Strategic Outsourcing: The Alchemy to Business Transformation in a Globally Converged World

Management for Professionals

For further volumes: http://www.springer.com/series/10101

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Bharat Vagadia

Strategic Outsourcing The Alchemy to Business Transformation in a Globally Converged World

Dr. Bharat Vagadia Brampton Grove 53 HA3 8LE London United Kingdom [email protected]

ISBN 978-3-642-22208-5 e-ISBN 978-3-642-22209-2 DOI 10.1007/978-3-642-22209-2 Springer Heidelberg Dordrecht London New York Library of Congress Control Number: 2011938156 # Springer-Verlag Berlin Heidelberg 2012 This work is subject to copyright. All rights are reserved, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilm or in any other way, and storage in data banks. Duplication of this publication or parts thereof is permitted only under the provisions of the German Copyright Law of September 9, 1965, in its current version, and permission for use must always be obtained from Springer. Violations are liable to prosecution under the German Copyright Law. The use of general descriptive names, registered names, trademarks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. Printed on acid-free paper Springer is part of Springer Science+Business Media (www.springer.com)

I dedicate this book to my late father and grandfather; Khimji Karsan Vagadia and Karsan Parbat Vagadia for showing me the light

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Preface

This book is for business leaders and managers from both the user and vendor communities who make or implement strategic sourcing decisions. If you lead outsourcing programmes or teams working on outsourcing, or seek to change a function or process through the use of outsourcing, have the power and authority to make decisions, or just feel strongly about the direction of your organisation or outsourcing programme, this book is for you. This book bridges academic research and draws on practitioner experience to provide a detailed understanding of how an organisation’s value chain can be reconfigured in order to create a more effective organisation using strategic outsourcing. Globalisation and in particular convergence are forces affecting most organisations and requires a strategic response by organisations in developed countries. To meet these challenges, business leaders have turned to outsourcing and offshoring as a tool to transform their organisational structures. However, strategic outsourcing and offshoring represent significant changes to business models, and have led to success and failure for many organisations. This book provides a roadmap to successful implementation of strategic outsourcing programmes, providing down to earth approaches to outsourcing decision making and implementation, based on a grass roots understanding. Outsourcing is not new; many organisations have used outsourcing successfully to bring about cost reduction, introduce flexibility or access specialist resources. However, not many have managed to use outsourcing in a strategic context. The book examines how strategic outsourcing can help transform organisational business models, structures and mindsets. Outsourcing can be a very risky strategy, if not managed adequately. Historically the success rate has not been encouraging, with only 40–60% of initiatives being deemed successful. Failure of the outsourcing programme not only affects those processes or functions being transitioned, but also those interdependent elements, touched by or associated with such activities. The failure of such a programme can have longer term consequences for the competitive advantage of the firm and its reputation in the market.

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Managing these risks, whilst ensuring the rewards sought from outsourcing are delivered, requires a combination of strong legal contracts and a relationship with the service provider based on high levels of trust. It also requires the organisation to thoroughly understand its own capabilities to manage outsourcing and the impact this may have on its longer term strategy. This book takes the reader on a journey through its 15 chapters: from understanding the drivers for change as a result of globalisation and convergence and their impact on organisational strategies; to examining how outsourcing can transform the various processes and functions of an organisation; to the impact outsourcing is having on various industry vertical sectors. The book then examines the role of the three “R’s” – Risks, Rewards and Relationships, in understanding the scope for the use of, and management of strategic outsourcing. A whole chapter is then focused on the outsourcing decision making process, for this is the most important management activity in developing and subsequently managing a programme which delivers. Having understood the decision making process for strategic outsourcing, the focus turns to transition management and governance, and how, what is the most difficult phase of an outsourcing programme, can be managed smoothly. At this point, insights drawn from academic research are provided to complement the practitioner experience. Through these insights, the book proceeds to explain how risks can be minimised through a combination of formal controls and informal relational exchanges. The whole concept of relational governance is explored in detail with two case studies providing insights into the client and vendor perspective. A chapter is dedicated to the review of offshore destinations, detailing criteria for the evaluation of destinations and analysing the relative merits of outsourcing within more than 35 countries across Asia, Americas, Europe and MENA. The issue of managing culture, especially when dealing with offshore destinations is then considered, with insights into how cultural differences manifest themselves within the relationship and how these can be managed. The concluding chapter details the eights foundations of successful strategic outsourcing implementation, which when combined with strategic decision making knowledge, guarantees that organisations embarking on the strategic outsourcing journey will derive the transformational benefits they seek. Each chapter includes an abstract at the beginning and a take-away at the end of the chapter, which serve as useful reference checklists for practitioners. I want you to stop thinking of outsourcing as a tactical tool, but recognise that it is a business system that will be increasingly important in the future, in transforming the organisational monoliths that we see today into the agile market leaders of the future. Strategic outsourcing will become an indispensable business model for progressive business leaders. This book will show you why and how.

Contents

1

2

3

Role of Strategic Sourcing in a Changing World . . . . . . . . . . . . . . . . . . . . . . . 1.1 Economic Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.1 Challenging Times Leading to Changing Business Models and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.2 Contrary Forces at Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.3 All Eyes on Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.4 All Aboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.5 Mixed Fortunes for the Outsourcing Industry . . . . . . . . . . . . . . . . . . 1.1.6 Changing Commercial Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.1.7 Getting it Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.2 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 1 2 2 2 3 4 5 5 6

Globalisation and Convergence: Drivers and Strategic Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2 Convergent World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 Raising Barriers to Globalisation and Convergence . . . . . . . . . . . . . . . . . . 2.4 Adapting Businesses to Compete on a Global Level . . . . . . . . . . . . . . . . . 2.5 A Case in Point: The Rise of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7 7 8 10 11 16 19

Social and Philosophical Considerations of Outsourcing . . . . . . . . . . . . . 3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Economic Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3 Social Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Separating the Spin from Reality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.6 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

21 21 22 23 24 24 25 25

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From Tactical to Strategic Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.2 The Role of Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3 Information Technology Outsourcing and the Cloud . . . . . . . . . . . . . . . . . 4.3.1 Cloud Computing and IT Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . 4.3.2 Cloud Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.3 The Challenges of Cloud Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 Cloud Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Business Process Outsourcing and Call Centres . . . . . . . . . . . . . . . . . . . . . . 4.4.1 Defining BPO Services by Organisational Impact . . . . . . . . . . . . . 4.4.2 Drivers for Customer Service Outsourcing . . . . . . . . . . . . . . . . . . . . 4.4.3 The Future of Call Centres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.5 Travel, Transport and Logistics Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . 4.5.1 Drivers for Logistics Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6 Finance and Accounting Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.6.1 Drivers for F&A outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.7 Human Resource and Recruitment Processing Outsourcing . . . . . . . . . 4.7.1 Drivers for HRO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8 Knowledge Process Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8.1 Typical KPO Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.8.2 Challenges in Knowledge Process Outsourcing . . . . . . . . . . . . . . . 4.9 Legal Process Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9.1 Drivers for LPO in Law Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9.2 What Not to Outsource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9.3 LSO Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.9.4 Corporations Rather Than Legal Firms Driving LSO . . . . . . . . . 4.10 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

27 27 28 31 31 32 36 37 38 39 41 43 44 44 45 46 47 47 48 49 50 51 52 52 52 53 54

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Outsourcing Within Industry Verticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1 Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 Banking Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.2 Outsourcing Drivers for Banking Sector . . . . . . . . . . . . . . . . . . . . . . . 5.2 Insurance Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 Insurance Sector Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 The Telecoms and Technology Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Main Drivers for Outsourcing and Managed Services . . . . . . . . . 5.4 Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.1 A Means to Radically Transform Service Provision . . . . . . . . . . . 5.4.2 Evolving Generations of Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.3 The Drivers for Outsourcing in the Public Sector . . . . . . . . . . . . . 5.4.4 Public-Private Partnerships (PPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.5 Outsourcing Offshore Versus Onshore . . . . . . . . . . . . . . . . . . . . . . . . . 5.4.6 A Closed Market for New Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . .

55 55 56 57 58 60 62 63 67 68 69 72 73 73 74

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5.5 Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.1 Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.2 Outsourcing Drivers not Just Focused on Cost . . . . . . . . . . . . . . . . 5.5.3 The Need for an Integrated Contact Management Strategy . . . 5.5.4 Transforming Customer Service Cost Centres into Sales Centres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.5.5 The Need for Greater Pro-activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.6 Charity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.7 The SME Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Strategic Outsourcing: Risks, Rewards and Relationships . . . . . . . . . . . 6.1 Rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Loss of Core Competence and Innovation Capability . . . . . . . . . 6.2.2 Cost Escalation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.3 Supply Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 Change Management Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.5 Selection, Contracting and Vendor Management . . . . . . . . . . . . . . 6.2.6 Communication Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.1 Knowledge Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3.2 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.4 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

81 81 84 85 86 86 87 87 87 87 89 89 91 91

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Sourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 7.1 Evolution of Sourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93 7.2 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98

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Strategic Outsourcing Decision Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Decisions Driven by Consensus and Debate . . . . . . . . . . . . . . . . . . . . . . . 8.3 Suggested Decision Process for Outsourcing . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Defining the Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 Outsource for the Right Reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Using a Methodical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.4 Engage with All Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.5 Choosing the Right Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.6 Negotiating a Robust Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.7 Use of Performance Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.8 Establish a Relationship Governance Structure . . . . . . . . . . . . . . . 8.3.9 Establish a Relationship Management Function . . . . . . . . . . . . . . 8.3.10 Managing Human and Communication Issues . . . . . . . . . . . . . .

76 76 77 78 79 80

101 101 107 107 107 108 109 109 111 112 112 112 113 113

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8.3.11 Single Versus Multi-Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113 8.3.12 Understand the Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114 8.4 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115 9

Transition and Relationship Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 Managing the Soft Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.3 Governance and Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . 9.4 Typical Governance Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.1 Joint Review Board (JRB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.2 Service Management Team (SMT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.4.3 The Operating Group/Service Delivery Team (OGSDT) . . . . . 9.5 Governance in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.6 Role of the Legal Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.7 Service Level Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

117 117 121 123 124 124 126 126 126 127 129 131 131

10

Insights from Academic Research on Outsourcing . . . . . . . . . . . . . . . . . . . 10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.1.1 Defining Outsourcing and Offshoring . . . . . . . . . . . . . . . . . . . . . 10.1.2 From Tactical to Strategic Outsourcing . . . . . . . . . . . . . . . . . . . 10.1.3 Empirical Studies Suggest Outsourcing can be a Risky Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 Outsourcing Rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.1 Better Focus on the Core Business . . . . . . . . . . . . . . . . . . . . . . . . 10.2.2 Cost Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2.3 Benefit from Supplier Investment and Innovation . . . . . . . . 10.2.4 Increased Flexibility and Technology . . . . . . . . . . . . . . . . . . . . . 10.2.5 Gain Access to External Competencies . . . . . . . . . . . . . . . . . . . 10.3 Outsourcing Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.1 Strategic Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.2 Operational Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.3 Commercial Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.3.4 Human Resource (HR)/Communication Risks . . . . . . . . . . . . 10.4 Outsourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.1 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.2 Transaction Cost Economics (TCE) . . . . . . . . . . . . . . . . . . . . . . . 10.4.3 Resource Based View (RBV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.4 Dynamic Resource (Capability) Model (DRM) . . . . . . . . . . . 10.4.5 Incomplete Contract Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.4.6 Other Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

133 133 133 134 135 136 136 136 137 137 137 138 138 139 140 140 141 142 142 143 144 144 145 147 147

Contents

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11

Minimising Risk Through the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.2 Outcome Based Accounting Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 Appropriate Contractual Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.4 Contract as an Enabler of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

151 151 152 152 153 154

12

Minimising Risk Through Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2.1 Organisational Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2.2 Group Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2.3 Individual Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.2.4 Creating Institutional Mechanisms for Building Trust . . . . 12.3 Control and Its Relationship to Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 Vendor Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.5 Service Level Agreements as a Means of Control . . . . . . . . . . . . . . . . 12.6 Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.7 Relationship Management and Internal Knowledge Retention . . . . 12.8 Necessity of Legal Contracts for Positive Trust Development . . . . 12.9 Adaptation to Cultural Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.10 Knowledge Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.11 Managing Distance and Communication Challenges . . . . . . . . . . . . 12.12 Continuous Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.13 Risk Minimisation in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.14 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

155 155 155 157 157 157 157 158 159 163 164 165 168 169 169 170 170 171 173 173

13

Offshoring Leaders, Laggards and Hopefuls . . . . . . . . . . . . . . . . . . . . . . . . . 13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2 Location Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.2.1 From Countries to Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 Criteria to Assess the Location Decision . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.1 Factor Weightings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.2 Country Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3.3 Relative Merits of each Location, Based on a Rational Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.4 Effects of the Recent Political Unrest on Offshoring . . . . . . . . . . . . . . 13.5 The Outsourcing Industry in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6 The Outsourcing Industry in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.6.1 Infrastructure Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.7 The Outsourcing Industry in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.8 The Outsourcing Industry in Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . 13.9 The Outsourcing Industry in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.10 The Outsourcing Industry in North America and Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

175 175 176 177 179 179 180 180 181 182 184 186 192 193 194 195

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Contents

13.11 The Outsourcing Industry in Middle East and Africa . . . . . . . . . . . . 196 13.12 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198 14

Managing Cultural Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.2 Cultural Influences on Management Style . . . . . . . . . . . . . . . . . . . . . . . . . 14.3 Cultural Influences on Hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.4 Cultural Influences on Group Relationships and Motivations . . . . 14.5 Cultural Influences on Negotiation Styles . . . . . . . . . . . . . . . . . . . . . . . . . 14.6 Distinctions Blurring Between Cultural Dimensions . . . . . . . . . . . . . . 14.7 Cultural Differences in Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

199 199 200 201 202 202 202 203 206 206

15

Implementing Successful Strategic Outsourcing Programmes . . . . . . . 15.1 The Eight Principles to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.2 Principle 1: Strong Yet Flexible Contracts . . . . . . . . . . . . . . . . . . . . . . . . 15.3 Principle 2: Effective Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.4 Principle 3: Effective Control and Monitoring . . . . . . . . . . . . . . . . . . . . 15.5 Principle 4: Building Commitment and Mutual Dependence . . . . . 15.6 Principle 5: Ensuring Goal/Expectation Alignment . . . . . . . . . . . . . . . 15.7 Principle 6: Building Individual and Institutional Trust . . . . . . . . . . . 15.8 Principle 7: Managing Effective Collaboration and Knowledge Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.9 Principle 8: Effective Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10 A Summary of Strategic Outsourcing: Risks, Rewards and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.1 Don’t Start at the End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.2 Establish What is Core . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.3 Establish What Success Means . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.4 Measuring Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.5 Making It Happen: Ever Had a Yearlong Migraine? . . . . 15.10.6 The True Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.7 It’s Not All Plain Sailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.8 Impact on Strategy and Value Retention . . . . . . . . . . . . . . . . 15.10.9 Don’t Overlook the Challenges . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.10 Organisational Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.11 Cultural Adaption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.10.12 Detailed Contractual Agreement . . . . . . . . . . . . . . . . . . . . . . . 15.10.13 Knowledgeable Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

207 207 209 210 211 212 213 215 215 216 216 216 218 218 218 219 220 220 221 221 221 222 222 222 222

Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

List of Figures

Fig. 2.1 Fig. 2.2 Fig. 2.3 Fig. 4.1 Fig. 4.2 Fig. 4.3 Fig. 4.4 Fig. 4.5 Fig. 4.6 Fig. 4.7 Fig. 4.8 Fig. 5.1 Fig. 5.2 Fig. 5.3 Fig. 5.4 Fig. 5.5 Fig. 5.6 Fig. 5.7 Fig. 5.8 Fig. 5.9 Fig. 5.10 Fig. 5.11

An interconnected world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pillars of competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . From a vertically integrated organisation to an allianced organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The historical context of outsourcing from a client and supplier perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The three generations of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Worldwide outsourcing market size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Technology stack – the decoupled approach driving innovation in service delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BPO service impact on organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finance and accounting value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Knowledge process outsourcing (KPO) services . . . . . . . . . . . . . . . . . Legal process and service outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Banking value chain – the role of outsourcing at each stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insurance value chain – the role of outsourcing at each stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Telecommunications value chain squeeze . . . . . . . . . . . . . . . . . . . . . . . . Role of outsourcing in transforming telecom operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Outsourcing growing throughout the value chain within the telecoms industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . The overriding drivers for outsourcing the telecoms industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changing cost structures in the mobile industry through use of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Government outsourcing trends by country . . . . . . . . . . . . . . . . . . . . . . UK government outsourcing by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . Evolution of public sector outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . .

9 12 18 28 30 30 33 39 46 49 53 56 58 61 62 63 64 64 65 68 69 70 xv

xvi

Fig. 5.12 Fig. 6.1 Fig. 6.2 Fig. 6.3 Fig. 8.1 Fig. 8.2 Fig. 8.3 Fig. 8.4 Fig. 8.5 Fig. 8.6 Fig. 9.1 Fig. 9.2 Fig. 9.3 Fig. 9.4 Fig. 9.5 Fig. 12.1 Fig. 12.2 Fig. 12.3 Fig. 12.4 Fig. 12.5 Fig. 12.6 Fig. 13.1 Fig. 13.2 Fig. 13.3 Fig. 13.4 Fig. 13.5 Fig. 13.6 Fig. 13.7 Fig. 13.8 Fig. 13.9 Fig. 13.10 Fig. 15.1

List of Figures

Key issues for consideration within public sector outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72 Outsourcing drivers – academic insight . . . . . . . . . . . . . . . . . . . . . . . . . . 82 Outsourcing cost levers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Key drivers of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83 Strategic sourcing choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102 Strategic intent to reality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104 The sourcing decision dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108 The detailed outsourcing decision process . . . . . . . . . . . . . . . . . . . . . 110 Stakeholder perceptions in outsourcing – example of IT outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110 Multi-sourcing versus single sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . 114 Transition phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 The balance between the legal contract and relational aspects of the deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 Transition management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Levels of governance relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124 Factors that lead to successful outsourcing governance . . . . . . . . 127 Relationship matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159 From adversarial to collaborative relationships . . . . . . . . . . . . . . . . 163 Rules for effective SLA metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164 Communication management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171 Practitioner views of outsourcing risks . . . . . . . . . . . . . . . . . . . . . . . . . 172 Practitioner views of most impacting risk mitigation actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172 Offshore destinations by maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176 Offshore destinations – high level criteria for assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 Offshore destination – detailed decision model . . . . . . . . . . . . . . . . 178 Offshore destination criteria weighting . . . . . . . . . . . . . . . . . . . . . . . . . 179 A rational country comparison using detailed decision model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180 Rational relative merits of each country – courtesy of GovernanceDirector.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181 Relative attractiveness of Asia-Pac countries . . . . . . . . . . . . . . . . . . 184 Relative attractiveness of European countries . . . . . . . . . . . . . . . . . . 195 Relative attractiveness of North and South American countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196 Relative attractiveness of Middle East and African countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197 Stakeholder conflicting requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 217

List of Tables

Table 2.1 Table 6.1 Table 7.1 Table 7.2 Table 9.1 Table 9.2

Surviving in a competitive global world . . . . . . . . . . . . . . . . . . . . . . . . . . Trust indicators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sourcing models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sourcing engagement models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transition risk management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . Outsourcing governance procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

12 90 94 94 122 125

xvii

.

List of Case Studies

Case study of Indian BPO Service Provider........................................................ 160 Case study of Cooperative Financial Services..................................................... 166

xix

.

The Author

Dr Bharat Vagadia is a leading authority on Telecommunications, Managed Services and Outsourcing and has been involved in Managed Services and Outsourcing throughout his careers. He has advised governments, regulatory authorities, and businesses in UK, Western and Eastern Europe, Kenya, Bahrain, Jordan, KSA, Egypt, Morocco, Oman, Qatar, the UAE and India. He has worked extensively with organisations, large and small, on strategy, financing, marketing, business process management, SLA development and more generally, outsourcing. Dr Vagadia is a director of an outsourcing research and advisory firm (www.Op2i. com), is a Board Director of the UK National Outsourcing Association, the founder of a software-as-a-service decision governance system (www.GovernanceDirector. com), an advisor to the International Telecommunications Union (ITU) on policy and regulatory affairs, and teaches on MBA programs at UK business schools. He is also the author of “Outsourcing to India – a Legal Handbook”, which offers concise, digestible and relevant legal advice to help organisations ensure an outsourcing deal delivers on its promise, offering practical advice on mechanisms to reduce outsourcing risk through the contract. Dr Vagadia has a PhD researching the interplay of legal contracts and trust in outsourcing relationships. He has been awarded an LLM in Commercial Law, an MBA from Imperial Business School, a 1st Class (Hons) in Engineering from King’s College London, and a CIM Diploma in Marketing. www.Op2i.com www.GovernanceDirector.com

xxi

.

Acknowledgements

I would like to thank the many people who have provided insight and feedback on the concepts and tools described in the book, including the senior managers from the two case studies for their time for interviews, and my colleague Ross Caldwell, who has helped develop a more robust methodology through our discussions, critical analysis and his penetration and probing questions, not to mention his invaluable help in proof reading the manuscript. It goes without saying that I owe a debt of gratitude to the academic tutors I have had the privilege of meeting over the many years spent studying the diverse subjects that have contributed to my understanding of the practice of outsourcing. I would like to thank my wife Bhavna, who has supported and encouraged me in writing this book and my daughter, Divyamayi, who brings a ray of sunshine every time the dark shadows of despair hover above. There are many others who have helped, encouraged or supported me in this journey, including friends, family and colleagues who I am immensely grateful to, but in the interest of saving trees, have not listed here. London, May 2011

Dr Bharat Vagadia

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Role of Strategic Sourcing in a Changing World

The recent economic turmoil witnessed by the global economy has brought outsourcing, managed services and shared services to the top of the board room agenda. Organisations are now re-examining their business models and structures and outsourcing is being seen as a tool for business transformation. The recent focus by many organisations on cost reduction, however, may cause more problems than they solve. This chapter outlines briefly the recent forces for change in the outsourcing landscape and concludes that while the outsourcing decision must be considered as a legitimate business strategy, it must be considered with a great deal of care.

1.1

Economic Drivers

Early in 2009, organisations around the world, including many within the emerging economies which had been somewhat protected from the recession, began to fear a deep global recession brought on by the banking and credit crisis. For the outsourcing market, this presented both heightened risks with more budget constrained clients and new opportunities, arising from a real need within organisations to cut costs and restructure balance sheets – outsourcing was featuring high on the board room agenda. Although emerging countries had not been as hard hit as the Western world, they have nevertheless suffered from a drop in international demand for their products and services. Just when organisations from these countries started moving up the value curve, beyond cost savings into business transformation, customer demand turned the clocks back by a decade and again expectations shifted back towards lower costs rather than fancy value added services.

B. Vagadia, Strategic Outsourcing, Management for Professionals, DOI 10.1007/978-3-642-22209-2_1, # Springer-Verlag Berlin Heidelberg 2012

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1.1.1

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Role of Strategic Sourcing in a Changing World

Challenging Times Leading to Changing Business Models and Practice

The world went through what can only be described as an incredibly challenging time. It is at such times that innovation normally thrives. If most large organisations were to start anew, typically they wouldn’t build the organisational model they have today. Outsourcing provides organisations with a framework to help re-engineer themselves using a model that is in tune with today’s technology enabled and converged environment. What the 2009–2011 recession did, was to accelerate this transformation of industries and business models. This transformation was not too different from that envisaged by Darwin’s natural evolution theory – a change in the environment leads to changes in demand, changes in the nature of competition, and the ways of doing business. During this evolution, some business models and processes became either more common or rare – to survive, standing still was not an option. As the recession tightened its grip on business, outsourcing increased in popularity as a cost saving business strategy and rose in importance. For a growing number of businesses, of all sizes, struggling to pay rents, rates and staff salaries, the idea of outsourcing, even for those that viewed it with suspicion in the past, saw it now as the new saviour of their business. Even the public sector seriously started examining the role that outsourcing and shared services can play in an era of reduced funding and tough choices.

1.1.2

Contrary Forces at Work

Interest in outsourcing has grown over the last few years, by around over 20% according to our most recent global survey.1 However, this has not necessarily translated into more outsourcing. Many were reluctant to pursue this path; with the uncertainty of the economic recovery hovering over executive’s heads, and many simply avoided making a decision. Most couldn’t justify the up-front transition costs involved in outsourcing. However, as a new wave of optimism spreads, many executive heads are emerging above the sand of recession and seriously thinking about what lessons they have learnt; taking the opportunity to transform their costs and business structures.

1.1.3

All Eyes on Cost

The activity that distracts someone from their core business is the core business of an outsourcing service provider – that means treating it as a profit centre, not a cost

1

Op2i Outsourcing Survey 2009–2010.

1.1

Economic Drivers

3

centre. This usually translates as “cheaper”. Following this logic, one would have assumed that this increased focus on costs savings would lead to significantly more offshoring, which contrary to popular belief, is currently just a small part of the overall offshoring industry. However, what we are seeing is a very focused and selective strategy for offshoring. As the industry matures, organisations understand better which processes and functions are more appropriate for offshoring – in fact what we have seen is that some processes and or functions that had been previously offshored, are now being brought back in-house – having learnt an expensive lesson in the process. This trend to bring back processes and functions in-house may accelerate as upheaval in national markets and political pressures mount, and organisations attempt to de-risk exposure to volatile regions – just look at the political unrest in Egypt and Tunisia, and the effects this has had on business and trade. If the right processes/functions are offshored, to the right destinations and the right service providers, they have the potential to dramatically change business economics through their significant impact on costs, quality and the availability of huge talent pools. However, the “if” is a big if.

1.1.4

All Aboard

What we are also seeing is the diffusion of outsourcing to a wider business audience. When facing battle with a multinational corporation with significant resources at its disposal – an SME with somewhat limited resources (human, technical, legal, financial and global reach) may find the battle somewhat difficult and short lived. However, it can be argued that the time has now come, when (operationally at least) the many David’s of the world can compete with the few Goliaths that have historically dominated the markets. With the increasing availability of outsourcing and offshoring to the SME market, times are changing and SMEs can consider these as new ways to compete, extending their business capability and reach. I myself, running a small firm, have used outsourcing to great effect, outsourcing web development, creative design and some aspects of marketing from India to Mexico to Brazil and even the USA – albeit with a few hiccoughs along the way. Outsourcing is nothing new – probably as old as the David and Goliath story. Most large corporate organisations around the globe have embraced outsourcing in one form or another over the last decade. Mid-market companies must now embrace outsourcing and offshoring as both a means of survival and as a means to level the playing field with their larger competitors. Although the benefits and drivers for outsourcing are pretty clear, operational execution and risk mitigation strategies are more difficult for the Mid-market to comprehend (from experience the same can be said for large corporate organisations. . .).

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Role of Strategic Sourcing in a Changing World

Mixed Fortunes for the Outsourcing Industry

Clearly the ingredients are there for the outsourcing industry to benefit from the recession. However, the industry must improve its success rate if it is to convince the wider population that outsourcing and offshoring are sufficiently mature to be considered a viable business strategy, rather than just another tactical approach to cutting costs. The fear is that the recent economic climate, has brought focus firmly back to simply cost cutting, without the necessary strategic focus being given to the wider opportunities presented by an outsourcing programme This ultimately moves outsourcing initiatives from being firm level strategic options to merely tactical considerations, managed by the procurement department within the organisation. A sharp focus on reducing costs has inevitably meant that the broader benefits from outsourcing, such as flexibility, service/process reengineering and transformation, have dropped down the agenda – something that may well have longer term consequences. With the success rate of outsourcing somewhere in the range 40–60%, it will be really unfortunate if this preoccupation with costs above other benefits extends into cost preoccupied decision and programme governance. Although the primary driver for outsourcing and certainly offshoring has always been cost, what we have seen is a dramatic shift in focus towards cost, with transformation concentrating on core competencies, and time to market being down played. Business transformation, the holy grail of outsourcing, although never quite living up to expectations (not surprising, given it was the vendor community who claimed the ability to deliver business transformation and enable their client’s to be more flexible, innovative, and respond to market changes more quickly and efficiently), must be the ultimate goal for the outsourcing industry. Unfortunately, some vendors just jumped on the business transformation bandwagon without the necessary domain expertise, or indeed the resources to be able to commit to large scale transformations. Outsourcing relationships in the vast majority of cases are still therefore very much transactional in nature and far from the strategic approach that can deliver substantial value to the parties. This is not to say that (some) vendors cannot deliver transformational change, but that it requires a very different relationship and a very different approach to the whole outsourcing decision process – an approach which both parties and their respective stakeholders agree and commit to. Another dramatic change has been the expectations of cost savings. Whereas organisations were happy to outsource and offshore, investing upfront in transition activities with payback within 3–5 years, customers now expect payback within 18 months, and ideally don’t want to invest/ spend any money upfront – not quite fitting the business model that vendors and indeed advisors are familiar with. However, this change in client demand firmly creates momentum for the cloud and Software as a Service (SaaS) models now beginning to be rolled out. This focus towards costs didn’t just affect new outsourcing service users; those organisations that had outsourced, started demanding suppliers live up to the partnership hype that they emphasised during the sales and negotiation phase, and

1.1

Economic Drivers

5

share the pain and pressures that customers faced – many sought to renegotiate their contracts during 2009 – asking suppliers to deliver more-for-less, whilst also seeking to deliver substantial cost reductions from the previously agreed rates (figures between 15% and 20% had been claimed).

1.1.6

Changing Commercial Models

In a bear market, most suppliers felt they had no real choice but to respond (some may well have lived up to the partnership model, others forced) to customer demands. Most suppliers secured longer term contract extensions in exchange for short term pain – where suppliers (e.g. offshore call centres) have profit margins between 20% and 30%, they could afford to give a little. . .. However, what this period showed is that the longer term contracts, typical within the outsourcing industry, can themselves lead to less flexibility – contrary to the common perception that outsourcing delivers greater flexibility. There will no doubt be continued pressure on the industry for shorter term contracts – not quite the model required for strategic outsourcing, where a long term partnership is sought. Given the principal mantra being prudence, organisations have also sought to cut out expensive, and what they may deem as unnecessary, advisory support services. Many have gone back to the antiquated belief that outsourcing is just another form of procurement and therefore something that can be done quite adequately within the organisation. This may well save costs in the short term and the organisation may well find suppliers that can deliver some cost savings. The likely longer term impact will be a dysfunctional organisation, with decisions being imposed by one department or sponsor on others. The wider organisational benefits will be brushed aside; all the possible options that may well deliver substantial benefits in the longer term will be ignored with the blinkered lens focused only on immediate cost savings. Within this environment, all the risks and possible risk mitigation strategies will not be fully evaluated or clearly communicated with wider stakeholders. This communication challenge has also more than ever, influenced the decision to outsource; “how will the market react to us outsourcing, how will our employees react to outsourcing and possible job losses, the unions, the public. . ..”. Many would-be outsourcers, seeing the benefits of outsourcing, have been restrained by this force of public opinion. This however has not stopped public sector organisations, especially local government looking hard at their sourcing options.

1.1.7

Getting it Right

Deciding what to outsource, where to outsource and identifying the right provider are simply the opening challenges. Making outsourcing happen provides further

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Role of Strategic Sourcing in a Changing World

potential pitfalls – it calls for new forms of strong project, change and governance management skills that in most organisations don’t exist internally. The outsourcing decision making process, although only the opening challenge, must, be done correctly, otherwise you end up fighting a lost cause, trying to stop a runaway juggernaut. The decision making process must be all encompassing, assessing all options; for outsourcing is not always the answer. An appropriate rational decision making process is called for, more so than ever before.

1.2

Take Aways

• Outsourcing becoming more popular – although still a lot of uncertainty. • Outsourcing being used as a tool to re-structure business models and value configurations. • Outsourcing will be embraced by more sectors and by the SME market in the near term. • Increased outsourcing has not translated into increased offshoring. • Vendors being forced to negotiate lower prices and create innovate commercial structures to deliver greater value, quality and without the upfront investment by client organisations.

2

Globalisation and Convergence: Drivers and Strategic Outsourcing

The world has gone through incredible change over the last few decades which is creating a globally interconnected world – a flat world. This pace of change is increasing with convergence of products, services, industries, technology and knowledge. The effects of globalisation and convergence will be dramatic and impact every aspect of business in developed and developing economies. Organisations in developed economies need to adapt to this new world and reexamine the basis of competitive advantage, redefine their businesses; become much more efficient through process and cost optimisation, seek best in class skills and knowledge from a globally dispersed talent pool, utilise technology to deliver superior value to their clients, provide products and services for this new converged world and tap into the globally interconnected financial markets to access cheaper capital. This chapter examines the drivers for globalisation and convergence, their impact on business and details how organisations can compete in this environment.

2.1

Introduction

The two transformational forces of the twenty-first century; globalisation and convergence are knocking down, long established structures, business models and beliefs. The effects of globalisation have been wonderfully illustrated in the book: The World Is Flat: A Brief History of the Twenty-First Century by Thomas Friedman, which analyses globalisation, primarily in the early twenty-first century. Friedman defines ten “flatteners” that he sees as levelling the global playing field: • Collapse of the Berlin Wall signifying the collapse of the Cold War and the integration of countries from the falling physical barriers; • The web broadened the audience for the Internet from its roots as a communications medium used primarily by the academic community and geeks to something that made the Internet accessible by everyone; • Workflow software enabled equipment to talk to other equipment without the need for human involvement; B. Vagadia, Strategic Outsourcing, Management for Professionals, DOI 10.1007/978-3-642-22209-2_2, # Springer-Verlag Berlin Heidelberg 2012

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Globalisation and Convergence: Drivers and Strategic Outsourcing

• Outsourcing allowed companies to split service into those deemed core and noncore and allowed entities to subcontract activity and perform these in the most efficient, cost-effective way; • Offshoring, which Friedman described as the internal relocation of a company’s manufacturing or other processes to a foreign land to take advantage of cost advantages. The famous BRIC countries are at the foremost here; • Open source software enabled communities to upload and collaborate on online projects; • The use of technology streamlining the supply chain, such as sales, distribution, and shipping; • In-sourcing, which is seen to be akin to what marketers call brand extension, where organisations supply goods or perform services into adjacent markets from their core markets, leveraging their existing assets, be it technology, channels to market or customer trust – he uses the example of UPS, in which the company’s employees perform services – beyond shipping – for another company – e.g. UPS itself repairs Toshiba computers on behalf of Toshiba. The work is done at the UPS hub, by UPS employees; • The holy grail of efficient markets theory is about access to all information in real time – this has now become closer to reality, thanks to Google and other search engines, which gives the participants in a market the ability to find all the information required in a timely and cost effective manner; and • Finally the technology revolution, including Mobile, Voice over Internet, Broadband and other technologies which to some extent sit above the underlying Broadband networks and makes the utility of the services much greater; helping spur new innovative models, services and competition (e.g. Skype).

2.2

Convergent World

Friedman talks about convergence in a limited sense around horizontal collaboration and converging economies from a communist perspective to a market led perspective. However, the effects of convergence in its true form are much broader and much more impacting on the world – more so than the ten individual flatteners that were listed. Convergence is happening in all its forms, which is changing the nature of market structures, demand, competition, competitors and the ways of doing business. Any organisation that is not cognisant of this, and does not transform their businesses will be adversely affected. Globalisation, increasing international trade and the lowering of barriers to entry into markets will continue over time. The impact from emerging countries in terms of competition, their effect on demand for raw materials and energy will only continue to increase. Organisations will need to not only transform their internal focus – improving efficiency, accessing world class talent, better partnerships and focused on what is

2.2

Convergent World

9

core to their business, but they must also, examine opportunities to serve the emerging markets. Everyone talks about convergence in one form or another, some talk about converging technologies, others converging markets and so forth. Convergence is changing the ICT industry significantly today. It is not a theoretical argument, but an everyday reality for companies within the ICT value chain. ICT convergence is a state in which networks and intellect are globally interconnected, integrating all forms of electronic communications into a single universal transmission system which interconnect processing resources, and deliver all forms of content that is delivered from one to the other, on whatever device and wherever that individual desires such content. I tend to view convergence more broadly and as my colleague, Ross Caldwell elegantly put it, it is the interaction, overlap and absorption of different industries converging together in a more competitive and deregulated market – a world where skill sets are available everywhere, where everywhere is connected, where knowledge is ubiquitous, where everything is now and where everywhere is here, and where resources are globally distributed. Viewing convergence in these broad terms paints a very different picture of what the world will look like in the twenty-first century and what the implications are for organisations. The relatively simple diagram (Fig. 2.1) illustrates the interconnected nature of convergence and globalisation: Effects of convergence can be seen at the macro level Advanced country local demand for goods and services

Emerging country supply of goods

Local resources outstripping demand Labour rates rise

Emerging country supply of labour

Migration of manufacturing to lower cost countries Emerging country growth driven by FDI

Globalisation – reducing trade barriers Deregulation of telecom – facilitates globalisation Global connectivity Relaxation of FDI limits Labour convergence

Outflow of funds from developed to developing

Emerging country supply of services Emerging country growth driven by exports

Aging workforce – competition for skill sets Immigration from developing to developed countries

Technology convergence

Repatriation of savings and funds

World Economy convergence

Advances in technology

Knowledge convergence

- reduces barrier to entry into industries - allowing different ways of doing business

Deregulation

Emerging country growth in local demand

Globalisation of knowledge

Free market mechanism

Positioning of developed countries as “knowledge” economies Local stock market correlated to Global stock market

Focus on Finance, Banking, Insurance industries Stock market driven society – economic growth linked to stock market Deregulation of BFSI sectors

Intense competition

Cheaper products

Intense BFSI sector competition, breaks link with local and world economy

Global Credit Crunch

Local Credit Crunch

Unsustainable competition – costs rise Increase in Default payments

Fig. 2.1 An interconnected world

Disposable incomes fall

Energy prices rise

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Globalisation and Convergence: Drivers and Strategic Outsourcing

A World where globalisation and convergence are interconnected Given this scenario, what are the options for world economies to compete on the global stage? Well two, either raise barriers to entry into your local markets or adapt businesses to compete in this spaghetti of economics, politics, regulation and internationalisation.

2.3

Raising Barriers to Globalisation and Convergence

A country could attempt to counter the forces of globalisation and convergence by raising barriers. Indeed countries have or are attempting to do just this – at the time of writing this book, the UK is attempting to limit immigration, the USA is considering raising trade barriers with China, the G20 is attempting to impose more regulatory controls on the financial industry. However, these are seen as relatively short term measures, an attempt to buy time. All participants in this game know full well, that in an interconnected world, one country raising barriers is likely to lead others to retaliate, and therefore over time the act of raising barriers could over time lead to a dis-benefit. That aside, the options for countries to raise barriers include: • Raise trade barriers – where countries cannot compete with others, it may raise trade barriers unilaterally or bilaterally – sometimes these may be rational intentions sought to counter the effects from currency manipulation by a country, but mostly is a reaction to competition from countries that have a lower cost base. • Regulate telecommunications strongly – globalisation, outsourcing and offshoring have only been possible because of the ubiquitous and cheap availability of telecommunications infrastructure. During the early 1980s the price of a call from the UK to India was more than £1.50 per minute – probably equivalent to £5.00 per minute in today’s value; today the liberalisation of telecommunications markets globally means it costs only £0.01 per minute. • Limit FDI – many industries in developing economies flourished as a result of foreign direct investment, but today many of these developing countries have started investing in developed economies – usually to secure a channel to market for their products and services. Although the largest investor in the UK remained the USA, India was the second-largest investor in 2008–2009, ahead of Italy, France, Canada and the Gulf countries.1 • Limit immigration – globalisation and outsourcing rely on the free flow of talent across national boundaries. Making these national boundaries stronger can help limit the effects of globalisation and outsourcing at a national level – it also panders to public opinion around immigration.

1

UK Treasury.

2.4

Adapting Businesses to Compete on a Global Level

11

• Limit repatriation of funds – FDI and immigration are linked to the ability to repatriate funds either to company head quarters or families, for business and consumers respectively. Limiting the ability to repatriate funds makes immigration and FDI less attractive. • Limit globalisation of knowledge – the fuel that has powered globalisation and higher end knowledge based outsourcing has been the distribution and collaboration of knowledge. Cutting this fuel can reduce the pace of globalisation and outsourcing. This could mean limiting university collaboration, Joint Ventures and reduced funding for joint research projects. • Regulate financial markets strongly – the free flowing nature of financial markets has led to the cross border flows of finance, liberating companies from their local domestic markets to the international stage. Regulation of financial markets can put the brakes on the pace to globalisation. • Seek alternative energy sources or reduce demand for energy – one of the effects the growing economies of the BRIC countries have had, is on the demand for energy and raw materials. This has the inevitable impact on the price for raw materials and energy prices. These being the primary inputs to production, have fed through to final goods and services prices. It has also driven globalisation as developing countries hungry to access steel, cement, coal and so forth have ventured into overseas markets in an attempt to secure these – all eyes have firmly been fixed on African countries for now. • Enforce bank lending to affordability criteria – another periphery affect of globalisation and the free flow of finance has been the relaxation of bank lending to compete in an increasingly competitive market – apart from the effects leveraged debt has on individuals when times get tough, it has meant individuals have sought to invest in higher growth markets, fuelling globalisation.

2.4

Adapting Businesses to Compete on a Global Level

Taking the above definition of convergence, and given the first option of raising barriers has to a large extent been relegated to the cold war era, means a business within a converged world, to continue to compete needs to examine and concentrate on: • Redefining what business they are in – what is unique, core and valuable – concentrating limited resources to these and outsourcing the rest; • Optimising and reducing costs through automation and outsourcing; • Accessing skills and knowledge across the globe, by embracing international partnerships, through a distributed workforce, and by accessing the necessary tools and capability to manage staff and partners remotely; • Embracing technology developments and working with the stakeholders to create integrated networks, channels and knowledge sharing; • Developing products and services for a converged customer and for delivery in converged distribution systems – using international partners to help the expansion of the business to the international stage; and • Seek lowest cost finance.

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Globalisation and Convergence: Drivers and Strategic Outsourcing

These pillars of business transformation are illustrated in Fig. 2.2. Achieving competitive advantage in a globalised converged world requires adaption of the business to take advantage of the following macro factors (Fig. 2.2):

Achieving Competitive Advantage –5 basic pillars for adapting to the new converged world

Seek cost and process optimisation

Technology

New products and markets

Seek new products, markets and distribution channels

Redefine what business you are in and converge with partners

Skills and Knowledge

Seek to utilise technology to enhance and build customer loyalty

Efficient

Seek global skills and knowledge

Focus

Finance

Fig. 2.2 Pillars of competitive advantage

Achieving competitive advantage in a converged market therefore requires the business to (Table 2.1): Table 2.1 Surviving in a competitive global world 1. Redefine what business you are in 1.1 Determining the strategy to compete – what’s niche, and partner what differentiates you, how do you compete with emerging countries? 1.2 Using partners to implement organisational functions/processes, which they can do better and cheaper than a company can do internally 2. Seek cost and process optimisation 2.1 Seeking raw materials globally at lowest possible cost 2.2 Improving allocative efficiency–resource allocation to maximise returns 2.3 Improving productive efficiency (minimal per unit cost) 2.4 Improving dynamic efficiency–investment in innovation 2.5 Automating processes wherever possible to eliminate errors and improve efficiency 2.6 Seeking to reduce consumption of inputs (continued)

2.4

Adapting Businesses to Compete on a Global Level

13

Table 2.1 (continued) 3. Seek global skills and knowledge

3.1 Recruiting talent globally and having the workforce stationed globally working remotely, working in different time zones – seeking to become a 24 h company 4. Seek to utilise technology to enhance 4.1 Implementing best available technology, systems and and build customer loyalty management to interconnect employees, suppliers, partners, customers and knowledge 4.2 Offering superior customer service, constantly communicating and managing the relationship 5. Seek new products, markets and 5.1 Entering new product/service and geographic distribution channels markets 5.2 Developing new products for the convergent age and protection of such innovation 6. Seek lowest cost finance 6.1 Sourcing lowest cost finance, whether this is from international markets, or new social clusters (e.g. expatriate funds)

Looking at each of the above in turn: 1.1 Determining strategy to compete – what’s niche, what differentiates you, how do you compete with emerging countries? With increasing competition from domestic competitors, competition from new players enabled by reduced barriers and international competition, basic products and services will tend to get commoditised. Competing against international competitors from emerging markets for commoditised products and services will become increasingly difficult. A company has to adopt three key strategic positions: • Cost leadership, enabled through lowest production costs, efficiency and optimised processes; • Differentiation, enabled through superiority in either product or service delivery, customer service or use of technology; and • Focus, enabled through highly customised products and service to niche markets. 1.2 Using partners to implement organisational functions/processes, which they can do better and cheaper than organisations can do internally In a world where organisations need to become efficient and spend their valuable resources in achieving excellence in allocative and dynamic efficiency, it is important that any function/process which can be done better and cheaper externally rather than internally, be considered for outsourcing. However contracting out services in the “old fashion” will not enable the firm to seamlessly change its business over time. To create a firm which transforms and transitions to changing market conditions over time, the firm must partner with outsourcing service providers on a relationship where both parties’ aims and goals are aligned. However, some functions/process must be kept internal to the business: • Because they are core and essential, such that it would be too risky to outsource; and • In order to achieve dynamic efficiency – innovation will in most cases not be invested in by the outsource service provider as it would be deemed as being too risky.

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Globalisation and Convergence: Drivers and Strategic Outsourcing

2.1 Seeking raw materials globally at lowest possible cost Whatever strategic position is adopted, it is imperative that production costs are minimised through the procurement of goods and intermediate services at the lowest possible costs – usually from international markets. Where intermediate services are being procured, it is also important that lowest cost does not also translate to poor service. 2.2 Improving allocative efficiency – resource allocation to achieve maximum returns An area where a firm must pay significant attention, especially in the context of convergence, is in the appropriate allocation of resources to achieve the maximum return on investment from a range of investment opportunities. This usually calls for serious examination of the state of competition and the firm’s capability to achieve ongoing margins given incremental production, distribution and customer service costs. Appropriate resource allocation may need to change continuously over time, changing in line with developments in the markets and customer behaviour. However, to do so effectively, requires instantaneous access to relevant data – at a detailed granular level. Without this information, it would be impossible to make appropriate decisions. This requires investment in cost models, systems and automation procedures. 2.3 Improving productive efficiency – lowest unit cost It is no understatement to say it is important that achieving the lowest possible unit cost per product or service is desirable, however this may not always be achievable without significant economies of scale – i.e. only the largest can be the cheapest. What is however important for all firms, large and small, is achieving efficiency in all their operations, from operations, distribution, marketing, HR management and within the area of SG&A. This usually calls for an examination of all the business processes, ensuring maximum process optimisation, ensuring all the processes are aligned and that there are no unnecessary delays, hand-offs or blockages. In the some cases business process engineering, six-sigma and so forth may be required. 2.4 Improving dynamic efficiency – investment in innovation An area which only a handful of firms spend much attention to, is in improving dynamic efficiency, which effectively means innovation – seeking new methods of doing business, new products/services which effectively change the nature of competition. However convergence provides a perfect opportunity to do just that. Innovation can break the mould and allow firms to thrive in what may have been competitive or difficult markets to enter – e.g. Skype, ebay, Napster – they change the market and the way in which firms within the market must compete. Innovation does not always derive from technology innovation, although most do. Innovation in customer service, in bundling of products and services and procurement methods can provide a key differentiator. 2.5 Automating processes wherever possible to eliminate errors and improve efficiency Most inefficiencies and errors that occur, especially in data intensive and process driven sectors are as a result of human error. In a world where customers are more

2.4

Adapting Businesses to Compete on a Global Level

15

demanding and switching costs from one provider to another are minimal, it is vital that firms reduce all forms of errors and inefficiencies from their processes – this usually calls for the automation of such processes. Automation also drives efficiencies by utilising technology and systems. Automation also enables: • The production and delivery of sub-process to be taken offshore and managed locally; • Enables processes to be brought back in house or migrated to an alternative service provider easily and effectively. 2.6 Seeking to reduce consumption of inputs It is important to reduce consumption of inputs wherever possible: raw materials, HR, energy and so on. It is given that energy prices will remain relatively high given the steady demand from emerging countries. Governments are keen to utilise “green” sources and incentives are being offered which companies could avail themselves of. In addition many consumers are becoming environmentally conscious and will in the future reward those that they perceive to be more aligned to their beliefs and views, by giving their loyalty to such businesses. 3.1 Recruiting talent globally and having the workforce stationed globally working remotely, working in different time zones – becoming a 24 hr company effectively When competing in an ever more competitive environment, and especially when firms seek to differentiate themselves and focus on niche markets, it is important to recruit talent globally. No longer should companies be restricted in what they can achieve, just because of the limitations in accessing talent locally. Consumers are becoming more demanding, seeking immediate access to services and products whenever they demand – a 24 hr society. This also requires firms to become 24 hr businesses. Recruiting talent globally and working remotely enables a firm to provide services and products 24 hr, without necessarily increasing costs significantly. However the firm must be able to manage the disparate workforce effectively. 4.1 Implementing best available technology, systems and management to interconnect employees, suppliers and partners, to offer superior customer service, constantly communicating and managing the relationship Where switching costs and loyalty are reducing over time, there appears to be two choices that a firm has, the first is to lower prices to attract and retain customers, and the other is to offer superior customer service, which customers are willing to pay a small premium for. Competing on price alone, will not serve the firm or the industry – a declining pricing spiral only benefits the end user. It is far more sensible to compete on the basis of customer service – this effectively raises the barriers to customers switching, and builds longer term loyalty. Offering superior customer service, means making the customer feel valued, which usually calls for: • Individualisation of some aspects of service; • Constant communication; and • Managing and being honest with customers if things go wrong. Communication needs to move with the times and should also include web 2.0 based technologies. Technology must be used to differentiate your firm from the rest – but keeping up with the latest technology comes at a cost.

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Globalisation and Convergence: Drivers and Strategic Outsourcing

4.2 Distributing knowledge throughout the organisation and its partners Excellence is achieved by constantly sharing knowledge and communicating with stakeholders – letting them know what is happening, where and why. Sharing knowledge enables stakeholders to make better decisions and share responsibility for the delivery of superior services and products. Knowledge encompasses both explicit and tacit knowledge. It is important that firms capture through thorough documentation management all forms of explicit knowledge, collect this centrally and share such knowledge between its stakeholders. Tacit knowledge (know how), in many cases distinguishes one firm from another, and it is important that the firm facilitates, captures and disseminates such knowledge. Training must form an integral part of organisational learning – not only in the form of formal external training, but also facilitated workshops. 5.1 Entering new product/service and geographic markets Globalisation and the emergence of developing countries on the world stage not only creates competition, but also creates opportunities for firms in developed countries. However, a firm must adjust its offerings for the needs of the local markets, which may include significant cost reduction. Understanding the nature of such local markets and the nuances that may not be visible can only be achieved through partnerships with firms based locally. There is nothing to stop an offshore firm which provides outsourcing services for some of your functions/processes, to also become a distribution partner for your products or services. 5.2 Developing new products for the convergent age and protect such innovation The nature of demand and the mechanisms for delivery is changing – firms must develop or adapt products and services to cater for these changes in demand and delivery modes. The changing nature of demand includes; more interactivity, more demand for relevant content and more choice. In addition there are now new delivery modes for content, through TV, IPTV, Web, Mobile, Games, etc. and new delivery modes for products, such as the new retail channels created by the likes of Amazon, Ebay, Tesco (who is now seeking to sell legal services from its stores). 6.1 Seeking lowest cost finance Although it is quite obvious that a company must seek the lowest cost finance, it is most often overlooked – many firms rely on bank loans or the local equity markets. As financial systems across the world are becoming integrated, the standards and governance frameworks of the most advanced financial markets are now being applied within developing countries. It may therefore be possible to seek finance from overseas markets, without the higher risks that would be associated with such a move in the past.

2.5

A Case in Point: The Rise of India

We all know about how India is becoming a world power, growing at an amazing rate, making headlines: from the smallest car in the world, sending satellites into orbit, becoming the provider to the world’s poorest when it comes to generic medicine, buying the UK’s beloved Tetley’s tea and so on. . ..

2.5

A Case in Point: The Rise of India

17

However, what I think is more remarkable is how less than 20 years ago, India was on the verge of bankruptcy. In an age where the bureaucrats in Delhi controlled the economy and to a large extent, enterprise, through their socialist lens, the country was seen as a basket case. During the 1990s the country opened up its markets not only to the private sector, but to international competition. In a matter of two decades, India grew exports of IT & Business Process Outsourcing services, exponentially to approximately $70bn today – contrast that with UK exports of ALL services at around $250bn. The pharmaceutical sector is growing exponentially, including bio-tech, which is growing by nearly 40% every year. The telecommunications sector is growing faster than any in other country. India is by some measures the second largest telecoms market with 10–20 million mobile subscribers added every month. The automobile industry is one of the fastest growing sectors globally, with predictions that India will be among the top five vehicle producers in the next 5 years. India is a country with a middle class larger than that of USA, or Europe, a country where more than 125 million people speak English, which churns out more than 2 m English speaking graduates and over 75,000 IT graduates every year (not to mention the mathematicians, the engineers and the doctors). It is a country where education is not only a pillar of the economy, but society as well – where the average salary is a lot less than the UK, where over half the population still live on two dollars a day. There are a lot of aspiring, hungry, go-getting people, all looking to making money in the global economy – if the private sector can churn out $70bn in exports in two decades, think how far they can go in the next decade – India is the equivalent to what China was, in the manufacturing world, for the service sector. So what you may ask? First, they will come knocking on your current and future customer’s doors, and they will be a lot cheaper than you are today. Apart from creating huge barriers or huge walls, like the old days, there is not much that you can do to stop them. China did this to the manufacturing sector. China didn’t necessarily come knocking on your customers doors, but your customers went knocking on China’s doors. This is also likely when it comes to services – your customers will go knocking on India’s door. You will hear many in the developed world say we are different today – the UK economy for instance is a knowledge based economy, it thrives on education and so on – but India is building itself to be the world’s back office – to be a service industry, to compete not in manufacturing, but on knowledge. So like it or not, it will affect most service businesses in the developed world. So what are the options for organisations in this new world order? First the Indian market should be seen as an opportunity to market your products and services. Unlike developed economies where growth is stagnant, the economy is growing and is expected to do so for some considerable time. It is still a very underdeveloped country. There is a massive need for improved

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Globalisation and Convergence: Drivers and Strategic Outsourcing

infrastructure – roads, rail, airports, the health system, the education system, security, defence, energy production, green technology, more intensive farming, better logistics, better distribution, and so on. India may have the large scale graduates, but it lacks the innovative products, the R&D, the experience, the technology, the high end engineering skills which developed countries have at their disposal. The second plank of this strategy: instead of fighting this invasion, why not collaborate – it is far easier to get onboard a running train, than trying to stop it. If you go to India, you will see this is quite normal – I’m always surprised why India doesn’t have more Olympic runners, given how most of the population are wonderful sprinters, racing to board a running train. . .. If you know the markets are getting more competitive, more demanding, more challenging – why not tap into the resources that are available. There’s been a lot of resistance to offshoring by the unions, and many people will increasingly view it with suspicion, as unemployment starts to rise in developed countries – but is it not better for a firm to continue trading, retraining staff to take new roles within the firm or beyond, than a firm going under because it cannot compete on the world stage? Globalisation and convergence require businesses to move from an integrated monolith to an allianced enterprise as illustrated in Fig. 2.3.

Vertically integrated organisation

Inbound logistics Operations

Outbound Logistics Marketing & Sales Service

Procurement Technology Development Finance & Accounting Human Resource Management Firm Infrastructure

Allianced organisation 1. 2. 3. 4. 5. 6.

Solution driven capabilities Investment in knowledge networks Solution & relationship excellence Competition for relationships Align structure & systems with required capabilities Change management to transform values and behaviours

Retained functions / processes

Outsourced process and Supplier management

Fig. 2.3 From a vertically integrated organisation to an allianced organisation

2.6

2.6

Take Aways

19

Take Aways

• Globalisation is impacting organisations today and will continue to do so into the future. • Convergence in all its forms is gathering pace and changing the markets, environments and the basis of competitive advantage – organisations must adapt or be left behind and meet the same fate as the dinosaurs. • Organisations need to focus on core competences – things that will help them differentiate in the global competitive canvas. • Competition from cheaper players from the developing world means organisations must seek cost and process optimisation to compete fairly. • Knowledge and skills are globally distributed – organisations must leverage this, rather than fight the inevitable trend. • Technology can help reduce costs, improve quality or even re-define markets – organisations must utilise technology, but do so within their cost constraints. • Globalisation and convergence create opportunities for serving new markets and offering new products – organisations must capitalise on this.

.

3

Social and Philosophical Considerations of Outsourcing

Outsourcing and in particular offshoring has received a lot of media attention, usually driven by the fear of local jobs going overseas or because outsourcing is seen as a way of cutting costs which is perceived to impact quality or compliance (such as the recent BP oil spill). Certainly the fear of job losses is one that needs an urgent policy response, when unemployment in the developed economies rises and the security of domestic economies is brought into question. However, when it comes to job losses, the media hype may have been slightly more exaggerated than experience has shown to date. There is also a social perspective of outsourcing that has not received much media attention which nevertheless is important for policy makers. This is the impact outsourcing has on recipient countries; the positives have been reported, but the negatives consequences on local populations, cultures and families have failed to make the headlines. This chapter highlights some of the social and philosophical consequences of outsourcing and in particular offshoring, along with some possible policy responses.

3.1

Introduction

Outsourcing has provoked a very emotional debate, especially in the United States. There are two conflicting interests that appear to be driving the debate: workers vs. employers and source countries vs. receiving countries. Take the example of Frank LaGrotta, Pennsylvania House of Representatives who in March 2004, stated: What’s going on with this offshoring of American jobs to India and China is nothing but terrorism – economic terrorism. He may have a point. The various stated benefits from outsourcing at the organisational level, are typically reiterated by developing country governments as a rationale for changing national institutional frameworks, with the aim of increasing the deal flow of outsourcing towards its country. However, there are wider consequences that B. Vagadia, Strategic Outsourcing, Management for Professionals, DOI 10.1007/978-3-642-22209-2_3, # Springer-Verlag Berlin Heidelberg 2012

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Social and Philosophical Considerations of Outsourcing

outsourcing more generally has upon economies. These consequences are not widely discussed in the business literature, but are nevertheless important considerations, especially with respect to national policy and politics.

3.2

Economic Consequences

Two decades ago, the loss of manufacturing jobs sparked fears of a hollowing out of the USA and UK economies. Yet painful as the loss of those positions were, strong economic growth and innovation created far more jobs to replace them. Now, the same process, many economists argue, is going on in services. Yes, some individuals are losing out, as well educated programmers or engineers are doing the same job, for far less, halfway across the globe. But as developed economies evolve, innovation should, the economists argue, create new highpaying jobs. Others though, argue that the outsourcing of highly skilled service jobs is fundamentally different from what happened when manufacturing jobs were outsourced – and poses greater risks for developed economies. They argue that trade implies reciprocity – it is a two-way street, but that there is no reciprocity in outsourcing, only the export of domestic jobs. In the old manufacturing based economy, a firm’s assets were primarily tangible, e.g. plant and equipment, machines, assembly lines, etc. In the new information based economy, however, the bulk of a firm’s assets are often intangible – the creativity, knowledge, brain power, motivation of its employees etc. In an information based economy, it is this human capital and knowledge that creates worth for the firm. Exporting key knowledge from within the organisation therefore poses serious risks. It is the concepts, strategies, ideas, and information exchange that set their companies apart from their competitors. It is the workers and their knowledge that differentiates one firm from another, giving it an identity, value, and an advantage in the market place. How can these knowledge assets be transferred, without a significant adverse impact on the firm and the economy at the macro level? In a knowledge based economy, knowledge is the value! At the macro level it does raise concerns – what jobs will professional workers re-train to, after the new wave of high-tech outsourcing? If an engineer, a chartered accountant, or an architect at the top of his/her respective corporate ladder loses a job, what does he/she do next? At a firm level there are also concerns about the sustainability of a firm’s competitive advantage – where cooperative relationships and exchange of ideas between workers are needed for long-term success, who will provide these and when these jobs are shipped out of the organisation? It is most destructive when the organisation competes on the basis of creativity or sophisticated thinking problem-solving. Economic models may support this bleak outlook for developing economies. In the case of two trading nations with factor differences in labour abundance (India) and capital abundance (UK), economic theory predicts that this imbalance leads to

3.3

Social Consequences

23

a decline in the natural rate of unemployment in the labour abundant nation (India), but a rise in the natural rate of unemployment in the capital abundant nation (UK). The rise of the Indian IT outsourcing destination has been almost simultaneous with the rise in unemployment of developed countries information systems workers. The economic theory of labour/capital inequality between India and the UK predicts a rise in the unemployment rate for information technology workers in developed countries as the movement of labour is facilitated by enabling communication technologies.

3.3

Social Consequences

If one considers outsourcing purely through a ‘free market’ capitalistic lens, it is easy to ignore the social/philosophical issues associated with outsourcing. Offshore outsourcing raises complicated social/philosophical questions with multiple stakeholder costs and benefits. Some consequences are positive, but many negatives are unseen. The positives include: • The outsourcing firms’ stakeholders (shareholders, consumers, and core employees) can reap benefits by having these firms become leaner and more cost competitive in the global marketplace – they are better positioned to create even more higher paying employment at home. • Outsourcing affords assistance to workers in recipient countries in terms of job creation, technology transfer, skills acquisition and more generally poverty alleviation. However, within developing countries which are the recipients of outsourcing work, who are supposedly the winners within the outsourcing debate, there are associated negative consequences which tend to be overlooked both in the literature and in practice. Within the recipient countries, negative consequences include: the impact that a concentration of the outsourcing industry within a particular city has in terms of infrastructure, culture, and the psychological affects such work may have upon the health and wellbeing of workers and their families (Budhwar et al. 2006). Bangalore, the heart of the Indian outsourcing industry, for example, has seen infrastructure problems (Dittrich 2007), encroachment on rural land, rising real estate price rises which have driven many of the poor out of the city (Dittrich 2005), an increase in alcohol abuse, and workers suffering from psychological problems (Noronha and D’Cruz 2007). There has also been a reported increase in divorce rates which can be attributed to the growth of outsourcing service provision within the city (Times 20071). Within the developed country, as workers’ income levels, status, education, and attitudes about business and the role of government change, clearly several

1

http://www.timesonline.co.uk (1st October 2007).

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Social and Philosophical Considerations of Outsourcing

significant social effects may arise from these changes. As workers attempt to maintain their standard of living on lower wage rates in lesser status jobs, they may be forced to work longer hours to earn the same total wages. Offshore outsourcing also raises concerns about extended retirement age, deleterious effects on intellectual capital, and the security of information stored at offshore firms.

3.4

Separating the Spin from Reality

In general, corporations exist to yield profits for entrepreneurs and investors. As a result, there is significant pressure on management to increase productivity and profits. Usually, this is a good thing. Capitalism is successful because it strongly rewards the best business models and the hardest workers. Outsourcing is not necessarily unethical, nor is it unavoidable. After all, international business has opened huge markets for developed countries products and has provided customers with new and cheaper goods. With advancements in shipping and telecommunications, it is easier now than ever before to sell products and services across the globe. If businesses and customers are willing to accept the international market, then we must also accept its consequences – increased competition. Developed country corporations now have to compete against businesses in regions where operating and labour costs vary greatly. It would be foolish to attempt to block the natural diffusion of labour into these areas. Outsourcing will undoubtedly remain a natural part of business today. What about the loyal employees who have been with the company for many years and no longer have work? The ethical directive would be to maintain fairness and attempt to pursue the best possible outcome for the employees within the framework of outsourcing. Only then would outsourcing become ethical by today’s standards. During a transition, the most important factor is open, honest communication and good planning. Decisions to cutback or outsource jobs should be made long in advance so employees have time to find replacement work. The organisation still has an ethical responsibility to its laid off employees. It is the organisation’s obligation to minimise the impact of the outsourcing on its employees.

3.5

Policy Implications

Outsourcing can make globalisation fairer between countries; it creates jobs in developing countries. Some developing countries have entered markets that were long (and still are) dominated by industrialised countries. Outsourcing has benefits for receiving countries, but can also bring welfare gains to sending countries. Many jobs created in developed countries are new jobs, not jobs re-located from other parts of the country and when the labour intensity of production is likely to be higher: when labour is relatively abundant, it makes sense to re-engineer production processes towards greater use of labour.

References

25

Outsourcing calls for active national policy responses: Developing countries need to lay the foundations to participate in outsourcing as a host country. The availability of low-wage labour is not sufficient to attract outsourcing. India’s success in attracting services outsourcing shows that government policy was crucial in driving investment in human capital formation. It also calls for the abstention from over-regulation; tax exemptions and FDI promotion. Within industrialised countries, the national policy response needs to cushion the effects on the local labour market and find mechanisms to re-employ workers who may have lost their jobs. There is no easy solution available, but a number of tools such as: skills upgrading, a free mobile labour market and social protection schemes are necessary to make outsourcing politically viable. Outsourcing can make globalisation unfair within countries. In industrialised countries: Low skilled workers in manufacturing and services (e.g. call centre agents, most of them women) are disproportionately affected. Outsourcing needs active governance to make globalisation fair. Isolated interventions are not likely to succeed. What are needed are global standards that are implemented globally, such as health and safety; freedom of association etc. There needs to be social protection, giving workers that have lost their job adequate social benefits (as part of an overall social security system) and importantly, governments and businesses must ensure that workers made redundant can find new jobs.

3.6

Take Aways

• There is a mixed picture of the economic effects of offshoring. Traditionally it is seen to have a relatively small effect on developed economies, but in a knowledge based economy, the effects are likely to be greater. • The positive benefits for recipient countries have been well documented, but the negatives can be considerable and have received less attention than they deserve. • Given outsourcing and offshoring are set to accelerate, it is imperative to consider how the negative consequences on local employment can be minimised through re-training and re-location. • The policy implications from offshoring are significant. To date, the policy response from developed economies has been lack lustre and rather confused. What is needed are global standards for outsourcing – which set a level competitive playing field between countries and a policy response which gives the workers made redundant through outsourcing, the due respect they deserve.

References Budhwar, P., Varma, A., Singh, V., & Dhar, R. (2006). HRM systems of Indian call centres: An exploratory study. International Journal of Human Resource Management, 17(5), 881–897. Dittrich, C. (2005). Bangalore: Divided city under the impact of globalization. Asian Journal of Water, Environment and Pollution, 2(2), 23–30.

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Dittrich, C. (2007). Bangalore: Globalisation and fragmentation in India’s Hightech-Capital. ASIEN, 103(S), 45–58. Noronha, E., & D’Cruz, P. (2007). Reconciling dichotomous demands: Telemarketing agents in Bangalore and Mumbai, India. The Qualitative Report, 12(2), 255–280.

4

From Tactical to Strategic Outsourcing

Although the outsourcing industry is relatively young, only making an impact on the world scene two decades ago, it has gone through a dramatic evolutionary process (from applications development to ITO to BPO to KPO) and will continue to do so. What we also see in this evolution is the move away from transactional to strategic outsourcing to transformational outsourcing and in the future innovative outsourcing. This chapter traces this evolutionary journey and examines the specific characteristics within each segment, looking at cloud computing’s impact on the IT outsourcing space, the impact demanding customers are having on call centre outsourcing, the competitive advantages delivered by BPO, the growth of travel and logistics outsourcing, Finance and Accounting outsourcing, Human Resource outsourcing and the recent emergence of knowledge process and legal outsourcing.

4.1

Introduction

The outsourcing industry has been through an evolutionary process over the last two decades. The initial phase of outsourcing represented engagements that focused on ancillary activities and basic commodity offerings, which were focused purely on cost savings. The relationships were transaction oriented with little emphasis on relational investments. The second phase of the evolution, having proved that the outsourcing model works, was where organisations started to outsource various areas of supportive activities that were slightly more central to business processes, the focus started to move away, albeit slowly from just cost savings. The third phase is where outsourcing started to be considered more strategically and where an organisation adopted an over-arching outsourcing strategy that was intended to coincide with its business level strategy. At this stage, outsourcing was looked upon as a key strategic enabler that required significant management focus to be leveraged for maximum advantage – so called Information Technology Outsourcing (ITO) was born. The adoption of ITO can be attributed to two primary factors: a focus on core competencies of the firm and reduction of IT costs. B. Vagadia, Strategic Outsourcing, Management for Professionals, DOI 10.1007/978-3-642-22209-2_4, # Springer-Verlag Berlin Heidelberg 2012

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From Tactical to Strategic Outsourcing

Transformation ITO & BPO Global standardisation Global relations Focus on core competency

1995-05

Standard ITO Access to skills

Advisory role

Multi-tower partnerships

Call centres

Integrated global delivery model Collaborative relationships Scale or scope – no middle ground Best Practice implementation

KPO

Rule based BPO

Skills on demand

Provider implications

2005-11

Systems integrator role Industry specific services

Local suppliers

1980-95

Apps support Cost focus

Tech Support

Data entry

Project based pricing Being the cheapest

Periphery activities

Time

Fig. 4.1 The historical context of outsourcing from a client and supplier perspective

The fourth wave was what we now call Business Process Outsourcing (BPO), where key process activities were outsourced and contractual responsibility was granted to the service provider – this wasn’t a homogeneous phase; there were subphases here, starting with call centre outsourcing, followed by back office outsourcing and then into other areas of the business. BPO involved significant diversity in outsourcing objectives, ranging from reduction in operating costs to innovation and business transformation. The range of BPO objectives reflected significant heterogeneity in the nature and strategic context of outsourced business processes. The fifth phase is what is being talked about at present, but not quite implemented by organisations – transformational outsourcing – a form of outsourcing, where the service provider effectively becomes an extended element of the organisation, seen as a true partner, one that can be inherently trusted, relied upon and one that can deliver significant operational and financial benefits to the organisation – usually coincident with a global delivery network – the holy grail so to speak. Transformational BPO relationships are especially pertinent to recent moves by CxOs toward consolidating back office functions into shared services units. This integration of services allows for their management by work process rather than by function to leverage scale and synergies across departments. Figure 4.1 illustrates this evolutionary journey.

4.2

The Role of Relationships

Relational investments in BPO are necessary and more important when the outsourcing process is firmly interdependent on other processes that may remain in-house, and where the information requirement is high for both parties. Relational

4.2

The Role of Relationships

29

investments help manage the process, bringing the parties together as one team for seamless process delivery. The output of transformational BPO initiatives has a more pervasive impact, often forming critical input to other processes. Such firmwide integration of process output in transformational BPO directly impacts competitiveness through creation of enterprise-level competences. Transformational BPO involves a cooperative, flexible, business process management relationship, with the service provider offering a broader scope of services underpinned by the technical infrastructure. The client and its partner frequently define these services jointly. Transformational BPO is a high-payoff BPO initiative involving a deep commitment between the company and its outsourcing partner to radically transform the company’s enterprise-level outcomes. The two companies jointly define a broad range of processes they will use and may also share in a joint venture that manages the assets and employees that both contribute. Other changes that we have seen within the industry include: • Multi-country outsourcing, as clients seek arrangements that cover their global operations; • Outsourcing increasingly encompassing “strategic” activities – areas which may have traditionally been deemed too near their core competence to outsource; and • Outsourcing now more often involves a significant development component – while most outsource providers offer “commoditised” services, many clients are pressing for “customised” solutions that require significant “bespoke” development effort. Figure 4.2 illustrates the three generations of outsourcing transformation over the last two decades. Transformational outsourcing is anchored around a programme jointly developed between the outsourcer and the enterprise to integrate change, capability, resources and business structures – around shared accountability. The contract is driven by business outcomes, and accommodates re-alignment based on future realities. It is designed to maximise incentives for both parties. The relationship offers incentives to both parties to win together and rely on what the supplier and the client can generate in strategic terms. Control and governance is based on trust, transparency, integration of workflows and executive commitment to the success of the partnership. Conventional outsourcing on the other hand is inflexible, with either party usually losing if the circumstances change – these deals do not reward the supplier for investments in new technologies, tools or automation, and rely on cost reduction as a major success measure. It often outlines specific operational outcomes to be generated by the supplier in tactical terms, such as cost per transaction, cycle-time, and number of calls per agent. Control and governance is through elaborate penalties, and credits. The underlying premise is mistrust and the need to keep the supplier “in check” at all times. The outsourcing industry has evolved to a stage where a number of different processes and verticals are now served. The newer processes (BPO rather than ITO)

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From Tactical to Strategic Outsourcing

Generation 1

Generation 2

Generation 3

Cost focus

Efficiency focus

Innovation focus

IT helpdesk

IT application development

Call centres

Business Process Outsourcing

IT development & management New technology development Knowledge Process Outsourcing Application support

Human Resource Outsourcing

Data entry

Finance Accounting Outsourcing

Legal Process Outsourcing Higher end BPO

Labour arbitrage Scale

Specialisation Process improvement

Flexibility Lower cost and higher value Greater emphasis on innovation Aggressive multi-sourcing

Long term inflexible contracts

Shorter term contracts

Long term flexible contracts

Onshore

Offshore captives and offshoring

Global delivery

Fig. 4.2 The three generations of outsourcing

Worldwide Outsourcing Market $362 billion Other 3%

Customer care 7%

Logistics 4%

CAGR = 26%

Industry specific processes 8%

IT Infrastructure 35%

CAGR = 10%

General & admin (HRO, FAO, Procurement) 14%

IT Applications Development & Maintenance 29% Source: IDC Research

Fig. 4.3 Worldwide outsourcing market size

are expected to grow more aggressively over the next few years as illustrated in Fig. 4.3. What we are also seeing is the gradual convergence of what have been seen as two separate silos within organisations and within the outsourcing industry.

4.3

Information Technology Outsourcing and the Cloud

31

Traditionally ITO and BPO have been considered as separate activities, driven by different requirements, served by different vendors and managed by different teams. However, what we are now seeing is the convergence between ITO and BPO. IT is integral to process execution and management in BPO. This is true of transactional processes such as administration or processing services, where IT performs simple automation or process updates, as well as more strategic processes such as customer analytics or financial planning, where IT facilitates linkages with other processes and delivers business information to process workers in a timely fashion.

4.3

Information Technology Outsourcing and the Cloud

Ever since Kodak’s landmark decision to outsource the bulk of its Information Technology (IT) functions in 1989, IT outsourcing has been a widely publicised practice. Organisations that have outsourced significant portions of their IT functions by transferring their IT assets, leases, licenses, and staff to outsourcing vendors include British Aerospace, British Petroleum, Chase Manhattan Bank, Continental Airlines, McDonnell Douglas, Xerox, English Heritage, MetLife, National Policing Improvement Agency, Lloyds TSB, Reuters, and the list goes on. However, despite predictions to the contrary, IT outsourcing has contracted rather than expanded in the years since we entered the recent recession, according to industry watchers, and analysts forecast, IT outsourcing growth will remain slow for some time to come. A lot of people renegotiated their contracts and a lot of people dropped their services and brought those functions in house during the recession, with one dominant feature of the outsourcing market over the last 12–15 months being the emphasis on cost above all else. Cost was (and remains) the primary driver in most outsourcing transactions. The difference is that during the boom years of 2002–2008, cost was often down-played by customers and, instead, emphasis was placed on other business benefits such as transformation, concentrating on core competencies, and speed to market. 2009 saw cost and, more particularly, immediate cost savings, take centre stage when customers engaged with existing suppliers or contemplated new sourcing projects. As the recovery gets under way, banks and insurance companies – which were among the hardest hit verticals of the recession and which put more deals on hold in 2009 than other sectors, are likely to come back to the fold in 2011.

4.3.1

Cloud Computing and IT Outsourcing

Cloud computing and outsourcing are very different. Both will help revolutionise the performance of businesses but I don’t believe one is a direct threat to the other. They are not mutually exclusive.

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Cloud computing describes the offering of hardware and software resources as services across (distributed) IT resources. As a relatively new concept, cloud computing and related technologies have rapidly gained momentum in the IT world. Outsourcing, particularly micro-outsourcing for small businesses is in fact booming and cloud computing is only making the process easier, just look at Freelancer.com. Up until recently, outsourced services were not necessarily fulfilled online. BPO has become attractive to both large and small businesses with the advent of service oriented computing and specifically Web services and Web 2.0 technologies.

4.3.2

Cloud Services

Cloud services require no software to purchase and install. Cloud service fees are typically subscription based. The vendors usually charge on a month-to-month or annual basis. Cloud services are flexible and easily scale up and down, effectively a self-service on-demand provisioning model. It usually goes side by side with automation, thus meaning decreased support cost for both client and vendor. Although cloud computing is not without concerns around security, stability, and data ownership, at its best it allows businesses to unshackle day-to-day operations from the local data centre. With cloud services, small businesses reap the benefits of not having to deploy physical infrastructure like file and e-mail servers, storage systems or shrink-wrapped software. Plus, the “anywhere, anytime” availability of these solutions, means hassle-free collaboration between business partners and employees by simply using a browser. Thus cloud services offer a number of benefits beyond cost, that include: • The scale of available technology – The largest vendors now have enormous data centres with the capability to store huge amounts of data and deliver vast processing capability to businesses. Google is estimated to have over 2 million servers in over 30 data centres and can now use that scale to offer a range of corporate services at very competitive prices; • A reduced price point – A low price point with no barrier to entry is another very important driver for adoption, as cloud enables a reduction in both operational and capital expenditure when compared to traditional methods of IT delivery, which in the current economic climate is a very attractive option to any CIO looking for competitive advantage; • Improving green credentials – In parallel to reducing costs, cloud computing has the potential to significantly reduce your carbon footprint through a reduced reliance on in-house technology and through a flexible model that enables a business to flex services to cope with peaks in demand, rather than resourcing for peaks and running the day to day business with unnecessary excess capacity; • Flexibility without the capex – service on tap and guaranteed service levels, paying only for what you use; • Ease of operations with better user interfaces and APIs that allow organisations to integrate their own applications with purchased cloud services;

4.3

Information Technology Outsourcing and the Cloud

33

• Standardisation such as The Open Cloud Computing Interface (OCCI); • Ease of configuration; • Better performance, as the cloud provider can use the latest technology to tune and improve processing speed, memory speed, storage access, read and write speeds, latency, bandwidth, through access to better technology or superior engineering and operations expertise; • Reliability and security. Reliability is understandable, but many assume that cloud service surely cannot be claimed to be more secure. Using the analogy of offshoring paints a useful picture. When organisations started offshoring to India, the media made a big deal with data security concerns; however over time we find most offshore suppliers have security procedures to protect client data which go far beyond what the clients themselves ever thought of implementing. Given client concerns and the drive to satisfy client needs, security was bolstered by the vendor community to a point where security is now only a concern for those uneducated of the industry. However, one must understand cloud computing is not a simple homogenous concept or service, but a series of discrete interlinked technologies, each stacked onto each other to enable further process or service value addition as you climb up the stack, as illustrated in Fig. 4.4. Hardware is the basic underlying physical technology – the nuts and bolts so to speak. This level of the hierarchy is inherently difficult to align itself to outsourcing or sharing of resources.

SaaS Cloud Applications

PaaS Cloud Software Environment

Cloud Software Infrastructure IaaS Computational Resources

DaaS Storage

CaaS Communications

Software Operating Systems

Hardware / Firmware (Haas)

Fig. 4.4 Technology stack – the decoupled approach driving innovation in service delivery

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From Tactical to Strategic Outsourcing

Software operating systems links the underlying physical technology with the functions using intelligence through the software operating system. Up until recently the market has been dominated by proprietary operating systems from a select few – think of MS Dos, Apple’s OSS, Unix etc. However, what we see today is a host of open-source software platforms such as Linux, OpenSolaris, Symbian which are slowly penetrating the market. Infrastructure as a Service (IaaS): hardware resources (such as storage) and computing power (CPU and memory) are offered as services to customers. This enables businesses to rent these resources rather than spending money to buy dedicated servers and networking equipment. Often companies are billed for their usage following a utility computing model, where usage of resources is metered. E.g. Amazon offers S3 for storage, EC2 for computing power, and SQS for network communication for small businesses and individual consumers; typically using virtualisation technologies to address the problem of underutilisation of physical resources. When people talk about virtualisation, they’re usually referring to server virtualisation, which means partitioning one physical server into several virtual servers, or machines. Each virtual machine can interact independently with other devices, applications, data and users as though it were a separate physical resource. Different virtual machines can run different operating systems and multiple applications while sharing the resources of a single physical computer, and because each virtual machine is isolated from other virtualised machines, if one crashes, it doesn’t affect the others. In addition to using virtualisation technology to partition one machine into several virtual machines, you can also use virtualisation solutions to combine multiple physical resources into a single virtual resource. A good example of this is storage virtualisation, where multiple network storage resources are pooled into what appears as a single storage device for easier and more efficient management of these resources. Other types of virtualisation include: • Network virtualisation splits available bandwidth in a network into independent channels that can be assigned to specific servers or devices; • Application virtualisation separates applications from the hardware and the operating system, putting them in a container that can be relocated without disrupting other systems; • Desktop virtualisation enables a centralised server to deliver and manage individualised desktops remotely. This gives users a full client experience, but lets IT staff provision, manage, upgrade and patch them virtually, instead of physically. Virtualisation also allows IT systems and the business processes that they enable to be disintegrated or deconstructed, and bought and sold separately rather than as part of a long term outsourcing arrangement. Business operations can then be operated with real flexibility in response to changing circumstances – and the business processes and software systems that underlie them can be assembled as individually sourced services from a competitive market place.

4.3

Information Technology Outsourcing and the Cloud

35

This begins to subtly shift the concept of outsourcing from the traditional facilities management model (“Client outsources their operations to the Supplier”) towards a direct sourcing of services model (“Client directly sources services from the Supplier”). Companies such as Amazon, e-Bay and Google have pioneered the exploitation of virtualisation in the practical delivery of B2C (Business to Consumer) services, using the Internet as the delivery channel. They have innovated business models based on the high productivity manufacture and delivery of services, with reliability, security and commodity economics. Although clearly more complex this service manufacturing model is directly applicable in B2B (Business to Business) markets, meaning that businesses can now source services direct from a range of suppliers, rather than the supplier simply taking over the customer’s existing or future technology requirements. The technical architectures enabled by virtualisation decouple the layers of the classic “big company” technology stack. Each layer can then potentially be sourced as a distinct service. Database as a Service (DaaS): A more specialised type of storage is offering database capability as a service. E.g. Amazon SimpleDB, Google BigTable, Apache HBase and Apache Force.com database platform and Microsoft SSDS. DaaS on the cloud often adopts a multi-tenant architecture, where the data of many users is kept in the same physical table. Communication as a Service (CaaS): Sometimes called hosted communications, allows you to implement communications services like VoIP and Unified Communications without the expense of buying, hosting and managing communication equipment. This emerging cloud service is gaining ground with enterprise users who want the benefits of unified communications without making the significant hardware and management investments to run them. Hosted, Internet-based communications is not new. There have been Centrex services for a long time. We also send video, voice, and data across the public Internet today. However, this type of communication has not been the model for most business voice communication. Businesses generally have purchased and run their own communications infrastructure. What we see within the CaaS space is the emergence of a new breed of vendor, not the traditional telecommunications operators, but the likes of Skype and Google. Platform as a Service (PaaS): Refers to the provision of facilities to support the entire application development lifecycle including design, implementation, debugging, testing, deployment, operation and support of rich Web applications and services on the Internet. Most often Internet browsers are used as the development environment, e.g. Microsoft Azure Services platform, Google App Engine and Salesforce.com Internet Application Development platform. PaaS enables Software as a Service (SaaS) developers to develop add-ons, and also develop standalone Web based applications, reuse other services and develop collaboratively in a team. However, vendor lock-in, limited platform interoperability and limitations of programming platforms in supporting some language features or capabilities are major concerns of using currently available platforms.

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Software as a Service (SaaS): Software applications are offered as services over the Internet rather than as software packages purchased by individual customers. One of the pioneering providers in this category is Salesforce.com offering its CRM application as a service. Other examples include Google web-based office applications, Microsoft online CRM and SharePoint, or Adobe Photoshop and Adobe Premiere on the Web, as well as new comers like GovernanceDirector. com. Customer data is kept in the cloud, potentially based on DaaS.

4.3.3

The Challenges of Cloud Sourcing

Before we get too excited however, there are a few challenges to be aware of to ensure a smooth transition to this brave new world: • Security – Storing your confidential business data in a shared, cloud environment requires complete trust in your potentially virtual supplier, which has up until now been one of the major barriers to adoption of the cloud. However this is gradually changing as the scale at which the cloud suppliers operate at, enables them to make vast investments in security that individual companies and smaller traditional operators cannot always match; • Data protection – Many of the larger cloud computing providers use US based data centres for the storage of their data, this is at best a risk and at worst a barrier for many potential customers with sensitive or regulatory constraints that prevent data from leaving the UK or the EU; • Public vs. Private – At a high level, there are two ways to use the cloud, either public or private and there are pros and cons to each. Public Clouds (such as Amazon EC2 or Microsoft Azure) are low cost and offer easy access, whereas a corporate Private Cloud where a business buys a cloud service from a dedicated supplier just for their use is more expensive, but potentially more secure and reliable (although this is a debatable point). Selecting the right option for your business requires careful thought and consideration; • Existing contract restrictions – Most large organisations already outsource some aspects of their corporate IT. Unless their existing suppliers can offer them the cloud based services themselves, the enterprise may need to look elsewhere for cloud services and encounter in the process contractual restrictions and relationship issues or even exit penalties within their existing IT Outsourcing agreements; • Who to trust – The vendor landscape in this new services world is a new one with three main categories of vendors to consider: • Traditional IT outsourcing suppliers – The major global IT organisations are developing their existing outsourcing models to cope with demand for cloud based services. • Large scale cloud specialists – Such as Amazon, Apple, Google & Microsoft who are all offering cloud in the form of infrastructure and applications services and have the scale and credibility to become major competitors in the previously closed world of corporate IT outsourcing.

4.3

Information Technology Outsourcing and the Cloud

37

• New entrants – There are multiple smaller specialist organisations, able to offer a range of services designed around the cloud computing model, offering a low cost, high service model, often targeted at specific industries or business functionality. • Complexity – Deciding who to work with, how to work with them and integrating the services into your existing service model can require system and service integration skills; • Bandwidth – A parallel consideration will be the quality and reliability of accessed networks and bandwidth – Google Apps guarantee 99.9% service reliability, but that is in practice “at the factory gate” not at the user’s machine; • Migration – Moving data from one cloud-based storage system to another, for example, is not always easy. Buyers of cloud services must take account of the dangers of lock-in, and favour service providers who allow them to switch between services without too much hassle; and • Change – Cloud computing requires a fundamental change to the way of thinking that most organisations have followed for recent years. One of the biggest barriers to adoption is corporate inertia as change of this magnitude requires a new way of thinking which can take time to fully understand. Cloud computing is likely to take centre stage in IT outsourcing in 2011. This will be the first year in which cloud computing will have a real role in procurement decisions. The outsourcing industry is likely to begin seriously addressing these issues in 2011. That means cloud solutions will become an acceptable risk for customers. At the very least, the dramatically lowered cost of cloud providers will become a lever for customers to use in negotiations with their traditional sourcing providers. In addition, cloud is likely to create new options for combining process, software and hardware in business process outsourcing (BPO) solutions. If you’re going to have your data and applications hosted externally in the cloud, do you really need to manage them yourself anymore? Do you really gain a competitive edge with the way you process your insurance claims, or isn’t it time to find a services vendor that will host the application, the associated infrastructure and even process the transactions for you? Cloud services could well be the foundation for next-generation enterprise sourcing solutions. It can make traditional delivery of IT services more efficient and cost-effective.

4.3.4

Cloud Vendors

Many traditional IT service providers and offshore vendors are beginning to work cloud service into their portfolio – or at least give the appearance of doing so. IBM Global Services and HP are serving up more and more “x-as-a-service” items on their menus, from infrastructure to storage. Infosys is offering end-to-end IT and business processes – Source-to-Pay for procurement, Hire-to-Retire for HR – on a pay-per-use basis built on a cloud backbone. Wipro Technologies is piloting

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a central computing cloud to study the potential of the trend. Patni Computing Systems is selling a “cloud acceleration service” to help developers migrate their processes to a cloud-based model the way it did internally and is experimenting with testing-as-a-service. Given that most customers care about where their confidential information is housed, it is likely they will prefer it to be within the confines of a trusted service vendor, rather than that vendor’s alliance partner. This may well be the impetus for greater mergers between strong infrastructure services and BPO vendors as the move to cloud services picks up more steam. In the years ahead, cloud services will separate the basic IT and business process body shops from the innovators. Vendors pushing standard labour arbitrage services under a thin veneer of “cloud marketing” will quickly get cast aside. The emergence of next-generation solutions requires a high degree of provider flexibility and management will to embrace new ways of working. It’s likely that this trend will further segment the provider topography. The biggest cloud-based opportunities could exist for the newer members of the outsourcing industry, like Salesforce.com, Rackspace, Amazon and Dropbox.

4.4

Business Process Outsourcing and Call Centres

BPO initiatives include very different processes and in many senses is an all encompassing term. However, one could make a distinction between BPO activities that involve content development from those that involve service provision: • Content development involves the creation of fairly well defined outputs or products by vendors. These relations involve clear handovers, schedules and typically more precise contracts. Examples include outsourcing for application development. • Service provision involves ongoing relationships where a vendor provides a service on a continual basis. Examples include applications maintenance, call centres, help desk, and transaction processing. The impact of transition costs and interaction costs are typically more severe in service provisioning than in content development and therefore the risk greater. The relative importance of these transaction costs are also likely to systematically differ depending on how the process is organised: i.e., on the ownership model and proximity to origin. BPO service provision requires significant coordination to take place between the vendor and the client on an ongoing basis, giving rise to ongoing interaction costs. Such coordination requires the need not only for personnel with the requisite knowledge, but also facilitating exchange by means of investment in appropriate communication channels. In relationships with continually evolving processes, face-to-face interaction by means of some on-site presence of vendors at client locations and clients at vendor locations proves helpful and efficient coordination. Given the range of BPO services, each with its own coordination costs, its capability to deliver competitive advantage and its impact on the organisational processes, what we see is that traditional standard BPO services (such as

4.4

Business Process Outsourcing and Call Centres High

39

Contact Customer Services Employee Services

Opportunity for total cost reduction

NonStandard

Standard Operational Processing (Automated) Exceptions Processing

Standard

Low

Analytics

Opportunity for competitive advantage

High

Fig. 4.5 BPO service impact on organisations

employment related services and customer service) are utilised primarily for their cost benefits. Increasingly, we are seeing organisations looking for BPO services to deliver competitive advantage in an increasingly difficult market (see Fig. 4.5). Services outsourcing is not a one-time transaction, but an exchange that evolves over time. Process improvements, service level expectations and fit with other contextual processes typically evolve with changing competitive conditions and changing technologies. These improvements in both delivery and development often evolve in unexpected ways.

4.4.1

Defining BPO Services by Organisational Impact

4.4.1.1 Customer Service Outsourcing Call Centres According to various surveys, only 4% of people in the UK have had a favourable experience when dealing with a customer call centre,1 44% complain that their biggest gripe is contacting a call centre based overseas. I believe it is not the location or people per se that drives this perception, but the system and controls that determine how the work is managed, delivered and quality controlled that drives failure (or success). Offshored call centres simply reinforce any negative perceptions and experience. There is nevertheless a mixed picture for Offshore Call Centres: • Even in the face of a media frenzied backlash, many executives continued to favour the idea of “offshore”;

1

YouGov survey commissioned by Callmedia.

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• The Chairman of HSBC famously said that his workers in Asian countries were superior to their British equivalent; • Then in recent years, we have seen a number of high profile businesses predominantly in the finance sector actively promote their “UK only call centres”; • In 2006, Channel 4 produced a documentary highlighting data protection failures in India’s call centre industry; • In early 2007, Lloyds Bank announced what appeared to be a scale-back in offshore operations which seemed to many the beginning of the end for offshoring; • But just as many people thought offshoring was dead, Barclays announced that they will be sending more jobs overseas. The fact is that the triple digit growth in offshoring has ended but nevertheless the British economy does not (that may change given the downturn) have the labour capacity to cope with the complete home shoring of all the jobs offshored. There is also clearly the cost factor to consider – despite the perceived public dislike for offshoring, there is little evidence to suggest that consumers would pay more for home-grown customer service. It is estimated that £3bn worth of goods and services are sold every year in the UK through outbound telemarketing. As well as the increased competition in the telecoms and utilities sectors, much of this growth has come from “warm calling” – calls to existing customers in order to gain further revenues. In large part, this is an effect driven by CRM processes, such as relationship-building calls, cross- and up-selling and customer satisfaction calls. As data protection becomes more of an issue, businesses are increasing the effort they make to sell more to their existing or past customers. Cold calling is still present, but untargeted campaigns are increasingly being seen as less economic than targeted outbound work. Increasingly consumers are taking a negative view of unsolicited outbound calling, which along with the increased uptake in TPS registrations, will reduce the number of unsolicited outbound calls in future years. Call Centre Opportunities by Vertical Sectors Financial services organisations run the most contact centres of any business sector in the UK. This vertical market consists mainly of banks, credit card companies, insurance companies, building societies, collection agencies and credit reference agencies. The first three sub-sectors are amongst the largest users of contact centres, and many of the largest operations are within this vertical market (over 33% of 500+ agent position contact centres are finance operations). The retail and distribution sector has the second-largest number of contact centre operations. This vertical market includes catalogue/direct mail retailers (which tend to be the largest in this sector), package couriers, high street retail support and niche retailers. This industry is driven by customer service and thus contact centres form a central part of the business. The telecoms vertical market although accounting for only 5% of operations, has a much bigger impact on the industry as a whole, as many telecoms contact centres

4.4

Business Process Outsourcing and Call Centres

41

are a considerable size (13% of 500+ agent position contact centres are in the telecoms sector). This vertical market includes both fixed line and mobile operators and are beginning to use contact centres and social media aggressively to attract subscribers as their markets get more competitive. The transport and travel vertical market which includes travel agents (both High Street and web-based), public transport companies, airlines, and car hire firms has almost 11% of the UK’s contact centres market. However the opportunities for pure call centres are likely to fall as the industry is shifting more towards self help and online booking. The IT sector is made up of both technology sales and external helpdesk operations. There are large numbers of internal helpdesks which support employees – this has been the home of offshore call centres and in particular India, because of the availability of highly skilled technical engineers at a fraction of the costs in the developed economies. The telemarketing and research vertical market is centred on outbound calling. A subsector of this is printing and publishing contact centres which include newspaper and magazine subscription and advertisement operations, along with a few book publishers, who use contact centres to sell advertisement and sponsorships. Due to tighter data protection and TPS registration procedures, this sector is likely to see a challenging time ahead. Manufacturing companies account for 8% of UK contact centres, although they are generally relatively small operations, dealing with customer support and sales to other companies rather than the public. This sector offers good outsourcing potential but is driven by quality rather than scale, and may be more appropriate for onshore outsourcing rather than offshore outsourcing. Public services contact centres are leading contenders for outsourcing currently (contactable government) – but offshoring is unlikely given that local job creation is a mandate for most public sector agencies.

4.4.2

Drivers for Customer Service Outsourcing

4.4.2.1 Cost Focus The primary reason businesses consider offshoring contact centres is to reduce the 60–70% of their operating expenses which are spent on agent salaries. For a 500seat contact centre, agent-driven expenses alone can approach £6–8 m per year. Payback time for a 50-seat contact centre operation moved to India for instance could be achieved in 3 months. This reduction in cost allows businesses to initiate projects which would not otherwise be economically viable in the UK, e.g. largescale outbound operations aimed at selling lower cost items or to lower-margin customers. 4.4.2.2 Better Customer Experience Differentiation through provision of a better customer experience may be one of the few opportunities retailers have to rise above price competition. Seventy-three

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percent of European consumers2 said they would do business with a company based on a great contact centre experience. Of these, 15% would do so even if prices were higher than average. When a customer walks into a shop they expect the sales assistant to understand the products and be able to help them. The same is true if a potential customer picks up the telephone, sends an email or clicks for instant chat. Replacing a skilled operator with an automated service might save money in the short term; in the long term however, you risk losing brand advocacy and sales. Inbound customer calls can generate “sales through service”. By resolving customer issues and exceeding their expectations, a contact centre agent sustains rather than loses a revenue stream.

4.4.2.3 Multi-Channel Availability Multi-channel shoppers generate 20–25% more profit than the average customer. However, these customers have low store loyalty across channels. Multi-channel availability if not managed, can therefore potentially be a threat to retailers, nevertheless, customers have come to expect multi-channel availability. By failing to provide customers with a means to transact with the organisation at their convenience, an organisation runs the risk of losing custom to its competitors. Multi-channel experience in most cases is lacking in a number of areas: • Retailers often fail to answer e-mails from their customers in a timely manner. • Retailers often fail to take advantage of opportunities to personalise their interaction. • Proactive contact can build brand, enhance customer service and increase revenue, yet is only a small portion of all outbound contact centre activity. A majority of new customers (~70%) will hang up if the phone is not answered within 25 seconds or if they get through to an answering machine. According to E-consultancy, providing a contact number during the online shopping process can foster trust – reassuring consumers that they can discuss any issues they may have with an adviser over the phone – this is especially true of reluctant e-shoppers. The publication notes, such a strategy can be particularly useful in persuading users who have misgivings about e-commerce to buy online. 4.4.2.4 Lower Costs Means Potentially a Greater Number of Staff The case can certainly be made that lower salary costs mean that offshore contact centres do not have to be staffed as carefully as in the UK, where over-generous scheduling means much higher costs. In offshore countries, a more relaxed attitude to staffing can benefit customers: the average speed to answer calls in India for instance is less than 7 seconds – more than twice as fast as in the UK. However, research suggests that offshore contact centres may not be offering quite the same level of performance as the UK industry in some areas, (although

2

Genesys Consumer Survey 2007 – Europe.

4.4

Business Process Outsourcing and Call Centres

43

outperforms it in others: e.g. salaries for an Indian call centre agent are ~£2K p.a. Compared to ~£13K p.a. in UK) and although Indian agents answer calls more than twice as quickly as UK workers, and work 6 hours a week longer than UK agents, on average, UK agents answer 25% more calls each hour than Indian agents, and resolve up to 20% more of these calls first-time. British call centre workers tend to stay with their organisation for well over 3 years. On average, Indian call centre workers move on after only 11 months in the job.3 A key metric for the contact centre of the future will be “first time resolution”. Whether in a sales or service environment, first-time resolution is key to developing a positive customer relationship and keeping costs down – something that offshoring has not been successful in achieving, to date.

4.4.2.5 Twenty Hour Availability Twenty-four hour businesses require 24 hour support. Having a 9 am to 5 pm business no longer caters for the demanding customer. Customers expect service here and now. From time to time things can go wrong and it is critical that the retailer can address these problems efficiently to ensure that it is providing the highest level of service to its customers. Customers will demand a 24 hour help desk. The speed of response in resolving a customer’s query is as important as the content of the response. Whereas customers were once happy to wait 2 or 3 days for a reply to an email, organisations must now aim for a response time of no more than 4 hour. Email communication means that the speed of response has to be so much faster, especially since people are making purchasing decisions based on what and how quickly their emails are answered.

4.4.3

The Future of Call Centres

The industry needs to evolve from call centre businesses to business automation centres. They need to be broader than just call centres. The advisors need to take a more conversational approach to their call handling rather than following a rigid script (this is not as easy as it seems). These same scripts were introduced to help overcome some of the cultural and language barriers that naturally exist between the offshore advisor and consumer; they help to prop up the confidence of the UK based managers who are being held responsible for the offshore call centre performance. Without those scripts, those managers fear the call centre quality will reduce. The truth is with these scripts the quality of the customer experience is significantly reduced. An important factor for improving customer experience is “Empathy”. Contact centres must find ways of establishing better empathy without compromising call cost. Call centres can do this by creating an environment where empathy thrives

3

Source: Precision Marketing.

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through: robust staff recruitment, training and retention, improved technology and better call routing. Creating better empathy allows agents to reflect and align with the callers’: Values, Beliefs, Experiences and Habits.

4.5

Travel, Transport and Logistics Outsourcing

Consumers of manufactured products and other goods, world-wide, are directly dependent on logistics, and the various activities involved therein, to provide the products and services they require when, where and how they want them. Manufacturers of all sizes are also dependent on logistics to ensure that they receive the necessary raw materials, components, and ingredients when, where and how they need them in order to continue with their manufacturing operations. Many large companies are outsourcing their transportation and logistics functions, driven by pressure to cut costs combined with the challenges of increasingly complex logistics technology. Although many companies are reluctant to hand over critical supply chain functions to an outside company, many are discovering that logistics service providers are better at integrating logistics functions into their supply chain management environments, whilst offering cost advantages. Companies are finding that outsourcing logistics can be a source of savings, and over the long-term they need logistics as part of their overall supply chain strategy. Most companies understand that it is not a core competency for them. There are many ways outsourcing aspects of the supply chain can add value to an efficient cost-effective logistics network, e.g.: • The automotive industry often relies on outside providers to perform functions associated with Just In Time (JIT) operations. This is often not classified as outsourcing, but in many senses could well be classified as outsourcing; • In the grocery industry, collaborative planning, forecasting and replenishment links customer demand with replenishment scheduling to reduce inventory in the system. This results in smaller, more frequent shipments. Contract logistics companies are able to combine these smaller shipments into truckloads, reducing freight and handling costs and enhancing the distribution process; • Information technology management is perhaps the most important value-added offering that third parties have provided in recent years. For many companies, increasing demands (for new information systems resources, and real-time visibility into production and order status) can often be met most efficiently through outsourcing.

4.5.1

Drivers for Logistics Outsourcing

As manufacturers shift more and more of the production to the east, supply chains become more complex and costly. For this reason, manufacturers and retailers are increasingly outsourcing a variety of value-adding logistics functions, above and beyond warehousing and distribution.

4.6

Finance and Accounting Outsourcing

45

Beyond the usual cost drivers this sector has specific drivers in terms of capture and intelligent use of real-time information; information which increases the flexibility of supply chains and which helps optimise movement of goods and services – whether through optimising the business processes or by using the latest technology. Technology can help turn data into intelligence by capturing and collating data and turning it into information that can be used for regaining control of the assets. The second driver is securing the movement of people, products and data security. This is an essential component of any business strategy, especially in response to the demands of government legislation, e-borders, homeland security, business continuity, data protection and may include: biometric access control; baggage screening; security consulting; RFID tracking systems; managed security services; and infrastructure management. Basic services like transportation and warehousing are becoming commodities, and Logistics Services Providers are expanding their services portfolio to address more profitable segments and provide multiple services starting from basic transportation to increasingly more complex areas such as fulfilment, global trade services, light assembly, and so on.

4.6

Finance and Accounting Outsourcing

Outsourcing finance and accounting processes has recently become a strategic issue for many organisations. Businesses are under increasing pressure to improve performance and reduce costs. Although the emphasis has often been on reducing cost, there is a trend towards outsourcing to enable strategic change. The real value to be gained is that the retained finance function can focus on working more closely with the business to provide business partnering and help improve decision making. A key consideration for most organisations is an understanding of which specific finance and accounting process should be outsourced (see Fig. 4.6). Transactional processes (such as accounts payable, travel and entertainment, accounts receivable, billing, cash management, etc.) tended to be the most popular to outsource. More recently, with improvements in provider capabilities, there has been a move to outsourcing higher end or higher value services such as statutory/regulatory accounting, financial reporting and tax. In some cases, more strategic processes such as management accounting, budgeting & forecasting and financial analysis are being considered for outsourcing, what is sometimes labelled KPO services. Finance and Accounting Outsourcing (FAO) has undergone major transformation over the last 10 years. The need to ensure their systems were Sarbanes Oxley compliant encouraged many US corporations to outsource. BPO service providers gained expertise and credibility in meeting this need. With constant changes to the complex financial reporting framework and regulatory requirements – it is becoming important for organisations to meet these obligations in a cost effective manner, whilst using the finance function strategically to make better decisions for the organisation with respect to

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te Budgeting and Forecasting Capital budgeting Treasury and Risk Management Management reporting & analysis

Judgement intensive process

Internal audit

gy

Regulatory reporting and compliance Fixed assets Tax General accounting Accounts receivable Accounts payable

on sacti s Tran processe sive inten

In creasing judgement intensive and strategic

ra St Finance & Accounting Strategy

Fig. 4.6 Finance and accounting value chain

transaction processing, general ledger, accounts payable and treasury. As recruiting the best finance talent and ensuring its optimum utilisation becomes an increasingly difficult challenge, the role of outsourcing of the F&A functions becomes more important to balance these requirements. To date F&A outsourcing has been the domain of larger organisations, where the economic benefits of improved transaction processing, clearly makes sense. However, it is likely that over the near term SMEs will embrace this also, as results indicates that there is high levels of satisfaction among companies that have outsourced finance and accounting, especially in the context of meeting compliance obligations.

4.6.1

Drivers for F&A Outsourcing

• Leveraging FAO to undergo a major, company-wide, global change agenda; • Helping consolidate internal finance operations after a merger and/or acquisition;

4.7

Human Resource and Recruitment Processing Outsourcing

47

• Moving an under-performing shared services model to FAO; • Access to specialist skills; • Achieving stronger metrics and clear visibility into the activities of its financial operations; • Consolidate different finance and accounting functions distributed at several locations; • Standardising processes; • Realising business continuity planning for the organisation by leveraging the service provider’s experience and involvement with multiple clients and service provider footprint; and • Leveraging the benefits technology innovation can have to the finance and accounting function – e.g. using Software-as-a-Service and cloud-based solutions in finance and accounting.

4.7

Human Resource and Recruitment Processing Outsourcing

Increasingly human resources are seen as being the most critical assets of any organisation, as the organisation’s success and know how lies in their hands. But in order to ensure that its employees remain satisfied, the company has to have a specialised human resources department. Most of the time this proves to be a costly option. Organisations are considering outsourcing their human resources management functions, or creating a shared service centre to access the specialised skills, provide flexibility and effectively deliver more for less. Deciding which functions to offload and which firm to outsource to is a major decision. HR functions include Payroll administration (producing checks, handling taxes, dealing with sick time and vacations), employee benefits (Health, Medical, Life insurance, cafeteria, etc.), human resource management (hiring and firing, background interviews, exit interviews and wage reviews), risk management (workers’ compensation, dispute resolution, safety inspection, office policies and handbooks) and others – the drivers and appropriateness of outsourcing can differ by each HR process and functional role.

4.7.1

Drivers for HRO

Cost management • Need to reduce/control administration costs • Reduce and better control HR operating costs • Access to technology which would otherwise be unaffordable • Access to new services which would otherwise be uneconomic

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Service quality/risk • Need to raise quality of service provision – provide higher quality HR services • Increased accountability • Improved legal compliance • Gain access to skills and expertise not available in-house • Gain access to technologies not available in-house Flexibility • Provide cost and organisational flexibility • Offload activities that are non-core • Free up HR time to focus on strategic activities Strategic • Share risks of new investment in technology with external specialists • Transform the HR function’s internal reputation • Improve organisational satisfaction with the HR function • Overcome capital investment limitations preventing upgrade of new technology solutions Usually four main reasons are given by organisations who externally source HR: 1. Provide HR the chance to position itself as a strategic partner for the management of the organisation. The reasoning behind this is that being responsible for transactions and all kinds of basic HR processes distracts the attention from thinking on an abstract level; it is not possible to be a strategist and an operational leader at the same time. 2. Reducing HR total cost of ownership – External sources better enable the calculation of the total cost of ownership of HR; not only costs of salary related costs like employer costs, pension, training, etc., but also derived costs, costs of employment (laptops, phone, clothing, etc.) and of course management costs. 3. A decentralised HR function within organisations poses a risk, especially in the context of associated systems for capturing and automating routine HR tasks. Outsourcing allows the organisation to centralise HR and access best in class technology and automation capabilities. 4. Most HR departments within organisations rely upon key staff for business continuity, when such staff are not available due to leave, sickness or because of a job transfer the whole department comes under pressure. Getting external support through agency staff can only provide temporary comfort but leads to loss of knowledge. Outsourcing this HR activity ensures the organisation no longer needs to worry about staffing levels, nor business continuity problems resulting from absent staff – in essence the organisation passes off this risk to the vendor.

4.8

Knowledge Process Outsourcing

Knowledge processes are different from business processes in terms of the value proposition to the client. Differences lie in process complexity, the amount of intellectual intervention in the process, the skills required and the ability to scale.

4.8

Knowledge Process Outsourcing

49

While business processes are essentially process driven and rule based, knowledge processes involve judgment.

4.8.1

Typical KPO Services

As the outsourcing industry matures, more complex processes are being offered by providers. Knowledge process outsourcing usually refers to “high end knowledge or judgment” services. According to Outsourcing.com, a professional information institute, the KPO market was projected to reach USD 17 billion by 2010. Knowledge work, by its very nature and definition, cannot necessarily be accomplished successfully by following a set of predefined procedures. Moreover, the outcome of a knowledge process (e.g. research and development) may be interwoven with an organisation’s core competency and/or long term sustainability, as opposed to commodity processes typically included in BPO contracts. Inherent difficulties in outsourcing knowledge processes exist, since creation of knowledge and its subsequent accumulation is associated with any activity. As such, outsourcing decisions affect the knowledge base resident within an organisation. This impact is more critical for those processes associated with the generation and use of knowledge. As knowledge related function or process is delegated to an external entity, loss of knowledge concerning these functions or processes can occur and may have implications on the availability of learning opportunities from which organisational knowledge can be increased.

Financial services

Market research and analysis services

Other KPO services

Financial research & analysis Corporate financial statements Analysis of financial statements Analysis of portfolio structures

Primary and secondary research (telephone surveys) Web based market research and analysis

Analysis of prospectus, offer documents Data analytics

Ad-hoc reports, industry reports (fact books, competitor analysis) Creation and maintenance of databases and libraries

Competitive business analysis Trend analysis Company profiling

Product pricing and financial analysis Financial model validations

Management and Marketing Consultancy

Equity research and M&A analytics support (valuations and related financial modelling)

Fig. 4.7 Knowledge process outsourcing (KPO) services

Pharmaceuticals research Biotechnology research Technology research Computer-aided simulation Engineering design Professional services such as business research and legal services.

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These knowledge processes can be embedded in an organisations business processes, in terms of: knowledge generation, knowledge codification (codifying the knowledge into a form accessible to others) and knowledge transfer (facilitating interaction between and among people as well as the interaction with repositories and knowledge management systems).

4.8.2

Challenges in Knowledge Process Outsourcing

Dependence on core competency: Outsourcing implies the shifting of an organisation’s risk to the supplier. This, however, does not eliminate all risk from the client organisation. The customer can become dependent on the supplier. The level of dependency or risk incurred by the customer can be assessed by how much the outsourced process impacts other organisational outcomes/processes. This level of dependency can be viewed as the distinction between knowledge partitioning and task partitioning. This partitioning helps clarify the level of ownership retained by the customer and/or the supplier. Knowledge loss: The inherent risk is that outsourcing knowledge processes also outsources the knowledge itself. The magnitude of the risk is a function of the knowledge learning curve, knowledge holding cost, knowledge value deterioration rate and future value of the knowledge in comparison to the cost to purchase such knowledge at some future point in time. Incentive to innovate: Innovation, specifically R&D activity, is viewed as a significant source of knowledge for an organisation. Outsourcing, especially in terms of proprietary knowledge assets, is not considered a means to innovate because an outside supplier lacks the incentive to innovate for the buying firm. This view is reinforced when an organisation considers that they will receive only the codified results of R&D externalisation and not the accumulated person-embodied skills. IP, legal issues and security: Security and confidentiality of data, customer information and proprietary intellectual property will pose considerable challenges in managing KPO relationships. For example, who will own the outcome of an R&D effort if the process itself is outsourced? When information related to the core competency of an organisation is outsourced, security will be an issue. Measurability of outcome: The outcome of a knowledge process may often be fuzzy. The deliverables being knowledge items, means it is often difficult to come up with precise measurable outcomes. Arguably, without definitive objectives, relational aspects between the provider and customer play a significant role. Integration of knowledge from disparate sources: For knowledge outsourcing, an emphasis must be placed on knowledge integration to reduce the knowledge loss. Since the degree of knowledge dispersion increases with outsourcing arrangements, the uncertainty regarding where the knowledge resides increases. Customers must create conditions to integrate knowledge dispersed across the supply chain.

4.9

4.9

Legal Process Outsourcing

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Legal Process Outsourcing

Traditionally, law firms started outsourcing their IT and business processes to outside vendors, what has been called by many, as Legal Process Outsourcing (LPO). This model was about adding low incremental value to high volume of work. It also meant that only work which was highly process and technology driven (and less knowledge driven) could be outsourced/offshored. The culture in this kind of delivery setup closely followed that of cost minimising BPO operations. The nature of work handled was commoditised. Legal Service Outsourcing (LSO) by comparison is knowledge driven; the incremental value is driven by people, enabled and supported by processes and technology. A necessary condition for the rise of LPO is the disintegration of the legal services value chain. In particular, information and communication technology (ICT) has enabled such disintegration, by (a) introducing a higher degree of standardisation and codification of legal knowledge, (b) facilitating organisational modularity between the back office and the front office; and (c) making geographically distanced delivery possible. It is generally understood that business corporations, rather than law firms, are driving the growth of the LSO phenomenon. The reason for this may be found in a number of factors that distinguish the business corporation from the law firm, including their ownership structure and its influence on strategic objectives. In particular, law firms’ relative reluctance to offshore legal work may be due to (a) lawyers’ conception of their work, and (b) the notion of partners’ autonomy to make make-or-buy decisions. From the perspective of a law firm, the value chain consists of three separable steps: (a) knowledge and information management (b) consultative advice and representation; and (c) client relationship management. Lawyers may appear reluctant to use the outsourcing and offshoring option because the billable hour does not give an incentive to necessarily lower costs rather than raise revenue. Moreover, the partnership model with distributed authority implies that decisions to outsource or offshore are typically taken at the decentralised level, practice by practice, or even partner by partner. This makes it less likely that law firms can easily adopt a centralised firm-wide decision to outsource. However, the challenges faced by law firms are significant and may lead to more lawyers looking at outsourcing as the economic woes and client demand forces change. There is likely to be a degree of flux in the industry moving forward. Law firms are well aware of what outsourcing can deliver – most provide advice to companies on their outsourcing deals. Despite this, very few law firms have considered outsourcing for themselves and even fewer have an outsourcing strategy. However, the legal sector is showing signs that it is now adopting outsourcing as a business strategy – partly driven by the economic turmoil. Clifford Chance led the field by moving back office and secretarial support to its own office in India, in order to

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carry out much of the company’s administrative work (LPO). The outsourcing programme is expected to yield more than £9.5 m in annual savings. Similarly, Pinsent Masons announced a deal to offshore its bulk typing and transcription services as part of a move to change the role of its secretaries.

4.9.1

Drivers for LPO in Law Firms

• Core cost reduction – Most expensive costs to a law firm are legal and paralegal staff – reduction of these costs mean it’s possible to provide competitively priced legal advice without reducing profitability. • Getting access to capability/resources – Legal instructions are often received ad hoc and at short notice when In-house resources/specialists may already be committed to other clients. Outsourcing means its possible to utilise external resources at short notice to enable the new instructions to be delivered, extending the ability of law firms to take on work. • Better utilisation of in-house resources by outsourcing low-value services – Many instructions are for low-value services which need to be undertaken to retain a client’s goodwill. It may be deemed better to outsource such matters and allow lawyers to concentrate on providing premium rate services. The success of any law partnership is dependent on the successful delivery of services to clients by all the lawyers in the firm. Legal service outsourcing is undoubtedly an option that can help law firms address key challenges, but only if done correctly. So how can a firm best go about using outsourcing to their advantage?

4.9.2

What Not to Outsource

• Complex, uniquely fact-driven cases – the amount of time required to bring outside lawyers up to speed require a greater amount of time than would be supported by the reduction in costs. • Fact-driven one-off cases – fairly complex, fact-driven subject matter can be reasonably outsourced only if the case is ongoing or recurring. • Complex work without local supervision – outsourcing efficiencies are undermined without proper supervision. • Unfamiliar subject matter – counsel limits their ability to provide proper supervision when, due to lack of familiarity with the area of law, they are unable to judge the quality or accuracy of the work (Fig. 4.8).

4.9.3

LSO Challenges

LSO delivers high value to organisations by providing domain-based processes and business expertise rather than just process expertise. These processes demand

4.9

Legal Process Outsourcing

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Intellectual property rights & Asset management Patent search & application drafting Trade-Mark and copyright registration Legal research Document review and analysis Intelligence services Contracting, administration and standardisation Audit and compliance Contract abstraction and summarisation

Low-end Work >>

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