relationships. But a customer-centric business transformation can only be accomplished by also transforming the underlying IT. Legacy systems built for product distribution and operational efficiency need to be reworked to provide better customer information more quickly.”

Motivated by the necessity of speed in achieving objectives, Whitacre adds, companies will reach out to BTO providers experienced in achieving transformation in multiple vertical markets.

Pricing for speed of change depends on how incremental the change is. Providers’ pricing methodologies vary.

Sally Herbert, global executive head of the Enterprise Resource Transformation Practice at EDS, explains their pricing methodology for transformation initiatives. “All the transformational activities in our model are upfront, so we price the service on a long-term contract. The price from the start is the same price throughout the term of the contract, along with an upfront bubble of cost.”

Buyers that opt for this pricing model incentivize a provider to be very good and fast at what they’re doing; the sooner the transformational phase is completed, the sooner the provider reaches the ongoing revenue.

Others opt for a risk-reward sharing mechanism to incentivize ongoing change initiatives; they pay for transformation when it is delivered.

The buyer clearly has an impact on the speed of change, too. As IBM’s Erdman states: “The buyer’s ability to impact change in process areas is a key factor in how quickly they can achieve change throughout an enterprise.”

McGrath at Unisys adds: “BTO’s volume of change usually forces the client to have a change management executive who will champion the change on a day-to-day basis.”

An important part of the partnership approach in BTO arrangements is managing risk. Although risk mitigation – shifting risk to the service provider – is traditionally a benefit of outsourcing, there are subtle differences (see Part 2 of this series ) in the DNA of business process outsourcing and business transformational outsourcing.

Transformational relationships require a different mindset, viewing the risks inherent in innovation and change as an opportunity. Nevertheless, the opportunity is usually surrounded by a need to dramatically speed up the work to achieve the change, develop best practices and benchmarking along the way, and invest in real-time innovating around processes. BTO arrangements do not thrive without mechanisms for creating value for both parties to share (see Part 3 of this series) in the reward of shouldering risks in continual change.

Principle #2: Cozy Up to Change

The change factor extends beyond the individual BTO partnership and its need to provide solutions for the buyer enterprise’s ever-changing competitive needs. Indeed, change punctuates where the BTO business, itself, is headed.

Today, the process of transforming an enterprise already must consider global aspects of a solution, regardless of whether the buyer has physical facilities in multiple countries or whether it utilizes the Net to compete around the world.

Erdman at IBM states, “We consider our ability to have points of contact in countries all over the globe and being able to deliver a solution that applies to all of our clients’ locations around the world as key. Global sourcing is a very important part of our value proposition.”

The essentials of broad, industry-wide BTO solutions (as opposed to process-centric solutions) are just now taking shape, as are the global aspects. BTO’s targets and solutions will be constantly on the move.

So will its providers, who are already carving out BTO territories from their existing domain expertise in business processes or IT and building those into industry solutions. (See the sidebar for examples of global and industry BTO solutions, highlighting the value propositions and methodologies of providers.)

There is no doubt that BTO will not only convert what its customers’ businesses actually do, but will also lead to converting the provider marketplace. Providers are already consolidating to cover process, industry, or IT gaps in capabilities for BTO offerings. (i)Structure, for example, is entering into strategic agreements to provide scalable IT infrastructure to BPO providers who otherwise would have to make intensive capital investment to acquire the IT infrastructure necessary for BTO capabilities.

Buyers must structure their contracts to incorporate flexibility for a changing marketplace and technology. The infamous change order necessitated by the way many outsourcing contracts are currently structured often leads to battles. “You have to approach BTO with a much different relationship,” says McGrath at Unisys. “The word ‘partnering’ has become a clichÈ but, in reality, you really do have to have a partnership for BTO. You also have to write a different kind of contract to remain agile.”

The role of IT in enabling BTO. Unless companies link business strategy to business processes and IT (and outsourcing to run them cost-effectively and efficiently), they cannot make real transformational changes.

Driving business transformation and moving to global solutions requires an incredibly robust technology enablement. As Joe Vales, senior partner with the Vales Consulting Group, LLC, a business development advisory firm, explains, the challenges are dynamic. “Developing an integrated global solution — where the books are closed globally on time; all the information in 40-50 countries is integrated in a consolidated manner; all the local customs, ordinances, policies and procedures are fully reflected in HR – has to be driven by technology.” It’s not the model of today, where the provider’s people are resident, as appropriate, to handle some complex global nuances.

Moreover, IT enablement of BTO will eventually fully integrate business functions that touch each other. Procurement, for example, affects accounts payable and receivable; payroll touches human resources and accounting processes.

So the future likely holds such creatures as BTO providers (with vendor-management expertise) that can bite off IT, finance and accounting, human resources, and procurement for a global client with mega-locations in 50 or more countries around the world.

Today, Vales says, that is still too big a bite for one provider to swallow because of the risks inherent in multiple\\function and global complexities. “Before that can happen,” he predicts, “we may see a whole new breed of outsourcers with the ability to bring in the ‘killer app’ — technology to integrate all those functions and global complexities.”

Principle #3: Don’t Be Seduced

BTO is a budding brave new world – an extraordinary environment of evolutionary actions with enterprise-wide and global outcomes. As Herbert at EDS warns, “The complexities of BTO cannot be shoved into cookie-cutter approaches.” But each provider has leveragable components already built into their models and currently being added to their offerings.

Selecting the right provider as a partner in a business transformational venture requires an understanding of the real dynamics at play. Buyer enterprises should seek providers that have the capability to

  • impact multiple enterprise functions and business unit goals
  • deliver end-to-end solutions
  • invest in innovation and technology infrastructure
  • continually generate more strategic value
  • have a cultural fit with the buyer enterprise

But not everyone can walk the talk. Buyers seeking a BTO provider that will be able to deliver on the buyer’s transformational vision should run – not walk – to an objective, third-party advisory firm for assistance in finding the right partner and structuring the relationship so that the vision can come true.

Lessons from the Outsourcing Journal:

  • Successful outcomes in business transformational outsourcing require a deep level of mutual trust and a continual demonstration of mutual commitment to each other’s best interests.
  • BTO success requires collaborative approaches to solution development and ongoing handling of challenges.
  • Risks in BTO should be viewed as an opportunity for both parties to benefit; thus, risk-reward pricing structures should surround the risk and ongoing-change/improvement aspects of the relationship.
  • Buyers should have an executive-level change management champion, as the buyer’s ability to impact how quickly change can be achieved is key.
  • Buyers should seek BTO providers that have the capability to impact multiple enterprise functions and business unit goals, deliver end-to-end solutions, invest in innovation and technology infrastructure, continually generate more strategic value, and have a cultural fit with the buyer enterprise.
  • BTO relationships will not supplant ITO or BPO. The type of outsourcing relationship entered into should be based on the outcomes the buyer wants to purchase. But buyers should consider that outsourcing’s strategic benefits are achieved in a long-term relationship, which will be fraught with changes in the buyer’s business needs and marketplace, as well as evolving technology.

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