Best practice approach for outsourcing and offshoring
With the focus on and rewards of outsourcing on the rise, so too are the stakes and risks involved with multi-million dollar transitions. To help executives saddled with the responsibility of bringing complex outsourcing transformations to a good end, Quint has on the back of decades of experience designed a best practice approach and methodology. Consultancy.uk took the methodology under scrutiny, and spoke with sourcing expert Alex van den Bergh.
In the past decades, sailing on the waves of worldwide globalisation, the drive for efficiency and a growing IT industry, the outsourcing industry has grown from its adolescence into a multi-billion dollar industry. According to data from analyst firm Gartner, the market is estimated to be worth $443 billion, of which 63% stems from IT-related services, and is growing with more than 4% per year.
The largest segment of outsourcing, Infrastructure Outsourcing (IO), is focussed on the basis of IT: datacenters that host applications, end-user computing devices such as workstations, laptops and (smart-)phones and networks such as LAN, WAN. Although this requires manual labour for maintenance and monitoring, most of the revenue is in the cost of hardware (e.g. servers, devices) and other assets (e.g. housing of a datacenter, electricity costs, cost of cooling).
Application Outsourcing (AO) and Business Process Outsourcing (BPO) are more labour intensive, therefore revenue is linked to the cost of labour. Ever since wide adoption of digital telecommunication in the mid 90’s, India has been at its forefront for AO and BPO. Currently India has over 2 million people directly employed in the IT outsourcing industry and is expected to add roughly 100,000 highly educated professionals per annum in the coming years. The outsourcing from companies in the West to India (or other far-away, low cost locations) is called ‘offshoring’.
India’s attractiveness as an offshore location is based on a range of factors, including widely available English language skills, the quality of its educational system, availability of workforce, its economic climate and its attractive labour costs. Perhaps more importantly, India has been using its early start to invest heavily in its delivery capacity, infrastructure, quality and experience to retain its lead. Competition is heating up though, with ‘cheaper’ markets such as China, Malaysia, Philippines and Mexico on the rise. An overview of the top 20 best outsourcing locations*:
Best practices
For multinationals, offshoring has become increasingly important. While it played a pioneering role in the creation of a cost advantage in the early years (e.g. 1990’s; early 2000’s), nowadays it has, following large economic and digital trends, become mainstream, and generally forms an integral part of operating models, in particular in the area of back-office operations (BPO) and application development and maintenance (AO). With the stakes and benefits on the rise, so too however do the risks. Outsourcing transformations are moving more into primary processes of organisations, elevating the investments required to setup and transition organisations, and similarly increasing the costs involved for managing outsourced functions. Because of this trend, offshore outsourcing has converged to even more business critical functions, making performance indicators such as speed and quality of service more important, with higher stakes at risk if outsourcing models fail.
Against the backdrop of the industry’s growing importance, Quint Wellington Redwood (recently named the world’s best outsourcing advisor) over the past years conducted research into the key levers of successful outsourcing. The firm found that in order to maximise the benefits from outsourcing, companies should follow a blended approach, which combines clear-cut strategy setting and operational management with ‘soft factors’ that guide the transition and ensure the highest quality standards are embedded within the operating model. The approach – which Quint has dubbed the Sourcing Phase Model – is based on three key phases and seven fundamental end-to-end activities:
Strategy
The first step focuses on unravelling the rationale behind outsourcing. “Outsourcing is not a goal in itself, many drivers for outsourcing exist, ranging from cost reduction, improvement of time to market and quality, focus on core business or increase of flexibility to scale,” explains Alex van den Bergh, Head of Quint’s Sourcing Advisory business. “Similarly, there are also many organisational forms for realising the end-state, such as on-site, off-site, nearshore, offshore, captive centers or joint ventures.” Other areas that according to Van den Bergh need to be assessed and thought out upfront include setting the criteria for external providers and defining guiding principles for the operating model and transition.
Contracting
With the strategy in place, companies enter the contracting phase, which centres around the selection and contracting of external service providers. Key success factors in this stage include: ensuring the providers match the hard and soft requirements from the business, a stringent yet efficient set of KPI’s and a clear governance and blueprint in place. In addition to these activity-related steps, there are a number of people-oriented other elements that should form an integral part of the approach. “Our experience shows that the setting with which the contracting phase occurs is a key determinant of future success. Agreements and KPI’s should be effective and SMART, yet not too detailed, risking an atmosphere of low confidence and later on tie-consuming micro-management. Equally, a positive stance and confidence in one another are considered as very important by all parties, although it should not deter the focus from a robust legal framework. It is striking this balance between the two sides of the coin which proves a key complementary success factor,” says Van den Bergh.
Implementation
With the blueprint and agreements in place, the transformation transitions into the implementation phase, statistically the most challenging phase of the project. “One of the main pitfalls of outsourcing and offshoring is lack of investment and focus on the phases after the contract is signed. From Quint perspective we keep on challenging our customers: if you want to make the business case work, you should invest into transition and sourcing management.”
The phase can broadly be split into two areas: the transition and, once all is up and running, the management. During the transition a number of challenges stand out, such as the setup of the new blueprint, which includes the implementation of the new processes, solutions, across all impacted functions. Easier said than done, acknowledges Van den Bergh, because it all must be done typically within a sharp timeframe, with a strapped resource team (“key BPO owners often fulfil a key role in the business”) and little, if not no, impact tolerated on the regular business. “For this to be successful, planning, management of resources and dependency’s, supported by strong project execution, is paramount.”
Transitioning the workforce to new ways of working is equally challenging, he admits. In the case of management for instance communication and leadership insights might suffice, yet in the case of business owners more detailed knowledge of the transition and changes is required. “And for those that are impacted most on a daily basis, training and on-the-job coaching are key. Not just during the transition, but this too should be in place post go-live,” says Van den Bergh, hence “involvement of HR and change management is key.”
For the group of employees transferring to external providers, something that happens with outsourcing within the same country (not offshoring), a tailored approach is required in his view. “This differs per case, and can be driven by agreements, outsourcing providers, legal frameworks, and most importantly, individual requirements. The common denominator here is to work intensively with teams, providing a set of change management initiatives aimed growing understanding, commitment and ensuring all is place to work happily and effectively.”
Business as usual
Once the transition is complete, the outsourcing transformation turns into business as usual, and the key risk here is that the focus fades. “A process of control needs to be in place, to balance demand versus supply and manage the gaps, as well as driving a process of continuous improvement. We call that ‘sourcing governance’. The same applies for management of performance, both at an operational level and a strategic level, linking back to the business case drivers.”
* Source = The 2014 edition of the ‘Global Services Location Index’ from consulting firm A.T. Kearney.
