By Jerry Durant

Everybody wants ROI from their outsourcing projects. Many (on both the buy and the sell side) claim it. But relatively few have the knowledge or background to calculate it correctly. This not only makes it harder to make good decisions, but saps the credibility of whoever is doing the calculations.

Far too many operations and procurement professionals try to calculate ROI without a sufficient understanding of it.

They also try to convert subjective value measures to quantifiable numbers and fail to relate ROI to business objectives that might not relate to money, but to harder-to-measure benefits such as innovation or the delivery of new products and services to customers.

First, one must understand what ROI is not. Consider a typical outsourcing decision, such as whether to outsource your e-mail infrastructure. Just because Option A costs less than Option B, while delivering similar service levels, does not demonstrate ROI. It just means you have lowered the cost of doing business – the cost of operations. You cannot claim ROI because you have not done anything to generate more revenue.

ROI is the result of the Gain from Investment less the Cost of the Investment all divided by the Cost of Investment. You achieve ROI when, and only when, it supports the operation of a profit center, rather than a support center where any savings are likely to be consumed by other areas.

So where do we stand?

1. Distinguish between investment and operating costs. An investment will produce a yield, in the form of an improvement in a profit-making operation, while operating costs allow you to keep the lights on for less than you otherwise would.

2. Know your objective. If it’s labor arbitrage then a simple comparison will reveal the spread between domestic and foreign labor costs.

3. Ensure ‘like’ comparisons. Are the processes you are comparing both fully optimized? All too often, the function you’re considering for outsourcing is not in best operating form. If it’s a simple “lift-and-drop” situation then cost comparisons would be OK, but if the provider is making changes you need to factor that in. So facilitate process improvement/optimization at some point in the relationship, whether pre- or post-engagement, measure the results and take them into account

4. Take into account all costs. It’s not simply a matter of contract cost vs. prior in-house costs. Take into account other costs that must be amortized over the duration of the contract, such as to transition the function to the provider. Remember new, in-house costs such as for a project management office (PMO) that oversees the outsourced relationship, as well as the need to monitor the quality of the outsourced work.

5. Make sure that you have systems in place that can track operating costs against the estimates you used to make your decision. In some ways this is a bold step because you may wind up finding flaws in your decision making. Don’t use this as an opportunity to find fault, but to improve your estimation and sourcing management skills.

6. Factor in whether you’re getting everything from your service provider you were getting in-house, such as a commitment to environmental efforts or working conditions. This is another way of saying “compare apples to apples,” but in an area that can cause big public embarrassment if you ignore it.

Bottom line: When calculating ROI keep in mind the difference between reducing operating costs and actually improving in business. And, when you’re comparing costs and benefits, make sure you’re doing a fair comparison that takes into account both everything you’re spending and everything you’re getting (or not getting.) The health of your organization – and of your own credibility – depends on it.

Jerry Durant is founder and chairman emeritus of The International Institute for Outsource Management, a trade organization dedicated to the assessment, development, and guidance of outsource service providers in the ITO, BPO, call center, and KPO domain areas.

By Patrick Haller

When making sourcing decisions, a lot of attention is paid to the pricing structure and qualifications of service providers, while their actual location is sometimes a secondary  consideration. However, when assessing a destination, it’s important to realize that what might be favorable today can morph into a nightmare scenario tomorrow. Don’t be caught unaware and unprepared for the ever-changing dynamics of  the Nearshore.

The best-shoring process goes beyond looking at the usual criteria like cost effectiveness, employee attrition and service capabilities, and examines issues such as the hidden aspects of hiring and firing, how non-performance claims are managed, a country’s political stability, propensity for natural disasters, nationalization of businesses, and concerns about infrastructure. It’s dangerous to give these critical factors short shrift when concentrating on which provider offers the best financial deal.

International management consulting firm A.T. Kearney advises that “the best-shoring evaluation process selects the most favorable location by applying a comprehensive set of criteria, which include not only current cost effectiveness and scenario analyses, but also an assessment of service and quality levels, as well as the question of warranty.”

“There are several items that are driving the trends towards best sourcing of solutions,” said Ed Fitzpatrick, director of Managed Services at Charles River Development, during a podcast about IT development, “The key thing is the competitive nature of the industry. Especially coming off the last couple of years in the worldwide financial situation, it’s about proving competitiveness, lowering costs, driving operational efficiencies, getting more value out of their investments in technology and systems, better aligning costs and values, and of course, reducing the strain on limited internal IT resources.”

Looking deeper than immediate cost savings, buyers should take into consideration driving factors, such as:

• Available Talent – How big is the current qualified labor pool? Will the operation be able to scale-up over the next five to ten years? Who are the competitors for the same talent? What are the strengths and weaknesses? Are wages expected to increase from year-to-year? Do the labor laws favor workers or employers?  For example, even though Brazil has the largest population in South America, can the country offer better software developers than Colombia? Can Colombia compete on the wage scale with Chile? Will Chile produce enough qualified candidates for contact center work over the long-term than Argentina? Will wage inflation and restrictive labor laws in Argentina have an adverse effect on the ability to continue operations there? Which nation is known for a strong work ethic as compared to the others?  When it comes to hiring and firing, every aspect of the country’s employment law should be examined carefully.

• Soundness of Infrastructure – Just because a country was known for having solid infrastructure in the past does not mean it will be true in the future. For instance, Chile was thought of us being relatively sound in this regard, but recently President Piñera warned executives that Chile would face an energy crisis during his administration due to an estimated annual demand increase of up to 7%. Other nations too might face energy crises, or an inability to keep up with the need for improved telecommunications technology and internet access. Safe roads and highways, efficient and adequate transportation systems, accessibility to international airports are also major considerations. El Dorado, the main international airport in Colombia’s capital city, Bogota, is being completely rebuilt in order to accommodate the heavily increased passenger traffic. However, observers have noted that by time the new facility is completely operational it will already be inadequate. Therefore, plans are under consideration to build a second airport.

• Natural Disasters – No country on earth is safeguarded from nature’s wrath. However, some are more prone to disasters than others. As charted by PreventionWeb, Chile is more prone to earthquakes than flooding, Colombia can suffer from flooding and earthquakes, Argentina is also susceptible to flooding whereas drought is the biggest threat to Brazil. Whatever the hazard, be sure redundant systems are in place and assess how quickly business can resume.

• Claims for Non-performance – Even though the contract might contain very specific clauses relating to non-performance issues, what jurisdiction will the contract be enforced in? If in the provider’s home country is there a enough of a history of similar cases in order to establish a precedence, and if so, who have they favored? If not, how would such a case be handled?

• Political Risk – Are foreign business entities welcome to operate freely within the selected country? Does the country have a history of nationalizing private enterprises, or are there indications to suggest this will start happening? Can the government close down an operation that is deemed contrary to their philosophy? Will a foreign entity, or a company hired by a foreign entity, be abruptly shut down? These are very real concerns, especially in Latin America where the political dynamics change rapidly in some nations. Closely examine the policies of countries such as Venezuela and Argentina who have been shown to be volatile environments, whereas Chile and Colombia stand as recent examples of political stability.

• Immigration Policies – Providers might need to hire employees from other countries, even on a temporary basis, in order to ensure they have the right individual in the right position. Also, companies that have shared services or captives most likely will want at least some high-level personnel from established business centers to oversee their operations. What countries are more welcoming to foreign workers? Where are the least restrictive immigration policies? Can foreign employees be arrested or deported without cause? Be sure to research these policies in-depth and gain an understanding of a particular country’s record, and pay attention to the “writing on the wall.”

Do not underestimate the importance of digging into these fundamental aspects of sourcing. Remember that the relationship is not only with your provider, but also with their country.

Second Annual Nearshore Nexus Comes to New York City this April

Nearshore Nexus, the only North America investor conference focused entirely on the Caribbean and Latin America IT and BPO sector, will take place on Thursday April 19, 2012, in New York City.

Nearshore Nexus will feature the best minds in global services to examine the growing role Latin America is playing in delivering quality outsourcing services to businesses across the Americas. The outsourcing sector in Latin America has been growing at over 20 percent per year – noticeably higher than the global average. The theme for the 2012 edition of Nexus is: “Intelligent Analysis of Outsourcing in the Americas.”

“I’m very proud of the fact that we will attract delegates and sponsors from over 15 countries in Latin America. This testifies to the strength of our business and the appeal of this topic,” said Kirk Laughlin, CEO and Founder of Nearshore Americas, the company staging the conference. The event brings together CIOs and IT leaders, global sourcing decision makers, procurement heads and country representatives. Besides analyzing complex ideas and generating stimulating debate, Nexus is also a place to enjoy something different. Musical entertainment will be provided during the event, and multiple networking opportunities are built in.

”The Nearshore outsourcing market is extremely robust,” noted Laughlin, “yet a good percentage of U.S. buy-side sourcing customers continue to lack sufficient knowledge of Latin America to make good business decisions. Our conference is all about accelerating that awareness and generating high-value connections.”

Nearshore Nexus features a list of top tier speakers from organizations such as GE, The McGraw-Hill Companies, Pace Harmon, Pegasus Solutions, UBS, HfS Research, Tata Consultancy Services, Ci&T and A.T. Kearney. Topics range from the current state of outsourcing in Latin America, getting smart about site selection, and how to manage vendors in a multi-vendor, multi-location environment.

Sponsors include Tata Consultancy Services (Diamond); Ci&T (Platinum); BRASSCOM, MexicoIT and Pro Mexico (Gold); Belatrix Software Factory, Common Sense, Invest Pacific, Nearshore Call Center Services, Neoris, ProBarranquilla, VSI Nearshore Outsourcing and Wipro (Premier). Partners include Avasant (Advisory Partner) and HfS Research (Research Partner).

This year’s conference will be held at the elegant Crowne Plaza Times Square Manhattan, which offers a luxurious oasis in the middle of Manhattan’s most vibrant and iconic neighborhood. Nearshore Nexus has secured a special room rate for attendees of $309 per night. This rate expires on March 16, 2012.

Nearshore Nexus is an invitation-only event. Individuals who are outsourcing services decision makers may request an invitation to the conference by sending an email, with your title and company name to invitation@nextcoastmedia.com . After submitting your registration request, your qualification status will be verified for eligibility. Qualified invitees are granted complimentary access to the entire conference. Vendors, service providers, business parks and government/private promotion and investment agencies may obtain access to the conference through sponsorship.

For information about Nearshore Nexus, visit www.nearshorenexus.com or contact the conference office at (516) 277-1108. Nearshore Nexus social communications can be found on Twitter and LinkedIn.

By Reshaad Durgahee

Lima, Peru: Surprisingly emerging.

In the period 2003 through 2010, Europe and Asia were the largest recipient regions of foreign investment projects in shared services and BPO activities, accounting for 46% and 29% respectively. Meanwhile, interest in Latin America has clearly been growing. The number of shared services and BPO foreign investment projects in Latin America rose year on year until 2010, when the total number of projects entering the region decreased by 15%.

However, in terms of jobs created by these investment projects in shared services and BPO, 2010 saw the highest number in the Nearshore region since 2006, increasing by almost 10% over 2009.

After the Asia-Pacific region, Latin America is now seeing the largest-size centers being set up, and indeed, the region continues to be characterized by a number of labor-intensive shared-services projects, with on average 350 announced jobs per center in 2010.

General trends in announced shared services jobs by world region, 2003-2010

Typical destinations for shared-services establishments in Latin America, such as Colombia and Costa Rica, continued to lead the rankings in 2010, representing 22% and 14% of regional shared-services job announcements. Brazil and Argentina – as dominant markets in the region – also continue to attract their share of investments.

Top ranking SSC/BPO destinations in Latin America & the Caribbean by estimated jobs, 2003-2010

However, it is the emergence of newcomers in the rankings, such as Nicaragua and Peru, that piques the interest of the observer of the outsourcing industry. These two countries attracted large-scale investments in shared services, demonstrating the widening of investor confidence across the region. Companies are now seeing the potential of previously untapped labor markets. Countries such as Nicaragua and Peru offer companies that are willing to take risks a first-mover advantage in terms of potentially lower labor costs, lower levels of competition from similar operations, and the opportunity to become the major player in a new market.

This would be in contrast to already well established shared-services locations in the region, which offer a more experienced labor pool and potentially higher-quality level of infrastructure, but are also starting to experience side effects such as increased levels of competition and elevated attrition rates.

The Rise of the Second Tier

In 2010, leading agglomerations in Latin America in terms of job creation through foreign investment in shared services and BPO included Bogota, Lima, San José, Guadalajara, Managua, and Medellin, the first four of which make the Global Top 20 ranking. Examples of new investments include Sitel, which announced 450 jobs at its new contact center in Managua; National Instruments, which has announced the establishment of a shared service center in San José creating 200 jobs in CRM, finance, IT, and sales; and Convergys, which has established a bilingual contact center and back-office support site in Bogota, creating up to 1,000 jobs.

The appearance of Bogota and San José, as now-seasoned shared services destinations comes perhaps as no surprise. The Mexican city of Guadalajara and Colombia’s second city Medellin highlight the potential of such second-tier cities in the region to operate shared services at lower cost than their capital cities, whilst still maintaining suitable operating environments desired by investing companies. Recent investments include West Customer Management’s bilingual contact center in Guadalajara and HP in Medellin.

Function-wise, investment in this sector into Latin America has been focused on contact centers (primarily to serve the local market and Spain, but also increasingly bilingual centers to serve the United States). In addition, in recent years, more and more companies have seen the potential for more value-added shared services operations in the region’s more mature locations, where there are now multiple finance and IT shared services, for example.

Sources of Investment

By far and away the largest source country of foreign investment in shared services operations in Latin America is the United States, which between 2003 and 2010 accounted for more than half of the jobs created in the region in this activity, generating almost 70,000 positions. Although Europe and Asia remain the most popular regions for US companies setting up shared services and BPO operations, Latin America remains a key market, in particular for nearshoring activities due to factors including timezone advantages and natural availability of Spanish language skills.

Between 2003 and 2009 Spanish companies (such as Telefonica and Banco Santander) accounted for about 20% of jobs created in shared services and BPO in the region, solidifying Spain’s position as the second largest investing country in this sector in Latin America.

Top source countries for SSC/BPO foreign investment into Latin America & the Caribbean, 2003-2010

Much has been written on the rise and dominance of India as a destination for shared services and BPO, but it is also interesting to note the rise of India as a source of such activities. Globally, Indian companies created over 15,000 jobs in this sector in 2010, continuing the year-on-year growth witnessed since 2005, accounting for 12% of all jobs created worldwide by foreign investors in this sector. From a Latin American perspective, in 2010, Indian companies such as Wipro, Genpact, and 24/7 Customer created just over 10% of shared services and BPO-related jobs announced by foreign investors in the region – a 60% increase from the previous year. It all represents a move to get closer to customers in a new market, highlighting the rise of India as an outward investor in shared services and BPO activities.

Profusion of Possibilities

Latin America continues to succeed at offering attractive options for companies wishing to establish shared services and BPO activities, as demonstrated by the increasing number of jobs created in the sector from foreign companies in recent years. These options come not only in the form of mature, well-established destinations, but also up-and-coming locations that companies are now finding worth investigating for outsourcing activities.

That is not to say that the mature shared services locations of the region are in decline. On the contrary, mature locations such as Costa Rica, Colombia, Argentina, and Brazil continue to attract their fair share of investment. In today’s economic climate, many companies have become increasingly risk-averse, and are content with opting for tried-and-tested options in the region, where costs may be slightly higher but where there is an availability of highly experienced shared-services profiles to recruit from. On the other hand, emerging Nearshore destinations offer those companies willing to be pioneers the opportunity to tap into new sources of talent and at a lower cost base, resulting in these locations now appearing next to traditional shared services locations in our global rankings.

Latin America’s profusion of location possibilities – both mature and emerging – means that it continues to develop as a strategic region that companies are considering for their shared services and BPO operations. Be it North American firms using the region as a nearshoring solution, Spanish companies cementing their presence in countries with similar linguistic and cultural affinities, or companies from emerging countries such as India wishing to extend their global footprint and gain a foothold in a new market, Latin America is sure to remain “on radar” for companies for the foreseeable future.

Reshaad Durgahee is a Senior Consultant at IBM Global Business Services’ Plant Location International (PLI) division. More analysis of location trends is available by download here.

By Daniel Berthiaume

A crucial aspect of many IT outsourcing and BPO initiatives is internal staff reduction. Despite the cost savings and more efficient operations that might result, few managers look forward to determining who stays and who goes when a department outsources certain functions. But properly evaluating employees in the event jobs need to be terminated is absolutely critical to BPO success.

Michael D. Brown, a corporate speaker, coach, and trainer who specializes in personal and professional development, has a few tips for managers trying to successfully execute an outsourcing-related staff reduction.

Think of the Customer

Although reducing staff is an internal process, Brown advises managers to begin with an external focus. “Define the experience you want to create for your customer, and then assess whether you have the right skills to deliver it, to be competitive, and to stay fresh and take it to the next level,” he says. “If you have some folks who can’t deliver this kind of customer experience, that’s your first filter.”

Doing the Job Is Not Enough

Brown also advises managers to be leery of employees who are willing to “do the job,” but little or nothing else. “Let go of people who never went above and beyond their job and never proactively went outside the job’s parameters to take things to the next level,” he says. “You want people who seek personal growth and have a hunger for more. People lacking these qualities or who are myopically focused on their jobs, you can do without.”

Brown warns that employees who strictly adhere to the official boundaries of their jobs don’t provide the necessary bandwidth for a company to grow. “You can’t pay for every piece of an employee’s contribution. Something has to come from passion and loyalty,” he says. “You want to keep people who say, ‘I know this isn’t my job but I really like what I’m doing,’ and develop their own skill-set on the job that they can also use in other areas of life.”

Be Honest and Open

Frequently, companies will shroud staff reductions in a veil of secrecy, leaving employees who will potentially be affected nervous and prone to gossip and innuendo. Brown says by maintaining an honest and open approach, managers can minimize disruption in the workplace.

“Be transparent early, quickly, and frequently,” Brown says. “Don’t let people hear things someplace else. If there are things you aren’t in a position to reveal, inform your employees, ‘I can’t tell you everything now.’”

Brown also recommends that managers help keep control of the inevitable office rumor mill by maintaining an open door, which can include making information available online or via a phone hotline. He further advises managers to provide transparency by holding meetings with individual departments or small groups of employees, in addition to large corporate meetings.

“Some people won’t want to ask questions in a big group setting,” he says. “People can deal with change but they cannot deal with uncertainty.”

Treat Everyone with Dignity

While Brown is clear about which employees should be the first targeted for a staff reduction, he is just as adamant that everyone, especially those whose jobs are terminated, be treated with dignity and respect throughout the process. “Don’t damage your brand with layoffs,” he says.

“The people you let go will eventually become your customers or have influence on your customers. They understand things happen and will get over it [if reductions are handled correctly], but with the effect of comments on social media like Twitter and Facebook, brand damage from disgruntled former employees can cost you more money trying to undo than the cost of creating a dignified process with features like help lines, extended benefits, retirement planning seminars, and resume workshops that help employees have a smooth exit.”

Move Forward

After reducing staff, managers must then act to assuage any fears or concerns remaining employees might have. “Reinforce why your business strategy required layoffs,” Brown says. “Don’t get into reasons why individual employees were terminated. Instead, explain why the employees who kept their jobs were chosen and how they can make themselves more competitive.”

And finally, Brown says managers should provide a direct answer to any questions about possible future staff reductions: “If people ask whether this will happen again, you need to be honest. Say, ‘We’re in a dynamic and changing marketplace and will respond accordingly.’ You can’t promise it won’t happen again.”

This article was originally published on BPO Outcomes

By Luke Bujarski

Sheltered services is an approach that has long been standard practice in the manufacturing industry, but now it’s becoming more of an option for customers of IT and BPO services too. Because of time zone alignment, the sheltered model can be particularly effective for customers of Nearshore providers – especially for North American customers of providers based in Mexico.

Sheltered services can remove much of the painstaking due diligence and commitment involved in setting up a captive center. Likewise, since the execution of core services and value creation rests with the buyer, substantial cost savings can be achieved. Those advantages make the sheltered option worth considering by small and medium-size enterprises (SMEs).

Offshoring often involves the multimillion-dollar question – whether it is better to outsource or to go it alone. Working with an outsourcing vendor can be less of a hassle, particularly in hard-to-maneuver and unfamiliar markets, but concerns over data security and operational excellence continue to push some enterprises to open their own captive centers. The sheltered services model is a third option: neither completely outsourced, nor completely captive.

This is the sheltered model in a nutshell: The buyer works with a partner on the ground that sorts out all or most of the things needed to get the operation up and running. This includes finding the right facility, getting the ICT connections, and most important, recruiting the right talent. From there, the buyer takes over and manages the team directly as it would any other department onsite, focusing on its core business. The difference between this arrangement and a captive operation is flexibility. As the needs of the buying organization change over time, the sheltered services provider works to adjust certain aspects of the operation, including the size of the office space, the number of staffers and their capabilities, and other needs.

Attractive for Smaller Businesses

The sheltered model is quite novel in the space of professional services. Nearshore operator Vangtel adopted the sheltered approach after seeing it in action in the manufacturing space. Opening its doors in 2006, Vangtel focuses on contact centers, IT and BPO services, and now coordinates close to 1,000 employees out of its facilities in Hermosillo, Puebla, and most recently Guadalajara.

“Our success has come thanks in part to the growth in the number of small to mid-sized companies getting turned on to the idea of offshoring,” says Arturo Rodriguez of Vangtel. The reason the sheltered model is so compatible with the SME market tier is ultimately cost and flexibility. Setting up a captive center is not cheap, and requires the kind of critical mass and commitment that most mid-size companies do not have. Likewise, going with one of the full-service outsourcing providers is also more expensive, because you’re paying for technical and operational expertise.

Working with a sheltered service provider (SSP) takes these two things out of the equation. It drastically reduces initial start-up costs, and it eliminates the brand-name premium that the larger multinational organizations typically pay for working with the bigger full-service providers.

The sheltered model can also be ideal for organizations that need scalability across different functions. Augmenting your team with five to ten junior .NET or Java developers at a cost savings of upwards of 50 percent is a strong value proposition. That same company can leverage the SSP to build out a customer contact operation capable of handling level-1 customer and tech support. A prime target for sheltered services might be a web development firm based out of the US that has about 200 clients.

Nearshore Suited for Sheltered Services

Because the sheltered route requires direct management of your offshore team (providers like Softtek and TCS do most of this work for you), being able to communicate and work in real-time is that much more important, particularly for certain functions. Customers that buy into the sheltered model do find themselves traveling to their offshore facilities more often, but with the rapid spread of videoconferencing technology the need to travel has been minimized. “Many of our clients hold daily videoconferences with their teams in Mexico,” says Rodriguez. That’s similar to what you would expect with agile software and web application development. That level of interaction would clearly fall short with a 12-hour time difference. Likewise, when travel is needed, catching a one-hour flight from Phoenix to Hermosillo beats an over-night flight to Bangalore.

Where the sheltered model might fall short is in its ability to deliver longer-run value through innovation, which might otherwise be harvested via continuity and critical mass. Since the different company teams in a sheltered facility work independently of each other, you don’t get a culture of optimization that you would see with a full-service provider, working across different customer needs. At least in theory, full-service providers keep all of their best practices in-house working from customer to customer, learning and applying new approaches as they move forward.

Similar to captive arrangements, the sheltered model tends to be a top-down process when it comes to process improvement. This might make it more suitable for organizations looking to supplement their teams with added savings from an offshore team, but not for larger enterprises looking for a long-term global delivery partner. However, innovation and value creation is not always what the buying organization expects. Sometimes the offshore journey is all about cost savings.

By Marc Tanowitz

As outsourcing buyers use service levels to measure the performance of a provider, service level agreements (SLAs) are one of the buyer’s fundamental vendor-performance management activities. An SLA’s agreed-upon quantitative provider requirements establish the baseline performance levels and define the monetary credits or other remedies associated with a provider’s failure to meet the standards. The principal role of an SLA is to align buyer and provider objectives.

First Things First: Constructing a Relevant Service Level Portfolio

Developing an effective SLA starts with creating service levels that relate as closely as possible to the buyer’s key business imperatives. After determining those imperatives, the buyer can effectively construct individual service levels.

Here are a few tips on setting truly relevant service levels:

• Service levels should focus the provider on understanding and meeting the buyer’s desired business outcomes.

• Service level design should be driven by requirements, not data. Just because a parameter is easily measured doesn’t make it suitable as a service level, and relating provider performance to its impact on the buyer’s business is more relevant than focusing on commodity transaction counts.

• An ideal set of service levels should be both collectively exhaustive – meaning a provider cannot fail to meet expectations without failing to meet at least one service level – and mutually exclusive, meaning no two SLAs measure different aspects of the same symptom.

• In general, eight to 10 service levels should be sufficient to align the overall goals of the buyer and the provider.

Keep the Structure Flexible

When initially designing an SLA framework, the buyer should keep its structure flexible enough to be substituted with alternative metrics as their needs change, especially in the case of broad, complex, and/or long-term service relationships. These metrics should include key performance indicators (KPIs), which are additional meaningful metrics not initially considered as critical as service levels. Each metric has a performance target but no associated credit, although credits may be implemented for missing an aggregate number of KPIs.

In addition, alternative metrics should include reports, metrics against which the provider is required to report to inform of potential issues, but which carry no explicit performance targets or credits/remedies. The circumstances under which a buyer can exchange SLAs and KPIs should be defined, such as a cap on the number of exchanges per year and the automatic promotion of KPIs to service levels if a provider fails to meet the prescribed performance a certain number of times in a specific period.

Building Individual Service Levels

Once the service level portfolio is defined, focus shifts to making individual service levels measurable and relevant. The effort expended to define and implement high-quality service levels will be repaid many times through the contract period.

Following are three key pointers on how buyers can properly construct individual service levels:

1. Take time to ensure the service levels are as unambiguous and quantitative as possible. While “user satisfaction” might seem to be the ultimate expression of a desired business outcome, the details of implementation typically make it meaningless in practice. With sufficient effort, the buyer can generally define what “user satisfaction” really means and convert that to measurable parameters, such as responsiveness or availability.

2. Do not be bound by convention in making service levels closely reflect the user experience across the entire scope of the provider’s responsibilities. For example, SaaS vendors (to the extent that they offer SLAs) will typically measure availability, response time, etc., from within their data centers. This methodology excludes the performance of the provider’s Internet connection, routers, and security/VPN termination infrastructure.

3. To minimize ambiguity, include the following components: Short name reference (for manageability and ease of reference), a full definition (description of the measurement, points of demarcation), measurement parameters (data sources and data fields used, frequency of measurement), calculation (calculation frequency, averaging approach used ‐ preferably in form of a formula), required performance from the provider, and specific exceptions/exclusions (beyond broad exclusions dealt with in the master agreement such as Force Majeure), with performance excused only to the extent affected by, and only for the duration of, the exception circumstance.

Provided by Pace Harmon

In BPO agreements where services are often labor-based, service levels relating to the timeliness (productivity) or quality (data entry accuracy) of execution provide meaningful measures of delivery performance.

Marc Tanowitz is a principal at outsourcing advisory firm Pace Harmon.

This article was originally published on BPO Outcomes

Vendor management requires an ‘all in’ approach to lowering risk

By Jan Erik Aase

In a recent Forrester survey, senior IT professionals ranked “security concerns about giving work to a third party” as their greatest concern about moving into managed services relationships. Surprised?

Although conventional wisdom says that giving vendors end-to-end accountability for a portfolio of applications and services is the best way to reduce risks in managed services relationships, far too many sourcing professionals believe that this end-to-end accountability eliminates the need for due diligence and other governance activities.

What Risk?

Sourcing and Vendor Management (SVM) professionals must engage senior leaders of internal departments to deepen vendor governance when vendors are given higher-risk projects, greater ownership of application portfolios, and access to greater levels of data.

As more system, application, and process ownerships are shifted to vendors, the number and severity of risks increases as well as the value of strong governance. Many vendors contend that due diligence and governance can be a part of their managed services engagement – but these activities are essential to the health of the vendor relationships and should not be outsourced.

Auditors, regulators, and security and risk professionals all have a stake in reducing the risk in vendor relationships, but they need the help of SVM professionals. In particular, SVM professionals must ensure that clear roles and responsibilities for vendors are articulated in the managed services contracts and vendors are held accountable to protect sensitive company, client, and employee information.

Many of the vendor governance activities can only be and will be best accomplished through collaborative efforts with other parts of the organization:

• Disaster recovery and business continuity: The recent partial outage of Amazon’s cloud services platform is a perfect example of why diligence is so critical. The impact of this outage on so many companies is evidence that most companies don’t have adequate or any contingency plans for the work and services outsourced to vendors. Although planning and testing is an essential part of vendor governance, for too many clients, it is still unclear who has ownership of the activity that demands involvement from application and service owners, Disaster Recovery and Business Continuity Planning (DR/BCP) experts, and procurement and vendor managers. There is a natural collaboration with DR/BCP experts, who have less experience with vendors than SVM pros.

• Finance: Concerns over a vendor’s financial well-being should not be limited to times of global economic stress; financial failure is an everyday occurrence. The failure of Axium, parent of Ensemble Chimes Global — a managed service provider of contract labor business — highlights why vendor health assessments are so important.

Axium’s failure left multiple Fortune 500 companies with a group of unpaid contractors despite the fact that these companies had paid Ensemble Chimes Global for its services. Assessing a strategic vendor’s financial viability is an essential part of vendor governance, but it is complicated by several factors: the challenge of finding reliable information on privately held companies, complex financial solvency formulas, the complexity of comparing solvency within global organizations, and the latency of financial information such as 10K filings and Dun & Bradstreet (D&B) scores for public companies. This activity requires a series of ongoing monitoring processes and a close collaboration among finance and procurement and vendor management professionals, who have an opportunity to plug in because financial professionals are less experienced with risk outside of financial statements.

• Enterprise Architecture: Enterprise architects are typically the owners of source code reviews. They set the standards and typically mandate the frequency and circumstances of these reviews but are generally not as experienced in managing the soundness of code developed by outside vendors. Although architects are able to control system and application changes that go through normal change control procedures, this becomes much more complex when companies are buying commercial-off-the-shelf (COTS) software and applications or when vendors are providing software or products that they are hosting, but which contain personal identifiable information about the company’s clients or employees. Updating the enterprise architectural standards is the role of the enterprise architect, but enforcing them requires the involvement of the SVM team.

• Security and Risk: A Vulnerability Threat Assessment (VTA) is an analysis performed by an outside party to define, identify, and classify the security holes (i.e., vulnerabilities) in a computer, network, or communications infrastructure, which goes beyond a source code review. This assessment is done through “ethical hacking,” in which an outside party, playing the role of a white hat hacker, assesses the vulnerabilities by deliberately probing a network or system to discover its weaknesses. This results in a list of weaknesses and an assessment of their potential risk to the company. The need for this type of analysis has existed since companies first started storing sensitive data on systems accessible through their firewalls, and the recent situation at Epsilon is an example of why they are still so important. Security and risk professionals are adept at managing internal systems. SVM can add value by managing ongoing VTA and service-level agreement (SLA) obligations.

The knowledge, sophistication, and abilities of third-party vendors are also increasing, but there is no assurance that all vendors are operating in a manner that protects their clients. To mitigate the risks created by an increased dependency on third-party vendors, companies must take a holistic approach to vendor management. It is no longer just the job of the SVM professional to ensure that the “vendor governance house is in order”; it is everyone’s job. Many companies are now forming vendor management councils, led by VMO or the Chief Procurement Officer (CPO) to help facilitate an enterprise view and management of their most strategic vendors. This is a trend Forrester expects will continue.

Jan Erik Aase is a Principal Analyst at Forrester Research, where he serves Sourcing & Vendor Management Professionals. He will be speaking at Forrester’s Sourcing & Vendor Management Forums in Miami and London in November.

Shared services showdown: Panama City

By Luke Bujarski

At last week’s IQPC’s Shared Service and Outsourcing Summit in Panama City, Panama,  the most popular people at the conference  were the corporate buyers weighing in on BPO vs. owned centers and whether to take established captives and merge them with third-party providers.
The big question we came away with: who is closing whom?

The path walked by these decision makers seemed to evoke the central question of buy vs. build tackled in this interview with KPMG’s David Kane last year. The challenge we saw in Panama and detailed in the article remains focused on what buyers are ultimately looking to achieve.

Helping to guide buyers through this maze of operational excellence in Panama were multinational vendors with integrated consulting and services. However, there was a palpable sense that the homegrown shared-service centers also want in on the action.

Colombia’s Carvajal Technology & Services, born from Grupo Carvajal shared services division, has broken through to the profit center side of the equation by officially sponsoring the summit.  But apparently they are not the only locals jockeying for position to service external clients.  Speaking with companies like TACA airlines with two SSCs, one in El Salvador and one in Costa Rica, they are also toying with the possibility of hanging out a shingle later down the road.  In discussions recently at ProNicaragua’s Investment Forum, representatives from British American Tobacco with service centers in Costa Rica have also begun looking at a client-aligned model.

Whether this activity will ignite another wave of captive spin-offs following suit with TCS, Wipro, and Infosys is yet to be seen.  Speaking with Capgemini’s VP of business development Felix Massun, it’s obvious that the BPO market here is moving at a frantic pace.  According to Massun, Bimbo and Telefonica also have very mature shared service operations in Latin America, and could be ready to throw in their hats within the next three to five years.  While there was no explicit confirmation from Massun on Bimbo and Telefonica, it’s not out of the question.

But the overall vibe here is that of collaboration and not competition.  From location analysis summarized by Chazey Partners, business parks with CIT Sinaloa and Zona Franca Bogota , to process automation  software from Readsoft, Latam’s shared services have plenty  of work ahead of them.

Massun from Capgemini, also a native Argentine, mentioned that “the markets we see here today will be unrecognizable 10 years from now.  Things are changing very rapidly.” This makes it difficult for all parties involved to plan ahead.  He also expressed doubts about a homegrown BPO market coming out of Latin America. “Everyone these days is focusing on their core business, which doesn’t leave much time for branching out.”

The fate of LatAm’s homegrown BPO sector is as much in the hands of SSC managers, as it is with corporate HQ.  Communicating strategy with leadership and building support for expanded shared services has been a huge topic of conversation at the summit.

Rutchik: Captives remove 'incremental risk' of third-party deals

Pace Harmon’s top captives expert talks about maturity of captives, impact from Mexico’s violence and why labor laws favor third-party outsourcers

By Luke Bujarski

Everest Group’s most recent quarterly Market Vista Report came out in recent weeks with some potentially staggering implications for Latin America’s offshoring landscape.  The global tally recorded a new 42-month high with 61 new captive announcements and zero divestitures.  Yet most of these announcements were located in Asia, followed by Eastern Europe and Africa. What then are LatAm’s prospects for captive operators?
If anything these figures clearly point to the fact that the captive offshoring model has endured and continues to be very much in favor with global sourcing execs.  So with Latin America’s touted nearshore advantages, shouldn’t we have expected to see more multinationals setting up shop over the last three and half years?

To get a better angle on what the future holds for LatAm’s captive market, we turned to David Rutchik from outsourcing advisory firm Pace Harmon.

Everest Group recently declared that “captives are not dead, but evolving”.  Do you agree with this view, or will third-parties be the new standard going forward?

David Rutchik: Yes, captives are definitely evolving, but this isn’t a one size fits all choice – there will still be a place for both captives/shared services centers and third-party outsourcing engagements. Many people have underestimated the cost and difficulty in building an internal captive center and managing it. When it’s not conducive to managing peaks and valleys of a business cycle, captives don’t make as much sense, but the model is appropriate in many cases depending on the situation. There are pros and cons to both models and companies will glean different results from each.

“Latin America will have a higher ratio of captives to outsourcing engagements versus other geographies such as India“

 What about in Latin America?  Will it be the Softteks, Stefaninis, and Genpacts in Mexico, Argentina, and Brazil, or shared service centers in Panama and Costa Rica?

David Rutchik: Both outsourced engagements and shared services centers are going to happen, but there will be more shared services centers in Latin America—particularly in Panama or Costa Rica— because of benefits such as time zone efficiencies, close proximity to the U.S., language capabilities and others. As such, it makes more sense for captives to handle those regions. Latin America will have a higher ratio of captives to outsourcing engagements versus other geographies such as India.

Are there any particular verticals that favor the captive model over third-party?

David Rutchik: It isn’t so much about verticals, but more about the type of business that is being handled in a captive model or through outsourcing. If the type of work is differentiating or competitive, e.g., product development, then it may make more sense to go the captive route in order to have more control over the environment and to remove incremental risk of a third-party partner working with a competitor or having that provider use the produced work for their own benefit. High-tech companies often fall into this category.

How about in Latin America?  What would you say is the overall state of health of LatAm’s captives?  Have they been managed well?

David Rutchik: Yes, they’ve been managed well.  It’s a pretty mature model – “maquilladoras” for the manufacturing industry have been managed successfully for years. There are shared services centers that have been created and run well across multiple companies in places like Panama and Costa Rica, where there is a lower cost of living, high literacy levels, time zone benefits, etc. The reason outsourcing doesn’t always make sense in these regions is that they often have efficient shared services centers.

For multinationals, are captives in Latin America purely a cost arbitrage play, or are they using them to service the domestic market as well?

David Rutchik: Yes, captives are primarily beneficial for cost arbitrage, but as the need becomes greater to service the areas in which they operate, is can absolutely be beneficial for local markets as well. As a caveat, it doesn’t always make sense to serve a particular Latin American market within which you operate, unless it aligns with a strategy pointing to specific, tangible benefits. While Latin America is a big market, it is not monolithic, so serving the local market in each country must be thoroughly evaluated on an individual basis.

The ability to ramp up and down resources is one value component to a captive center.  Can you talk a little about labor law differences in Latin American countries compared to India? In which markets is it easier to be agile?

David Rutchik: The opposite premise is actually true – the ability to scale resources is a benefit of working with a third-party outsourcer. Many of these countries have local employment laws and restrictions that should be acknowledged before hiring. For example, there is often a 90-day probationary period, after which employees are heavily unionized and more difficult to terminate without incurring significant costs. There are also policies such as for every year employed, the employee receives one month of severance pay. These types of labor laws may cause companies to shy away from a captive arrangement.
Everyone knows that cartel-related violence has created negative perceptions of Mexico.  Do you think Mexico’s drug war has also swayed US companies’ decisions to either go captive or third-party?

David Rutchik: In general, the violence in Mexico is making companies more open to third-party engagements. Some companies think the violence is a major issue whereas others think it is overblown regarding business impact. However, if the violence continues and/or escalates, some companies may not want to invest in facilities and an on-the-ground presence if they don’t already have it. As such, establishing a presence through an outsourcing arrangement may be more attractive to these companies.