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Research & Insight

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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 Other risks of lock-in include being weighed down by legacy systems and outdated applications that constrain the buyer from adapting to current business demands, as well as a rigid cost structure.”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 …

When is an SLA Not Necessary in an Outsourcing Relationship?

Outsourcing Center, Kathleen Goolsby, Senior Writer

A service level agreement (SLA) plays two important roles in an outsourcing arrangement. It sets the stage for the service provider’s accountability, and it is the major factor in determining the price of the service. The buyer of outsourced services can achieve a comfort level that it’s getting what it pays for if it regularly monitors the provider’s performance against service level agreement specifications for such factors as accuracy, timeliness, regulatory compliance, customer satisfaction, etc. Establishing SLAs in an outsourcing arrangement is critical, as it helps the buyer eliminate risks in outsourcing. However, the fact is there are times in outsourcing relationships where the parties choose to proceed with a new initiative without tying it to SLAs. Is there an advantage to doing this that outweighs the risk? We asked this question of the buyers participating in Outsourcing Center’s Outsourcing Excellence Awards program. Their responses provide insights into when it might be acceptable to move forward without SLAs as well as factors that lead to a comfort level in proceeding without SLAs. Types of initiatives entered into without SLAs The surveyed buyers stated there were types of situations that led to starting new initiatives or a new scope of services without SLA specifications for those services. 1. Side projects. The buyers cited this segment of situations without SLAs more frequently than any others. In these instances, the initiative was a small “side” project that was not part of the process already outsourced. Examples include testing a theory, helping to eliminate backlogged work in a function related to the outsourced process, or experimenting with a potential opportunity that arose from brainstorming. In some of the side projects, the buyer and provider both discussed at the outset that they could potentially transition to pilot projects or to long-term services, but that was not necessarily a goal in lot of these projects. One buyer addressed the risk factor stating that essentially there was not much risk in moving forward without an SLA in these initiatives because the buyer would “be in no worse situation” if the initiative didn’t produce the hoped-for outcomes. 2. Time to market. Coming in second place for most frequently mentioned, the buyers in this second group believed they had a unique opportunity and a great risk in not starting the initiative quickly; they felt it was too risky to delay it by taking the time necessary to negotiate SLAs. These initiatives were not for short-term services. They were usually something completely new and not associated with the outsourced process yet were similar to the work already outsourced. In each case, they intended to establish SLAs at a later point in time. Several buyers commented that these kinds of initiatives were intended as “something we could partner on.” 3. Impact on the relationship. Similarly to the partnering aspect in the instances in #2 (time to market), the buyers in these situations chose to move forward without SLAs because they “didn’t want to be unfair” to their service providers. In most of these cases, the initiative involved a new process with which neither the buyer nor provider had experience, nor were there industry benchmarks. As one buyer put it, “We didn’t think it was fair to ask our provider to commit to a service level blindly with no data points to back it up.” A few were situations where the buyer had a mindset that SLAs imply a penalty approach to services and are associated with “managing a vendor” rather than taking a partnering approach and, therefore, should not be used in an initiative designed to enhance a partnering relationship. Factors leading to comfort with not having SLAs Without exception, trust was at the heart of the surveyed buyers’ comfort level in starting initiatives or a new scope of services without SLAs in place. Their responses included such statements as: “We are confident they are a partner with us and are working for our mutual benefit.” “We really understand each other and know we can trust each other.” “Our experience with them to date shows we can trust them.” “We know that they understand the quality we expect, so we know we can trust them.” “We trust them because we know they recognize it is in their best interest and their reputation to meet our targets and ensure we are satisfied with their service.” “They always take a long-term approach to our relationship, and they’re going to execute the way they always have, even if there’s not a piece of paper dictating what they have to do.” However, trust is not blind faith, and in outsourcing it extends only to the level at which the providers have demonstrated their trustworthiness. Among the surveyed buyers, this characteristic was the same for long-term relationships as for relationships that had just completed their transition phase. Despite their statements that they knew they could trust their providers, the surveyed buyers’ responses revealed their level of trust had limitations. Most also mentioned additional accountability factors that helped bolster their trust in moving forward without SLAs in place. For example, a buyer stated it put in place an audit process to validate all decisions the provider makes on the buyer’s behalf. Several established a base period for the initiative with a deadline beyond which they will cease operating without establishing SLAs. Lack of SLAs should not mean lack of structure When is a service level agreement not necessary in an outsourcing relationship? The answer from a buyer’s risk perspective is “never.” However, as pointed out in the examples described above, there are other perspectives and various contributing factors that lead some buyers to veer from that answer. Negotiating SLAs can be an inhibiting factor. Several surveyed buyers related this happened in their relationships. In one case, they “stopped the SLA conversation in mid-stream” and decided they would work through the SLA later. This ended the constraints and enabled them to turn the conversation back to figuring out what they needed to do to meet their objectives. …

Combating the “Hidden” Costs of Managing Outsourcing

Outsourcing Center, Kathleen Goolsby, Senior Writer

Industry media, especially over the past two years, often points out that a significantly high number of outsourcing arrangements do not deliver the promised cost savings due to “hidden” costs associated with managing the relationship. This is especially true, the reports state, in outsourcing relationships with an offshore delivery component, where administrative costs increase due to travel, communication workarounds, attrition, and other factors. However, there are numerous industry studies also finding a high number of companies that are very satisfied with the results of their outsourcing arrangements, some even achieving greater return on investment (and higher cost savings) than anticipated. Why the two drastically different outcomes? What makes the difference? What can buyers of outsourcing services do to boost their chances of achieving their desired objectives and eliminating or minimizing the “hidden” costs? Outsourcing Center studied these questions in the context of 14 outsourcing relationships that each have been in existence for a minimum of eight years (and several for 12 years) and achieved more than they anticipated through outsourcing – including the level of cost savings. The study found some commonalties in the way these outsourcing relationships were structured at the outset as well as how they were managed over the long term, which are major factors in overcoming “hidden” costs. The study participants Nine of the 14 relationships originated in 1998 or 1999, which is significant because the industry did not have as many widely recognized best practices and risk-mitigation factors back then. Also of note, four of the 14 buyers are government entities, significant because government outsourcing arrangements have some unique characteristics that usually create challenges in managing the relationship cost-effectively. Four have offshore components. In addition to the public-sector relationships, the other buyers in the study represent the following industries: energy, telecommunications, healthcare providers (hospitals), pharmaceutical, banking, and insurance. They include multinational enterprises and midsize companies. The service providers in the study are Tier-1 and Tier-2 providers.  All 14 relationships were participants in the Outsourcing Center’s Outsourcing Excellence Awards program. The processes outsourced in the studied relationships include Finance and accounting Data center / IT infrastructure Real estate Inbound/outbound mail processing and document management HR benefits administration Application development and testing Provider selection matters The first commonality the 14 relationships share is their criteria for selecting their service providers. Other than “value proposition,” which was cited as the top criterion by almost all the buyers, “the provider’s superior processes and methodologies” was ranked most frequently as the #2 criterion. In describing how they manage or govern their relationships, several buyers pointed out they experienced fewer management challenges because of the provider’s superior expertise not only in performing the outsourced work but also because of its methodologies for managing through risks and issues that arise. The study also revealed that, with the exception of the government deals, nearly all of the buyers included “the provider’s willingness to put skin in the game” among their criteria. With the exception of the government deals – which are bound by laws that usually prohibits the use financial incentives in services agreements – all of the relationships studied established either incentives tied to service level agreements (SLAs) or a gain-sharing initiative. In each of these cases, the study participants cited the incentives as a significant factor in driving behavior in both companies. Particularly with gain-sharing mechanisms, the incentive plan is an influencer of how flexible the parties are and how openly and proactively they communicate – which then lessens the challenges that can cause a need for increased relationship management (and resultant costs). The buyers in the study also described the kinds of information they sought (in the due-diligence phase) about a potential service provider in references from the provider’s clients or in the demonstrations of a partnering approach during the solutioning and negotiating process. These include such characteristics as the following: Always looking for win-win solutions Communicating early and often Teaming, collaborative approach Accountability Governance assures desired behavior from both parties The second commonality the 14 relationships share is a set of characteristics within the governance framework that each established to manage their relationship. These governance elements include the following: An issue-resolution process that ensures both parties address challenges in real time and from a fact-based analysis A communication structure that includes frequent (even daily), candid discussions about goals, visions, capabilities, solutions – especially around ways to save money – in addition to the more formal governance meetings Access to both companies’ top management levels to assure timely provision of resources necessary to execute on the planned objectives, especially when exploring new ideas to respond to changing dynamics Each of the 14 relationships established a framework for governance meetings that includes meetings to review the relationship itself separately from the operational issues and strategic objectives. Five of the relationships meet on a monthly basis to discuss strategic issues, one meets twice a year, and the others meet quarterly. The study reveals a major finding regarding the participants’ belief about the value of checking the “health” of their relationship. One-half of the 14 have relationship governance meetings on a weekly basis. Of the remaining seven, five meet monthly and two meet quarterly. The extent and formality of the relationship governance meetings varies, but clearly the majority of them place high value on discussing their relationship frequently. In addition, several of the studied relationships include team-building activities in their governance structure on at least a quarterly basis. Factors producing cost savings Each relationship in the study achieved a level of cost savings at or above their agreed-upon objectives. When asked to rank various contributing factors to the cost savings achieved, all 14 participants identified two factors as a driver yielding their cost-reduction: Technology implementation Standardization and/or centralization of process and resources The four relationships with offshore components cited “offshore labor arbitrage” as one of their top two drivers. It is important to note that all four faced the potential for greater “hidden costs” eroding their cost savings because of the characteristics …

How Outsourcing Helped a New Company Deal with a Major Challenge

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

Talecris was a spin-out. The new company had a drop-dead date to separate its IT systems from its parent. This was a complex challenge with much risk. Three weeks after the cut-off date, Talecris faced a business challenge that easily could have put it out of business. Together the partners weathered the storm.

How Outsourcing Transformed a Hotel Operator into a Services Company

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

When this outsourcing relationship started, Grupo Posadas was a hospitality provider in Latin America. Today, it has transformed itself into a services company with multiple revenue streams in a variety of vertical markets. Grupo Posadas formed four new companies based on the platform it created with Oracle On Demand.

When an Outsourcing Service Provider’s Lack of Domain Knowledge is a Good Thing

Outsourcing Center, Kathleen Goolsby, Senior Writer

How important to the value proposition for an outsourcing initiative is the service provider’s domain knowledge specific to the buyer’s industry? Many buyers report that the provider’s expertise in a particular business process ranks higher in importance than industry expertise when selecting a service provider. But there are situations where industry knowledge is crucial, especially in industries undergoing significant regulatory or other changes and in situations where innovation is a key deliverable in the outsourcing arrangement. In addition, outsourcing solutions are beginning to trend toward verticalization. Outsourcing Center’s annual Outsourcing Excellence Awards data gathered shows a significant number of buyers that are reaping benefits from selecting a service provider that lacked the necessary level of expertise in the buyer’s industry – and two that even lacked expertise in the business process that was outsourced. The study looked at 63 outsourcing relationships where the parties had moved beyond the transition phase. In twenty-four percent of these deals, the buyers are devoting a significant amount of time and effort (and sometimes capital) to assist their providers in gaining the necessary level of domain knowledge in the buyer’s industry. It’s fairly obvious how the providers benefit from such valuable assistance, as the increased knowledge and insights helps them build their business in that industry. But what are the benefits to the buyers using this strategy? And what is the extent of the buyers’ assistance in beefing up providers’ knowledge? Collaboration counts Increasingly, collaboration is a hallmark of successful outsourcing relationships as it enables partnering in dealing with business challenges and opportunities. All of the buyers (in the twenty-four percent) in Outsourcing Center’s study report said that a collaborative approach was a key criterion when selecting their provider. All of the buyers in the studied group were in a growth mode when they outsourced, and at the top of their selection criteria in nearly every case was finding a provider that would “grow with” the buyer’s business. Interestingly, none of the providers were new players; all were long established, highly successful outsourcers, and several were tier-one players. Twenty-six percent of the providers were located in India; the others were headquartered in the United States (some with offshore components). The buyers in the studied group range in size from small or midsized businesses to large enterprises and are in eight different industries. Half of the deals Outsourcing Center studied were ITO; half were BPO. Buyers explained that choosing a provider that would “grow with” them meant that the provider wanted to grow its capabilities. Thus, as the buyer’s business grew, the provider would be more amenable to investments and scaling resources, which in turn would bring a new revenue stream from the gained industry expertise. Buyers’ roles in assisting providers with vertical domain knowledge The buyers in the studied group report four types of assistance they provide to their outsourcing partners regarding industry knowledge: Acting as a sounding board for new ideas the provider is considering regarding a potential solution Serving as the testing ground for a provider’s new technology Participating with the provider in joint development of a technology solution or in designing a process model Advising where the provider has crucial knowledge gaps, alerting the provider to changing industry regulations or other industry/market developments As Figure 1 illustrates, one of the biggest benefits buyers gain from this strategy is a significant first-mover advantage (and often customization) for new technology solutions. Combining the chart’s pie slices for serving as a technology testing ground or joint activities in developing new technology, Figure 1 shows that nearly half (47%) of the buyers gained this first-mover advantage. Figure 1 Good targets for the strategy What type of organization is a good candidate for the strategy of selecting a provider that wants to increase its industry knowledge with the buyer’s help? The study revealed three characteristics that drive this strategy: A buyer in an industry with significant regulatory change. The healthcare and financial services industries are good examples and also comprised one-third of the buyers studied. A buyer in an industry with a quickly changing market competition factors. Telecommunications, media/entertainment, and energy/utilities represented the studied buyers’ industries regarding this driver. A multinational buyer that decides to outsource in a region with specific requirements that are different from other regions. The study included two buyers in this category. Both had existing relationships with their providers for scope in the United States and wanted to add scope in European countries where the providers lacked knowledge of regional impacts on the process outsourced. Two important factors for success The study also found that a high degree of trust is a key characteristic of these relationships, and the parties must build that trust and partnering mode during the planning stages of their relationship. They often “experiment” and conduct pilots regarding phases of the technology and process solutions they develop together, and sometimes they undertake these activities without service level agreements (SLAs) in place at the outset of a particular initiative. Buyers participating in the study also reported that cultural fit is a crucial key to their success. Companies that don’t share the same approach to decision making about investing in opportunities, don’t have the same risk appetite, and don’t have the same decision process (hierarchal or entrepreneurial) will encounter problems in trying to jointly develop new industry solutions. Recommendation While this strategy was very successful for the companies participating in this study and for many that are outsourcing a process that is nascent in outsourcing, it is not universally a good idea. In cases, for instance, where the buyer needs quick, proven solutions at the outset in order to achieve its objectives, it would find more value in selecting a service provider with already-established domain knowledge in the buyer’s industry and business process. Lessons from the Outsourcing Journal: Some buyers reap benefits from selecting an outsourcing service provider that lacks the necessary level of knowledge in the buyer’s industry and assisting the provider in gaining the necessary industry expertise. The buyer …

Predictions: Marketplace Turmoil and Change in How Outsourcing Relationships Work Over the Next Five Years

Outsourcing Center, Kathleen Goolsby, Senior Writer

Getting from A to Z (from the current state of outsourcing relationships to the future state of how relationships will need to work in order to bring about the outcomes that buyers demand) is not an easy path, and some providers will fall away during that journey. In addition, cloud computing changes the entire picture. To better understand today’s outsourcing relationships from the lens of the client as well as understand how to drive change that will result in more successful relationships, CompuCom conducted a number of roundtable discussions with buyers of outsourced services. What clearly came through in buyers’ comments is that they are not happy, states Ed Anderson, Chief Strategy Officer at CompuCom. “They’re not happy with current contracting methodology, the way SLAs stifle innovation, what happens to the value proposition in the way things get implemented and, frankly, they’re not happy with the partnering aspect in how the two sides work together.” Based on this roundtable feedback — and from similar comments that other outsourcing providers shared with CompuCom — Anderson sums up the situation: “The current way of doing things is not working very well.” Yet, in complete contrast to this expressed dissatisfaction, the other industry experts we interviewed about how outsourcing will function during the next five years described future relationships as follows: “BPO deals of the future will become more relationship oriented, more long-term, and more strategic,” states Abid Ali, Vice President and Global Head, BPO Services for Tata Consultancy Services (TCS). RamPrasad Kan, Chief Technologist at Wipro Technologies, says, “There will be a fundamental change in the relationships because the service providers will be getting more and more into the core business processes of the customers.” Les Mara, HP’s head of Enterprise Services BPO in EMEA, says in the next five years, buyers in the provider-selection phase will look for providers that can prove more than their capability to deliver the services day-in and day-out. “They will need to demonstrate how they can take an enterprise to a new technology-enabled paradigm where there are fewer transactions and greater working capital performance.” “Relationships over the next five years will be far more joint-ownership based, with both companies becoming intimately involved in a true partnership through effective governance and a combined approach to achieving strategic objectives,” says Don Schulman, General Manager, Finance and Administration at IBM. “Relationships will be more like a virtual captive, where the culture and values are similar, buyers are involved in selecting key people delivering the services, and the provider is a true partner and has the strategic role of trusted advisor,” says Mohammed Haque, Vice President and Head of Enterprise Solutions Service practice at Genpact. Obviously, they predicate these predictions on an assumption that relationships over the next five years will work much more successfully than the dissatisfaction that currently exists among buyers. Cross-purposes versus trusted advisor As CompuCom’s roundtable feedback revealed about many relationships today, the trusted advisor role and partnering feelings often fly out the window as soon as the relationship begins. “Buyers are happy on the day they sign the contract, but the day after, they feel like they’re working at cross-purposes with their service provider because the provider seems to be trying to catch them in a request that isn’t part of the statement of work and then bill them on a separate item,” explains Anderson. The providers’ trusted advisor role will become even more crucial to successful outsourcing in the future because the impact of opportunities from cloud-delivered services will create a lot of innovations and start-ups in the industry, says Ken Stephens, senior vice president, Strategy and Transformation at ACS. “If I were a CIO during the next five years, I would expect my provider to be knowledgeable and help me make intelligent decisions about how to run my company’s business — even if that’s moving some services away from my current provider or restructuring my existing agreement so I can get the benefits of cloud-like services immediately.” Unfortunately, that type of partnering relationship and trusted advisor role does not exist in many outsourcing arrangements today. “The trusted advisor role will take on more importance as the cloud becomes more and more prevalent,” says Stephens. “CIOs really need a provider that understands what can and cannot happen — otherwise, they put their companies at risk by moving it to a public or a private cloud environment that is potentially not a long-term, sustainable solution.” So how will the industry move from its current relationship state to its near-future state? Overhauling contracting methodology CompuCom predicts that the process of changing the way relationships work will start with changing the contracting methodology. Anderson says that in the next few years “buyers and providers will overhaul the contracting process and replace it with something that will give more value and freedom to innovate and thereby also improve the quality of the relationship.” Even though today’s complicated contracts spell out the scope of services, performance requirements, prices, and what to do if something goes awry, they aren’t adequate. As a buyer in a roundtable discussion pointed out, “We can’t anticipate how our business needs will change over the term of a contract, whether that’s due to a merger or divestiture or even changing the quality of service that we’re delivering to our end users. The contract is where it all begins to break down, because we’re locked into contractual specifications that work against our changing needs.” As CompuCom’s CIO, John Douglas, points out, both parties in an outsourcing relationship start out operating in the “partnering spirit of the agreement. But very often the contract locks both sides into a position where it’s difficult to be flexible in working through the mechanics of change and difficult to maintain that partnering spirit.” A buyer at one of CompuCom’s roundtable forums believes a covenant approach is a better way to structure an outsourcing relationship. Similar to a marriage where the man and woman actually have a legal contract that changes …

How Two Partners Made the Largest Pan-European Finance and Accounting Engagement Work

Outsourcing Center, Beth Ellyn Rosenthal, Senior Writer

Unilever Europe has 80 factories in 24 countries. The division used 18 ERP systems and hundreds of different finance processes, which led to high costs and varying reliability. IBM turned the organization upside down. This contract is groundbreaking in the FAO BPO sector in Europe in both size and scope.

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This guide will walk you through some areas most important when outsourcing, such as
  • Identifying Your Outsourcing Needs Intelligently
  • Research & Selection
  • The Bidding Process
  • Contracts & Agreements
  • Implementation & Onboarding
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