Description
Outsourcing is the contracting out of an internal business process to a third-party organization. The term "outsourcing" became popular in the United States near the turn of the 21st century.
Business Process Outsourcing
Aligning Buyer Capabilities and Outsourcing Strategies
The recent economic downturn has forced companies to examine all aspects of their strategy in their struggle between addressing near-term requirements and establishing a longer-term competitive foundation. Getting the outsourcing strategy right can address near-term needs such as cost savings, improved cash flow, while positioning the company for accelerated growth rates, and is critical for an organization in establishing a robust competitive foundation. Choosing the correct outsourcing strategy is complex, however. It requires balancing near-term needs with a longer-term view, and a clear understanding of organizational strengths and capabilities. Research shows that outsourcing decisions driven primarily by near-term conditions and pressures such as cost reduction, capital avoidance, etc. almost always create problems in building a foundation for the longer term. To avoid the near-term trap, the starting point for any organization reviewing its outsourcing strategy is
benchmarking itself to identify its current outsourcing strategy and capabilities. While all organizations are different and make decisions differently depending on a range of factors – business strategy, industry dynamics, organizational culture, experience and maturity in outsourcing, provider capabilities, etc. – identifying the capabilities the business has and needs to build and then comparing that with other organizations’ approaches can assist a management team in choosing the best outsourcing option for them at that moment. Once these have been identified, the business can examine the different approaches available to determine the optimum outsourcing strategy for its specific needs. Accenture recently commissioned a research study by the Outsourcing Unit of the London School of Economics which examined over 1,850 outsourcing contracts and interviewed 69 leading clients and suppliers in ITO and BPO services. One of the most
Figure 1 shows different paths organizations take as they move towards more strategic outsourcing arrangements.
Strategic Explorer
Multi-Sourcer
Sourcing Management Capabilities Operational Exploiter
Service Extender
Experimenter
Strategic Sourcing Capabilities
useful outcomes from the research is a set of “profiles” that can help buyers understand where they currently are on the sourcing continuum, how other organizations approach their outsourcing decisions, and what paths to higher performance and greater value are available to them through outsourcing.
Emerging Outsourcing Buyer Profiles
The organizations which were studied as part of the research are at different points in their outsourcing development. Some are relatively new to outsourcing and are still experimenting with different models. Others are in their third or fourth generation of outsourcing contracts. They are all united by a desire to use outsourcing to help their businesses achieve cost and operational efficiencies. While these profiles were developed as part of a wider investigation of clients contemplating bundled outsourcing services, they describe organizations at all stages of outsourcing experience. The five different types are: 1. The Experimenter type 2. The Operational Exploiter type 3. The Multi-sourcer type 4. The Service Extender type 5. The Strategic Explorer type Clients will likely recognize their own organization in the description of one of the profiles which will suggest outsourcing strategies that are appropriate to the strengths of their business. The process will also highlight those areas where clients need to develop in-house 2
management and experience that will allow them to enter into more complex outsourcing deals. Moving into complex deals without the right experience or management capabilities can result in a strategy and service agreements which do not release the desired value and can retard rather than accelerate a company’s growth.
The Operational Exploiter type
Identifying characteristics If you are an Operational Exploiter, you have primarily outsourced administrative and transactional services, with perhaps a few more high-touch services. You utilize outsourcing as a means to improve both functional performance and costefficiency. You tend to focus on the daily management of service level agreements and delivery. When considering outsourcing new activities, you examine each service and outsource it when you can identify cost advantages to doing so. Challenge Your focus on operations means you may risk losing sight of long-term strategic opportunities. While extracting value and efficiencies is important, you could be missing the synergies between individual outsourced services and this is often where the greatest value is found. You will also find that as your business strategy evolves, you would like to have more flexibility built into the contract to reflect your changing needs, and be able to work more strategically with your outsourcing providers.
The Experimenter type
Identifying characteristics You are an Experimenter if you are new to outsourcing. Being new, you probably do not have the in-house outsourcing management capabilities that others, with more experience, have developed. You’ll have a few small outsourcing deals on the go but they are all in areas which are lowvalue to your organization. Your focus is more on risk mitigation than innovation or value creation. Challenge If you want to get more from your outsourcing contracts, your challenge is to develop internal outsourcing management capabilities. Without these capabilities you will be unable to manage large-scale contracts which are necessary to move up the value chain. Before you invest heavily in relational capabilities, vendor development, and strategic sourcing, you should first assess which approaches to outsourcing arrangements are the correct strategic direction for your organization.
The Multi-sourcer type
Identifying characteristics Outsourcing is a way of life for your organization. You have not only done outsourcing but you have done it many times and have a large portfolio of providers. As a Multi-sourcer, you believe in the “best-of-breed” for each outsourced function. Typically, your organization is large and complex and you are confident in your ability, based on extensive experience,
to manage multiple outsourcing providers and the interfaces among them effectively. Challenge Since you use multiple suppliers you have to be ready to incur the management and transaction costs required to maintain this approach. You will incur costs setting up each vendor and as the number of your outsourcing provider increases, so does your operational complexity. You need to juggle multiple moving pieces across multiple areas to ensure seamless integration. You are likely to experience significant “hidden” costs in managing multiple relationships, and project overruns stemming from the inter-linkages across suppliers.
Your approach to bundled services is ‘My vendor and I can improve my value proposition only when we innovate across my end-to-end services’.
Optimizing your position
Businesses can capture additional gains from outsourcing simply by identifying their primary type and then optimizing their strengths within that type. Movement between types only happens when a competency threshold is reached within a given type and the buyer is able to progress to the next level of competency. All types (with the exception of Experimenters) present viable outsourcing strategies, but not all businesses can or should aspire to become Strategic Explorers. Across all types there were two areas where organizations should focus their efforts to get more value from their outsourcing programs: strategic sourcing capabilities and sourcing management capabilities. Strategic Sourcing Capabilities Businesses should focus on developing inhouse capabilities which: • Align sourcing strategies with dynamic business strategies over a five year period; • Create the conditions for partnership with various vendors. Sourcing Management capabilities Organizations need to focus on the following: • Extracting efficiencies; • Building management capabilities; • Developing tools and methodologies to realize the potential in strategic partnership with vendors.
practice and become a committed Multisourcer, or else strengthen its strategic sourcing capabilities as well, and work with a limited number of providers to find synergies between outsourced functions and processes as a Strategic Explorer. Scenario Two: An organization engages a new CEO or there is a significant change within its industry. When a new CEO arrives, he/she is very often brought in with a mandate of change. In such situations, the CEO will typically have a limited timeframe to make significant change in the organization. This drive to change rapidly can move an organization from one type to another. If there is a significant change within an industry, moreover – a new technology, new player, etc. – a business may need to urgently change its shape and this too can result in a change in outsourcing approach.
The Service Extender type
Identifying characteristics Are you into your second or third generation of outsourcing arrangements? If you have renewed your outsourcing contracts with the same providers more than once, you are potentially a Service Extender. Typically you look for a provider that can deliver reliable services and understands your business. And if it’s working, why break it? Challenge You are likely to add scope to incumbent suppliers, and to move into bundled services through an incremental approach. You will outsource additional functions or services in order to realize additional cost savings and synergies. And you would be quite happy to do so with providers that you already have relationships with if they have a proven track record. You have a very clear agenda of what you want to achieve and you place a high value on building longterm partnerships. You need to be careful with whom you partner from the outset, however, to ensure your provider has the full range of capabilities that you will be looking for over the long run.
Conclusion
An organization searching for the best outsourcing strategy must balance near-term needs with a longer term view. All organizations are different and make decisions differently depending on a range of factors but the starting point for a business searching for the best outsourcing strategy is correctly identifying its current type and capabilities. After this has been done, the focus for the management team should be getting the most out of the current outsourcing type with building up internal management capabilities. For a business that has reached a performance threshold, changing its outsourcing strategy is a moment of opportunity and risk. Often it is very difficult to change entrenched attitudes within an organization and, as often, the skills needed for a new approach might not exist internally. But the opportunities that a new approach offers should not be ignored and persevering with a model that is inappropriate for the business and does not establish a foundation for future requirements can be more damaging than initiating change.
Moving between types
Once a business identifies its type, a management team should focus on optimizing the strategic sourcing and sourcing management capabilities. Once this has happened there are typically two scenarios which will cause a business to progress from one type to another. Scenario One: An organization reaches a threshold when the incremental benefit from the current approach no longer provides enough of a return to justify the investment. For example, an Operational Exploiter will often come to a point when outsourcing individual services will no longer provide the desired returns. To get better outcomes, the business will have to strengthen its outsourcing management
The Strategic Explorer type
Identifying characteristics Do you outsource both low-value and high-value activities in both single and multi-vendor settings? Do you have highly developed capabilities in vendor selection, relationship management, vendor management, domain expertise and learning capabilities? If so, you are ahead of the game! As a Strategic Explorer you expect innovation from the vendor and the ability to leverage synergies across the different services outsourced. You will be able to assess the degree to which synergies between the different services have been realized and will aspire to systematically measure these outcomes.
Related reading
Bundled Outsourcing: Myths and Realities, Tradeoffs and Benefits: www.accenture.com/ bundledoutsourcingbenefits To bundle or not to bundle? Effective decision-making for business and IT services: www.accenture.com/ effectivedecisionmaking
3
What’s next?
To learn how Accenture can help you achieve High Performance, reach us at www.accenture.com/bundledoutsourcing
Copyright © 2010 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 181,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.
ACC10-0433
doc_774621506.pdf
Outsourcing is the contracting out of an internal business process to a third-party organization. The term "outsourcing" became popular in the United States near the turn of the 21st century.
Business Process Outsourcing
Aligning Buyer Capabilities and Outsourcing Strategies
The recent economic downturn has forced companies to examine all aspects of their strategy in their struggle between addressing near-term requirements and establishing a longer-term competitive foundation. Getting the outsourcing strategy right can address near-term needs such as cost savings, improved cash flow, while positioning the company for accelerated growth rates, and is critical for an organization in establishing a robust competitive foundation. Choosing the correct outsourcing strategy is complex, however. It requires balancing near-term needs with a longer-term view, and a clear understanding of organizational strengths and capabilities. Research shows that outsourcing decisions driven primarily by near-term conditions and pressures such as cost reduction, capital avoidance, etc. almost always create problems in building a foundation for the longer term. To avoid the near-term trap, the starting point for any organization reviewing its outsourcing strategy is
benchmarking itself to identify its current outsourcing strategy and capabilities. While all organizations are different and make decisions differently depending on a range of factors – business strategy, industry dynamics, organizational culture, experience and maturity in outsourcing, provider capabilities, etc. – identifying the capabilities the business has and needs to build and then comparing that with other organizations’ approaches can assist a management team in choosing the best outsourcing option for them at that moment. Once these have been identified, the business can examine the different approaches available to determine the optimum outsourcing strategy for its specific needs. Accenture recently commissioned a research study by the Outsourcing Unit of the London School of Economics which examined over 1,850 outsourcing contracts and interviewed 69 leading clients and suppliers in ITO and BPO services. One of the most
Figure 1 shows different paths organizations take as they move towards more strategic outsourcing arrangements.
Strategic Explorer
Multi-Sourcer
Sourcing Management Capabilities Operational Exploiter
Service Extender
Experimenter
Strategic Sourcing Capabilities
useful outcomes from the research is a set of “profiles” that can help buyers understand where they currently are on the sourcing continuum, how other organizations approach their outsourcing decisions, and what paths to higher performance and greater value are available to them through outsourcing.
Emerging Outsourcing Buyer Profiles
The organizations which were studied as part of the research are at different points in their outsourcing development. Some are relatively new to outsourcing and are still experimenting with different models. Others are in their third or fourth generation of outsourcing contracts. They are all united by a desire to use outsourcing to help their businesses achieve cost and operational efficiencies. While these profiles were developed as part of a wider investigation of clients contemplating bundled outsourcing services, they describe organizations at all stages of outsourcing experience. The five different types are: 1. The Experimenter type 2. The Operational Exploiter type 3. The Multi-sourcer type 4. The Service Extender type 5. The Strategic Explorer type Clients will likely recognize their own organization in the description of one of the profiles which will suggest outsourcing strategies that are appropriate to the strengths of their business. The process will also highlight those areas where clients need to develop in-house 2
management and experience that will allow them to enter into more complex outsourcing deals. Moving into complex deals without the right experience or management capabilities can result in a strategy and service agreements which do not release the desired value and can retard rather than accelerate a company’s growth.
The Operational Exploiter type
Identifying characteristics If you are an Operational Exploiter, you have primarily outsourced administrative and transactional services, with perhaps a few more high-touch services. You utilize outsourcing as a means to improve both functional performance and costefficiency. You tend to focus on the daily management of service level agreements and delivery. When considering outsourcing new activities, you examine each service and outsource it when you can identify cost advantages to doing so. Challenge Your focus on operations means you may risk losing sight of long-term strategic opportunities. While extracting value and efficiencies is important, you could be missing the synergies between individual outsourced services and this is often where the greatest value is found. You will also find that as your business strategy evolves, you would like to have more flexibility built into the contract to reflect your changing needs, and be able to work more strategically with your outsourcing providers.
The Experimenter type
Identifying characteristics You are an Experimenter if you are new to outsourcing. Being new, you probably do not have the in-house outsourcing management capabilities that others, with more experience, have developed. You’ll have a few small outsourcing deals on the go but they are all in areas which are lowvalue to your organization. Your focus is more on risk mitigation than innovation or value creation. Challenge If you want to get more from your outsourcing contracts, your challenge is to develop internal outsourcing management capabilities. Without these capabilities you will be unable to manage large-scale contracts which are necessary to move up the value chain. Before you invest heavily in relational capabilities, vendor development, and strategic sourcing, you should first assess which approaches to outsourcing arrangements are the correct strategic direction for your organization.
The Multi-sourcer type
Identifying characteristics Outsourcing is a way of life for your organization. You have not only done outsourcing but you have done it many times and have a large portfolio of providers. As a Multi-sourcer, you believe in the “best-of-breed” for each outsourced function. Typically, your organization is large and complex and you are confident in your ability, based on extensive experience,
to manage multiple outsourcing providers and the interfaces among them effectively. Challenge Since you use multiple suppliers you have to be ready to incur the management and transaction costs required to maintain this approach. You will incur costs setting up each vendor and as the number of your outsourcing provider increases, so does your operational complexity. You need to juggle multiple moving pieces across multiple areas to ensure seamless integration. You are likely to experience significant “hidden” costs in managing multiple relationships, and project overruns stemming from the inter-linkages across suppliers.
Your approach to bundled services is ‘My vendor and I can improve my value proposition only when we innovate across my end-to-end services’.
Optimizing your position
Businesses can capture additional gains from outsourcing simply by identifying their primary type and then optimizing their strengths within that type. Movement between types only happens when a competency threshold is reached within a given type and the buyer is able to progress to the next level of competency. All types (with the exception of Experimenters) present viable outsourcing strategies, but not all businesses can or should aspire to become Strategic Explorers. Across all types there were two areas where organizations should focus their efforts to get more value from their outsourcing programs: strategic sourcing capabilities and sourcing management capabilities. Strategic Sourcing Capabilities Businesses should focus on developing inhouse capabilities which: • Align sourcing strategies with dynamic business strategies over a five year period; • Create the conditions for partnership with various vendors. Sourcing Management capabilities Organizations need to focus on the following: • Extracting efficiencies; • Building management capabilities; • Developing tools and methodologies to realize the potential in strategic partnership with vendors.
practice and become a committed Multisourcer, or else strengthen its strategic sourcing capabilities as well, and work with a limited number of providers to find synergies between outsourced functions and processes as a Strategic Explorer. Scenario Two: An organization engages a new CEO or there is a significant change within its industry. When a new CEO arrives, he/she is very often brought in with a mandate of change. In such situations, the CEO will typically have a limited timeframe to make significant change in the organization. This drive to change rapidly can move an organization from one type to another. If there is a significant change within an industry, moreover – a new technology, new player, etc. – a business may need to urgently change its shape and this too can result in a change in outsourcing approach.
The Service Extender type
Identifying characteristics Are you into your second or third generation of outsourcing arrangements? If you have renewed your outsourcing contracts with the same providers more than once, you are potentially a Service Extender. Typically you look for a provider that can deliver reliable services and understands your business. And if it’s working, why break it? Challenge You are likely to add scope to incumbent suppliers, and to move into bundled services through an incremental approach. You will outsource additional functions or services in order to realize additional cost savings and synergies. And you would be quite happy to do so with providers that you already have relationships with if they have a proven track record. You have a very clear agenda of what you want to achieve and you place a high value on building longterm partnerships. You need to be careful with whom you partner from the outset, however, to ensure your provider has the full range of capabilities that you will be looking for over the long run.
Conclusion
An organization searching for the best outsourcing strategy must balance near-term needs with a longer term view. All organizations are different and make decisions differently depending on a range of factors but the starting point for a business searching for the best outsourcing strategy is correctly identifying its current type and capabilities. After this has been done, the focus for the management team should be getting the most out of the current outsourcing type with building up internal management capabilities. For a business that has reached a performance threshold, changing its outsourcing strategy is a moment of opportunity and risk. Often it is very difficult to change entrenched attitudes within an organization and, as often, the skills needed for a new approach might not exist internally. But the opportunities that a new approach offers should not be ignored and persevering with a model that is inappropriate for the business and does not establish a foundation for future requirements can be more damaging than initiating change.
Moving between types
Once a business identifies its type, a management team should focus on optimizing the strategic sourcing and sourcing management capabilities. Once this has happened there are typically two scenarios which will cause a business to progress from one type to another. Scenario One: An organization reaches a threshold when the incremental benefit from the current approach no longer provides enough of a return to justify the investment. For example, an Operational Exploiter will often come to a point when outsourcing individual services will no longer provide the desired returns. To get better outcomes, the business will have to strengthen its outsourcing management
The Strategic Explorer type
Identifying characteristics Do you outsource both low-value and high-value activities in both single and multi-vendor settings? Do you have highly developed capabilities in vendor selection, relationship management, vendor management, domain expertise and learning capabilities? If so, you are ahead of the game! As a Strategic Explorer you expect innovation from the vendor and the ability to leverage synergies across the different services outsourced. You will be able to assess the degree to which synergies between the different services have been realized and will aspire to systematically measure these outcomes.
Related reading
Bundled Outsourcing: Myths and Realities, Tradeoffs and Benefits: www.accenture.com/ bundledoutsourcingbenefits To bundle or not to bundle? Effective decision-making for business and IT services: www.accenture.com/ effectivedecisionmaking
3
What’s next?
To learn how Accenture can help you achieve High Performance, reach us at www.accenture.com/bundledoutsourcing
Copyright © 2010 Accenture All rights reserved. Accenture, its logo, and High Performance Delivered are trademarks of Accenture.
About Accenture
Accenture is a global management consulting, technology services and outsourcing company, with more than 181,000 people serving clients in more than 120 countries. Combining unparalleled experience, comprehensive capabilities across all industries and business functions, and extensive research on the world’s most successful companies, Accenture collaborates with clients to help them become high-performance businesses and governments. The company generated net revenues of US$21.58 billion for the fiscal year ended Aug. 31, 2009. Its home page is www.accenture.com.
ACC10-0433
doc_774621506.pdf