Source to stay?

The world of sourcing advisory has gone through unprecedented change over the last couple of years.  

The days of enterprise buyers dropping millions to view their favored (and less favored) providers strut the catwalk and have their contracts hammered out by some baseball-bat wielding former ITO salesman are rapidly fading into the past.  That ship has, thankfully, sailed.

However, a new ship is now dropping anchor in the sourcing harbor, promising riches beyond your wildest dreams to re-vamp your shared service centers, re-craft your entire governance framework and ensure those outsourcing engagements fit seamlessly into the overall mix.  But are these new-found riches all they appear to be, or another crafty way for consultants to sneak that MBA bus back into the visitor’s car park?  Who better than Deb Kops to investigate further…

Source to stay

The aggressive push of the big name management consultancies and the Big Whatever into sourcing advisory is in many respects a good thing. These organizations bring a wealth of resource—from an acute understanding of corporate strategy, incredibly deep domain knowledge, regulatory requirements, organizational design and development, and all shades of expertise in between…plus strong ties to the c-suite (the power of which should never be underestimated when hiring a consultant). After all, the sourcing decision encompasses so much more than a market study, a location analysis, writing a good RFP and implementing a rigorous selection process.

But to any shared services and outsourcing conference these days and you’ll hear many of these white shoe guys express a decided preference for shared services as a model. And the traditional sourcing transaction firms are now following close behind, echoing the same refrain.

The guidance from the podium sounds something like this—“Be safe and smart. Alternative delivery models are tricky no matter what. Consider outsourcing but only after you’ve fixed, consolidated into captive centers, and operated until stable. Then think about outsourcing that transactional stuff to a provider to tap into transaction pricing/gain flexibility/leverage investment/free up management bandwidth.”

What’s the implicit message? “Outsourcing is risky. Outsourcing is not the first step on the journey. If you want to fix the mess, do it yourself (with our help). Outsourcing is not transformational. Outsourcing is a commodity—pursue it only after you ring out every penny of cost, then throw it over the transom to a specialist factory.”

Now, shared services very well may be the right answer for many of current crop of organizations investigating or evolving alternative delivery models. First, despite what the pundits say, Western companies are reacting to pressure (or at least thinking twice) to keep jobs onshore and in-house—ergo a captive. Second, what value outsourcing or a simple shared services implementation is capable of delivering at this point in time is pretty well understood. And some organizations are now getting comfortable revisiting their strategies with the view that the trick is no longer fixing the factory, but getting closer to the business—perceiving shared services as the better ticket. But these trends alone cannot account for the noise from the consultancy bully pulpit, and the number of firms renaming outsourcing advisory “shared services” or “global business” or “enterprise advisory”, putting the “O” word in awfully fine print.

Why the push for shared services rather than outsourcing from some of the biggest  consulting names in the industry?  It might be driven by the fact that, post the 2008 recession, major corporations invited in consultants by the tens of thousands, asking them to broadly transform their enterprises post a 2008 near death experience. And these good folk, rather than the more deal-oriented outsourcing advisors, had a superb opening to evaluate sourcing as one out of many in a transformation bags of tricks, building up legions of consultants on engagements.

But, as a former consultant, I can’t help wondering whether this trend also results from the need to grow consulting revenue, making it engagements sticky as possible. Is it merely a coincidence that shared services is actually tout the right model for the majority of  organizations given their maturity at this point in time–or could it be a manifestation of enlightened self interest on the part of consultants–what I glibly am calling “source to stay.” After all, if full-on outsourcing becomes the model of choice at the beginning of the sourcing journey, chances are pretty high that consultants will be cut out of the equation early unless the buyer has resource or expertise issues, or is looking to for an insurance policy in the event something goes wrong. With providers now equipped with cookbooks full of methodologies, choosing the outsourcing route usually reduces sourcing consultants’ fee earning potential. That means a material difference in fee magnitude—a hundred thousand or two as opposed to engagements closer to the million mark and more.

Deborah Kops, HfS Research Fellow

Deborah Kops, Research Fellow, HfS Research (click for bio)

I’m not saying that  consultants push shared services rather than outsourcing merely because they are concerned about growing wallet share and feeding their legions of junior associates. A good consultant—and we are gifted with many in this industry—understands what the client needs to achieve through a sourcing strategy, and helps him understand the benefits and challenges associated with each option accordingly. But when the consultants are falling over each other to differentiate themselves as business services globalizers and enterprises extenders, while the traditional outsourcing advisors are actively rebranding themselves as shared services advisors, it suggests that the “O” word may be falling off the table.

The Bottom-line: Buyers must identify the right model for their particular organizations, and not fall prey to source to stay

  • Be honest about speed to implementation. If you want to move fast and have the skills to outsource, you can move the dial more rapidly. Shared services implementation often moves at a tortoise’s pace as compared to tapping into the existing infrastructure and network of a provider. But if time is on your side, perhaps a first foray into shared services is optimal given other considerations.
  • Evaluate how your organization will best take on the change culturally. If the organization will not take kindly to, or have much trust in, third party delivery of any stripe, outsourcing might be better staged later in model evolution.
  • Gauge the value of a commercial relationship in moving the dial. Some organizations are better off moving right to outsourcing because the formality of a contract gives them the discipline they need to make any sort of change.
  • Be honest about what the rub is in outsourcing. Assuming you select the right provider, getting to better for the business is rarely the problem.  Given the evolution of providers, it’s not the quality of the delivery, it’s the business’s ability to adopt new ways of working and get over their loss of control. Recalcitrant business lines don’t discriminate—they’ll resist both outsourcing and shared services.
  • Think about whether your organization is more comfortable as builder or buyer. My research indicates that buyer companies are better managing providers as part of a supply chain, while builder companies like to make change internally, seizing any opportunity to innovate by inventing and implementing new models.

At the outset of any sourcing advisory engagement, it’s important to be very clear about what you want out of it—a true design exercise, air cover to underwrite the decision, handholding through the process, or deep expertise (and arms and legs) from strategy through implementation. Pushing a one size “fix-it-first-internally-than-flip-it-over-the-transom-to-a-provider-when-there-are-a-few-more-pennies-to-wring-out” approach is like prescribing heart surgery without first assessing the patient’s history and symptoms. Consulting expertise can be critical to making the right decision, but the best consultants never source to stay.

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11 Comments

  1. Posted March 13, 2012 at 6:21 pm | Permalink

    Your bullet points are spot on and could be easily added to even further. I would hasten to use the BIG is safe approach, a large portion of time is spent cleaning up these messes just as much as the smaller once created by inept authorities. But in general… good job and spot on.

  2. Warren McDonald
    Posted March 13, 2012 at 9:39 pm | Permalink

    Excellent article, Deborah.

    Simply put, clients are getting smarter at sourcing and their needs are often so unique to them, it’s hard for consultants to find a good “hook” for engineering long term project engagements for themselves. In so many cases today, clients are often better off figuring out their own approaches to sourcing, and only need occasional guidance from third parties to benchmark performance and offer feedback and guidance. The smart consultants in this space are working out lighter engagement models, where they can help clients profitably without having to push the large teams.

    I fully expect the consulting environment to look very different in a couple of years as clients’ needs change and their spend levels on consulting decrease,

    Warren McDonald

  3. Posted March 14, 2012 at 1:03 pm | Permalink

    Rather than the death of the ‘O’ word, this article actually seems to say that the best value from a sourcing advisor is to be gained from going ’boutique’ rather than ‘Big 4′ – the boutique consultancies (of which I declare Orbys to be one of them) will generally take the trusted advisor, as opposed to the ‘MBA bus’ (nice phrase by the way), approach. We all have to come to terms with smaller deal sizes, but pushing ‘source to stay’ strategies is a very short term view, and ultimately bad for the client and our industry as a whole.

  4. Posted March 14, 2012 at 2:42 pm | Permalink

    Andrew, thanks for your comments I am not saying/and would not say/ that the best value comes from boutique sourcing advisors. Frankly, good talent can be found across the spectrum of firms. I am merely saying that the advice seems to increasingly push shared services…even from the boutiques as i said in the article. Is this driven by the disparity in fees? I wonder, and hope the rest of the community weighs in.

  5. Posted March 15, 2012 at 9:57 am | Permalink

    It is no question that potential consulting fees for a shared services recommendation can be many times higher than they are for support of an outsourcing transaction. We have even observed conflicts within large outsourcing firms that also have large consulting practices where the consulting practice can drive very large advisory revenues on a shared services transformation that are potentially more profitable to the provider than outsourcing, at least over the first two years. We encountered on case recently where an outsourced solution would have provided a significantly more compelling business case, but where the consulting arm of the firm had convinced the buyer to implement a three year shared services transformation, advised by a large consulting team from the provider over a three year period.

    Of course, implementation of a shared services organization doesn’t preclude the eventual migration to an outsourced solution down the road. As is the case in selecting any advisory firm, trust is critical, but the buyer should be diligent in verifying that recommendations provided by the advisor, while no doubt providing for an improvement over the current state, are objectively the most advantageous recommendations to the buyer, and not simply for the consultant.

  6. Posted March 15, 2012 at 11:10 am | Permalink

    Bill, thanks for your last para. Exactly my point>

  7. Posted March 15, 2012 at 1:22 pm | Permalink

    In general, there really need to be compelling reasons to choose a Shared Services approach over a hybrid or outsourced model. It’s very difficult and costly for most organizations to manage the change involved in establishing a shared services organization, to develop a market-like charge-back/funding mechanism, to compete for and recruit the right kind of talent to drive innovation, to implement the transition without having the experience of doing transitions for a living, and frankly, most shared services cost more than outsourced options.

    However, where there are regulatory or strategic regions that justify an internal solution, then internal shared services can be the best option.

  8. Posted March 15, 2012 at 3:56 pm | Permalink

    Bill,I find that some organizations are builders not buyers. They cannot make the changes necessary to become good buyers of services. I would say that that best option is always the one that stakeholders will most readily adopt.

  9. kris
    Posted March 19, 2012 at 7:12 am | Permalink

    This is fabulous. Also look to someone’s incentives. Then you can pretty much tell what they’re going to say.

    thanks

  10. Posted April 1, 2012 at 12:43 pm | Permalink

    Kris, you said it well.

  11. Sean McGrath
    Posted June 1, 2012 at 1:16 am | Permalink

    My thinking having worked in a Shared Service at two companies, & now for a BPO Provider, is that the right option for an organization can be evaluated to a certain extent depending on complexity, quality, & costs. Current state vs potential future states (both SS &/or Outsourced).
    Deborah, I am keen to understand further how you differentiate between “Builder” & “Buyer” organizations?

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