Outsourcing: introduction

Defining the term

In its simplest term, outsourcing is the contracting out of a business function to an external supplier, involving  the transfer of people, processes and assets. This  contracting out can be undertaken at either an on- shore or off-shore location, and to one (single-sourced) or more (multi-sourced) outsourcing partners.

Outsourcing is most mature in the Information Technology sector (Information Technology  Outsourcing – ITO) although it is increasingly  developing to include a wide range of business  processes (Business Process Outsourcing – BPO) such as  HR, Finance, Procurement, Customer Service, and the  wider back office function.

IT Outsourcing

From small beginnings in the 1980s, IT Outsourcing  has evolved into a sophisticated global market and  most companies, no matter how traditional their  business model, have outsourced one or more layers  of their IT function. Outsourcing IT has always been  a complex exercise, in part due to the requirement to bundle IT into ‘services’ combining hardware, software,  people and processes. These services (‘towers’) often  contain data centre, end-user computing, service desk,  application development and maintenance, and voice  and data network packages.

For traditional IT outsourcing there are intricacies in transferring staff, novating contracts and assessing the financial impact of selling physical assets. These complications have been recently compounded by on-demand IT offerings, the evolution of off-shore centres,  and the advent of cloud-based offerings.

Business process outsourcing

The outsourcing of business processes that were typically performed in-house began in the early 1990s,  and has since grown dramatically with the drive for  reducing costs and improving performance.

There are two broad sub categories of BPO:

  • Horizontal BPO: Which focuses on the delivery of classic, back office business support functions such as Finance and Accounting (F&A) and Human Resources;
  • Industry specific BPO: A rapidly emerging sector which includes services such as claims processing in the insurance industry, and mortgage processing for  banks.

Sometimes perceived as a simpler proposition given its focus on transactional processes when compared  to ITO, BPO faces its own unique challenges. These  are primarily driven by the relative immaturity of BPO,  particularly in the industry-specific arena, and the  consequential risks of the first generation outsourcing  for both the supplier and customer.

Whilst the offering mix is widening, deals are becoming  shorter with five years now the prevailing contract  term. This aligns to a more rapid technology refresh  cycle and provides a client with further control over the deal.

 

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Drivers and evolution

Traditionally, the key driver for outsourcing activity  has been cost reduction. Cost is still key factor, but we have yet to see anyone adopt outsourcing  when it is more expensive than in-house delivery.

Nevertheless, there are other drivers that are important:

  • Speed of development: Following a start up or carve out, a new business entity can use outsourcing to put in place key functions much more quickly and  cheaply than developing an in-house capability from  scratch;
  • Flexibility: Outsourcing can provide the flexible capacity that a rapidly growing – or declining – business may need to keep pace with changing  demand;
  • Specialist skills: In specialist areas such as IT, attracting, developing and retaining skilled staff can be a real challenge: outsourced providers can often  offer access to these scarce skills;
  • Political manoeuvring: Off-shoring can be a sensitive topic – outsourcing to a provider that can then draw on its own near-shore and off-shore  capability can be politically acceptable way of  achieving the same end.

Outsourcing: A dynamic market

Outsourcing has become a major market activity, with Gartner forecasting the IT Outsourcing market alone to reach $287 billion in 2013. With an annual growth  rate of 6.5% until 2017, average annual IT Outsourcing  investment has reached almost 25% of total IT spend.As this shows, the outsourcing market is growing in  complexity as well as size – IT’s impact on the business  is growing and with continuing economic uncertainty,  there is an ever stronger focus on innovation. In  recent years, offshore providers have entered the  global market, providing increasingly sophisticated  alternatives to the established US and European  providers. Outsourcing can also bring regulatory and  financial complexity, with legislation around services frequently changing and the tax implications of shifting  sourcing strategies providing considerable complexity.  Throw in issues such as risk, and rapid, game-changing  technological advances such as cloud computing, and  you have a market increasing in both sophistication  and significance.

A challenging relationship?

“Outsourcing Failure Stories” is its own Google  keyword. The potential to achieve significant savings  through outsourcing is well known. However, there are  a number of examples where companies hit obstacles,  get entangled in complexities and simply get it wrong.  Without adequate advice, planning and management,  outsourcing projects can and do fail. The consequences  of a messy public divorce can be disastrous.

In our experience, organisations will almost certainly  fail to realise the benefits of outsourcing unless they  stick rigorously to the following steps:

  • Adequately plan, manage and retain the right level of control/direction in the outsourcing relationship;
  • Establish and manage an effective governance process;
  • Effectively manage the commercial, legal and financial risks of outsourcing;
  • Effectively manage any transition and transformation phases (these being the highest risk, and most failed upon phases along the life-cycle).

With so many opportunities for failure, and to get the  very best from suppliers, a ‘tough love’ approach to  outsourcing is required.

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Section structure

Each section of the handbook begins with an overview of the key concepts, guiding principles and a summary of  the main activities being undertaken. The exact structure of each section varies according to the exact detail being  described, but a consistent format for these pages has been followed, as set out below.

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