I was recently engaged in an excellent conversation witn Gianni Giacommelli, who leads marketing strategy for SAP’s BPO division, on the way forward for the Procurement BPO market. One of the aspects about SAP that has impressed me, is their strong view of BPO as a opportunity, as opposed to a threat, to their business. Gianni’s boss, Christain Baader, has performed an excellent job driving this strategy in recent years, and made his case-in-point last year where he discussed why technology is an important key to BPO-sustainaility. BPO is all about driving common strandards that can help service providers leverage their service staff and technology applications across multiple clients in a utility model. So what better opportunity is there to encourage enterprises to standardize on a common ERP archtecture than when they evaluate BPO opportunities for their business? And it’s not solely about BPO, it’s also about globalization: the more global enterprises can encourage their country-level businesses to operate within a global process template for functions such as finance, HR, sales and procurement, the quicker they can access critical data to make global business decisions. Without digressing further, I asked Gianni to summarize our conversation regarding the development of procurement BPO solutions, where many of the leverage points for cost savings are driven through process and platform optimization, and not solely labor arbitrage. Over to you Gianni:
Procurement outsourcing burst onto the business process outsourcing scene with great promise, but it has changed of face in the last two years. While early deals delivered tactical benefits such as procurement operations cost savings, many companies are still not realizing the more substantial advantages that can be gained. In early procurement outsourcing deals, service providers did not consistently manage to deliver more substantial spend-related savings. With the cooperation of clients, they need to complete designing and deploy integrated, end-to-end, sourcing-to-settlement procurement processes – and be allowed to contribute experience and best practices. At the very least, the provider should be able to bring in an infrastructure (i.e. a pre-configured best practices platform, ideally with some procurement-specific services on top e.g. level-1 support and supplier onboarding) that would allow the client to focus on executing seamlessly. Technology utilization has a key role here and, while theoretically understood, is often a contentious ground – and in our experience requires more than a “business as usual” treatment.
Realizing the Full Value of Procurement Outsourcing
Basics first – and a home truth: procurement outsourcing success requires the CPO, COO and CFO to do their part – collegially. The only way theoretical savings negotiated at the sourcing level (which is where often CPOs incentives are confined) can be turned into actual savings is 1) ensuring compliance within the client company and 2) ensuring the results can loop back into strategic sourcing where the observation of the actual company behavior (what is bought, when, where, in what sizes) can provide additional levers to the category managers. Most of the remaining savings come from controlling one-off purchasing and vendor payments and from cost avoidance as a result of demand management and reduced costs of enterprise procurement activities (this is where the CFO and COO typically have a say).
While companies can realize procurement outsourcing value by leveraging the provider’s economies of scale and labor arbitrage, process optimization (defined as processes and knowledge including securing category-specific knowledge and related usage) is the single most important lever. To maximize the impact of this lever a unified technology platform must support and consolidate sourcing and purchasing processes. A key aspect in securing procurement savings, compliance is ensured in the purchasing and ordering process. This can be accomplished by leveraging the use of procurement cards, approval and other workflows, as well as data analysis and reporting based on standard procurement reports within the business intelligence component. Strategic sourcing savings are obtained by enforcing stronger compliance, as the customer converts results from sourcing events into contracts and catalog items from which requisitioners can choose. Poor performance in activities such as one-off purchasing and problems like high costs of demand management and enterprise procurement activities (such as the cost of the procurement organization) can be addressed with internally hosted catalogs that contain only approved purchasing items (both goods and services) and respective vendor contracts.
Four years of experience in procurement outsourcing, two simple views
1) Providers that are striving to deliver optimum procurement outsourcing solutions typically offer processes based on best industry practices and – in order to achieve that – have realized the importance of strong relationships with the software suppliers underlying their offerings to ensure effective design and execution of service delivery. BPO-specific implementations are different from typical system-integration jobs (due to the search for replicability leading to heavier templatization and multi-client architectural choices). For this reason such collaboration must go beyond a simple joint go-to-market effort, and must encompass service delivery design – so that the solutions are deployed in a way that they address the business problem and they are cheaper to implement and run. As an example, SAP has signed such partnership agreements with Accenture, Hubwoo, IBM, Infosys and Quadrem and spends a significant amount of resources in those activities.
2) Customers that have achieved long-term benefits from procurement outsourcing are shown to be consistently open to using their providers’ standard processes and platforms. By doing so, providers can achieve the economic model they need to deliver innovation. Again as an example SAP has a few dozen customers operating on the basis of the BPO program and we continuously collect learnings from such experiences. The learnings are exceedingly interesting, and the sad truth is that – in the absence of such program – those experiences would be lost between (and within) BPO provider and software vendor
Gianni Giacomelli (pictured) is Director of global strategy and marketing for SAP’s BPO business unit. He previously worked as an outsourcing sourcing advisor for Everest Group in Europe..
So the long debated and much anticipated saga of the Aviva BOT (Build-Operate-Transfer) has finally been resolved, with WNS Global Services taking on a $1 billion contract to become the British insurance giant’s BPO provider of choice for the next 8 years. WNS will be assuming all of the current 24/7 Customer contact center work and some of EXL Service’s F&A work, with the latter’s contract remaining until 2012. This contract follows a storming 2007 for WNS, where the Mumbai-headquartered firm has made significant inroads into both financial services and retail sectors, in addition to its already dominant position in the airline sector.
Some key points
This deal will likely propel WNS close to a 10% marketshare for F&A BPO
WNS’s recent acquisition of BizAps gives the firm much-needed ERP enablement skills at a time the firm is making aggressive strides to compete for enterprise BPO deals – a key requirement
Not a vote of confidence for the much-vaunted BOT model for business processes – and Wall St. also seems to be going cold on BOT. It’s interesting that Aviva is electing to move to a straight BPO model at the same time it is expanding aggressively into the US domestic insurance market
WNS’s revenue has rocketed to $460m for fiscal 08 – a 32% hike over 2007, ever since our popular guest columnist Deborah Kops took over their marketing.
During this year’s NASSCOM BPO summit, we were subjected to a deluge of three-lettered acronyms which (let’s face it) aren’t particularly relevant today – as Pramod Bhasin so eloquently opined. And while “BPO” is clearly a broad and fluffy term that is now used to to describe any type of outsourced process solution that isn’t IT, “KPO” is even more vague. In fact, I discover a new firm daily which claims to have a “KPO” solution, ever since I invited every man and his dog to partake in my new research effort. And when you have the Chairman of NASSCOM asking “what the hell is KPO?”, you know there is a communication issue out there.
So why should we care?
Because “KPO” is truly the next phase of Business Process Outsourcing. Until now – and for a little while to come – BPO has represented largely transactional processes being offloaded to offshore locales with a service provider, sizeable employee remediation from the buyer, and quickfire cost-savings resulting. And if the service provider can muck through to some sort of adequate operating state within a couple of years, the engagement can be largely deemed a success. All-in-all, most firms have pretty much trimmed their payroll, accounts payable and customer service staff as much as they can feasibly manage, and once they have moved into a BPO engagement, this is normally the limit of savings they can hope to achieve from offshoring their transaction processes to a third-party provider. Within a couple more years, there won’t be many medium-to-large firms left which haven’t outsourced most of their transactional processes where is makes business sense to do so.
The next wave of savings will occur from buyers moving elements of higher-value processes over to third-parties, where onshore costs are high and skilled resources often scarce, in areas such as analytics, front-office finance, legal contract development, marketing, clinical data analysis, research and investment services.
Moreover, the manner in which this next outsourcing wave will happen is going to be different. Instead of broadscale employee remediation, buyers will take-on piecemeal services in relatively small initial projects delivered by high-qualified personnel, whose rates are still three times lower than the cost of using qualified onshore employees. And many buyers will not move immediately into multi-year outsourcing contracts, they will pay for these “PhD Services” by the drink – often weekly, monthly, or by the project.
Nervous CFOs, previously anxious about moving too much too quickly to an outsourcing provider, will be much happier to experiment with services they need, find a comfortable medium that works for them, and not have to make tough employee-remediation decisions off-the-bat. They can take their time, transition into an outsourced environment at a pace that suits them, and get access to the incremental talent that they need. Moreover, financial services firms, suffering from the credit-crunch, will be intrigued by this model, as they seek quickfire solutions to resolve resource constraints that do not require major surgery on their own operations. These guys are simply trying to get through their next quarter in this economy, and the thought of major multi-year commitments are simply indigestible for them in this climate.
This new model is beginning to have a significant impact on the way companies are sourcing services globally. And it will move quicker than we expect (remember F&A BPO). And it will threaten other incumbent services providers that deliver high-value business services. The leading consultancies better wise-up to this model, or they will find their share of the total knowledge-services pie being gradually eroded.
Legendary technology columnist Bill Kutik ran an interesting piece today discussing the betrayal of LinkedIn members. Basically, it’s becoming a mammoth database of 23 million professionals, which can be sold en masse to advertisers wishing to peddle their services to targeted members; it’s a direct marketeer’s dream. Moroever, Bill described LinkedIn as becoming a job board dressed in social-networking clothing.He explains:
“Without so much as a notification to its members (perhaps a new privacy policy appeared in tiny type somewhere) and certainly no opportunity to opt-out, LinkedIn burst open its entire database to recruiters with its new Enterprise Corporate Solution.
“The pricing is not public but account holders can search all 23 million members and get back their names and profiles, up to 1,000 with each search. They can do customized InMail blasts to groups of candidates (err … I mean … members), annotate their profiles, forward them to hiring managers and post jobs to LinkedIn’s home page.”
Thanks Bill for pointing this out – I did not know this, but suspected as much. No wonder it’s now valued at $1bn.
While LinkedIn certainly has its limitations, I have to admit I’m better off for using it. I recently set up the BPO and Offshoring Best Practices Forum recently, which now has close to 2000 members. I’ve been making acquaintances with literally hundreds of people with whom I would never had otherwise ‘met’. However, where I once had a couple of hundred treasured professional acquaintances on LinkedIn, I now have well over 1000. There needs to be some sort of filter where we can assign tiers to our online acquaintances – i.e. I actually have met this person, versus some guy with a funny name and strange photo who claims to be some independent evangelist / CEO / author. I also want to have that degree of privacy where I am free from recruiters and mortgage firms plying their trade. I’d use Facebook more, but I really don’t want my CEO co-mingling with old college friends who haven’t changed a bit in the last 15 years and know far too much about me…. I’m getting quite Linked-off.
My good friend David Kinnear has been working hard to drive the Global Sourcing Council over the last year, and has some passionate views on how today’s industry should approach global sourcing. David has submitted a compelling argument about how we should look at the longer-term remifications of the global outsourcing climate today. Before I send you over to David, I’d also like to draw your attention to the next meeting for the GSC in New York’s Down Town Association next Wednesday 18th June. For more details click here. Take it away David:
The issue of Legacy has been on my mind for some time and it is on the minds of many just now. Regardless of party persuasion, an older generation gravitates with sadness to the many lives lost in world conflicts and with frustration to the economic immediacy of rocketing energy prices; younger generations move quickly with new forms of social community and communication – and they have been hugely instrumental in bringing world climate change to mainstream dialog. Young and old meet around global change and the drivers behind it.
These are just one or two of many major issues that (like it or not) impact us all – all being everyone in the world – regardless of race, religion, color, gender or orientation. Our legacy will be shaped by our response to these issues. Our many feelings of vulnerability and uncertainty now lead us to ask what lies ahead for our children and grandchildren. We don’t doubt their ingenuity and survival skills – but we wonder what it will be like for them – if this is what it is like now. And we wonder what they will think about what we did.
So it is with legacy. It is about consequences. And learning to deal with consequences is that really hard part of growing up. Legacy is about what we did – or did not do – with the opportunities and resources we had. Who we learned to work with – and what we learned to do. Legacy is like a shadow – there, regardless, and unshakeable. Legacy is not the total measure of a person but it is an important measure of what we did with the particular opportunities and talents afforded us. Our future generations will reflect on this period in history and they will make judgments on our legacy – whether this is flattering or not.
Andrew Carnegie was a very successful businessman – even if, in his day, some thought he was a little ‘nouveau riche’ and not their cup of tea. He was not always Society’s favorite chap. He experienced personal adversity and the scary side of business risk – and overcame all to be a truly successful merchant with no need of funny accounting to turn a profit. He was, as they say, the real deal. And he could have remained this – a happy, successful and prosperous man who owed nothing to anyone – and perhaps none of us would have been the wiser today. But he elected to take what he had created and use this to much greater effect. To be sure, this is why we know who he was and why we reflect so positively on his legacy.
It was the unflinching, authentic, granite-like story of Andrew Carnegie – and what he did with what he had – that inspired the creation of The Global Sourcing Council just over a year ago – together with the message it delivers on the legacy of the global sourcing sector.
If you are reading this article, you are part of the legacy of the global sourcing sector that is evolving as we speak.
The outsourcing industry is not, let’s face it,the most popular – for a whole variety of reasons some more valid than others. It might be easier to be part of the media and entertainment sector. Sorry to say, whether you agree with Lou Dobbs or not, some of the negativity around this industry and some of the questions on the part of investors about the growth and value prospects of this sector stem (I think) from our own actions and complacencies. We stay largely in the shadows; we are known to cut but not as creators. We are seen to take but not to give. We invest in ourselves but do not reinvest. And this is why many journalists and politicians have a field day with the sector. And why shouldn’t they?
One could argue that we are paying the price of failing to lead. If we continue on this path, the sector will pay a far higher price – just as other industry sectors have stumbled in the past. But the greatest price will be paid by those who do not have a voice, who do not have economic leverage and those who can be most productively helped by the actions of this industry if we find our voice.
As an industry, we already have a financial colossus and momentum that is capable (even now) of far more than it has demonstrated to date. That is, beyond the white papers and presentations on process efficiency and cost savings, lies a now critical role in driving socio-economic change at local, national and international level. In prompting and spearheading technology investment and innovation – developing the tools that will create new, future-centric jobs for existing and future generations. Turning an industry that tends to follow – into an industry that leads from the front.
If we stand still, we fall behind. If we do not invest, innovate and reinvest in both our client and domestic communities, we fail. We have missed a compelling opportunity that is ours for the taking.
As outsourcing industry stakeholders, we could do nothing and achieve modest financial success (and be largely forgotten over time). Or we can achieve memorable levels of accomplishment – by doing more with what we have than we do now. We can be leaders and drivers of change and investment in people and technology – taking the initiative to invest wisely in future generations, not just for immediate returns but also for longer-term returns and the knowledge that we have invested in our fellow global citizens.
As we consider the implications of global warming and the inter-dependencies of economies around the world, we must surely realize that there is an epic historical change underway and – ironically – the outsourcing sector is right in the middle of it. This industry is as global as it gets. This industry is all about human capital – the extraordinary, wonderful and invaluable asset common to all countries, people.
It is all about people just like you and me – who typically aspire to work to feed themselves, their families and their communities. Who fear many of the same things but who perhaps speak different languages and will never actually meet.
This industry is all about people connected by technology and change WILL impact us all. If we stand still, we will fall behind. Technology will make many redundant all around the world and the issues we face of how to train and redeploy people will be widespread. We must plot a forward course that engages in dialog and concerted investment in enabling technologies that create new and far-reaching employment opportunities.
This takes the employment debate beyond job elimination to an urgent focus on innovation and job creation. Not job insurance or unrealistic job protectionism – but bold exploration into new untapped areas of job generation, applying new creativities and new technologies that advance all participants and assist those that are most at risk of being left behind.
OK, what does that mean? It means we should be looking at ways to eliminate process-heavy, manual tasks – but while also investing in technology, education and training in new products, services that can provide a forward-stable working environment for MORE people, not less. It means that there are new opportunities all around us – even in our global warming crisis there are design, consulting, engineering, manufacturing, mining and construction work opportunities – that also help us save energy and reduce the impact of our economy on future generations.
Work brings a sense of purpose and hope to people. It is an extraordinary source of pride and grounding for many. Without it, many find basic survival becomes reality – very painfully. And it is a shortcut to many deep social problems.
Our industry stands at a crossroads – and we can elect a passive, self-centric path that benefits some but offers little to broader numbers of people. Or we can take the path less trodden – a distinct and bold alternative. On this path, we acknowledge what we can do – just by doing it. Just by trying.
This is surely good news. It takes some thinking about – and it takes some doing. But the alternative is forever to be regarded as the industry that ‘takes but doesn’t give’ – the bad guys who take jobs and propose few if any solutions for future growth. The people that talked, the folks that ran analysis – but that was all.
The sector has saved – and generated – a lot of money for a lot of people. It has extraordinary growth potential ahead. But its history of reinvestment is shorter than this article. Herein lies the issue.
Any industry has to learn to give back – and the sooner the better. This is different from creating jobs to carry out the work. This is the over-and-above reinvestment in social advancement that sets good business apart – and reflects well on clients and providers alike. That puts legs on thoughts and ideas. That gives life and substance to thought-leadership. That generates fresh water in wells and healthcare for developing communities where a little goes a very long way. And, my personal favorite, provides education for the next generations and desperately needed investment in technology that will create new and vital opportunities for generations to come. We have such a compelling education opportunity here. The next Einstein could be sitting just about anywhere in the world and this industry might be the connector we all need to releasing that genius for everyone’s benefit.
If we do not invest in our communities and if we do not reinvest in our socio-economic infrastructures, we have failed one of the critical tests of our time. Quarterly results, white papers and all the good intentions in the world will mean little or nothing if we do not take the opportunity which is ours (now) to be a catalyst for long-term change.
Tomorrow’s building blocks lie at our feet. We have a legacy to build and the time is now. Beyond the talk, there is the walk.
Our legacy is still ours to make. Or it will be written for us.
What’s (y)ours?
David Kinnear is a co-Founder and Research Chair of The Global Sourcing Council (GSC). The GSC is a global business forum addressing both the emerging business issues and also the socio-economic implications of global sourcing. David’s past experience includes serving President and CEO for DDC HRO, a Director at Credit Suisse First Boston, and was an attorney for Linklaters and Paines prior.
We’ve had some pretty spicy debating this year about the role and importance of third-party sourcing advisors. In addition, we’ve had lively discussion on the boutique advisors which are proving to be an active low-cost channel for many buyers. As part of my ongoing research into this market, I am very interested in what today’s buyers and providers of outsourcing services are experiencing with the sourcing advisor medium. Please take a few minutes to add your opinion here. And yes, you can remain anonymous if you prefer.
We are privileged to showcase the following incisive article from my good long-time friend Graham Russell, who leads Global Transaction Processing for pharma giant AstraZeneca.
Graham has been a long-established and respected authority on shared services and outsourcing for many years, and is one of a rare breed of executives who has had many years of experience managing both models. I can’t think of many other people in the industry more qualified than Graham to discuss the merits and shortcomings of both captive and outsourced delivery models. Over to you Graham:
Birth of captives
Once upon a time, global and pan regional companies operated as a collection of single country businesses. Their back-office financial support was organized in the same way, with processes and systems being developed at a local level in each country.
In the nineteen-eighties, new global companies such as Microsoft entered the scene and were able to quickly organize their businesses and their back-office support services in a different manner since they were able to start with a clean sheet of paper, making them appear very lean and nimble. By the late eighties, the more progressive companies, which were now often being challenged to compete with new market entrants, began to realize that they had been diluting the effectiveness of their Information Technology spend and perhaps more importantly, had become unable to respond consistently to their new, more global customers who were frustrated by different billing systems, account collection approaches and settlement methodologies. Similarly, on the supply side, these companies realized that they were struggling to take advantage of their global spend with global suppliers due to their inability to easily consolidate the information on their spend patterns. Meanwhile, they often had resale inventories stranded in countries, with each country business being unable to view that held by other countries leading to overall inefficiency in the supply chain. In addition, it became apparent that country based financial organization structures, required like pyramids, typically with sub-optimal spans of management and insufficient specialization due to the variety of tasks being performed by the relatively small country based staffs.
The pioneers in this area set about creating accounting centers usually at a regional level, which eventually grew up to become full-fledged Shared Service Centers, now referred to as captives. These centers operating with one support structure, quickly learned the value of standardizing processes, which offered one face to the internal and external customer. In time with the advancement of technology and introduction of networks, the islands of information quickly became the information readily available in one regional server, further enhancing the value to the business. The organization structures at these new centers, flattened out the structures of old, allowing specialization in the various functions and an improved management span due to the critical mass created. Over time, these centers began to move to locations often with lower cost and usually a pool of multi-lingual talent allowing them to serve broader geographies, for example Singapore, Poland, Ireland and Canada. With experience and maturity, it became clear that internal control was also being strengthened as a consequence of the one way of working, and after the passage of some time, the most forward thinking companies started to move their regional centers to global centers to further enjoy the benefits.
Birth of outsourcing
In the seventies, many companies realized that there was value in outsourcing functions, which were not core to their business and payroll, was usually the first of these functions to be performed outside of the business. Companies such as EDS applied the outsourcing approach to Information Technology support and so the models began to form.
In the early nineties, British Petroleum (BP) often labeled as the godfather of business process outsourcing (BPO), entered into an arrangement with the then Andersen Consulting (now Accenture) to outsource many of its back office financial functions from its quickly developing North Sea Operations Center in Aberdeen Scotland. BPO as we know it today, was born!
Outsourcing offered many if not all of the benefits identified under the captive models described above, but introduced the new notion of service performance levels being defined with the external provider. Moreover, the service provider would often have greater experience hiring and retaining local talent, the ability to offer round the clock support with its global delivery infrastructure, and could also take on the risks associated with running remote service centers, for example currency fluctuations, wage inflation and local political, legal and tax issues. Over the last decade, the outsourcing providers have expanded their BPO offerings, with finance as the “hub” function, offering HR, inbound customer support and industry-specific processes, such as insurance claims processing or clinical data management, in addition to finance support. The leading providers are also offering “hybrid” solutions that include the management of the software applications underpinning the business processes being outsourced, where they can help deliver the synergies of having IT and business processes tightly aligned in an outsourced model.
Many of the earlier BPO pioneers, such as BP, Unilever and Proctor and Gamble, saw outsourcing as an opportunity to out-task non-core back office processes, such as payroll, accounts receivable, accounts payable and reconciliations and re-focus their inhouse staff on managing service levels, higher-value controllership activities and other functions that had greater alignment with their core business. However, as several of the earlier BPO pioneers ventured into outsourcing relationships, they also found several challenges with the model, namely getting constant ongoing value, cost-reduction and innovation from their service provider, which would often provide a reactive service based solely on the contractually-agreed terms. BPO adopters quickly had to learn how to manage their outsourcing providers effectively, and acquire the right skills and experience to do so.
Over time as the outsourcing providers matured, and technology advanced, they were able to take their new-found critical mass into markets like India which had only previously been tested in a significant way by companies such as General Electric (GE) who were providing in-house support for some of their companies in their conglomerate business.
Markets like India and the Philippines offered significant cost advantages over the typical European locations like Dublin and Amsterdam which flourished in the early captive days. In time, GE became an outsourcing provider through the creation of its GECIS subsidiary (now Genpact), and there were new entrants to the market such as Hewlett Packard, ACS, Cap Gemini, IBM and more recently a number of more newly-established providers that have rapidly grown with outsourcing boom over the last decade, namely Indian owned companies operating the services from India, such as Infosys, Wipro and Tata Consultancy Services. We are even seeing a further wave of offshore outsourcing providers making attempts to enter the global BPO market, for example Satyam, Cognizant and Patni.
Operating Models
These models have grown up in parallel and can be the answer to many companies looking to improve their effectiveness, reduce their costs and improve internal control. Over time the functions being handled by these models have also moved up the value chain from simple accounting or transaction processing to most back and front office support functions.
For those companies not quite sure about outsourcing, hybrid or “virtual captive” models have been developed by the outsourcing providers allowing for a middle ground which selects from some of the benefits from either model.
It is not unusual for companies to start out with a captive model, and over time move to an outsourcing model. Other companies which started their transformation journey late, often skip the first step and go straight to outsourcing. However, those companies which have had significant experience with developing a captive model have clearly found the transition to a fully-outsourced model less complex and arduous, as they typically have some degree of standardization of their processes and technology already established. In many cases, moving from a captive model to a fully-outsourced scenario has proven to be a straightforward advancement in optimizing efficiencies, as outsourcing offers the logical next step for companies with captives to strip out further costs and find further efficiencies.
The key drivers to selection of the appropriate model include the following:
• Availability of talent
o Company size – is the company large enough to attract, retain and develop the best work force in a given location?
o University access – does the company have access to the best universities to attract the new graduate population in a given location?
o Retention programs – can the company offer sufficient career opportunities either in the Shared Service center environment or in the business in the given location? The outsourcing providers have in cases 10,000 seats and more and multiple clients, which almost guarantees an exciting career path for the successful young graduate.
• Given their size, the outsourcing provider usually had the advantage here in the most popular offshore or nearshore markets such as India and Eastern Europe, but the captive can usually hold its own in the onshore markets.
• Business Control
o Flexibility – many companies require a degree of flexibility, which may not be available in a strict outsourcing scenario, and so propensity for control and flexibility becomes a key selection factor.
o Process documentation – although Sarbanes Oxley has helped improve this for everybody, again the outsourcing provider tends to be more rigid in process and control documentation for no reason other than it is the basis for training the outsourcing provider employee on how to support the client
• Degree of flexibility required will be the key determinant in this area.
• Continuous improvement capability
o Lean/Six Sigma skills – this has become a core competency for outsourcing providers and been necessary to drive the productivity improvement s and consequent cost reductions which are designed into outsourcing contracts.
o Organizational culture around improvement – while many companies have a like appetite for continuous improvement, it is not the norm for all companies.
o Best practices across client base – the outsourcing provider has the advantage of being able to draw upon the best practices from multiple clients.
• The outsourcing provider usually has the advantage here.
• Technology and infrastructure investments
o This is an ongoing requirement for the outsourcing provider in order to drive its productivity. Technologies such as scanning, OCR etc over a greater population are easier to justify and never suffer from the inevitable capital expenditure squeeze. The majority of today’s top-tier outsourcing providers now offer technology workflow tools that can help integrate financial data actoss disparate systems and grographies and provider dashboards for inhouse financial management to gain quicker access to data.
o Contingency planning and back up-many companies even with Shared Service Models do not invest filly in this area, while for the outsourcing provider, it is an imperative otherwise reputations can suffer and costly contract penalties ca trip in.
• Advantage outsourcing provider.
• Deciding whether finance back office is core
o The finance back office is the business of the outsourcing provider and since it represents its product or service, it has to be good or better to stay competitive.
o If the company decides that it does not want its employees, customers or suppliers dealing with a third party for back office support, then it will have deemed these functions as reasonably core and will most likely find the captive model more appropriate.
• Decision here depends on consideration of what is core.
• Service level-internal v external
o Capability to measure-as outsource contracts often have gain sharing or risk/reward clauses which represent compensation for the outsourcing provider, there is usually a robust set of service levels clearly defined and measured. While many companies are good at doing this internally it is still a luxury for many.
o Reporting forums/mechanisms-in order to share the results of performance measurement, the outsourcing providers tend to have portals and formal monthly meetings to review the findings. This may not be the case at every captive
o Performance penalties/incentives-these usually help influence the right behaviors with the outsourcing provider, and may provide a stick or carrot not always available under the captive model.
o Benchmarking-although not offered or used by all outsourcing providers, the existence of such a clause in an outsourcing contract should allow the client company to stay abreast of market developments and take advantage of new practices such as pricing models or latest cost structures in a given location. This may be much less formal or appropriate in a captive model.
• Advantage outsourcing provider
Conclusions
While I am not a spokesperson for outsourcing, I do believe that with the foregoing selection drivers, outsourcing offers a distinct advantage for many companies today seeking to take full advantage of lower-cost resources and the process acumen being offered by many of today’s maturing outsourcing providers. However, the captive model is still a preferential delivery model for a company deciding that the support function is core to the business, or whether it prefers the support function remain in the same onshore geography, or it does not have an appropriate plan for potentially displaced employees. Each of these factors will need to be considered by the company, along with the cost models and goals for productivity and efficiency improvement, internal control improvement and the service culture.
