Outsourcing And The Changing Models For Shared Services

Last week I listened to the Horses for Sources (HfS) webinar, Outsourcing is Dead, Long Live Outsourcing. With a dramatic title like that – I was expecting some interesting content, and I was not disappointed. The webinar discussed the results of a recent survey of 1,355 industry stakeholders which was conducted with the support of KMPG’s Shared Services and Outsourcing Advisory group. You can see the full webinar replay on their website, but here are some of my key takeaways from the webinar.

1.    Cost reduction no longer biggest motivation for outsourcing.

We have been hearing this for a while, but it was helpful to see some numbers to support this, particularly in American firms. In the survey, 41% of North American firms said reducing operating costs was a ‘mission critical’ driver behind IT Outsourcing and BPO decision making. However even more people (54%) said standardizing processes was a ‘mission critical’ driver. Analytics and better offerings from more mature service providers in market were ‘mission critical’ drivers in almost a quarter of American firms.

Phil Fersht from HfS explained that this is likely because many organizations that have been using outsourcing are “running out of wiggle rooms in terms of finding cost saving simply from labor arbitrage.” They are instead having finding new savings from productivity and smarter process redesign and standardization. He said, “a more analytical workforce can also help the firms make smarter and faster decisions.”

2.    Yet enterprises are still very focused on achieving operational results when they are outsourcing.

One of the trends the webinar pointed out is that it is still generally the low end work that is outsourced, and the high end work is retained in-house. Respondents said outsourcing initiatives were most effective for more tactical measures such as reducing operating costs, standardizing processes, and making operations more efficient.

However the survey also showed that once firms start outsourcing, they increasingly focus on improving analytics, defining business outcomes beyond cost reduction and driving innovation.

3.   Good relationships lead to good outsourcing partnerships

Both BPOs and companies that use outsourcers are increasingly focused on getting more value from the outsourcing partnership. However when ‘moving up the value chain’ and adding activities such as analytics and business intelligence, the panelists pointed out that the best results they see come from companies that have an existing relationship with a BPO and then add analytics into their service.

David Brown, Global Lead of Shared Services and Outsourcing Advisory at KPMG said, “In terms of analytics because of its infancy what we have seen successful are those that have existing service provider relationships or outsourcing deals where they have extended those agreements, added a piece on here, a piece on there, almost like a trial, versus those that have actually gone in and brought in a third party that they haven’t had strong relationships with.” Having a healthy and trusting relationship with the BPO is important as they will understand your business and requirements.

4.    Hybrid models are on the rise

The webinar explained that the use of in-house delivery and outsourcing as primary operating models is decreasing. When asking sourcing providers how their clients were looking to change their operating models, 80% said their clients were looking to increase their use of the hybrid outsourcing and shared services model. 46% were looking to reduce the amount of administrative services done in-house with no shared services.

5.    Global Business Services is a model for innovation

According to their survey, 29% of companies with over $5b revenue said creating a Global Business Services framework was 'mission critical'.

Fersht defined Global Business Services as an “operating model and a strategic governance framework that helps companies transform end-to-end business support services that can deliver more effective solutions for both internal and external customers of the organization. The beauty of GBS it focuses on optimizing the mix of human capital, service delivery models, process innovation and technology to deliver services on an enterprise wide, cross functional platform that can really support the business strategy. So it’s about aligning the back and the front office much more effectively”

The panelists explained that whereas outsourcing has been cost savings driven, shared services has been about improved efficiency, the GBS model has really been about cost savings, efficiency, client service focus, agility, scalability and innovation and really pulling everything together into one broad strategy.

In sum

It was interesting to see an evidence base behind many of the trends we are seeing in the market. Outsourcers are certainly sharpening their spike and are much focused on value, and shared services and global business services are trying to get more and more out of their providers. Hopefully this will continue to fuel the innovation and create better service delivery models for shared services.