The undisputed facts about outsourcing, Part 1: Buyers are saving money, but aren’t seeing a whole lot more

We would like to thank personally all 1,335 of you who took the time to compete our State of Outsourcing 2011 study we’re conducting with the London School of Economics Outsourcing Unit. 

This is the largest ever study that’s looked at outsourcing, which included all industry stakeholders (buyers – both business ops and IT practitioners, service providers and advisors).  A special shout also goes out to our partner, the Sourcing Interests Group, for inviting their members to participate, in addition to our 53,000 loyal readers.

We’ve been sifting through the findings these past few days, and let’s start here:

Engagements struggle to deliver business value beyond cost reduction

Whatever the motives buyers have when they outsource, the first critical metric they must reach is to save the money they were promised at the onset of the engagement.  And we have spectacularly good news for the entire outsourcing industry – the cost savings targets are being met – and being met well, with over 95% of current buyers viewing the engagements as effective for reducing their operating costs. 

And half of them are really pleased with their cost-reduction progress, the other half seeing progress as “somewhat effective”.  However, that’s pretty much where the good news tapers off, as the rest of the results are pretty modest…


After cost-reduction, how is outsourcing faring?

Business Process improvements. Barely one-in-five buyers feel they are experiencing significant improvements from accessing new expertise and transforming processes with their current outsourcing initiatives.  Half of them do see some effectiveness gains, while more than a quarter are seeing no effectiveness gains at all with their business processes. Considering many of these processes were likely non-core/non-strategic to begin with, which is why they outsourced them in the first place, it’s unlikely buyers are clamoring for process improvement in the initial phases, instead waiting patiently for their providers to serve up experts, process maps and best practice examples to harmonize processes.  As many buyers quickly discover, if process improvement is not in the contract, it will unlikely materialize without additional investment.

HfS believes those providers looking to develop real utility across their clients, proactively need to encourage them to adopt common best-practice process workflows.  This means they need the availability of process consultants to drive the agenda with their clients. 

And these consultants should largely be based onshore (spending time onsite) to work with the retained team.  This should be a major differentiator between providers – those that can quickly help clients to evaluate improvements, versus those who simply want to shift as much of the work offshore as quickly as possible and keep margins to a maximum.

Introducing new technology. This is an area where buyers should be experiencing far more effectiveness than they currently are, with 56% only seeing modest progress and 31% none whatsoever.  Too many engagements are still largely centered on shifts in labor-based services, as opposed to any genuine technology transformation. 

It’s hard to gain improvements in processes beyond a certain point if they are not IT-enabled, and clearly most outsourcing clients still run the same processes off the same technology platforms that they were using pre-outsourcing.  Like above, clients quickly discover if it’s not in the contract, they needed to budget for it – whether it’s the latest SAP upgrade, or implementation of a new expense management tool. 

If providers want to build true utility, they not only need their clients to have similar processes, but the more they can be enabled on the same technology, the more replicable and scalable their services will become.  And if these technology platforms can be delivered in the Cloud (even for components of functions), the easier they are to provision for clients.

HfS believes providers need to aggressively introduce new platforms to their outsourcing clients, and drive the IT-enablement of their business processes.  Those providers which can acquire or develop unique technology IP to support their outsourcing clients are at a clear advantage.  If clients are using highly customized IT platforms, for example in the capital markets industry, providers need to have the consultative skills to IT-enable the outsourced business processes effectively.

Innovation. As we discussed last year (read post here), at least 50% of clients take innovation very seriously when they outsource. And where they may be struggling to achieve innovation with their outsourcing engagement today, they at least see the potential to achieve it in the future.

Innovation is a progressive goal, once clients have got their processes operational and are in a position to explore new and creative ways to improve growth or productivity.  Providers need to work with their clients to develop an innovation agenda as they operationalize their outsourcing model, and their clients need to be encouraged to plan and budget for an innovation strategy from the onset of their engagement. 

Turning around to the board after two/three years to request budget for “innovation” is going to be a lot harder than if it was embedded into the initial agreement with some contractual provisions to cater for future innovation needs.  Once the ink on the outsourcing contract has started to dry, corporate leadership has likely already turned attention to other priorities.

HfS believes innovation needs to be addressed front-and-center – right from the onset of an outsourcing initiative, and not as an afterthought.  It’s like changing the wheels of a care while your driving – the world isn’t going to stop suddenly to allow for an innovation plan to be developed.  It needs to be in the works constantly as the engagement matures.

The bottom-line

HfS views this data as an important success factor for the outsourcing industry.  The initial goal of outsourcing – to drive out cost – has succeeded, and succeeded with flying colors.  However, the findings also point out that the sequential business needs that need to be addressed are falling short. 

Our concern at HfS is that costs are like hedgerows  – once trimmed they always grow back.  Providers cannot afford their clients to struggle.  After their transition to a working operational outsourcing model, corporate leadership isn’t going to keep reminding their shareholders about “that stellar 30% we took off the bottom-line three years ago”.  They are going to be looking for their next improvement metric. 

And the only way to achieve that, is to constantly look at harmonizing process and enabling it with better technology.  Outsourcing should provide an opportunity for buyers to take advantage of the talent acumen and IP their provider can deliver.  If buyers really do care about continuous improvement, then they will seek out a services partner which can prove, through multiple client experiences, that they have the discipline, culture and motivation to work with them over the long-haul.


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