How should companies approach outsourcing in this economy?

It’s easy for enterprises to panic in this market and jump at outsourcing opportunities, simply with the goal of shedding some cost from the bottom-line. In too many situations, clients have jumped at the lowest cost option, and now live to regret their decision.

Outsourcing clients have to think more smartly and strategically about creating an experience than can drive new growth, deliver business value to the top-line, and not just take out short-term costs from the bottom. If clients can engage outsourcing to become more competitive, it creates an entirely different paradigm than simply “shipping jobs offshore”.



Believe it or not, many of the smart businesses that survive this economic hardship are going to emerge more nimble, more competitive, and more globally-integrated. Outsourcing alone is not the answer; it simply provides a vehicle for enterprises to gain access to new talent, better process acumen, new technology and global markets, provided they venture into an outsourcing engagement with the right objectives in mind.  There is a proliferation of service providers eager for business, and most of them will offer attractive short-term cost savings.  However, clients must focus on forging a partnership with a provider which will work with them to add a lot more competitive bite to their business over a multi-year contract. 

Key decision-points companies must take onboard when approaching outsourcing opportunities

1. Think globally.  One of the core differences between the current economic recession and those of the past, is the fact that all of today’s financial markets and economies across the globe are so much more integrated than they used to be.  The Internet and global communications revolution have created unprecedented access to global talent, where you can have your mainframe computers managed in Brazil, your general ledger consolidated in Hungary and your logistics analytics performed in India.  The need to enter new global markets quickly has never been as pressing as it is in today markets, and the right service partners can help you grow your business globally.  Having a ready support infrastructure that can support foreign payrolls, accounting procedures, local regulations etc. can save your company months of painful work to set up shop in new markets.

2. Focus on common standards and bundling apps / BPO.  Engaging an outsourcing provider which can provide common processes around a solid ERP backbone is critical (see earlier discussion on bundling).  Smart enterprises are moving ever-closer to developing commons standards to support processes that can enable them to operate and compete as global entities, and this current economic predicament is accelerating this dynamic.  When you have rapid access to your global financial, HR, supply chain, customer and product information, you are in a position where you can make quicker informed decisions to enter new markets, sunset dwindling product or service lines and mobilize your resources and partners accordingly to respond to your existing and future customers.  ERP platforms are far more globally-integrated now than they were a decade ago.  These platforms provide a crucial backbone for supporting global business initiatives, and developing technology standards, such as XRBL and HR-XML, are helping firms re-use and optimize a lot of what they already have. 

3. Add discipline to your revenue cycle.  A good BPO provider can add discipline to your collections and speed up your cash-flow, eliminate bad debt and free up a more timely cash-supply. On the flip side, quality procurement processes help you keep the cash you currently have. This is critical in today’s tougher environment.

4. Approach cost-containment as an ongoing objective.   A good outsourcing partner should be able to help you sustain cost-savings over a long period, not simply at the onset of an engagement, through ongoing quality and process improvements.  For example, you may save $10 million in the first year or your engagement, but how about the subsequent years?  Those initial costs you saved will creep back if you don’t constantly refine your processes across your global supply chain.

MumbaiAll-in-all, it’s really not a good time to go to your board and demand multiple millions of dollars to add a new service provider to your outsourced delivery infrastructure, or even rip up your current contract, if you rushed into an outsourcing situation without an eye on the medium-to-long term.  My advice to clients is to use this economic climate as an opportunity to drive more radical changes into their business and consider the decision-points above when they start engaging outsourcing providers.  I'll leave you with a more peaceful scence from Mumbai… 

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12 Comments

  1. Posted November 29, 2008 at 9:34 pm | Permalink

    With the economic uncertainty growing in America, it is important to reevaluate global partnerships and find opportunities for added value. Traditionally, offshore outsourcing reduced costs, period … However, by focusing only on cost reduction, companies are missing out on added value that can be created from global outsourcing partnerships.

    For example, software companies who moved offshore testing from India to China to reduce costs are now leveraging relationships with outsourcing partners to jointly develop China market entry strategies. Service provider’s local business expertise and contacts have proved invaluable to American companies expanding into China.

    Business relationships developed during better economic times can now help companies navigate the current economic downturn. American companies who taken a collaborative approach to working with service providers are now able to evolve the buyer – supplier relationship into business partnerships and improve the bottom lines of both companies.

    Best regards,

    James

  2. Posted November 30, 2008 at 7:52 am | Permalink

    James,

    Interesting points. Do you see Chinese outsourcing providers actually providing business services help to foreign firms trying to expand into the Chinese market beyond basic administrative IT/BPO processes? I’d be interested to hear more examples of what’s going on over there,

    PF

  3. Posted November 30, 2008 at 7:54 am | Permalink

    Phil,

    I think the solution lies in a good combination of the 4 key points you’ve mentioned. Global-integration is the most pressing need today and firms need to speedily incubate, execute and mature strategies around this major objective.

    In line with this objective, next key aspect is of setting up strategic outsourcing arrangements with providers who can understand your organization both vertically and horizontally.

    Vertically they should be able to view and understand the service relationship from strategic level up to the actual day-to-day operations and tasks that they perform. Horizontally they should be able to augment your cross-functional integration rather than becoming party to any of the political or functional silo your firm might have.

    From the implementation perspective, IT/BPO bundled deals are a key – and ERPs and SOA middleware which can faciliate BPO is the need for the day. SOA (BPEL) architectures facilitate creating and changing your business processes quickly as the need arises. Having a SOA framework which provides an ability to easily span these “internal” processes beyond your organizational boundary to support BPO arrangements can become a strong competitive advantage for a firm today and in to the future.

    Best Regards,
    Ali

  4. Josh Chernin
    Posted November 30, 2008 at 7:55 am | Permalink

    Phil,

    Firms need to compare the end-to-end benefits and costs of outsourcing. Too many times I have seen comparisons done on the basis of direct costs only, without understanding the true landed costs, and without taking care to understand the “soft” qualities as well.

    Josh.

  5. Posted December 1, 2008 at 3:13 pm | Permalink

    I found the most salient point to be reviewing contracts and setting milestones and deliverables. We did not have good due diligence in our last outsourcing deal and it WILL affect our bottom line this year.

    Kendall Gordan, SE
    http://www.foxfiresoftware.com

  6. Sam Sharan
    Posted December 1, 2008 at 6:10 pm | Permalink

    The fundamental reasons behind outsourcing do not get altered by the economic cycles. Thus, any organization that changes its outsourcing strategy to take advantage of or to react to the temporary prevailing conditions will be making suboptimal decisions for the long term. The most important fundamental to keep in mind for outsourcing is:

    Outsource only that element of your business that can be performed most effectively and efficiently by the chosen third party organization.

    Thus, here is one temptation that one can resist while making outsourcing decisions during the downturn:

    Don’t squeeze the vendor – Times are tough and competition for your business is intense. if you were to take advantage of the vendor and get over aggressive rates, you are guaranteed to regret this when the cycle flips.

    Sam Sharan

  7. Posted December 1, 2008 at 6:13 pm | Permalink

    I think it’s impossible to say that your outsourcing strategy won’t be affected by today’s economic climate. The simple fact is that the long term company strategy which may have been in place prior to the current downturn may still be a perfectly viable in a normal business environment, but with spending cuts, tighter credit limits, etc., the strategy itself may have to change to be currently viable.

    As an example, dry cleaning is not what most of us would consider a “core competency”. We happily outsource our dry cleaning each week to a vendor that we’ve selected – and, FYI – we typically don’t care who that vendor has outsourced to (who’s doing the actual dry cleaning) or where they’re located (do they dry clean at that location, or send it somewhere else?), but that’s a story for another day.

    In our model, however, assume that the household income is going to be affected, and the funds previously used to outsource dry cleaning needs to be redistributed to a more essential function (like food/mortgage). We can take that function back in house (yes, somebody will have to do laundry again), and we may not have the nice creases in our dress shirts that we normally have, so the quality may suffer, but we are in fact saving money.

    So, to me at least, it comes down a single issue – does your company’s anticipated financial position require that you rethink your 3-5 year strategic plan (which is where the ROI from outsourcing will come)?

    If so, you may need to rethink your outsourcing plans, or at least rethink the allowable ROI period to make them viable.

    Shawn Fields

  8. Posted December 1, 2008 at 6:15 pm | Permalink

    Hi Phil,

    Outsourcing makes sense for any non-medullar corporate task that does not add directly business value for the company.

    There are valid circumstances and business drivers that justify the outsourcing of functions like Finance, HR or IT. Such an assumption is truly pertinent in an economic recession where companies should be advocated to develop their core competences to be viable in a highly uncertain and volatile business landscape.

    1. The first driver that justifies outsourcing is cost-reductions that outsourcers can offer in virtue of its economies of scale, streamlined processes and state-of-the art approaches.

    2. If the organisation is geographically dispersed and has different subsidiaries around the world, the task of developing non-core tasks at home could be a nightmarish experience. When consultancy is hired is perfectly possible identify an optimum organizational model to manage efficiently the outsourced functions.

    3. The company wants to dedicate resources, labor and effort to its medullar processes and to make emphasis in proper strategy execution to gain business differentiation and competitiveness. Relinquishing the management of non-core support functions the organisation will gain the agility and flexibility that requires in being an authentic overachiever in terms of strategy execution.

    4. The rate of attrition of professionals belonging to support functions is anomaly high and impact negatively the costs derived of hiring, training and retaining the over and over replaced talent.

    5. The operational efficiency of these functions of support is unsatisfactory as is shown by the relevant KPI and may affect perniciously proper strategy execution.

    6. Senior Management has expectations that outsourced processes can be managed by applying best business practices, streamlined processes and state-of-the-art technology to increase and improve supportiveness to strategy execution.

    7. The company is developing profound transformational changes that requires from proper support and an unbiased managerial approach that should be independent from culture nuisances and corporate climate disturbances.

    8. In business contexts highly endangered by disruptive change, upsetting regulations or exaggeratedly high competitive pressure, the goal of ensuring operational continuity is a top concern and hiring outsourcing is a good option to mitigate such possibility.

    9. The organization is experiencing extraordinarily high rates of organic growth and requires from the most efficient support framework to avoid unnecessary expenses and support effectively such pattern of growth

    10. Being developed professionally and efficiently, the outsourcing of selected administrative functions release to Senior Management from the burden of being involved in the management, control and administration of these units of support.

    In traumatic corporate processes as major downsizings and outsourcing an unfavourable consequence to be expected is that most of the employees will be fired out with the negative implications that these actions usually have over them who can then feel a profound demoralization, a paralyzing fear and an enormous uncertainty about the future.

    You should also considerer that a successful strategy cannot be built being entirely based in usual practices of cost reduction. As a valid attempt of ensure differentiation and promote competitiveness in these tough times of economic slowdown you should evaluate the convenience, relevance and pertinence of improving your business processes, not just as a mean of reducing costs by reaching operational excellence, but like a valid effort of gaining competitiveness and differentiation to help to your organisation in achieving a better market positioning and in improving its financial performance.

    Octavio

  9. Posted December 1, 2008 at 6:43 pm | Permalink

    Phil;

    As usual, great insight and a nifty list! I’d offer one more item – “Embrace Leverage”.

    The principle of tuning the percentage of a firm’s costs that are fixed is called operating leverage. As we know, fixed costs do not decline when demand decreases, thus increasing the company’s business risk.

    Outsourcing is a key tool to achieve realignment of fixed/variable costs and I perceive an increasing appetite among Boards of Directors and senior corporate leadership to better understand the options available to achieve greater operating leverage.

    Peter

  10. Posted December 2, 2008 at 4:45 pm | Permalink

    There are multiple elements for outsourcing to be considered:

    • BPO – Business Process Outsourcing (eg traditional back office functions like Accounting, Payroll, Purchasing, Travel, manufacturing, call center operations etc). This can be either within the country or offshore. Or can be done in two steps, first outsource (get local wage arbitrage, tax benefits, lower real estate costs etc) stabilize the business model and then have the BPO offshore components of the functions retaining an onshore presence to build a global presence.

    • BPO’s can be a model where both the systems and the related business processes are outsourced or the systems may be owned by the organization but only the business process is outsourced. If only the business processes are outsourced and the systems kept in house or are with another supplier access and connectivity, uptime and availability issues along with service levels will have to be thoroughly addressed.

    • IT Outsourcing – whereby the IT systems are outsourced but the business processes are in house (or could be outsourced but generally with a different supplier). IT outsourcing is most popular with hosting and telecom spaces and in smaller organizations to a limited extent in the application system space primarily due to local regulatory requirements that have to be incorporated into systems. Large companies are able to leverage economies of scale to successfully outsource the entire shop.

    • ASP – Application Service Provider – this is where the complete system is provided by the service provider and the business just uses the system. (its like leasing a system). These are good for COTS packages eg Travel booking system ( where a global common system from a travel provider can be easily leveraged for booking tickets etc) This is usually not a good idea when one wants to customize one’s applications as maintenance can be expensive and you will lose the benefits of the ASP model.

    • Optimal Shoring – a combination of an offshore and onshore model to service a global organization

    All of these require a long term vision and commitment as it can be extremely expensive both in terms of costs and competitive advantage to an organization’s viability in the long term.

    Total cost of ownership of any model is key to drive the ROI and internal politics and departmental / business unit agenda’s should be set aside.

    However one key factor is also culture in the organization to move to a common global process for BPO’s to be truly successful. One cannot keep executing functional processes customized to fit a particular geography or departmental need but there should first be some element of transformation of the business process to a common model to derive best value from an outsourced model. This will result in truly horizontal benefits instead of getting caught in vertical territorial behavior and politics.

    One should also keep in mind the transition of the model later on if it becomes necessary to change the BPO/ASP supplier to a different supplier or in-source again. If one has a multi geography outsourced model it will be more challenging to do this and the organization will have to have a solid contract management skills around this space.

    If done carefully and with precisely thought thru strategies BPO and offshoring can successful regardless of the economic cycles. Keep in mind the political and economic policies of the offshoring countries also have to be kept in mind before plunging into an offshore model.

    In conclusion there is a lot to BPO’s, Outsourcing and Off-shoring than appears at first glance that needs to be considered and economic cycles should not be the driver for these, but just a component of the benefits of a well thought out overall strategy.

    Hemant Damani

  11. Posted December 4, 2008 at 5:08 am | Permalink

    Phil,

    A very interesting discussion in the current scenario together with some very valuable perspectives. Here`s my opinion..

    Outsourcing has always been used as a low cost alternative to accomplish parts of the work of the company which are usually supportive in nature to the core business of an organization.. be it IT, Recruitment, Payroll & so on.

    In the wake of the current economic turndown, companies ought to be looking more closely at the possibilities to outsource more & more in an effort to bring down costs.. Add to it as pointed out by someone.. the turndown is also bound to hit the companies which are at the recieving end of the outsourcing process.. BPO`s for instance.. hence the term used by some one “squeeze the vendor” may well be an advantage in getting a good bargain in terms of lower cost.

    The targetted audience would ofcourse be countries with low labour costs as India! However, in the rate race to reduce costs.. it is critical to be focussed on the actual strongholds which determine the value of the company..

    Hence, it is important to look closely at what exactly is being outsourced & how it could adversely effect a company in terms of performance, image with its customers or market positioning… if unfortunately things dont go the waty they were expected to….

    The essence lies in managing the entire outsourcing portfolio of the company in an effective manner & this is where choosing the right company to whom the job is outsourced is important. This leads us to the points mentioned where the credibility of the company to whom the job is outsourced is assessed for global versatility & adaptability, effectiveness in performance & delivery etc.

    The key lies in having the right proportion of outsourcing without a compromise on Quality!!

    Peter Nazareth

  12. Posted December 10, 2008 at 2:49 pm | Permalink

    Phil,
    The way companies approach outsourcing in this economy should be very similar to how successful companies have approached outsourcing in other economic conditions. However I have noted some interesting trends on both the supply and demand side.
    On the supply side – I specialise in providing HR Outsourcing advice, and we are seeing a large increase in demand right now, I expect this is the same for BPO, ITO etc. In a ‘busy’ market the outsourcing vendors need to prioritise which prospects they are going to respond to. They have limited resources to work on bids and will choose those with the best prospects – and quickly reject ‘time-wasters’. If you are thinking about outsourcing then make sure your Request for Proposal (RfP) is robust and thorough, your sourcing strategy validated and consider your timing very carefully.

    On the demand side – good practice has always been to link your ‘outsourcing strategy’ to your overall ‘organisation strategy’. The challenge is that with so much flux in the economy, not many organisations have confidently revamped their overall ‘organisation strategy’ yet. However, there is a burning platform with shareholders demanding cost-savings. So the risk is that companies act too hastily without the usual analysis and checks, sign a 5-10 year contract and find that the organisation is radically different in 18 months years time. If the 10-30% cost savings from outsourcing will potentially save the company then this is a much clearer decision.
    Kind regards,
    Andrew
    Glass Bead Consulting

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