Getting outsourcing right

CXO. In what areas of business has outsourcing become most common and most valuable to companies in Europe and why is this?

RS. Outsourcing generally begins with processes that are clearly identified as non-core to a company’s business – typically transactional processes. Aside from IT functions (desktop, helpdesk, data centres), companies in Europe have been outsourcing various business processes, such as payroll, claims, mortgage processing and accounts payable, for many years. Companies with large-scale transaction processing are usually the first to outsource, which is why the financial services industry is one of the early adopters of outsourcing. The UK government sector is also one of the early adopters of outsourcing in Europe, driven by the government’s mandate to local authorities to become more efficient.

As companies and organisations become more comfortable with the benefits of outsourcing transactional processes, they progressively start to outsource higher value-added services and more comprehensive processes; they move from outsourcing just one function to an entire end-to-end process (e.g. from accounts payable to entire finance and accounting operations). As companies move to more comprehensive outsourcing contracts, they are able to benefit from stronger economies of scale and a deeper transformation – especially when they bundle the process with the software application supporting the process (HRIS, for instance).

CXO. In what other processes, or perhaps sectors, do you see most untapped potential?

RS. Today, most European organisations have been selective outsourcers – both for IT outsourcing (ITO) and for business process outsourcing (BPO) – preferring to outsource only small functions or sub-processes rather than entire processes. A few mega-deals in IT outsourcing were signed in 2003 and 2004, announcing the trend towards more comprehensive outsourcing. I’d say the strongest untapped potential for outsourcing in Europe is in multi-process outsourcing for non-core, yet critical administrative, functions such as finance and accounting, human resources and procurement.

CXO. How would you sum up the key benefits and drawbacks of outsourcing today?

RS. Within one company, different stakeholders expect different benefits from outsourcing – some looking for cost savings, others for better service levels, and others still for access to new technology. It is, therefore, critical that the different stakeholders align their objectives before starting the selection of outsourcing providers. Even outsourcers do not want end-users to rush towards the outsourcing selection – because in the end it will end up in a poor outsourcing contract for all parties involved.

The benefits of outsourcing that ACS have identified as most critical from its client base are: economies of scale, process transformation, better visibility over process performance, access to best practices, shorter implementation time for new technology, process standardisation, flexibility and, ultimately, an increase in shareholder value. European companies tend to focus more on the transformational impact of outsourcing than their American counterparts.

However, outsourcing is not a simple decision. Several obstacles are still holding companies back, such as fear of losing control or that service levels will decrease, uncertainty around quality of service providers, lack of benchmarks of internal process performance, employee unrest and cultural opposition to outsourcing. European companies tend to be more concerned over the employee impact of outsourcing than their US counterparts.

CXO. What would you like to see happen, either in development of certain technology or perhaps changes in regulations and compliance issues, that would improve the efficacy of outsourcing?

RS. Several regulations need to be taken into consideration when outsourcing in the European market. In particular, employee transfer rules regulated by the European Acquired Rights Directive (ARD), as well as data privacy regulations, need to be integrated to the sourcing process. The ARD provides protection to employees in the context of the transfer of a discrete function to an external party – but in some countries employees complain that they would prefer to have the right to choose. A more flexible approach to the ARD would enable smoother transitions of personnel and knowledge. Data privacy regulations ensure that critical data remains within the EU, and therefore limit the application of offshore outsourcing to functions that do not involve use of this critical data. Outsourcing providers and users alike must take this restriction into account when modelling the impact of offshore outsourcing in Europe.

Technology is an integral part of outsourcing. Outsourcing providers use enterprise applications (such as SAP, Oracle/PeopleSoft) as foundations to deliver BPO in HR and F&A, but also rely on workflow and middleware applications to link legacy applications with enterprise applications. At ACS, we believe that workflow applications are critical to BPO, as they allow us to deliver simpler and more flexible processing for our clients. Technology is also key to enabling front-end access to applications for end-users, to measuring productivity within the outsourcing providers’ ranks, to monitoring SLA performance, etc. As the outsourcing market matures, technology and automation will also replace a significant portion of the economies of scale derived from offshoring today.

CXO. What advice would you give companies when choosing a company and country to outsource to? What should the short- and long-term considerations and expectations be?

RS. Companies should clearly identify their selection criteria and weigh them up according to the importance of each factor. When selecting a country, companies should examine the size and quality of the labour pool size, cost, the quality of infrastructure in terms of accessibility for roads, telecommunications, IT and economic and political stability, cultural match, and any economic incentives provided by the government.

When evaluating a company, companies should look for a customer service approach, existing references in the same process and/or industry, a cultural match, and process and technology expertise.

CXO. Once a third-party is chosen, how can a company continually monitor and evaluate the ROI of that outsourcing relationship?

RS. The question of ROI in outsourcing remains elusive. Companies should focus on measuring three key groups of metrics: cost, service levels and customer service.

For all three groups of metrics, it is critical to establish a baseline before outsourcing and to set expectations properly. This will enable you to set appropriate cost targets and service levels. The costing of the baseline must include both direct and indirect costs to running a function (e.g, not only the direct costs included in the HR department, but also the HR costs that are embedded within business units).

The provider should be responsible for delivering regular reports on all three aspects of cost, service levels and customer service – but the end user should also be directly involved in the assessment. As part of the governance process, end users should set up at least three levels of management of the contract. First of these is a strategic level that monitors whether the outsourcing contract is delivering on its strategic intent and takes into account strategic changes that may occur at the end-user or at the service provider (such as a merger, acquisition, change in ownership, etc.). The most senior people at both organisations should be involved at this level of management. Meetings will take place once or twice a year.

Secondly, you should have a contract management level that monitors whether the contract is delivering on scope, service levels and cost. Contract managers should be involved at this level of management. Meetings will take place once a quarter.

Lastly, there is the country level, which ensures that local issues are resolved in a timely fashion. Country managers should be involved at this level and meetings will take place weekly or monthly, depending on the stage of maturity of the contract – or on an as-needed basis.

CXO. What do you believe will be the main outsourcing trends in the next five years?

RS. Based on our experience of the outsourcing market in Europe, we believe the top five trends will be: acceleration of adoption of BPO for HR and F&A; increasing use of external sourcing advisors to help with sourcing strategy, vendor selection and negotiations; increased partnering between software providers and BPO providers to deliver outsourcing services in a shared environment; expansion of outsourcing to Eastern Europe; and consolidation in the outsourcing provider market.

TOP MISTAKES IN OUTSOURCING

From an end-user perspective

• Outsourcing without a plan. if you do not know what you as an organisation wants out of the contract, you will have difficulty measuring whether it is successful. Some companies will focus more on cost savings, while others will focus more on process transformation. These expectations should be clear from the start.
• Outsourcing a process before measuring internal performance. Without a baseline, it is impossible to measure whether the outsourcing provider has delivered on its promise.
• Outsourcing a process without executive buy-in. If the top stakeholders in the company are not aligned behind the key objectives of outsourcing, it will be very difficult to ensure a smooth transition, as there is always resistance to outsourcing in any organisation. Only senior executive alignment behind outsourcing as a strategic driver will ensure that the outsourcing contract moves forward.
• Outsourcing without an exit strategy. If you negotiate a contract that does not allow for adjustment or renegotiation, you may end up being dissatisfied with no mechanism to readjust your contract, leading to further frustration.
• Discounting the importance of governance. Many organisations believe that once they have outsourced a process, they can just forget about it. In fact, it is essential to have a formal process for monitoring and managing the outsourcing contract.

From a provider’s perspective

• Cultural mismatch. Some providers rush into an outsourcing contract without carefully evaluating the culture of the end-user and comparing it to their own. If the cultural mismatch is too strong, it will lead to miscommunication and misalignment of objectives.
• Underestimating the amount of transition work required. In Europe, the complexity of multi-lingual, multi-country requirements is easy to underestimate. If the provider has not built in the additional European requirements into their model, they might end up extending the transition time and undermining their own profitability.
• Lack of communication. this is a challenge for users and providers, but providers should take the lead in communicating often and clearly with all stakeholders involved to ensure alignment of all parties – particularly during the transition phase.

A brief bio
Rebecca Scholl is Director of Market Strategy for ACS in Europe. She is responsible for developing ACS’ BPO value proposition in Europe, providing market intelligence, assisting on overall marketing efforts in Europe, helping form partnerships, identifying acquisition candidates and developing influential business relationships in Europe.

Prior to joining ACS in 2004, Scholl was the principal analyst at Gartner, Inc. covering the BPO market, where she published numerous reports on BPO Market Trends.