What is Outsourcing?
Ensuring Successful Sole Sourcing
by: Carlo Abadilla
Thursday, March 11, 2010 | Comments (0)
Category: Outsourcing Research / Trends
Sole sourcing gives outsourcing buyers the opportunity to negotiate, define, and purchase services from a single provider – thereby making it easier to keep track of performance metrics and mitigate risks. This has become more than a viable option as outsourcing providers expand their service capabilities across multiple platforms and, in many cases multiple offshore outsourcing locations – eliminating the need for multi-vendor approaches.
While sole sourcing can potentially decrease costs and enable a more efficient decision-making process, like any sourcing model, it comes with its own challenges. Outsourcing giant, Everest Group, outlines 3 steps that a buyer can take in order to ensure a successful sole sourcing partnership.
The first is to carefully define the buyer's objectives and the services required. This is also a critical step in ensuring outsourcing creates value and that strategies are aligned to help the client business grow.
Second on the list is establishing a framework that helps both parties know when the proposed solution is acceptable. Although process improvement and innovation are big factors that can potentially be the difference between a good contract and a highly successful one, cost-efficiency still rules the industry. As such, the framework will almost always come down to financial feasibility and profit margins.
Lastly, a foundation must be laid for the two organizations to productively govern the implementation and ongoing execution of the solution. This will help ensure that both the buyer and supplier not only possess the drive to produce increased performance, but know exactly how to forge a productive working relationship.
F&A Outsourcing Poised to Regain Traction after Recession
by: Karen Cayamanda
Tuesday, March 09, 2010 | Comments (0)
Category: Outsourcing Research / Trends
According to the Finance & Accounting Outsourcing Annual Report 2010 by global consulting and research firm Everest Group, 2010 will be a stronger year for F&A outsourcing (FAO) compared to the previous year.
It is predicted that the annual contract value (ACV) this year will reach about US$3.7 billion - a 20 percent increase from US$3.1 billion posted in 2009. This increase in global expenses is taken as a sign that the low activity in FAO, which involves outsourcing capital budget and internal audit, processing of payroll, and general accounting, is now over.
Compared to 20 percent annual increase from 2006 to 2008, FAO had seen a slow growth rate of only 11 percent in total value of contracts in 2009. However, Katrina Menzigian, Vice President, Research, said FAO is expected to regain traction this year as the economy bounces back from the crisis, with new contracts and scope expansions. “We foresee increased adoption across industries and geographies to continue. Beyond the United States, we expect contract signings in the domestic Asia-Pacific market as well as Rest of Europe to rise.”
Here are other key findings in the report:
- FAO market growth continues to see strong adoption across manufacturing, consumer packaged goods, retail and high-tech sectors. Telecom and pharma are emerging sectors with the highest growth rates.
- The financial services sector saw stronger activity than expected last year, and pent up demand will contribute to growth in 2010.
- Asia Pacific started to emerge last year, capturing 35 percent of new contracts.
- Adoption by the mid-market was unable to sustain momentum garnered from 2006 to 2007 primarily due to the economic climate and lack of proven, successful FAO solutions.
New deals, contract renewals, and scope expansion show that 2010 is bound to be a much better year for the FAO market than 2009. As the economy continues to recover from the economic turmoil, it is with high hopes that FAO will register a growth rate which is similar to the rate seen before companies felt the impact of recession.
Common Mistakes of New IT Outsourcing Buyers
by: Karen Cayamanda
Thursday, March 04, 2010 | Comments (0)
Category: Uncategorized
Contract negotiator Julian Millstein enumerates the five most common reasons why novices in IT outsourcing fail to get it right in the article “The pitfalls of outsourcing” published at computing.co.uk:
- Outsourcing is an easy endeavor. There is more to it than just paying a service provider to take on some of your IT processes. Time and effort are needed in order to have a better understanding of how the entire outsourcing process works, what to do in case security concerns come up, and how it affects your overall operations.
- The outsourcing provider will fix everything. It's wrong to say that the service provider will fix your “mess” without affecting or having to change how you do business. As Millstein points out, “... although they [IT outsourcing providers] are generally better at the given function than you are, the way they solve your particular problem, the solution they bring to the table, will by its very nature change the way you do business.”
- The buyer fails to provide a baseline. Performance metrics must be established during the contract negotiation. Providing a baseline will enable you to accurately measure or review performance.
- The only reason to outsource is to save money. While cost reduction remains to be the top reason why companies opt to outsource, problems may still arise even if you're satisfied with cost savings. What you think you have saved now may mean nothing after several years as salaries increase and turnover takes a toll on the outsourcing process.
- It's easy to manage the outsourcing relationship. Outsourcing means, in its simplest form, transferring business processes to a service provider. However, this does not mean that it is a one-way street - the buyer transfers tasks to another company to reduce costs as the latter does the work. It is important to establish a good and efficient relationship so both parties will reap the benefits of outsourcing.
To increase your chances of achieving a successful IT outsourcing deal, avoid these pitfalls and seek advice from those who have extensive knowledge and experience about the process.
Warning Signs that Mean Trouble in your Outsourcing Deal
by: Karen Cayamanda
Tuesday, March 02, 2010 | Comments (0)
Category: Outsourcing Research / Trends
During the global financial crisis, many companies put outsourcing contracts on hold to focus primarily on ways to keep the business going, while some opted for contract renegotiations. With all the factors to take into account when it comes to closing or renegotiating outsourcing deals, how would you know that you are on the right track?
In the article “A dozen danger signs that your outsourcing contract is on the rocks”, Linda Tucci brings together some insights of different experts on the mistakes commonly committed as well as misconceptions in outsourcing deals.
- Lack of innovation and productivity gains - According to Thomas Young, partner and managing director with the CIO Services-Infrastructure at IT consulting firm TPI, documentation is the key to a successful outsourcing contract. When it comes to continuous improvement, Young said that productivity gains which are greater than 3-4 percent need investment from both buyer and vendor, and it should be explicitly stated in the outsourcing contract.
- Cultural differences - Culture clashes may not result to a good, long-lasting relationship between buyer and vendor.
- Optimizing price but failing to focus on quantity - When a company aims to reduce costs, it usually tends to ignore the quantity / consumption of services. According to Young, "when I tell clients to take costs out, I tell them to focus on the Qs [quantity]."
- Neglecting governance and contract “maintenance” - Young said that failing to create a good contract that is flexible enough to adapt to changes in business and technology is a big mistake committed by companies. In a constantly evolving industry such as outsourcing, it is crucial to have a well-written contract that provides room for any changes.
The Shift Towards Outcome-Based Outsourcing
by: Carlo Abadilla
Thursday, February 25, 2010 | Comments (0)
Category: Outsourcing Research / Trends
The global outsourcing industry has been typified by outsourcing deals based on quick-fix cost-cutting solutions that don't always consider long-term process improvement. As the economies of major outsourcing players recover, buyers and vendors are presented with an opportunity to divert focus on ways to create value instead; writes Kathleen Goolsby of the Outsourcing Journal.
The key factor towards maintaining a successful relationship, both personal and professional, is trust. Attaining that trust depends on a healthy system of communication. For the outsourcing industry, this means increasing the level of transparency and information-sharing are key catalysts in attaining an outcome-based approach. The shift towards outcome-based outsourcing is described by Genpact's Mohammed Haque as “a journey that can take at least 18-24 months to implement” due to the requirement of a complete data assessment of the buyer's landscape.
Advancements toward value-creating platforms require attaining a more in-depth understanding of a customer's industry. Haque explains that it is "extremely important that the buyer understand the level of risk the provider must take to help the customer achieve the desired business outcome. This will only work if it is a complete partnership type of relationship and if there is strong governance and relationship management. And senior leaders on both sides must work together."
Upon getting a good grasp on the needs of a buyer's business context, it then remains to align service level agreements (SLAs) to meet desired strategic goals. To further solidify the commitment of both parties to a value-adding partnership, industry experts advocate employing a model in which the responsibilities for risk mitigation and maximizing returns on investment are shared.
According to Haque, only 5 to 10 percent of outsourcing arrangements today utilize outcome-based pricing – the other 90 to 95 percent of outsourcing arrangements are based on time, materials, or a fixed fee. However, he predicts that within the next five years, outcome-based outsourcing contracts will grow to 40 to 50 percent.
RP’s Game Development Sector and the Lack of Enough Manpower
by: Karen Cayamanda
Wednesday, February 24, 2010 | Comments (0)
Category: Outsourcing Research / Trends
The Philippines has long been known as a location of choice for voice-based work. Call centers abound not only in Greater Manila area but also in nearby cities and towns. The outsourcing industry soon expanded, including non-voice BPO work in its service offerings. Even during the tough financial crisis, the Philippine outsourcing industry had showed resiliency and it was one of the few industries which raked in revenues that greatly helped the economy.
There’s no doubt that outsourcing has become a major income generator for the country, and it doesn’t stop at call center functions, IT services, and medical transcription. Another promising field is game development, the youngest branch of the industry.
The different factors that make the Philippines an ideal BPO location still apply when it comes to the game development sector. There is no question about talent. Filipino game developers are creative, highly skilled, and innovative. Aside from English proficiency and low operational costs, the immersion with the Western culture is advantageous for game developers in the sense that cultural compatibility makes it easier for them to appreciate and comprehend the games from the West.
What keeps the country from tapping a large part of the game development outsourcing market is the lack of enough trained game developers to meet the demand. In an article entitled "Philippine game developers ready for big players?" by Nestor Arellano, Ranulf Goss, President of the Game Developers Association of the Philippines, said there were about 50 employees in the sector back in 2004. Five years later, more than 600 comprised the game development workforce. "We're the fastest growing industry in outsourcing right now, but definitely we need more manpower."
While there are game development courses being offered in the Philippines, there is no formal training available. For the country to become a game development outsourcing hub, it is crucial to provide the necessary training for those who want to work as game developers.
The country must find ways to beef up the workforce for the game development sector and make BPO players aware that Filipino game developers have the right skills and talent. If the country has enough manpower to meet the demand, this young sector may soon put the Philippines on the map of global game development outsourcing industry.
Factors towards a Successful Sole Sourcing Approach
by: Karen Cayamanda
Monday, February 22, 2010 | Comments (0)
Category: Outsourcing Research / Trends
In an Everest Group Whitepaper entitled “Sole Source Outsourcing: Ensuring a Successful One”, the global research firm cites these seven factors that will lead to successful sole-source approach to outsourcing.
1. Develop the relationship. This is important even in multi-supplier approaches. Since both parties will be investing a lot of time and money in the outsourcing deal, it is crucial to establish a healthy and effective relationship in which both the supplier and buyer know each other’s goals and are committed to make the relationship work.
2. Engage senior leadership. A sole sourcing approach relies on the trust and goodwill at senior executives of the company. People at the highest levels of the organization should be the ones to carry out the decision-making process, specifically when it comes to service delivery and terms of the agreement.
3. Involve the board. For many board members who are used to a multi-supplier approach, presenting a sole-source situation may raise some concerns such as whether it is the best and most cost-effective solution for the company or not. Do not leave the board of directors in the shadows. Present the sole-source approach early in the process to give the board some time to evaluate it.
4. Don’t boil the ocean. Before signing any outsourcing deal, make sure you have an accurate and robust business case, reasonable pricing and achievable scope, and a Masters Services Agreement (MSA) that focuses negotiations on terms which are most relevant to outsourcing.
5. Develop a robust business case. Have a well-structured business case that can be easily explained and understood. Aside from stating the base case model, the business case must be clear and comprehensive. It must also take direct cost and business impacts, as well as strategic risks into account.
6. Compare to ensure value. To have a successful sole sourcing approach, “parties must adopt a sophisticated external comparative analysis process to ensure fairness of value sharing.” The buyer must make sure that the supplier has the capabilities to match the scope of services to be delivered.
7. Focus the contract and negotiations on truly important factors. The buyer must set specific milestones and end goals. The contract will also include scope targets and metrics in measuring the success of the proposed solution and the outsourcing relationship.
While a sole-source approach may not be suitable for every organization, Everest notes that if it is well-designed and executed carefully, the sole-source approach can be the most cost-effective and time-saving solution for many companies.
Global Outsourcing Shows Signs of Recovery
by: Karen Cayamanda
Tuesday, February 16, 2010 | Comments (0)
Category: Outsourcing Research / Trends
Results from the Market Vista: Q4 2009 report by global consulting and research firm Everest indicate that the global outsourcing market is seeing signs of recovery.
Everest’s study findings include the following (compared to the Q3 market report):
- Twenty-six percent of deals signed in fourth quarter were held by business process outsourcing (BPO).
- IT outsourcing (ITO) comprised 71 percent of transaction activity.
- The annual contract value (ACV) increased 72 percent to about US$4 billion, mainly due to mega-deals with ITO and BPO components.
- About one-third of deals signed in fourth quarter came from BFSI (banking, financial services, insurance) and MDR (manufacturing, distribution, retail) verticals.
- The BFSI vertical comprised one-sixth of the overall market ACV, while ACV from the MDR vertical increased 44 percent.
- Buyers in the United States and Europe increased global transaction activity, making up 75 percent of total transaction deals signed in fourth quarter.
- Significant increase in ACV was seen in the United Kingdom.
- Captive activity sets two-year high mark, with deals from MDR and BFSI verticals, and 40 new announcements, led by India (14) and remaining parts of Asia (18).
- Tier-I and Tier-II locations contributed equally towards overall offshore delivery.
- Ten acquisitions and 39 new alliances were reported in M&A.
These evidences show that things are looking up for the global outsourcing market. It may be a slow start, but what’s important is that we are seeing steady growth across the world - from US and European buyers to emerging trends and outsourcing locations.
Top 5 Tips for Effective Renewal of Outsourcing Contracts
by: Karen Cayamanda
Thursday, February 11, 2010 | Comments (0)
Category: Outsourcing Research / Trends
When it comes to renewal of outsourcing contracts, Debora Card, Associate Partner at outsourcing advisory firm TPI, said the key is to be prepared before negotiating with the supplier. “Effective contract negotiations leverage comes from developing viable alternatives that are financially, technically, and tactically feasible and desirable; and from being ready, willing and able to execute against them.”
Here are Card’s top five tips to get the most out of contract renewal:
1. Start early. If you start renewal planning early, you will have ample time to think about whether to outsource to a different service provider or move business process/es back in-house. For single-process transactions, Card said you need to work on renewal planning about a year before the contract expires. For multi-process transactions, start 24-36 months before expiration.
2. Do your homework. Take a closer look at the current market and see if the relationship you have with your service provider is at par with industry standards when it comes to pricing and service level agreement. Know what alternative suppliers can offer and find out which can provide a better and more efficient solution for your business.
3. Realign with reality. It is likely that there are expectations which are not met. This can happen to both parties. In renewing the contract, make sure to realign expectations and responsibilities. These can involve changes in pricing structure and services offered.
4. Remove the fog. Have a crystal clear agreement. According to Card, parties commonly disagree on two primary areas: scope of services and management or governance. Be clear on your expectations so you will get what you contract for and avoid conflict in the future.
5. Play out your hand. After analyzing the current market, evaluating the alternative providers, and determining your expectations, it’s time to communicate with your supplier. Make sure to document what you want to get in terms of pricing structure, scope of service, and management. It is also important to let the supplier know about your timeline for service delivery.
Don’t wait until the last minute. Be fully equipped with the right information about the existing environment and viable options before your existing contract expires.
Diversification of the RP BPO competitive landscape
by: Carlo Abadilla
Wednesday, February 10, 2010 | Comments (0)
Category: Outsourcing Research / Trends
As new outsourcing locations and technologies emerge, the competitive landscape of the outsourcing industry is becoming more and more diversified. With an increasing amount of countries realizing the benefits of outsourcing on both the buyer and vendor front, it's hard to keep track of who the Philippines is competing with; as a survey by PricewaterhouseCoopers showed.
The survey lists the locations that have stepped up to the plate to rival the Philippines' sunshine industry and the respective outsourcing services they specialize in. Just to give you an idea of how diversified the competitive landscape is, here is what has become quite an exotic list of rival outsourcing locations:
For contact center outsourcing services, Makati Manila and Cebu are challenged by Bangalore, Chennai and Mumbai in India; Beijing, Dalian and Shanghai in China; Sofia in Bulgaria and Budapest in Hungary; Barcelona and Madrid in Spain; as well as Bogota in Colombia, Buenos Aires in Argentina, and Lima in Peru.
For Finance and Accounting Outsourcing (FAO), Makati and Manila will have to contend with Bangalore, Chennai and Mumbai; Beijing, Dailan and Shanghai; Sydney, Australia; Munich, Germany; Zurich, Switzerland; as well as Bogota and Buenos Aires.
For Human Resources Outsourcing (HRO), Makati and Manila stand against Bangalore, Mumbai and Hyderabad, India; Beijing, Shanghai and Guangzhou, China; Taipei; Singapore; Munich; as well as Bogota, Buenos Aires and Sao Paulo (Brazil).
For marketing and sales outsourcing, Manila competes with Bangalore, Chennai and Nashik, India; Dalian, Shanghai and Shenzhen; Kuala Lumpur, Malaysia; Taipei; Munich and Frankfurt in Germany; as well as Bogota and Sofia.
For legal services or Legal Process Outsourcing (LPO), Manila faces Bangalore and Chennai; Sri Lanka; Bogota and Medellin, Colombia; London, UK; and Prague, Czech Republic.
There are outsourcing services on the PwC survey in which the Philippines has yet to make a competitive bid; such as procurement outsourcing in which Bangalore, Chennai and Delhi; Dalian, Shanghai and Shenzhen; Munich; as well as Bogota and Sofia dominate.
The survey reveals that India is the only location to offer the full spectrum of outsourcing services. The Philippines joins India and China as the only outsourcing nations that have developed multiple “most popular” cities; the ones in the Philippines being Manila, Makati and Cebu.
