By: Michael Santamaria

There’s little doubt that Business Process Outsourcing is here to stay; the lure of “easy” cost savings is just too powerful for companies to resist. But the truth of the matter is that implementing a successful outsourcing project is hard work and realizing those “easy” savings is by no means a foregone conclusion. While data on outsourcing failure is hard to come by, the Aberdeen Group has reported that 21% of outsourcing projects fail to meet stakeholder expectations, and Gartner puts the outsourcing failure rate as high as 30%. Although neither study defines what constitutes a “failure,” the bottom line is a large percent of projects end with unhappy clients.

When an outsourcing project fails, it’s easy to blame the vendor. But having experienced the situation from both sides of the table, I would suggest that more often than not, the purchasing company lays the groundwork for the poor performance. The onus is on the purchasing company to do an adequate due diligence and to manage the project. Can you really blame the vendor when they were put in the position to fail from the beginning? Ultimately, no one wins the “blame game,” you are better off doing the project right the first time around.

To avoid being one of the Gartner statistics, there are four considerations that need to be part of your outsourcing initiative, 1) set an outsourcing strategy, 2) choose the vendor that best fits that strategy, 3) own the transition, and 4) create the structure to manage the relationship.

Strategize Wisely

Setting your outsourcing strategy is the all-important first step. To a certain degree, outsourcing strategies can be classified as either tactical or transformational. The tactical model is designed to take advantage of labor arbitrage and often employs what is referred to as a “lift and shift” approach. Work is lifted from your company and shifted to one in a lower cost area. Vendors of lift and shift models typically use existing processes and work in your existing systems, requiring little change on the part of your company. Essentially, the location of the worker changes, but the work itself does not.

On the other hand, a transformational model almost always involves a software implementation, which leverages optimized workflows. Under a transformational model, your company replaces existing processes and technology with the vendor’s processes and technology. As such, an IT project is embedded within the implementation. Clearly, implementing a transformational model is more involved than lift and shift, but it yields some notable advantages.

So, how do you decide which approach is best for your company? While there are no pat answers, I have found that companies often shy away from “yet another IT project” and end up following the tactical path, which is a mistake. My advice is to start assuming the transformation/software dependent solutions. Many of these solutions are very sophisticated, their processes and technologies successfully encapsulating industry best practices, and they have a large installed base so you can take comfort knowing that most of the bugs have been worked out. In addition, most solutions have a relatively streamlined and formalized client onboarding process, mitigating many concerns about implementing the solutions. In some cases, of course, there are no transformational options that fit your needs, forcing you to go the tactical route. This approach is workable, as each model has its benefits.

Figure 1 below breaks down the strengths and weaknesses of each.

Choosing the Right Vendor

The next step in implementing a successful outsourcing project is choosing the right vendor. If your company’s strategy employs the transformational approach, the process of choosing a vendor will be driven by the software solution, actually making selection easier. Comparison of tactical vendors is more difficult, because, for the most part, you will be comparing intangibles.

Regardless as to the approach, it is necessary to spend adequate time on due diligence checking all references, asking the hard questions, and arranging to visit reference sites in order to observe the process in action. Observing the process in person provides a better understanding of the processes, handoffs, potential issues related to team integration, and challenges communicating across distance. A vendor demonstration cannot compare to an onsite visit. A trip to one or two reference sites will prove to be money well spent.

Once vendor selection is complete, the planning stage begins in earnest. Generally, vendors will provide the overall implementation work plan. That said, since this is ultimately your project, you have the responsibility of owning it! Your company should remain integrally involved in the transition, which means dedicating the appropriate staff, assigning a sponsor, and holding senior leadership governance and gate reviews. It is also necessary to spend time developing a comprehensive risk mitigation plan. Your company needs contingency plans to address potential obstacles, including negative employee-client reaction to temporary performance dips, the PR response if contacted by the local press, transition plans for the local staff, and most importantly, plans to deal with unforeseen departures.

Regardless of severance packages or retention bonuses, once job eliminations are made public, employees begin searching for new opportunities. Needless to say, their departures don’t always align with your company’s staffing needs. Recently, I had the opportunity to experience this issue first hand, when my client on a six-month outsourcing project announced to me that we needed to go live in one week, three months early, because they no longer had the staff in the department to process the work. It goes without saying that the next few weeks were not exactly smooth.

Manage the Vendor

The last factor to consider for your outsourcing project is post-implementation vendor management. Unfortunately, this step tends to go overlooked until problems arise. Communication is one of the most vital elements in making an outsourcing relationship work. I recommend you plan to over communicate at the beginning of the project. The communication plan should include daily supervisor calls, monthly management reviews, and a quarterly sponsor meeting. Over time, if this proves cumbersome, you can dial it back. At the beginning, though, plan to over-communicate.

The daily calls should occur at the supervisor level, last no more than 10 minutes, and address yesterday’s challenges and today’s expected volume. I try to keep the daily calls informal to help forge a relationship between the team’s supervisor groups. Monthly management meetings should focus on the service level agreement (SLA) and performance metrics. It is critical to agree on what will be measured, how it will be measured, and what performance levels are acceptable before going live. In my experience, failure to exercise rigor in this step is where many outsourcing initiatives go wrong. Finally, the sponsor meeting should be a review of monthly trends and discussion of performance issues.

For these meetings, it is important that sponsors treat the two teams as unified and hold them jointly accountable. When issues inevitably arise and a “blame game” begins, sponsors need to be able to cut through the noise and force the teams to work together towards a solution. After all, one team cannot be successful if the other fails.

Outsourcing is not easy. But if you start with a sound strategy, leverage the right vendor, and are prepared to manage the project and relationship you can achieve significant savings. Let’s face it, those savings are hard to ignore.

Michael Santamaria is a director at ScottMadden. His consulting experience spans a number of areas including business process outsourcing, process redesign, organization design, operations improvement, and project management. Prior to joining ScottMadden, Michael ran operations for a business process outsourcer, consulted for Clarkston Potomac Group and Emerson Consulting, and held several positions with General Electric. Michael received an M.B.A. from Case Western Reserve University, Weatherhead School of Management and his undergraduate degree from Washington and Jefferson College. He is a certified GE Six Sigma Master Black Belt.

By Dan Berthiaume

When selecting a location for BPO service delivery, there are some standard metrics most BPO buyers use to determine the best location. However, “standard” does not always mean “right.” Just as in so many other areas of business, sometimes the common wisdom in the BPO realm is outdated, distorted or just plain wrong. Following is a brief review – compiled from several different expert sources- of some popular myths:

1. Rankings are helpful to understand relative attractiveness of locations. 
Despite heavy reliance on various “official” rankings of BPO locations, it is prudent to digest these reports with a heavy grain of salt.  Factors such as an incrasingly large number of competing rankings, a lack of correlation between rankings and actual end outcomes, score differences that are not meaningful enough to denote relative attractiveness, and the inability of generic rankings to take company-specific considerations into account limit the usefulness of rankings.

Furthermore – as long-time followers of Nearshore Americas can recall – there are firms pretending to do analysis of markets, but when confronted to produce evidence of their findings, they are nowhere to be found. The classic example of this is the 2009 “Black Book” of Outsourcing’s unfair attack on Bogota, performed by the owners of “Black Book” which was later acquired by DataMonitor/ Ovum. The ‘authors’ never engaged with us when we requested they provide evidence of Bogota being the ‘riskiest place on earth’ to do outsourcing. (Ovum CEO’s actually wrote a letter to us about this topic – published here.)

2. Size = scalability.
While the “size of an overall talent pool is often assumed to indicate scalability,  in reality, scalability is driven by multiple factors including quality of talent, competition, and companies’ unique requirements. The size of what appears to be an available talent pool  can be significantly reduced by issues such as lack of quality of quality and propensity and competition, resulting in a much smaller net talent pool. In addition, Everest Group – among others – cautions that statistics on available talent pools of qualified college graduates can often be misleading, and that local college graduates are not always part of the available talent pool.

3. Wage increase directly leads to an increase in overall people costs.
Using the typical wages paid to ITO workers in India during the past few years as an example, Everest Group demonstrates that although wage inflation of 10-12% for senior programmers and 12-15% for junior programmers has often been reported, in actuality wages for these employees have actually risen 3-8%, with a net 4-6% impact on overall people costs. Everest Group attributes the disparity to lower levels of total inflation in salary bands than individual changes due to promotions and growth, as well as cost controls allowed by high rates of attrition among junior programmers.

Everest Group says high-cost locations can supplement a BPO portfolio by fulfilling unique needs, such as niche skills, customer proximity, and time zone overlap

4. Locations experiencing tight labor conditions are always unattractive.
Large cities in popular BPO locations often experience labor pool tightness due to competition for workers. However, Everest Group advises that BPO buyers can often supplement a “tight” labor pool in an urban BPO location with workers from adjoining areas, as well as the possible “additional” talent pool represented by employable high school graduates, part-time workers, and experienced professionals with similar skills from other industries. BPO buyers will need to implement the proper hiring and training models to implement and scale hiring of workers from the additional talent pool.

5. High-cost and low-cost locations are in competition with each other.
BPO buyers often assume they must select either a low-cost or a high-cost location, with an obvious bias toward the cheaper destination. In actuality, Everest Group says high-cost locations can supplement a BPO portfolio by fulfilling unique needs, such as niche skills, customer proximity, and time zone overlap. BPO buyers should also assess delivery risks, including stability and predictability and business continuity, as well as consider direct financial metrics such as labor arbitrage, operational costs and taxes and incentives.

(Editorial note: Much of our research for this report resulted from a webinar, the “5 Common Myths of Location Selection,” produced by Everest Group).

Nearshore Nexus – the ‘home conference’ for the thriving Latin America BPO and IT industry – created a huge splash last week in New York City. Capturing the passion and energy of over 200 executive attendees, twenty sponsors and attendees from 15 countries in the region is a tall order – but our photographer managed to distill the full-day program into  this colorful pictorial.. 

What are the winning locations for captives in LatAm and which operators are ready to sell? Rodrigo Slelatt of AT Kearney gives comprehensive update on current market drivers.

By Heather Littlejohns

Companies seeking to locate new outsourced or shared services centers to offshore or near shore locations typically focus their exploration on factors such as price, local government support and incentives, cultural affinity with the target market, unemployment rates, labor pool, language skills, etc. But are companies really taking the necessary time to explore, assess and discuss their own points of differentiation as they are perceived by the local population?

Beyond providing a basic salary, what contribution can the business make to the lives of the people who will be employed? These cultural considerations should be an important component of the due diligence process as they are crucial to the long-term sustainability of the business. Unfortunately, they are too often overlooked.

Act “Corporate,” Think “Local”

The most effective way to select a successful and sustainable market, community and location to facilitate an operation is to spend time on the ground with local community leaders and prospective employees, using the language skill with which you expect services to be delivered. In a sense, this is a grassroots and tourist approach to the region, building on a foundation of previously completed market analysis, research and the corporation’s strategic vision.

Before investing in a destination, many basic requirements “on the ground” should be fully identified. These are easily gained through market analysis and research and by speaking directly with economic and government groups within the country/region of choice. The following check list can serve as a starting point:

• Local government investment and support

• Technology and infrastructure

• Education

• Safety and security

• Tourism

• Like industry success

• Transportation

• Labor pool

• Education level and graduation rates

• Language skill–English bilingualism

• Skills learned (preferred)

• Customer service orientation

• Affinity to Western culture

• Employable population–demographics

To truly test the likelihood of success, spend time on the ground in the community. Ask questions, document observations and understand the community from which you will hire and where you will be a corporate citizen:

• Understand how education works in the destination. Is it public or private? Is it mandatory? What is the local government’s degree of engagement in the education system? How do people get to school? Is there an emphasis on learning English/other language?

• Assess the rates of school attendance.

• Visit a school, university or community college. Build relationships.

• Determine who are the economic and community development supporters and funders in the community. When do they meet? Who are the members? Do they live in the community in which they serve?

• Attend a meeting of these community development supporters. Take notes and make observations about interactions and behaviors such as tone and pitch in conversation; gender based interactions; non-verbal communication such as eye contact and handshaking. These observations will help you adapt your body language and mannerisms to put people at ease when interacting with the local population.

• Discover the cultural customs of the local community including holidays, events and religious ceremonies. This knowledge will help when managing your new workforce.

• Understand the demographics of the region. What is the average employable age and are they male or female? What is the current make-up of the population interested in the BPO industry? Are they well-educated males or single mothers? Are they second income earners or primary breadwinners?

• Investigate local restaurants, shopping facilities and tourist hot spots. Eat at local favorite restaurants. Attend a local customary event, read the tourist brochures and spend time in the recommended areas. This will tell you what the local people are proud of within their country. Knowing exactly what gives a person pride can also act as a motivational tool. This can allow you to better identify with the needs of the people that the corporation will employ. It will allow the opportunity to learn, understand and place value on what is important to the team.

• Learn how local services are facilitated and distributed. Are these services valued and utilized? How does the role of the family contribute?

• Research health care, child care, transportation, etc. This will help provide a more comprehensive view of total costs. It will also help you “design the differentiators” that I referred to earlier to strengthen your value proposition as a “glocal” employer, and can help you in “positioning” your corporate philosophy to your future employees.

Integrate Cultural Components with Business Goals

By integrating the “softer”, cultural components of the destination you are reviewing with that of your strategic business objectives and long term priorities, your answers to questions like those below will become far more informed and accurate.

• Is a local staffing agency required to help launch the business?

• Does it make sense to place the business in the duty free zone or is an urban, centralized location more feasible?

• What type of community participation and recruiting event will need to be held?

• What aspects of the corporation should be advertised? What are the value added benefits for employees that will matter most? What are your differentiators as they relate to the community?

On the surface these concepts are relatively simple, logical and one would assume being facilitated, however, this is not the case in many situations. Cross-cultural communication and a grassroots approach is not often practiced for a wide variety of reasons. These include the assumption that knowing the statistical facts about unemployment rates and government incentives is enough to be successful, aggressive timelines, low price points driving a quick transition, lack of regional expertise within the organization or simply an attitude that cultural considerations are an “after thought.”

To truly minimize new geo risk, not only should the selection team conduct the formal process, but drive the due diligence from a grassroots perspective and through a cultural prism. Once this knowledge and, more importantly, experiences are gained, the transition or execution team should act as the “cultural interpreter” for the enterprise. This is crucial to see a new operation through to success.

Heather Littlejohns, Director-Operations at Aditya Birla Minacs and also an independent consultant, is responsible for strategic Country and Site Leadership and Client Relationship Management. She also serves as Partner & Contract Liaison, Implementation & Launch Project Sponsor and Government Point of Contact. Heather brings 16 years of rich and varied experience in directing, developing and implementing effective near shore and offshore BPO global service delivery solutions. Heather.Littlejohns-Brown@minacs.adityabirla.com

By Jon Tonti

Of the 8.2 million business services jobs held domestically at the beginning of 2002 in some 4,700 companies based in North America and Europe only 4.5 million will remain in their domestic markets by 2016 according to a study by The Hackett Group, a management consulting firm. The same study finds that the amount of business services work moving offshore will “level off significantly” during the next few years due to changes in the conditions of offshore drivers.

The Hackett study concentrates on the business services jobs related to finance, procurement, human resources, and IT that have been moving out of developed economies for well over a decade. Historical and predictive data shows that the number of jobs created in those four categories between 2002 and 2016 is offset by productivity improvements resulting in no net gain; the net loss of business services jobs appears to be the amount of work moved offshore.

Loss of IT Jobs to Increase 

Of business services jobs IT will see the highest job loss rate of 54% between 2002 and 2016 compared to that of 42%, 36%, and 33% for Finance, Procurement, and HR respectively. Despite what may seem to be a tough hit to domestic IT business services jobs provided by companies with over US$ 1 billion in revenue in North America and Europe, the IT sector continues to grow and small and medium sized technology companies often do not offshore with similar intensity.

The creative destruction of productivity improvements and movement of commodity processes from domestic business units to Global Business Services centers (Captive or Outsourced) reduce the costs of business processing services that are not only transactional in nature but also knowledge-centric. This trend permits Hackett Advisors to state that “the likelihood that the HR, IT, finance and procurement organizations of corporate America and Europe will become contributors to job creation is extremely low.”

Economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally

Service Centers Diversify

Driving this continued migration of business services jobs is the transformation of one dimensional service centers for routine business services into multifunction Global Business Services centers capable of delivering knowledge-centric services. The FTE (full-time equivalent) job base that is now based out of Global Business Services centers, instead of domestically in North America or Europe, is staggering in both transactional and knowledge-centric realms. Captive GBS far outstrips Outsourced GBS with an average 42% of the knowledge-centric FTE job base residing in Captive GBS organizations while only 10% of knowledge-centric FTE is concentrated in Outsourced GBS. Captive GBS again trumps Outsourced GBS with regard to transactional FTE job base; an average of 50% of transactional FTE job base for business services resides in Captive GBS while a mere 15% on average for Outsourced GBS.

Another reason companies are continuing to displace business services jobs from traditional domestic markets is that the increased use of the GBS model complements the predictable globalization of any large company’s operations. As supply chains, target consumer markets, strategy, etc. have to be reoriented in a global context that redefines the value chain, business services to serve that value chain must also adapt. Business services are adapting and transforming what were once shared services operations only taking advantage of economies of scale into GBS organizations enabling economies of scope and economies of skill as well.

Business Services to Level Off 

Expanding the scope of a GBS’s portfolio of services to include other commodity like services is a natural progression of the GBS model. Likewise, economies of scale allowing companies based in North America and Europe to take advantage of high skilled offshore resources are evolving naturally. Service offerings of offshore BPO/IT providers and Captive GBS organizations are more mature than ever. This truth presents itself in the context of the standardization and digitization of work and workflow making work less origin dependent. Now that intellectual talent is not constrained by its geography, why is it that the Hackett Group posits business services offshoring will “level off significantly during the next few years?”

First Hackett asserts that the number of business services jobs going offshore is rapidly declining because the majority of tradable jobs that can be offshored already have been moved offshore. Also mentioned is that economic growth in North America and Europe is creating less suitable jobs for offshoring while productivity improvements continue to eliminate jobs of the offshorable variety. Not mentioned were the obvious rising wages in traditionally low cost countries which is diminishing opportunities for labor-arbitrage and making the close-shore model in second-tier US and European cities more viable. Hackett goes on to comment that in ten years’ time “demand by Western companies for traditional offshore capacity will have largely dried up.”

If the Hackett Group is talking about the most basic business services jobs which have already been outsourced or are set to be eliminated by productivity improvements, then the assessment that business services offshoring will continue to slow and indeed level off is correct. However, traditional offshore capacity has already matured to the point where basic knowledge-centric services are commonplace and foreign R&D operations have become necessary to support any large company’s global operations. What were once simple shared services centers are now GBS organizations poised to evolve into headquarters for important knowledge-centric activities.

The mass offshoring of low level business services jobs is reaching a saturation point, but the steady trickle of knowledge-centric jobs moving offshore continues. Despite that, it is not a zero sum game in which developed economies lose jobs to lower cost countries never to be seen again. Global companies born in what are considered low cost countries are increasing their presence in developed countries and may be the new forces generating the offshore jobs of the future. This trend will be accompanied by a shift in BPO says Mark Hillary author of “Who Moved My Job?” and CEO of IT Decisions, a Brazilian tech research firm based in São Paulo. “Large companies not of Western origin doing business in the US and Europe will need local staff in those markets for their customer sensitive BPO operations.”

By Robert L. Scheier

As the global economy improves, customers are looking to outsourcers to not only save money, but to drive growth, improve quality and drive innovation.

Those were among the key themes from two days prowling the corridors and break-outs at the Sourcing Interest Group (SIG) spring summit. Speaker after speaker, whether the topic was procurement, category management or macroeconomic trends, described how their employers are trying to use outsourcers not “just” to save money but to make a more strategic contribution.

Beyond Short-Term Savings

The need to drive strategic, ongoing business benefits runs throughout the top concerns presented during a summary of the executive roundtable. They include:

Revenue enhancement: The need to drive more sales, and higher profit sales. Outsourcers and other service providers can help by suggesting new products, services or delivery channels and then helping to create them.

Cloud and what comes after: Understanding the various flavors of the cloud, the true nature of the risks and benefits, and how to use it effectively is confusing for most organizations. It can also be a great opportunity for outsourcing providers, especially those who can tailor their regional advantages (such as in Latin America) to the requirements of the cloud. Execs at SIG also want partners who can help them understand the Next Big Thing after the cloud.

More automation: Also known as the “relentless elimination of non-value added activities.” Automating ongoing processes is a great way to deliver “sustainable” savings over time, versus one-time cost savings that can fade as business requirements and outsourcing requirements change.

Managing complexity: As customers use more different outsourcers for more different functions, the environment gets more complex and harder to manage. This is an area where an outsourcer with the best practices for managing “portfolios” of applications, services and relationships can deliver the most value to customers.

Close interaction with the business: This also comes under the heading of “alignment.” It means really understanding the most strategic, long-term needs of the entire business, rather than the short-term, tactical needs of individual departments. Achieving this alignment requires both the outside partner and the internal purchaser to have the attention and respect of senior management.

Outcome-based contract: Rather than pay outsourcers per full-time equivalent (FTE) or per transaction (both of which incent the provider to do more work, even if it’s not useful) many customers hope to pay vendors based on their ability to deliver business results. This is still a hoped for, rather than a usual, state of affairs. It requires changes in both thinking and processes, which speaks to the next area of concern:

Organizational readiness: There was a lot of talk at SIG about the need for customers to change their own behavior to accept new and better practices from their outsourcers. This means not only developing ways to measure the benefits of innovation, but changing incentives so internal departments don’t act like “junkyard dogs” protecting their own turf and keeping out new, better processes from a partner.

What all these concerns have in common is they reflect the need to move beyond short-term cost savings (especially those where the savings fade over time or drives up costs elsewhere in the organization) to newer, fundamentally better processes that drive value over time. That’s what some leading customers say they want – now comes the hard work of implementation.

This article originally appeared on our sister publication Global Delivery Report 

Garratt: KPO and LPO are bright spots

By Clayton Browne

Some historians argue that Kodak’s 1989 decision to outsource most of their IT operations was the watershed moment for the outsourcing industry, and certainly many other large companies jumped on the outsourcing bandwagon shortly after that. And for the next decade or so the question was not whether to outsource, but what and how much to outsource. But can offshore outsourcing continue to grow year after year at such a sizzling pace?

However, in the 21st century the conversation between business executives and outsourcers has begun to change from “tell me how much I can save” to “tell me how much you can help me grow” and “tell me how you are going to help me improve my products/services.” Accompanying this trend has been a rapid growth in specialty outsourcing that offers companies services in areas such as sales or product development or clinical trials, areas that used to be considered core processes that companies did not outsource.

Double Digits

While the Financial Crisis of 2008 and the resulting recession that many international economies are just now starting to emerge from has dampened growth in some sectors of the outsourcing industry, the reality is that the number of businesses undertaking outsourcing has continued to grow, albeit more slowly, and is almost certain to continue to grow over the next couple of decades.

According to a recent report from the Everest Group, the global outsourcing industry will grow at around a 15% pace in 2012. And although not quite the double-digit growth seen in the late 1990s and early 2000s, the market research firm Gartner projects that global IT spending will increase by around 4% in 2012 despite the ongoing European recession slowing growth. Furthermore, IT spending is likely to increase at a greater rate in 2013 and 2014 as the international economy emerges from the current recessionary environment.

The development of functional partnerships between large businesses and their specialty outsourcing partners is almost inevitable

Nearshore’s Benefactor

The term nearshoring has come into vogue in the 21st century to describe the practice of offshore outsourcing in a nearby location (whereas offshoring typically means outsourcing in a relatively far away location). There are a number of advantages to nearshoring, principally revolving around ease of management and collaboration and creating efficiency and flexibility in project management. Latin America has developed into a nearshore hub for US businesses, much as Eastern Europe has for Western Europe and East Asia has for Japan and Korea.

Nearshoring has received even more attention since the economic downturn of 2008 as companies have looked for ways to boost the bottom line with minimal risk. By the same token, continued growth in nearshoring is highly likely as businesses simply can’t ignore the relative benefits versus long-distance offshoring. This is especially true in nearshore outsourcing hotspots like Eastern Europe and East Asia where there is a great deal of high-quality human capital available.

From Non-Core Processes to Core Processes and Functional Partnerships

The original idea behind outsourcing was to have the relatively expensive employees of US and European businesses focusing on work that was important to the company, and to outsource the non-core businesses processes like HR and accounting to others who specialized in those processes. That model of outsourcing has proven to be win-win situation, at least in terms of economics, for both the companies doing the outsourcing and for the outsourcing firms.

By the same token, it is only natural that even further efficiencies emerge over time as the parties involved develop trust and a greater understanding of each others’ needs. In the ideal case a truly synergistic relationshipis created, as highly efficient companies can ultimately produce more products and services at a lower cost.

Brenna Garratt, CEO of The Delve Group who has been involved in the outsourcing industry since the late 1990s, projects that the next decade will see significant growth in the specialty outsourcing industry as companies seek greater efficiencies. She argues that fields such as knowledge process outsourcing (KPO) and legal process outsourcing (LPO) are likely to see robust growth as companies become more and more willing to move core functions to top quality specialized outsourcers.

Garratt also points out that the concept of knowledge management has been around since the 1990s, but the practice of knowledge management is undergoing a revolution in the 21st century. Knowledge management today is not just about sharing lessons learned and improving performance, but about “virtual enterprises” and innovation and integration of various knowledge sets to create a more efficient whole.

Garratt also emphasized that the development of functional partnerships between large businesses and their specialty outsourcing partners is almost inevitable. When you are talking about having another company undertaking some of the core functions of a business (like big pharma companies outsourcing clinical trials and even sales operations today), you are talking about sharing the innermost operating “secrets” of the company, including intellectual property and business models.

R&D Outsourcing

R&D outsourcing used to be largely IT and software development, but outsourcing of R&D today is found all across the board from clinical trials to consumer product development. The rapid growth of contract research organizations (CROs) of all types is clear evidence of the strength of this trend, and some analysts project that 60% to 80% of total global commercial R&D will be actually undertaken by CROs within another decade.

Outsourcing and the Cloud

The advent of the cloud and growing adoption of various forms of cloud computing services by businesses has begun to blur the lines between outsourcing IT functions and purchasing software or other technical or infrastructural services. The paradigm change is reaching the point where business execs of companies of almost any size can legitimately ask do I need a dedicated software development team (or accounting or HR department) in-house or in India when I can get virtually all my technical, infrastructural and even human support needs met through the cloud?

Software-as-a-Service (SaaS) was the foundational business model of the cloud, and SaaS offers significant benefits in helping businesses get the right apps on the right desktops at the right price. However, new business models such as Platform-as-a Service (PaaS) and Infrastructure-as-a-Service (IaaS) have been developed in the last couple of years, and analysts project IaaS providers such as Amazon and Rockspace will derive at least $1.5 billion in revenues from these new more inclusive business platform cloud service models in 2012.

This trend toward companies utilizing “off the shelf” business processes is just in its infancy, and the sky is literally the limit as these new business models have the potential to revolutionize not just the IT industry, but the outsourcing industry more generally.

By Linda Tuck Chapman

Outsourcing is serious business and will have a long-term impact on your company’s future. Let’s improve the odds that it’s a positive one! Your customers and shareholders shouldn’t and won’t differentiate who delivers their services – your company or a third party. So the time you invest in planning your outsourcing program and sourcing the right service providers is time well spent.

Before you set your sights on a service provider or a destination, spend time setting strategy and planning. During an initial discussion with a client about expanding their small offshore program, they quickly realized that there was no consensus across the senior leadership team about their long term outsourcing strategy or the appetite for more offshoring in the current political climate.

Questions Precede Success

The questions you must answer are numerous and wide ranging: What value are you hoping to capture? What needs to happen to increase the probability of success? Every company that makes the decision to outsource wants to save money or avoid capital investment, so what else do you want to get out of the relationship? Is there visible executive support and who are the internal champions? Which countries and companies should you be looking at? What are the key constraints? How can you make the engagement process easy and predictable? What are the obvious mistakes that other companies have made and how can you avoid them?

The good news is that while there are lots of questions there are many, many successful offshore programs. And you don’t have to reinvent the wheel.

Determining what is most important to internal stakeholders is important but it doesn’t have to get complicated. Typical goals that are readily satisfied by outsourcing include: 1) Cost savings or cost avoidance 2) Access to a large, high quality and skilled labor pool 3) Capacity that flexes with your demand 4) Exposure to sophisticated processes and knowledge transfer 5) Access to superior technology, processes or a platform.

Keep on Track

Once there is consensus on goals and objectives write it down, validate that you got it right, then re-state the goals and objectives at each phase. It is amazing how much drift can occur if you ignore this tactic. Re-validating goals and frequent stakeholder communication are fundamental to managing expectations and driving wildly successful programs.

The next consideration is potential service providers and locations. Although India and China are leaders, Nearshore service providers are quickly climbing the value chain with competitive talent pools, robust technology and viable solutions. And they offer something that India and Asia can’t…. same-time work hours. The value of which should not to be under-estimated.

Sourcing a Nearshore service provider means also means that cultural differences are not as extreme, geo-political risks are better understood, travel for site visits and operational management is far less onerous and costly, and the opportunities for collaboration should be more likely and frequent. And cost savings are comparable.

Do the Right Work Up Front

You need to be thorough during sourcing and contracting. This means investing enough time to think through and finalize everything possible during the sourcing contracting phases. Make sure you do your research, benchmark pricing by role and location, and adopt published best practices. Set up a simple pricing model, anticipate current, near-term, and future needs including specialized skills. Design a competitive but manageable number of performance metrics and minimum service levels, and define respective roles and responsibilities. Establish time-specific targets to increase the ratio of offsite/onsite resources, and strategies to minimize turnover of resources assigned to your account.

Once you have a strong foundation, a user-friendly engagement process will become the key to a successful program. If your program is for IT application development, maintenance and/or testing, developing a good set of requirements is far more important than ever before. If you have a PMO, good news. If not, source or quickly develop training or leverage your outsourcer to help develop this key skill within your team. Your project teams need to write solid Statements of Work and be able to size the work effort. You can publish examples on your intranet, deploy proactive support and mentoring, and establish internal user groups.

As for project pricing, it is okay to start out with time and materials pricing using negotiated rates. Within six months you should have enough experience and expertise to move to fixed pricing. And over time, if you commit a minimum number of resources or spend, you can evolve to “development centers,” dedicated teams who identify with your company and are exclusively assigned to your projects. This will help you to control costs, improve quality and increase your offsite/onsite resource ratios. Your informal leaders will emerge, so identify these internal champions early and noisily celebrate their successes.

If you want your outsourcing program to be wildly successful, here are three key tips to take away:

• invest time to develop an enduring strategy and take time to plan
• finalize every detail possible during the contracting phase
• make it easy for users to engage

Linda Tuck Chapman, ONTALA Performance Solutions, is a former Chief Sourcing Officer and is now an expert advisor in Outsourcing, Strategic Cost Management, and Vendor Governance.