Where next for Outsourcing?
Now is the time for corporations to bring outsourcing to the
fore. With increased competition and in a stationery market,
concentrating on core activity becomes ever more vital. Outsourcing
deals offer corporations the virtuous cycle of decreasing costs,
increasing EBITDA and the subsequent increase in shareholder
value.
The term outsourcing gained common acceptance in the 1980s and is
still used today to describe a contractual relationship with a
specialised outside service provider for work traditionally done
in-house. All outsourcing deals involve the running of people,
process and technology. Outsourcing takes place when a company
transfers the ownership of a business process to a supplier. The
important distinction between an outsourcing deal and any other
business relationship is that in outsourcing, control of the
process is determined not by the client, but by the supplier. The
client dictates what it wants to gain from the relationship, but it
is left to the supplier to set the strategy to accomplish the
implementation and delivery.
Business process outsourcing, or BPO, is a more comprehensive, or
business process oriented, approach. Instead of outsourcing along
traditional functional lines, the scope of the services covered by
the deal cuts across the organisation in a more horizontal way.
Generally, BPO contracts are seen as being more inclusive, covering
a great deal of process redesign work, redeployment and retraining
of the people transitioned to the supplier, and almost always
include the information technology that enables and supports the
business process. The goal is to provide an even greater
opportunity for generating innovation, speed to market and
shareholder value through this more integrated approach.
The suppliers like to suggest that they can be all things to all
clients. The reality is that each supplier has its strengths and
weaknesses. There is an expanding level of knowledge on the part of
the client community as they utilise specialist consultancies such
as Morgan Chambers in Europe and TPI in the US to help them
identify those suppliers that most closely match their need for
increased ROI.
Over the last five years, the outsourcing market in the UK alone
has been worth £22.9 billion. A third of this figure has been
generated from BPO deals. In the Human Resource Outsourcing market,
2001 saw an increase of 65% year-on-year. One look in any business
or consulting publications gives the same view; outsourcing is
going to be the only game to be in for the next 24-36 months.
How can organisations capitalise on this increase to maximise the
benefit to themselves and their shareholders? To use a
much-maligned phrase from the UK Prime Minister, the answer is
"education, education, education." The process of building market
knowledge for both the suppliers and the client community is key to
the successful outcome of these deals. It is only by understanding
what can be achieved within realistic time scales, that
corporations can benefit most by such deals.
Examples of success in this field are not hard to find, Accenture's
success with the finance and accounting outsource deal with BP and
the subsequent operation of a shared service model for BP's
competitors is one striking instance. David Andrews, who ran
Andersen Consulting's business process management business is now
CEO of a pre-IPO business called Xchanging. Their business model is
one of true shared risk-shared reward, with each party owning half
of the new business unit created from the client's internal
process. In the case of BAe Systems, this is their HR function; for
Lloyds of London, it is the settlement function for the Brokers,
Managing Agents and Intermediaries that make up the Lloyds
Insurance market. These imaginative deals signal the way forward
for successful unions.
It is difficult to imagine that by outsourcing something like
finance, procurement, information technology, or human resource
services the firm can increase its revenue but it's true. It may be
indirect but by improving the businesses focus by peeling off the
non-core activities the firm improves its ability to focus on
revenue generating activities.
Guy Kirkwood, who runs a headhunting firm focussed exclusively on
the outsourcing market, suggests the next step should be to:
"Schedule a meeting with an outsourcing supplier to assess your
objectives, scope, costs and the benefits of outsourcing. A
preliminary assessment will provide you with useful information,
raise questions, stimulate dialogue, and move the process forward.
Now is the time to make that strategic decision, before your
competitors force you into such a decision."