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Outsourcing Matures, Slowly

To make outsourcing deals succeed, CFOs still need to ask plenty of questions – and demand more flexibility in contracts.

Fersht suggests that as the average deal for business-process-outsourcing arrangements declines in value, newer providers may be only too happy to take on smaller, less-profitable contracts, hoping they can expand them. And that could give companies more vendors from which to choose, and more opportunity to play one against another.

Making It Work

Companies would love to see more competition drive down prices, of course, but that alone won’t make outsourcing decisions all that much simpler. Often the more important starting point is to think carefully about what is being outsourced, and how. “We have seen cases with F&A outsourcing of companies that moved too many processes at once over to a third party, and those processes had to be pulled back because they just went out too soon,” says David Upton, professor of operations management at Oxford University’s Saïd Business School. Two common errors: failing to take the time up front to do a detailed analysis of a process being outsourced, and not preparing staff for what needs to change internally to help the outsourcing agreement run smoothly.

Even before addressing those kinds of execution challenges, companies need to think about whether a given process should be outsourced at all. Often that hinges on determining whether or not it is “core,” an issue far more difficult than it may appear.

As Upton notes, particular processes are often outsourced as a way to achieve quick cost-saving goals, without the company understanding that those processes either are or might become a core competency that differentiates a company from its rivals. “People say, ‘It’s not really our core competence, so someone else should do it.’ But by saying that, they’ve made sure that it never will be,” says Upton. “What may appear to be a short-term financial decision often ends up being a longer-term strategic one.” He advises companies to focus on what they will become, versus what they are today, and to remember that current noncore competencies may become a source of innovation.

Understanding what a company’s core competencies may or may not be stymies many executives, agrees Stuart Drew, senior vice president of financial services in Europe at HCL Technologies. “Companies do need to ask, ‘What is our core business?’ And that’s what should be kept in-house,” he says. “But it is a huge challenge. One board will say 85% of what we do is core, another will say 15% is, and both will be right.”

Assuming a company has worked out those issues, and has crafted an agreement that builds in plenty of flexibility, another key will be to avoid the temptation to then forget about the process altogether. Tony Chambliss, managing director of business-process-outsourcing services at Accenture, says that continually modifying an outsourcing engagement is now standard operating procedure as outsourcing agreements evolve into true partnerships.

Outsourcing engagements can’t stand still. As CFOs gain a better understanding of what their companies can and can’t outsource, “there is a big debate about what the role of outsourcers should be — are they being hired to help run the business, or change the business?” says Drew. The answer could be both.

Janet Kersnar is a London-based journalist.

 

 

What’s Ahead?

As the economy recovers, HfS Research predicts that two segments of the business-process-outsourcing (BPO) market will see a marked increase in deals in 2011: finance and accounting (F&A) and procurement. Nearly a quarter of midmarket companies (defined as those with annual revenue of $1 billion to $3 billion) will take their first steps toward F&A outsourcing this year, according to HfS. And they may find some good deals. Many service providers in this space, HfS says, will adopt a “penetrate and radiate” strategy, luring companies with small contracts that include scant profit margin, in the hopes that happy customers will sign on for additional, higher-margin deals over time. The research firm also predicts that service providers will expand beyond their current siloed structure, offering more forms of outsourcing across a broader swath of industries. There will also be a blurring of IT and BPO services as vendors in each space try to become more cost-effective by appealing to potential clients outside their current bases. — J.K.

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