5 Questions to ask when making the Outsourcing decision White paper
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Economic and competitive pressures have made it imperative for organizations of all sizes to focus on business transformation. The objective of this change is to minimize risk and achieve greater agility, efficiency and profitability. To this end, outsourcing has proved to be a tried-and-tested model and is recognized as a long term competitive strategy for success. A survey on ‘Global Sourcing of Business Services’ by Duke University’s Fuqua School of Business concluded that 80% of large companies (over 20,000 employees) use outsourcing in some form, while 58% of mid-sized companies (500-20,000 employees) and 43% of small companies (under 500 employees) use outsourcing services. As companies grow, it becomes increasingly vital that their focus be
redirected to their core activities while the non-core functions can be outsourced to vendors specialized in that particular function. Outsourcing is a long term strategy that requires serious commitment, clear communication and unflinching support by all the stakeholders for it to deliver consistent results. That makes it even more important that the decision to outsource is well thought out and has full support of the top management. As you evaluate your choices and decisions in outsourcing different business functions, you will need to consider the following five questions. These questions will help you make an informed decision on your way towards first-time-outsourcing.
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Is Outsourcing the right choice for you? It depends hugely on the nature of your business and you need to understand your company and its capabilities. You could consider the following: • • • • • •
How specialized is the required skill-set How the function fits culturally with the organization What are the potential cost savings How complex is the function Whether it’s a core or a non-core function Historical performance after outsourcing the function.
For the above considerations, if your answers respectively lean towards • not highly specialized • medium to high cost savings • non-core and
• culturally a loose fit • not so complex • successfully outsourced historically
then, in all likelihood, that function is a potentially good prospect for outsourcing.
The Duke study (mentioned earlier) also pointed out that, “Companies that moved processes offshore say they have gained in flexibility and agility, and the ability to compete in challenging economic environments.” While cost savings are clearly the leading driver for outsourcing, there are numerous other factors that influence the decision to move functions offshore (refer to figure 1).
Figure 1: Duke University-s Fuqua school of business offshoring Research Network study TOP THREE REASONS TO CONSIDER OUTSOURCING 80 70 60 50 40 30 20 10 Access to new markets
Domestic shortage of qualified personnel
Enhance capacity for innovation
Increase speed to market
Explore location specific advantages
Accepted industry practice
Improved service levels
Other cost savings
Competitive pressure
Growth strategy
Part of larger global strategy
Business process redesign
Access to qualified personnel
Increase organisational flexibility
0 Laber cost saving
1
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2
Where to Outsource? We live in a global and connected world so when you decide to expand the operation by outsourcing to an external partner, where to outsource is one of the most important considerations. Depending on factors like geography, scope and mandate of the arrangement, outsourcing takes the form of offshoring or nearshoring.
Each of these models have their own pros and cons and hence they should be evaluated objectively. For example, nearshoring may provide a greater cultural similarity and control for the buyer due to geographical proximity with the vendor. It may, however, provide considerably less cost reduction.
Common practice these days is that back office functions that are considered ‘transactional’ are provided by third party outsourcers. It is called ‘nearshoring’ when the vendor is in the same domestic location, and ‘Offshoring’ when the service provider locations range from Asia to Latin America.
Tholons, a consulting advisory firm, ranks the top 100 outsourcing destinations in the world every year. Their report rates cities across the continents. The table below is an extract from Tholon’s report highlighting some of the prime outsourcing target countries per continent.
In shared services, the services are being provided to business unit(s) by a separate entity, which is an in-house department of the overall organization. Generally, shared services center consolidates and standardizes operations, which include business processes, systems and controls across business units.
Asia Europe Africa Latin America
India, Philippines, China and Vietnam Ireland, Poland, Czech Republic and Hungary South Africa, Ghana, Morocco and Egypt Costa Rica, Brazil, Chile and Argentina
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Rank 2016
Region
Country
City
1
Asia Pacific
India
Bangalore
2
Asia Pacific
Philippines
Manila (NCR)
3
Asia Pacific
India
Mumbai
4
Asia Pacific
India
Delhi (NCR)
5
Asia Pacific
India
Chennai
6
Asia Pacific
India
Hyderabad
7
Asia Pacific
Philippines
Cebu City
8
Asia Pacific
India
Pune
9
Europe
Poland
Kraków
10
Europe
Ireland
Dublin
11
Americas
Costa Rica
San José
12
Asia Pacific
China
Shanghai
13
Asia Pacific
China
Beijing
14
Europe
Czech Republic
Prague
15
Asia Pacific
China
Dalian
16
Asia Pacific
Sri Lanka
Colombo
17
Asia Pacific
Malaysia
Kuala Lumpur
18
Asia Pacific
Vietnam
Ho Chi Minh City
19
Asia Pacific
Vietnam
Hanoi
20
Middle East and Africa
South Africa
Johannesburg
21
Asia Pacific
China
Shenzhen
22
Asia Pacific
India
Chandigarh
23
Asia Pacific
India
Kolkata
24
Europe
Hungary
Budapest
25
Europe
Poland
Warsaw
The Political, Economic, Social and Technological (PEST) Analysis is a strategic evaluation framework that helps identify the ideal target country for Outsourcing. A higher PEST score would mean stability of external factors that may otherwise hamper the performance of the outsourced unit. If the primary driver for your outsourcing is cost savings, Asia will present the strongest business case. If you are willing to trade some savings for the proximity, cultural alignment and time zone benefits, then for US based companies, Latin America presents a better option. Economics and geography are always going to be the top factors in answering the location question.
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3
Which offshoring partner to choose? Before choosing an offshore partner, ask the following questions: Does the selected offshore partner have experience in the service that you want to outsource? Has your selected outsourcing service provider been able to provide quality services to other companies like yours? Does your chosen business partner use the best in technology, software and infrastructure? Does your outsourcing provider have experienced, trained and qualiďŹ ed professionals that can efďŹ ciently handle your projects? Before you choose an offshore partner; think about your company needs, expectations and resources and try to match those with what the vendor can offer you. Because a good offshore partner is a company which meets your needs.
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4
Which function to outsource and what performance model to choose? Outsourcing allows you to focus on your core business and can create a competitive advantage by reducing operational costs. You can outsource an entire function or only a part of it. If a function within your business has performance issues, it is probably a likely target for outsourcing. Do you really understand why it is under-performing? Have you put effort into analyzing and understanding the challenges that function is facing currently? It is critical to closely understand the current problems of the function in order to help the vendor tackle them effectively. The outsourcing partner needs to be made accountable through stringent service level agreements and performance requirements. If a client’s processes are inefficient, an ideal outsourcing partner will be able to bring in their experience to strategically advise and make an effort to introduce efficiencies. The vendor should also be willing to commit to
continual process improvement. In the absence of a vision to improve the processes, outsourcing these functions would only mean shifting inefficiencies somewhere else. This may still give you initial cost savings due to labour arbitrage, but it will fail to provide further incremental benefits. The other aspect to ascertain is the performance model. Understanding which pricing and operating model is best suited for you is important as there are various options such as fixed fee, time and materials, per transaction, per device (for ITO agreements). Fixed Fee is the simplest model to go for but provides little flexibility. Transactional agreement is complex and requires detailed understanding of the function being outsourced but provides significant flexibility.
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5
What would be the ideal target state? Direct benefits of outsourcing are reduction of costs, increase in organizational flexibility, improvement of business and performance, and a reinforcement of competitive difference. But before commencing your journey to outsourcing, it is important to clearly identify your ideal target (To-Be) state. Some questions that can help you define that state are: • what is the cost reduction we aim to achieve, • what is the productivity improvement we seek to achieve, • what is the customer satisfaction level we want to achieve, and so on. The real advantage in outsourcing is not just the initial cost savings but the savings achieved over time, through continual improvements.
25%-50% Labor Arbitrage
15%-30% Operating Efficiency
5%-10% Cross Company Leverage
Savings Over Time Outsourcing is a strategic initiative. You may be outsourcing a non-core function, but a focus on continuous improvement that is driven down by the top management helps the company overall in terms of cascading productivity improvements and cost savings. Outsourcing is also a long term exercise and not a one-off tactical project, so companies need to put in increased effort initially until the new entity starts delivering results.
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About Global Step GlobalStep is a full service technology firm with rich industry expertise in Internet, Media & Entertainment. For more than 9 years, we’ve provided customized product support solutions for the Interactive Entertainment Industry including Games QA and Customer Support. Our lines of service include, Test & Validation, IT Infrastructure, QA Engineering, Video Analytics and Application Development. As a brand, we are passionate about the success of our customers and committed to creating an environment that enables our people to fulfil their inherent potential. GlobalStep provides services to over 100 clients worldwide ranging from small companies to Fortune 100 companies.
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