October 2008
By Corinna Ritter

Corinna Ritter is editor of tcworld.


Outsourcing – buying a service or contracting a relationship?

Improving your performance, using your in-house resources more profitably, staying focused on your core business, accelerating time-to-market and decreasing costs – the benefits of outsourcing sound very promising. But how can you jump on the bandwagon of outsourcing? Between Russia and India, Dubai and Vietnam – where do you find your outsourcing provider? And how can you trust that the provider will help you achieve the promised benefits? tcworld investigated.

While cost-savings remain the most common reason for companies starting to look into outsourcing, strategic aspects play an increasing role today. “Our global footprint grew through acquisitions and by establishing new offices and branches throughout the world”, explains Daniel McGeachy, Executive Director of a large Dutch-based global financial institution. “In order to maintain control whilst preserving business agility, we required partners with proven track records to help us succeed.” The bank started looking for reliable providers in a stable technological environment to help achieve the defined goals: Increase business agility, achieve technology transformation and total cost of ownership savings, develop governance and standard processes, implement global service level agreements locally and consolidate an international supplier model.

To find outsourcing partners the bank retained the help of an external consulting firm. “They drove a request for information and a request for proposal and provided us with the top five providers of the different services we required.” The bank based its decision not only on the performance level of the outsourcing provider.

“Linguistic and cultural factors played a significant role given the fact that we are a global financial institution and our goal was – and still is – to manage globally but deliver locally.”

Today the institution maintains outsourcing relationships with ten providers working across 55 countries. Along with bottom line savings and a sustainable service level, the outsourcing deals also brought competitive advantages: “The partnerships enabled us to establish new offices and branches in various countries around the globe. This increased our time to market and helped us set an immediate footprint in terms of infrastructure”, Mc Geachy continues.

Accepting change has been the key to success for the financial institute. “In order to be successful in outsourcing, organizations must be willing to adapt to the new environment without relinquishing control and ensuring that duplication does not exist. Without this any savings will quickly be lost.”

Find out what you want to outsource

Experts advise us that outsourcing is not simply buying a service from an external supplier. Usually, buyer and vendor embark on a long-term relationship where liabilities and risks as well as opportunities and benefits are shared. The significance of any outsourcing decision notwithstanding, many companies still lack experience. “There are so many things that can go wrong, one might consider it appropriate to get some guidance to lower the risks”, recommends Jerry Durant, Senior Advisor at the Outsourcing Institute.

Advisory firms like the Global Sourcing Advisory Group (GSAG) provide such guidance for companies seeking to outsource a part of their business. “In many cases the companies don’t even know what it is they want to outsource”, explains John Stacey, who is Chairman and CEO of GSAG. The offshoring and outsourcing advisor helps companies analyze their business and find out what it is that they should outsource. By taking a look at the divisions and departments within the organization, he identifies where the highest costs are and where an outsourcing provider could realize immediate cost benefits.

“Typically an outsource is an attempt to reduce costs”, Stacey says. He has found that the typical areas in which companies can achieve cost savings include Human Resources as well as Finance and Accounting.

Finding your partner

Trust and reliability are certainly the foundation of any successful outsourcing relationship, making the search for the right provider even harder. Looking in detail at your potential service provider will definitely be worthwhile. Investigate the following questions:

  • Does the provider have a track record of service commitment?
  • Has the company achieved recognition in its industry?
  • Is the business expanding?
  • How good are the service level agreements it offers?
  • Is the company financially stable?

It is advisable to get in contact with the provider’s existing customers. Find out how satisfied they are, what they see as the provider’s strength and how the provider deals with problems. You might also want to consider visiting the potential partner at work to learn about their working environment, IT systems and equipment as well as their processes.

In case your work will be subcontracted, apply the same checks to the subcontracted company.owever, no matter how well you investigate the potential supplier, a certain level of risk will always be part of any new outsourcing deal. “Reputation is a hard thing to measure”, says Jerry Durant. “Let’s face it, references will only be positive ones and may not necessarily reflect the whole picture.”

Again, an outsourcing advisor can assist you in finding the right partner. “We sometimes go out with a request for proposal (RFP) or a request for information (RFI)”, John Stacey continues. He recommends to be very exclusive: “Try to identify those providers that have experience in those specific services which you require and who have been successful in this field for quite some time.”

Allow enough time for finding the right partner. While some large organizations allow six to nine months for the entire process, GSAG calculates 60 to 90 day. This includes analyzing the business, identifying the initiatives that need to be outsourced, creating an RFP or RFI and finally, selecting the vendor, negotiating the price and getting to a contract stage.

Offshore or nearshore

With increasing wages in traditionally low-salary countries, many companies are now taking a different look at outsourcing and offshoring. While India used to be the number one outsourcing destination, firms in the US today also look at Central America and the Middle East, among other destinations. “Not everything has to be offshored nowadays”, Stacey says. “Nearshoring is becoming a scenario that is much more realized than it used to be. Depending on the economic situation, in some cases it is actually as cost-effective to go to an outsource provider onshore than it would be to go offshore.” Some offshore providers have even moved onshore to provide the same services in the countries where their clients reside.

The physical location of their data has been a major issue for many US companies. Some companies are offshoring services, however, keeping the data at home or in a location close to home. “A lot depends on the company and the relationships they have with other countries.”

The industry is another factor determining the outsourcing location. Typically, in IT cultural and linguistic proximity are not that important. However, other industry sectors are forced to look at outsourcing from a different angle: “There are several large organizations that will never be able to outsource services entirely, for example audit and accounting firms. The industry they are in stops them from outsourcing many things, because their data consists of very private financial information.”

Maintaining the relationship

According to GSAG, problems are most likely to occur during the first stage of the outsourcing relationship. “Of a five-year outsource deal, the first twelve to 18 months are very critical”, Stacey explains. While the client expects to achieve revenue gains within those first twelve to 18 months, the vendor expects to receive all the necessary data within that period.

In order to discuss the upcoming issues and to ensure that you achieve the defined objectives, set up a steering committee including the client, the vendor and the advisor, if one was involved. The committee meets once or twice a month and makes sure things are moving forward based on a project plan that has identified the critical path. “Typically, the first thing that breaks an outsource contract, is that timelines are not held causing unforeseen expenses. So make sure that all delivery times are strictly met”, Stacey recommends.

Eliminating risks

To avoid failures and misunderstanding, it is essential to have coherent and tight contractual arrangements. “A tight and proper contract gives the client a certain measure of safety and reliability. The vendor will be under a level of scrutiny for some time to make sure that the terms are met.” Several law firms specialize in outsourcing contracts. To ensure that the provider can get the job done properly, the transformation process needs to be planned strategically and priorities need to be set. Find out exactly what the risk factors are if something goes wrong and how you can correct them.

Outsourcing – is it worth the trouble?

While – according to the Outsourcing Institute – a large majority of the big companies use some degree of outsourcing, it might not necessarily be the key to success for certain organizations. “Companies are beginning to realize that there are plenty of cases in which outsourcing or offshoring are not the best business strategies – even when it comes to manufacturing, a realm that's generally well suited to these practices“, Stacey continues.

“We recommend to our clients: Never outsource what you don't fully understand yourself and never outsource mission critical functions. These two factors are key points on why outsourcing and offshoring may not be the best approach.“

In the “Outsourcing and Offshoring Satisfaction Study” published by GSAG, the following critical aspects of outsourcing are mentioned:

  • Control and flexibility issues Doing it yourself may seem to cost more, but when you want something done, you can usually get it done with a minimum of hassle and incremental costs.
  • Responsibility, liability and trust issues If your outsourcing partner ever experienced data losses (something that is true for all major players) this is a clear warning that their procedures are inadequate.
  • Competitive advantage issues There is no competitive advantage in using the same software and interchangably the same people as your competitors.

Vendors becoming partners

New forms of outsourcing relationships have started to develop. Companies are increasingly looking for partners to share risks and financial liability as well as new business opportunities. “Nowadays, the vendor is becoming almost a partner of the client. Not only are they engaged on a very long-term basis, they also hold financial and legal responsibility together”, Stacey says. “The high-level providers partner with their buyers while sharing the same financial responsibilities. They become part of the business. It is almost an acquisition.”