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The world of outsourcing is evolving as the industry matures, and there are currently some clear directions that companies wish to pursue when it comes to Business Process Outsourcing (BPO). In this first column, we outline and explore some clear outsourcing trends.
Historically outsourcing contract terms have been relatively long, typically ranging from 5 to 10 years. The reasons for these longer contract terms for clients have been the significant ramp up of transition costs and efforts, ensuring stability of services, guaranteeing quality and consistency of resources and increased attractiveness of the outsourcing business case. In addition, outsourcing decisions have always been considered long-term strategic choices and valid alternatives for corporate activities and functions that are considered non-core activities. Hence, it has made sense to focus on long-term contracts with limited exit clauses and optimal pricing.
However, some companies are starting to feel that long-term contractual arrangements, which do not provide business leaders with the flexibility they need in strategic decision-making, are no longer viable. Competitive environments are changing, companies are acquiring and exiting businesses and or business lines, strategies require more frequent updates and adjustments to adapt to evolving customer and consumer requirements, technology developments and new innovations are increasing. The constant changes within business environments require corporate infrastructure to be flexible in at least in some areas of the business. Shorter-term and more flexible contracts provide an opportunity to exercise the right to change scope or exit the services provided if necessary. They also enable a regular review of core vs. context thinking and allow an opportunity for adjustments in strategic thinking, depending on business circumstances.
In the past few years the trend has been towards increased outsourcing, especially in IT, Finance, HR, Facilities and Procurement Services. Many companies have outsourced various IT functions, such as hosting, applications support and maintenance, helpdesk, user services and information management. In financial services typical areas for outsourcing have been accounts payables and receivable, vendor master management, expense reporting process, bill to cash and record to report services. Outsourcing in HR is typical in payroll, recruitment, benefits administration and processing, helpdesk, learning administration, data management and reporting. In the area of procurement, outsourcing is common in procurement services and transactions (Purchase Order processing) and, increasingly, also in strategic sourcing services, especially in indirect spend areas.
Typical end of term strategies have been contract extensions or provider transfers. Scope of services typically stays the same at end of term, with scope reduction being more common than expansion. Some heavily outsourced companies are now starting to look at the service landscape and reconsider outsourcing decisions and possible repatriation. Could the services be provided internally at higher quality, with employee satisfaction and at lower cost? In some cases this is possible, especially if current relationships and contracts with service providers are not effectively managed and if the correct key performance indicators (KPI) are not in place.
An alternative, naturally, is to review and renegotiate KPI’s and align them to reflect employees’ expectations for service quality. When making in-sourcing decisions, it is important to bear in mind that exiting contracts is complex, costly and time consuming, so it requires correct planning and project management. Also, managing services in-house requires a business case, process rigor and measurement. Repatriation is not the most common end of term action for the majority of outsourcing contracts, but it is growing in popularity.
Outsourcing in emerging and developing markets
Companies are increasingly exploring opportunities for sourcing goods and services in emerging and developing markets to control costs and have local presence for customers and consumers. The same trend applies to outsourcing services. Organisations are seeking alternatives for North-America or Europe based outsourcing providers in countries like India, China and the Philippines for a more balanced, global portfolio. International outsourcing providers are also seeking greater presence and, as such, are offering more services from off-shore locations in order to lower engagement and operating costs.
New suppliers in the BPO space are emerging in all areas of outsourcing services to offer clients more choice when it comes to selecting providers. At the same time, a lot of mergers and acquisitions are ongoing in the outsourcing industry, resulting in supplier consolidation and reduced choice – especially in best of breed sourcing.
Process and best of breed outsourcing
Traditional outsourcing has been based on functional outsourcing. Organisations like IT, HR and Finance outsourced all or part of their operations to providers and managed these relationships within the function. Typical providers used were those with broad experience across all BPO areas or within the particular function. Now companies are increasingly starting to look at end to end process outsourcing, in order to streamline and lean out processes and to eliminate multiple providers offering services within the same process. An example of this trend could be Procurement and Finance teaming up to select a provider for the Procure to Pay process, rather than functionally managing providers in Procurement and Accounts Payables separately.
Another trend is smaller scale best of breed outsourcing. This involves very specific areas of the business being outsourced to specialists, such as promotional item suppliers or event management companies, rather than large-scale generic BPO providers. The trend of large BPO companies’ acquiring these best of breed providers, however, limits sourcing options in some cases.
Outsourcing centers of excellence
Many business teams are using external advisors and consultants to support outsourcing business case creation and scoping, provider selection, negotiations and contracting together with governance model design and implementation. These advisors provide valuable knowledge in terms of market insights, experience and best practices and they are good enhancements for cross-functional business teams considering and executing outsourcing contracts.
The challenge is that using external advisors does not build outsourcing skills and competencies in-house. Rather, this leads to a practice where every outsourcing project pays for the same advice again and again. An alternative is building internal centres of outsourcing excellence responsible for outsourcing strategy, business case, and process and contract standardization and governance models. This team could also provide market intelligence, share best practices between governance and contract management teams, and drive negotiations and problem solving for new and existing BPO contracts. This type of internal advisory role sits well, for instance, in Indirect Procurement/Supply Management.
Role of Procurement in outsourcing
Procurement teams are becoming more central in outsourcing negotiations as a part of cross-functional teams driving outsourcing decisions. This trend is a positive expansion of Procurement’s role in an area where business functions have typically created business cases and negotiated with providers themselves. Procurement can bring sourcing rigor to provider selection process and negotiations and offer tools and techniques for effectively managing the contracts and providers. . Procurement can also identify opportunities for additional leverage with the providers globally in other areas of indirect spend and benchmark and audit contracts and relationships regularly.
As a summary, the outsourcing landscape is evolving and maturing quickly, providing more and more options in terms of providers, scope, contracting alternatives and governance models. This is certainly positive for clients who are currently looking into outsourcing as an alternative to in-house operations. Describing these trends should help the audience in defining the approach and alternatives. Subsequent columns will go deeper into details of building the business case, negotiation techniques and managing outsourcing relationships.