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Research & Insight

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BPO Study’s Surprising Findings on Value and Long-Term Intent in Outsourcing Relationships

Outsourcing Center, Kathleen Goolsby, Senior Writer

Buyers of outsourced services want their service providers to invest in technologies that bring continual improvement to the outsourced processes. Providers want to invest only where it is also beneficial to their margins in the long run. Therein lies a conflict. Are there reliable predictors of a buyer’s intent for a long-term, mutually beneficial relationship in which providers can trust the customer enough to risk significant investments? Outsourcing Center studied this question by interviewing 20 customers in highly satisfactory relationships at the time they were interviewed. Although all 20 buyers stated multiple times that they were very satisfied with the outsourced services to date, the study found clear evidence of predictors of long-term intent. Findings reveal that there are circumstances in which they would terminate their relationships – rather than trying to work with the providers to reach a compromise – even before the time for contract renewal decisions. All 20 relationships were for BPO services (not IT) and all had been in existence for at least one year after completing their transition phase (and many for multiple years). The 20 buyers were involved in relationships nominated for Outsourcing Center’s Outsourcing Excellence Awards program and agreed to answer questions about their future intents for the relationships. The study posed some questions within the context of a discussion around aspects that would lead to the service delivery and relationship yielding more value to the buyer. The first question asked: “What is your company’s most important objective involving outsourced services during the next 24 months?” We can differentiate the buyers’ answers into five segments according to their most important objectives at the time of the study: 30% – Cost reduction / cost containment 25% – Flexibility to scale up and down (buyers in this segment were experiencing a rapid growth phase at the time of the study or were planning acquisitions in the next year) 10% – Supporting or enabling globalization 10% – Achieving compliance with government or industry regulations and security compliance 25% – Other miscellaneous objectives The study then followed up with this question: “What will happen if the provider does not meet your expectations regarding this objective?” Outsourcing Center’s study found that 100 percent of the buyers whose most important objective over the next 24 months was cost reduction or cost containment stated they would switch to another provider if the existing provider did not meet their expectations. Among the buyers expecting their providers to support scalability to support rapid growth, there were two distinct mindsets regarding the future of the relationship, as follows: If the provider is “unable” to make the required additional “reasonable” investment to build the capability for supporting growth, the buyer would look at other options to support the growth but would also continue the existing relationship. If the provider is not “open” to investing in the necessary capacity to support growth, the buyer would continue the relationship but definitely would not expand the provider’s scope (or footprint) and would consider termination or at least benchmarking at contract renewal time. The buyers with globalization as their most important objective stated they would either look at alternatives for servicing the entire scope or alternatives for the geographic scope where the existing provider could not deliver services as desired. Fifty percent of the buyers looking to achieve compliance with government or industry regulations and security compliance said they would exit the relationship at the end of the contract term if the provider did not meet their expectations; the other 50 percent said they would exit earlier. The study also found that 100 percent of the buyers in the “miscellaneous objectives” segment stated they would work collaboratively with their providers to resolve the issues that were barriers to achieving their objectives. Objectives among this segment of buyers include the following: Accomplishing a smooth roll-out of a clinical information system Moving services to the cloud Helping the buyer improve its customer retention Realigning the outsourcing service delivery to match the buyer’s internal initiative to roll all core processes into one business services group It is significant to note that the objectives listed as “most important” at the time of the study were also the primary objectives for the buyers when they initially decided to outsource and selected the 20 service providers. Thus, these are definite predictors of long-term intent and mindsets regarding the “partnering” aspects of a relationship.  

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 …

Midsized Firms Benefit from Outsourcing

J Ben Trowbridge

Midsized businesses frequently have the same challenges that larger organizations have. At some point, they have to standardize their internal services, like HR, in order to scale or control costs. Enter outsourcing benefits. Outsourcing the build and then taking it back after some time (Build Operate & Transfer) or by outsourcing the operations in an ongoing basis may be the key to standardizing and improving shared services. Why do midsized companies outsource Often, if the company has a few rings in its tree, it may have a set of tools that were either custom-built and legacy or purchased for a particular idea in mind, but overlooking its overlap with other tools in the company’s set. At some point, standing up a call center in support of their products and services while balancing the costs and benefits of location, can prove daunting to do in-house. Lacking the expertise to centralize and optimize a set of back-office services can also lead to a longer transformation window than necessary, as well as costing way more than what it could have if that had either a) bid it out to a provider of these services, or b) found a company that could Build, Operate, and Transfer that shared services center. Service provider selection By bringing together an internal, cross-functional team to evaluate the request for proposal (RFP) responses, either with or without an advisor, can provide insight in what to do next even if a buyer holds off on selecting anyone at that time. For instance, it may reveal a country or city that the buyer likes but doesn’t necessarily align with the provider itself. But if the right provider is found, and the benefits of a lasting relationship with this provider can be identified ahead of time, then a contract that is built to last should be implemented. Better outsourcing options for midsized businesses are available today If the relationship is not built to last, it will likely be revealed in the first 6-12 months of the contract. At this point, the cost of the 3-5 year contract could be higher than anticipated if, for example, a provider that low-balled the RFP has outs to nickel and dime the buyer in order to meet the SLAs. Realizing the finer points of a provider’s solution before signing on the dotted line is paramount. Incorporating clauses that produce win-win scenarios, like performance improvements, will help foster a provider that is incentivized to improve its operations. Outsourcing benefits Utilizing the expertise that a provider has in geography, for a set of services gained by cross-skilling across various customers and industries, can produce results that would likely not be realized from within. The obvious factor of cost is also at the top of the mind of any executive on the buying committee, but a balance of price to the value received by the provider would need to be factored appropriately. What are the outsourcing benefits your company has reaped?  

Putting Humpty Dumpty Together

Outsourcing Center, Kathleen Goolsby, Senior Writer

In any vendor relationship, you can let the vendor manage you and direct you, but I’m not sure that you will get full satisfaction and have your full expectationss met. Companies have to understand what they are expecting and actually make decisions based on that, advises Vickie Pettee, Manager, Global Compensation and Benefits for Nokia.

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