Outsourcing is like ripping off a Band-Aid. Do it slowly, it’s a slow and painful experience. Do it quickly, and the pain is gone before you know it…
Outsourcing of IT and business process has always been a game for large enterprises, where well-executed large-scale employee transitions have resulted in profitable endeavors for both providers and buyers. But while the large buyers like saving the money (see Part 1), it’s actually the mid-market sector ($1bn-$3bn revenues) which is getting a lot more out of the experience:
This graphic shows where outsourcing has been very effective for organizations. And the mid-market buyers have been enjoying considerably more success in every area – from cost reduction through to global effectiveness, through to getting better business process improvement and technology.
HfS believes much of the reason for this is that mid-market buyers are forced to jump into outsourcing more aggressively to attract a quality provider, which, in turn, is forcing them to transform their operations much more rapidly to incorporate the provider’s global delivery infrastructure. Let’s examine this further…
Why mid-market buyers are enjoying more successful business outcomes when they outsource
Mid-market firms appreciate the global scale, expertise and process acumen providers bring to the table
In the mid-market, organizations are less well-resourced – they often have legacy IT and can’t often afford to have well-paid top-notch finance, procurement, HR and operations talent. Hence, having skilled service providers take on their stuff has been – by and large – a positive experience for them. Their bigger counterparts tend to have more sophisticated ERP and empires of IT, finance, procurement and HR. When the large firms outsource, they don’t really want to change the way they do things – they simply want to run them the same way at a lower operating cost. While a mid-market organization may not wield the same level of aggressive cost reduction through large-scale labor arbitrage as larger enterprises, they clearly enjoy the benefits of accessing improved technology and process expertise.
Mid-market buyers initially outsource a greater proportion of their staff and processes to make the economics work, which is leading to more positive business outcomes
Enterprises usually have a lot more staff supporting business functions, and many of them are today outsourcing in increments, perhaps starting, for example, with accounts payable, before extending to receivables, reporting, procurement and analytics. They are large enough to be able to dictate to suppliers their preferred pace of outsourcing. Many mid-market firms may only have, for example, 150 people in finance and 25 in procurement. They’re pretty much going to have to bundle as many staff into the first deal to attract a top tier provider and don’t have the “luxury” of outsourcing step-by-step.
Moreover, the fact that most of the mid-market buyers have to outsource more processes and staff faster correlates with the increased satisfaction ratings – a more rapid transition to an end-state clearly helps drive transformation and improvements in process.
Many enterprise buyers are outsourcing in an incremental fashion, which doesn’t encourage business transformation
Large enterprises continue to dominate the lion’s share of current outsourcing activity – because they are tending to outsource in smaller increments which, in turn, is inhibiting change and encouraging them to muddle through with their existing processes, which are often inefficient and not very effective in a global outsourcing delivery model.
The following graphic illustrates the fact the enterprise buyers are far more active increasing the scope of their existing engagements:
As this data plainly illustrates, large buyers are not holding back when it comes to expanding their outsourcing engagements in established areas where they have eager suppliers swarming all over them to take on more work. For example, 40% of large buyers already outsource parts of their finance and accounting and are looking to grow their engagements, half of them are doing likewise with document and print management, and two-thirds in application development and maintenance.
It really does beg the question: why continually look to increase scope, when you could have outsourced a load of these processes years ago? What were you waiting for?
Let’s be realistic here – organizations outsource processes that probably aren’t very well run in the first place. Why persist is continuing to run them poorly and take 5 years to reach a point where you finally admit you have to change?
HfS believes the whole “softly, softly” approach to outsourcing that we are seeing from many enterprises, is prolonging the disruptive change a buyer needs to go through to reach its desired global operations end-state. Enterprises clearly struggle to achieve the business benefits of smaller organizations which are forced to bite the bullet and take on new ways of running processes when they outsource.
Moreover, the mid-market is clearly becoming the testing ground to develop more standardized outsourcing models that can be implemented quickly and incorporate quality process workflows. Moreover, the opportunity is clearly there to bring together much more “industrialized” outsourcing solutions that incorporate software IP, analytical outcomes and BPO. HfS strongly believes that providers need to attack the middle market, in addition to the “easy dollars” at the enterprise level, in order to develop a balanced portfolio of clients: enterprise engagements will serve up profit and delivery scale that can be invested in middle-market clients which are road-testing these industrialized solutions of the future.