The continuing economic downturn is seeing an increasing reliance on outsourcing, yet companies are still making mistakes in their outsourcing deals, reports SearchCIO.com, a website for technology managers and executives.
SearchCIO.com senior news writer Linda Tucci reports that for 2010, companies that outsourced IT work spent 7.1% of their total budgets for outsourced IT services. From 3.8% in 2008 to 6.1% in 2009, the data from advisory firm Computer Economics, Inc., on which she based her figures, are simply impressive.
In her report, Tucci interviews Steve Martin, a partner at outsourcing advisory firm Pace Harmon LLC. Martin was a former partner with Deloitte Consulting, where he closed $7 billion worth of outsourcing deals. He lends his experience to provide an insight into the four common mistakes committed in outsourcing deals.
Mistake no. 1: Relying on a single outsourcing provider.
Martin says “it takes two outsourcing vendors to tango to a competitive deal, even if one of them has only a 10% chance of winning.” Never forego the bidding – there are benefits to having two competing outsourcing providers bidding for a deal. Sole-sourced deals, meaning deals that didn’t go through bidding, are usually priced at 30% to 40% above market rates, says Martin.
Mistake no. 2: Too much focus on cost.
A deal that works for both the client-company and the provider needs a thorough understanding of the real costs for a successful operation. Martin says budgets that are too tight cannot be expected to perform well.
Mistake no. 3: Imbalance in sharing information.
Martin says that in any IT outsourcing deal, all IT assets, i.e. PCs, servers, routers, printers, and facilities, must be brought to the table. However, current performance levels must not be disclosed at all, advises Martin. An outsourcing provider is supposed to offer a cost-efficient deal for your operations, not to cancel some of your current costs.
Mistake no. 4: Hasty deals.
Martin advises companies to keep the “losing” bidder around, since early low odds are founded on unfamiliarity, and usually not on anything else. The tables can turn around, says Martin – a bidder with a 10% chance can suddenly have a 40% chance, or higher, as talks go on.
This year, we saw the global economy greatly affected by the effects of the U.S. recession. Outsourcing, though, continued to mature and develop, with the Philippines getting the top spot as the preferred global destination for outsourcing.
For 2011, Network World reports that the outsourcing industry will witness massive changes, from undervalued contracts to cloud computing woes. The publication, a member of the International Data Group (IDG), supplies “information, intelligence and insight” for network and IT executives.
Stephanie Overby, Network World’s chief information officer (CIO), cites 11 outsourcing trends to watch out for in 2011:
1. Outsourcing goes micro. New buyers, who sat on fences watching the 2010 downturn, will now sign small IT services deals with service providers. In these “small” deals, providers will use the classic “penetrate-and-radiate” strategy to “enlarge” these deals.
2. Search for savings. With the economic downturn, network and IT executives will seek savings from their current outsourcing deals. Existing contracts will undergo scrutiny for under-deliveries and over-payments.
3. Cloudsourcing surge. Outsourcing consultancy Alsbridge says the outsourcing market will merge with the developing cloud sourcing market to “drive the rebirth of outsourcing.” The company notes the effect of Amazon, Google, and Rackspace, reducing the profits of industry giants HP and IBM. Legacy providers may react to this fusion either by merging with other providers or by acquiring younger companies.
4. CIOs face risks with back-door deals. Business unit heads will leave out IT executives in discussing and deciding about cloud computing and its services, secure in the fact that CIOs can solve issues later on. This scenario can create problems, especially if the CIO is unequipped to solve them.
5. Rise of “vanilla” packages. Customized packages will slowly be phased out, as clients start to accept standard, “ vanilla” services, and providers being standardizing their offerings. Outsourcing consultancy EquaTerra says standardization may also permeate processes, technologies, and even locations.
6. Stable prices. Outsourcing service providers will no longer market themselves with lower prices, but will instead sell the quality of their service and their varied offerings. Customers will choose their providers based on delivery models, agreements, and other advantages to maximize cost savings.
7. East-West mergers. We may witness an Indian acquisition of an American company this year, industry experts say. Indian service providers are ascending the value chain to differentiate from other providers. As India focuses on consulting and integration service deals, their labor force is adding more skills to their offerings.
8. Shift to emerging economies. Brazil, China, and Egypt – countries with improving economies – are becoming choice destinations for service providers. Aside from cheap, skilled labor, their citizens have strong purchasing power, something service providers can also profit from.
9. Growth despite protectionism. The unemployment rate in the U.S. stays high in spite of government efforts to curb the worsening downturn. U.S. legislators are proposing protectionist policies to stem the overseas shift of American jobs. Indian service providers may react by acquiring an American company to improve their onshore presence.
10. Enhanced mass automation. To maintain cost savings and profitability, service providers will turn to automation. Technology can enable optical character recognition to replace human data processors, and even lights-out, employee-free delivery centers can be established instead of facilities teeming with human operators.
11. Offshore work migration en masse. As more and more work are shifted offshore, the technologies and methodologies supporting such gargantuan shifts are improving by the minute. Large numbers of skilled employees can be activated almost immediately for offshore delivery centers.
Outsourcing, as a business process, has been recognized by industry experts as a viable and strategic tool for companies aiming to be globally competitive. However, governments have varying degrees of support for the outsourcing industry and public opinion is still divided on the merits of outsourcing. Due to the relative inexperience of client-companies and their outsourcing providers in ironing out an outsourcing agreement, many partnerships fall flat on their promises of cost savings.
Dr. Stephan Meixner, director at Technology Partners International, Inc. (TPI), shares five (5) critical factors in building a strong foundation for a successful outsourcing transition. US-based TPI is one of the world's leading outsourcing advisory firms.
He shares the following tips:
1. Draw support for a “burning platform”. When there is a financial crisis brewing within the company, the industry, or the economy, people are easier to rally towards change.
2. Lead the leaders in an alliance for change. When people are rallied towards change, the alliance must be organized and led. Those who need to be particularly convinced of the initiative for change are senior managers and, most importantly, the chief executive officer.
3. Accordingly adjust the rewards system for senior managers with the initiative. Shifting to an outsourcing system can be accelerated when the rewards system for the company leaders are integrated with the objectives of the transition.
4. Make senior management aware of the intricacies of outsourcing and its realities. Awareness of outsourcing's pros and cons among senior managers is important in having a successful transition. Sharing of notes and best practices among new and existing outsourcing initiatives can help in spreading outsourcing know-how. This contributes to better management of outsourcing challenges such as recruitment, methodologies, cultural barriers, etc.
5. Create a robust project plan. A plan must be robust enough to cover project status reports, timeline of deliverables and milestones, budget requirements, and the projected risks and benefits. As early as possible, all company operations must be engaged with the transition. A plan professionally implemented communicates to all stakeholders that all their combined efforts are needed for a successful transition.
In summary, Dr. Meixner writes that “a change programme is only as robust as the skills of the team managing the process.” It is thus important that both outsourcing parties - the client-company and the service provider - are fully aware of the risks and challenges of outsourcing.
Exploring the BPO market in search for a service provider can be a long and tedious process. Your end choice has too great an impact to your operational capacity to be taken lightly. This is precisely the reason why relying on the services of a sourcing advisor can be highly advantageous. They bring you years and years of experience in negotiating with providers in the BPO industry. Alsbridge Inc. came up with a list of ways a sourcing advisor can bring you leverage:
1. Level Playing Field
Your exposure on the intricacies of the outsourcing industry is very limited. All the more, negotiating with service providers is not something you do on a regular basis and chances are, coming out of the negotiation phase successful is highly unlikely if you’re not fully equipped with information. Sourcing Advisors are heavily involved in the field of outsourcing and they are up-to-date when it comes to the latest trends. In order to really get the best deal, it would be nifty to make use of somebody else’s knowledge and expertise.
2. Improved Cost Savings
Cost savings is usually the primary motivation for outsourcing work to a third party provider. Surprisingly, you can further lower down your costs by seeking help from a sourcing advisor because he/she allows you to land the most optimal and cost-effective deal.
3. Shorter Negotiations
As you observe caution and engage in time-consuming research before signing any official agreement with a service provider, you expend time and money in this lengthy negotiation. While you can reduce costs by outsourcing IT services, you continue to finance your in-house operations and lose on opportunity cost. Sourcing advisors have an extensive knowledge on the industry and standard market prices; research has shown that sourcing professionals can speed up negotiation by up to 70%.
4. Sustainable Outsourcing Relationships
Apart from service definition and price level, there are other high-value advantages to hiring a sourcing advisor. In particular, they can help you end up with a sustainable outsourcing set-up. What happens for most outsourcing agreements is that internal circumstances change for your company after a year or two, and the agreement turns out to be irrelevant and out-of-date. Sourcing advisors ensure that there is flexibility to the agreement which can keep the arrangement updated and valuable even from a long-term perspective.
While there are a lot more reasons behind working with outsourcing advisors, all you really need to remember is that they negotiate to achieve the best terms for a living. Their unparalleled expertise and knowledge of the industry will indubitably help you through sourcing, negotiation, and on-boarding.