Companies search for savings via outsourcing

Companies search for savings via outsourcing

THE FINANCIAL and economic crisis has highlighted outsourcing, that is delegating services to other firms, as a way for companies to reduce or optimise costs. But in spite of this impetus, the popularity of outsourcing has not risen significantly in Slovakia. This is partly because of the limited scope for savings which the approach offers Slovak firms. However, a move to greater outsourcing is visible in public services to keep pace with development, for example in information technologies.

Outsourcing of services and processes is seen as a way to reduce or optimise operating costs, increase the quality of provided services, standardise processes and make them more effective, and make relationships and organisation more transparent, including responsibilities and optimal utilisation of sources.

“It is precisely during an economic crisis that outsourcing, as a way to reduce costs and maintain access to qualified human resources, comes to the fore,” Matus Jurovych, senior consultant at PricewaterhouseCoopers Slovakia, told The Slovak Spectator. “The main reasons why companies opt for outsourcing are to reduce wage costs, to obtain access to a qualified labour force, and to achieve effectiveness via a change in business processes and pressure of competition.”

Market watchers see two main trends in Slovakia related to Slovak and global customers. Milos Molnar, the manager of the performance and technologies department at KPMG in Slovakia, said, with regards to Slovak customers, that many companies have just started outsourcing, especially IT, payroll processing, and print and associated services. Those companies which have already outsourced some of their services and processes are now re-assessing and optimising existing contracts. Global customers in particular are consolidating and re-organising their outsourcing contracts. Many of them have left Slovakia, but some new ones have also arrived. Among those who have cancelled positions in Slovakia, Molnar listed Allianz insurer (print services), Bausch & Lomb (services related to bookkeeping) and a Swiss insurer (call centre).

“What is interesting is the increase in outsourcing in the state administration, especially in the IT sector and operation of systems,” Molnar told The Slovak Spectator. “Here the trend is that with the rising demand on human resources, with technology and systems becoming more and more complicated, and technologies becoming outdated more quickly, the state administration is unable to keep pace. To pay for quality specialists and use them full time is problematic for institutions, especially in Bratislava.”

But Molnar sees the crisis as merely a catalyst for these processes.

“What was ripe for outsourcing began to be outsourced, and what was already outsourced went through the process of searching for savings, as with any other cost,” he said.

Outsourcing’s low popularity in Slovakia

In the past, companies in Slovakia used outsourcing less than was usual abroad. And even though Martin Klamo, manager at the consulting department of Deloitte in Slovakia sees an increased interest in outsourcing as a method of long-term cost reduction, according to Molnar the situation has not changed very much.

“I think that the situation remains the same,” said Molnar. “This is linked with the general performance of companies and their process structure. Slovak companies are naturally smaller and are not able to achieve such a ‘saving from extent’ from outsourcing as can their Czech or Polish competitors.”

What is outsourced?

In general, companies outsource support and non-core services and processes, where the repeatability of processes is higher, and which are not linked to the core business of the companies and hence are not of strategic importance for their development, Klamo of Deloitte explained. These mainly include IT, including development and operation, services linked with HR, payroll and bookkeeping administration, logistics and call-centres. Companies also outsource cleaning services, maintenance, printing and mailing services, management of vehicle fleets and claiming of receivables, as well as catering for employees.

The normal rule is that companies do not outsource processes vital for their successful operation and those which they do not control completely. Other services and processes not suitable for outsourcing are those which a company is not able to monitor, or which cannot be sufficiently standardised.

According to Klamo, outsourcing of processes directly linked to the production programme or offered services of a company and which are supported by a unique technology are also not suitable for outsourcing. Nor is outsourcing recommended for areas in which knowledge transfer to the outsourcing provider may lead to a weakening of the position of the company in the market or abuse of sensitive data.

Slovaks like to outsource in Slovakia

Slovak customers use mostly Slovak partners for outsourcing, sometimes in regions offering more favourable conditions.

“Slovak companies have a primary interest in outsourcing in Slovakia because of availability, the ability to control and supervise, lower and more transparent costs, and the lack of a language barrier or a time difference,” said Klamo.

Molnar confirmed this interest in local sources.

“Foreign sources are not used, especially because of the minor difference between the level between, for example, Romania and Slovakia,” said Molnar. “The second reason is the relatively small volume of services which Slovak customers are able to demand.”

Insourcing versus outsourcing

Outsourcing remains a way to reduce costs, and the crisis has not changed this. Market watchers have not observed a trend for previously outsourced services and processes to return to companies in Slovakia.

“This is not common,” said Molnar. “It is also because the companies have lost their ability to perform the outsourced services and processes with their own resources. The costs of such process are usually higher than switching to a new partner.”

Jurovych of PricewaterhouseCoopers Slovakia agreed.

“One of factors which companies ponder when deciding whether to ‘insource’ is, in particular, the costs linked with repeated implementation of these business processes,” said Jurovych. “Because of this reason, small rather than large companies tend to opt for insourcing.”

According to Lukas Neduchal, senior manager of the IT risk and assurance department at Ernst and Young in Slovakia, insourcing is considered by significant companies in the financial sphere which are subject, for example, to regulatory requirements related to the protection of their clients’ personal data, or companies in which the criticality of a business process and potential risks prevail over the economic advantages of outsourcing.

But there are some other situations in which companies retreat from existing outsourcing contracts.

“Companies mostly cancel outsourcing when they lack a clear outsourcing strategy, when they do not have enough resources to implement the change in processes after their outsourcing, after a change in their ‘target operating model’, and, of course, when expected savings from outsourcing are not achieved,” said Jurovych.

Companies cancel outsourcing contracts when these contracts are not kept or repeatedly violated or they are not satisfied with services provided, or when a new, more advantageous provider, appears in the market.

“The quality of outsourcing, as with any customer-supplier relationship, depends on a correct and proper service-level agreement and mutual trust built up over the long term and based on the quality supply of services or activities,” Neduchal of Ernst and Young in Slovakia told The Slovak Spectator.

Source: Spectator

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