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Outsourcing: From Buzzword to Potential ‘Best Practice’?
No more a magic wand, outsourcing can still offer more than just temporary relief
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Business New Haven
2/3/2003
By: Anne-Marie Brungard
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Outsourcing is the tool of choice for many companies looking to implement strategic initiatives that will take them to the next level. Outsourcing can be a means of focusing heretofore unavailable resources to generate wealth and value for the business, a business tool that can address pressing problems of core competencies, supplier alliances, business process reengineering and restructuring.
Essentially, outsourcing allows "a company [to] focus on its core competencies," explains Christopher Malloy, managing partner of Express Professional Staffing in New Haven. "Another company with expertise in the area can manage certain key functions of the business."
Even a small business can use outsourcing as a lever for growth. As the available time of small business owners and key operators becomes a limiting factor, making a commitment to let go of certain projects or tasks while freeing up some time for crucial business matters is essential.
"Business owners and managers should stay aware of what their time is worth," says human-resources consultant and trainer Mary Jo Leahy, of Leahy Resources in Tolland. Outsourcing functions such as payroll, credit collection, printing or public relations to experts rather than trying to handle them in-house can free up a substantial portion of a business owner's time. Delegating internally works best for functions that call for flexibility and quick responses on a daily basis.
But while experts agree that the industry itself is growing, in today's business environment outsourcing is still an industry very much in transition.
IT Outsourcing: A Second Chance?
Peter Bendor-Samuel, chief executive officer of the Everest Group, says that 2002 was very bad news for IT service providers: IT outsourcing (ITO) hit a wall and stopped growing.
Several factors combined to administer ITO service-providers a body blow. With the economy still reeling from the aftershocks of the dot.com bubble, IT outsourcing today is primarily recession-driven. The fundamental reason companies outsource IT in this economic environment is to save money. Couple this focus on price with increased competition for the ITO dollar and you have a highly dynamic marketplace.
New market entrants and large firms with unquestioned credibility and expertise have entered the marketplace. These new entrants and potential buyers' increased focus on price have had only one result for ITO service-providers: increasing pressure on prices. IT service providers struggled because of this price squeeze.
September 11 and potential war with Iraq have created uncertainty and hesitation in the market. In 2002 companies were focused on continuity planning and worked to avert risk. The market psychology, worried about terrorism and war, was not ready to tackle the hard questions that surface in an outsourcing initiative.
In general, 2002 was a year of transition. Buyers shifted their mentality and changed the nature of their outsourcing endeavors. Many delayed outsourcing plans until they felt sure of the direction they want to take and the financial stability of their outsourcers. ITO moved from a growth sector into a mature business.
Bendor-Samuel predicts that the price competition will continue throughout 2003, "because the overcapacity hasn't worked itself through the system yet." One new trend appears to be that service-providers may now be willing to assume more risk for the end product. That's because savvy buyers are demanding their outsourcers assume more of the business risk of outsourcing. Service providers are agreeing because they will share in the increased equity, if it develops.
"I'm seeing deals where the service-provider structures and prices the transaction to 'own' the end result," Bendor-Samuel explains. "The integration of ITO and Business Process Outsourcing [BPO] is an emerging market segment. Combining IT in a BPO offering helps service providers create new value in the outsourcing transaction. And that's just what buyers need - and are looking for - in these challenging economic times."
Retailers Jump on Bandwagon
With the economy sputtering, consumers are watching their wallets, too. According to Beth Ellyn Rosenthal, editor of the Outsourcing Journal, this is forcing U.S. retailers to focus on their core competencies as the only way to compete for the shrinking discretionary spending of fickle consumers.
Outsourcing is one way for retailers to compete. "Retailers would rather refurbish an old store or open a new one than install a new IT system," says Matt Shocklee, vice president of outsourcing for the Americas at Cap Gemini Ernst & Young, an outsourcing service provider with North American headquarters in New York.
"Outsourcing takes the onerous business of technology - which is constantly changing and very expensive - out of [retailers'] hands," he adds. Interest levels are rising among retailers who are investigating IT that powers many of the BPO processes, Shocklee reports.
According to the Outsourcing Journal, six trends dominated retail outsourcing in 2002:
1. Buyers wanted service-providers to simplify their lives. Multiple vendors in a store are less attractive to customers who are looking for an integrated process for service delivery.
2. Buyers wanted service-providers to prolong the life of their infrastructure and integrate new technology where needed. Retailers have been farming out non-store systems components - customer call centers, e-commerce sites, network management - to outsourcers so retailers can focus their IT resources on improving store systems while enhancing customer service.
3. Buyers moved to packaged software and let the service provider run it. Shocklee says retailers wanted back-office software to run their finance and accounting and human resources processes. Increasingly, retailers are relying on packaged software to run their businesses. Historically, retailers preferred to develop their software internally.
4. Buyers wanted service-providers to deliver the same service level but lower the cost. Like most other outsourcing buyers in 2002, retailers wanted to secure more value at a reduced cost.
5. Delivery from shared service centers gained greater acceptance. There was greater market acceptance for service delivery from a multi-client shared service center. Past successes and the tough economy contributed to retailers' overall tolerance for and even acceptance of the shared service model.
6. Professional employee organizations (PEOs) helped retailers improve employee benefits and address workers compensation issues. Small to mid-sized retailers were able to offer Wal-Mart-style benefits to their employees through PEOs. Companies had to offer these benefits to stay competitive, but didn't have the funds to provide them. Outsourcing benefits to a PEO solved the problem for many. In addition, PEOs helped these smaller retailers achieve the scale they needed to bargain with workers' compensation insurers.
What can we expect for the balance of 2003? Retailing is one of the last industries to outsource help-desk operations. As retailers strive for simplicity the business environment can become even simpler when the primary infrastructure provider handles help-desk functions as well.
Shocklee predicts retailers will continue to rely on service-providers to implement and run new IT systems. In addition to human resources and finance and accounting, retailers will increase their collaboration through supply-chain outsourcing with manufacturers, their product partners.
Legal Outsourcing: Focus on the Future
"Recent and marked changes to the outsourcing landscape will have some profound effects in 2003," says Paul J.N. Roy of the Chicago law firm of Mayer, Brown, Rowe & Maw. While outsourcing continues to provide significant business opportunities for customers, it also now represents new risks. Meanwhile, the outsourcing market continues to evolve toward the newer terrain of business-process outsourcing.
Cost savings will continue to be a priority for most customers in outsourcing deals, as businesses continue to adapt to the challenging economic environment. In the past cost savings was a common outsourcing objective - but typically one of many, and often not even the most important.
However, customers are being careful. Lessons of past deals gone awry have left businesses wary of mortgaging near-term savings for long-term losses (i.e., Enron). Customers are demanding savings as well as protections to ensure that they maintain market-rate pricing for the life of their agreements.
In the legal outsourcing industry the trend toward more renegotiations will continue, as customers find the need to extract more savings from their existing arrangements. Customers are forced to re-open negotiations to take advantage of additional cost savings opportunities and adapt to new economic standards. The lure of new business or the threat of a declining scope may serve as the motivation for renegotiation.
In response to financial turmoil among outsourcing suppliers, customers will focus carefully on suppliers' financial strength. WorldCom's bankruptcy and the declining forecasts of other major outsourcing suppliers have led customers to carefully scrutinize the financial strength and stability of prospective suppliers.
According to Roy, customers have also started to demand and receive contractual protections designed to minimize their exposure to a supplier in financial distress or bankruptcy. Consequently, customers are exhibiting greater reluctance to work with start-up or thinly capitalized providers.
Malloy recognizes that where companies place management control of outside business units on their list of priorities plays a large part in the success or failure of the venture. Although the market has grown, he says his company has experienced a newer trend of companies attempting to pull back in-house functions that were previously outsourced, in response to the unstable economic and business environment.
Business owners and managers are recognizing that there are some downfalls, such as being at the mercy of the contractor or hoping that technology is up to date, but in general are still opting for outsourcing - where, as always, the key element is the strength of the partnership.
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