Outsourcing – what continues and what trends are emerging?

Outsourcing which was booming over last 10 years had slowed down over past 2 years, starting 2008 due to financial and economic downturns. But it’s picking steam again. 2009 and 2010 was not a growth year for many organizations and the economic downturn and the weakening U.S. dollar has inspired some companies to move their outsourced work back to the domestic arena. Even though Federal govt is providing incentives to keep jobs home, in long run companies will have not option but to outsource a good chunk of work to be globally competitive.

Continuing Trends
Companies are more than ever struggling to reduce and control operating costs, which is forcing them to continue to outsource. Tech integration sector is booming as you can tell by growing revenues of Big 4 Indian Consulting firms – TCS, Wipro, Infosys and Cognizant. India’s revenue from back-office outsourcing is expected to surge nearly five-fold to $50 billion by 2012, per Reuters. Areas which will continue to grow include:

  • Web Application Development
  • BPO/Call Center
  • Application Maintenance
  • Manufacturing, especially in semiconductor industry

What are the Future trends?
Service-providers/Outsourcers are beginning to focus on building capabilities like ones below, partly because that’s the future and clients are demanding for it.

  • Cloud Computing – many client expect to adopt Cloud Computing in the near future and want Cloud provisions written into outsourcing contracts
  • Mobile Development/Smartphone applications
  • Green IT – Federal government and Fortune 500 companies are promoting higher emphasis on socially responsible business environments, driving outsourcers to create solutions that address them
  • Healthcare – Changes in U.S. law will stimulate growth in healthcare outsourcing. Payors and providers are realizing they lack the personnel, expertise, or facilities to manage applications that have to be on continuously and that have to comply with newly strengthened privacy and security regulations
  • Service Quality, Value for Money and Flexibility– Global uncertainty and customers’ desire for immediate and guaranteed cost savings will lead companies to seek shorter outsourcing contracts that give them the ability to adjust volume and service level terms. Outsourcers will have to adapt to organizations’ changing needs and help the generate immediate savings
  • Management Consultancy – organizations are looking for service providers beyond IT to help them in crafting Business and IT strategy. This is one area where outsourcers will have to build significant capabilities
  • Virtualization

CIO.com has an excellent article on Outsourcing Trends to watch for in 2011.

Bottomline, outsourcing will continue to grow and the service-providers will be expected to do more by rounding out their skills and capabilities.

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How to develop an Outsourcing Strategy?

Over the past 10 years, interest in Sourcing, esp. Outsourcing, has surged. Many of the back-office functions like Customer Support, Call center, IT Maintenance, Application Development etc, have already moved to BRIC countries and is growing with revenues of upwards of $373 billion/year.

Many a times, organizations are quick to jump to Outsourcing w/o a sound Outsourcing Strategy. Cost saving has been one of the most important objectives for many organizations in any global sourcing decision. But with sound sourcing strategy, many strategic and tactical objectives/benefits can be derived, other than cost saving. Failure to create a strategy and establish a framework with a clear set of project goals spells disaster for an offshore outsourcing arrangement.

First step, Outsourcing Strategy:

Strategy is a key for winning everything. Organizations should spend considerable time defining their Outsourcing Strategies. Once defined, the Outsourcing Strategy should be refined on annual basis, and adjustments made as necessary.

Preferably, the strategy should be an organization-wide strategy. Doing so, will set directions and provides guiding principles for individual LOBs to plan and execute Outsourcing engagements. In order to achieve this, the organization must address a number of key questions:

  • What are the business imperatives for Outsourcing?
  • What are the Outsourcing goals & objectives?
  • What can be outsourced? And what should not be sourced? [What is your core and non-core business?]
  • What are the Outsourcing drivers?
  • What type of Outsourcing models/relationship should be used?
  • What are our competitors and/or industry doing w.r.t Outsourcing?
  • What are the key trends in your business?
  • What are in-house skills/capabilities?

Factor in the risk and organization culture as well, while crafting the strategy. Outsourcing strategy should be clearly aligned with business and IT strategy.

Fig 1: Sourcing objectives alignment with organizations’ Business Strategy

Establishing a clear Outsourcing Strategy involves the following steps:

  1. Set the Vision – Executive Management should set the vision, direction, guiding principles
  2. Self-Assessment: (a) Assess the Outsourcing capabilities using a framework like Gartner’s’ Self assessment framework. The assessment will help organizations understand where they stand w.r.t Outsourcing capabilities (both Strategy and Execution capabilities). Least, it will create awareness on Outsourcing. (b) Second option is to perform SWOT (Strength, Weakness, Opportunities, Threats) analysis to further assist is developing strategic options
  3. Identify potential Outsourcing areas (of business)
  4. Identify potential Outsourcing models E.g. JV, In-Outsourcing, Multi-Outsourcing, Co-Outsourcing, etc
  5. Develop the Outsourcing objectives in a measurable/quantifiable way [e.g. reduce the cost of running IT Operations by 20%]

Next step, translating Strategy -> Operation:

Once the Outsourcing Strategy is defined, next step is how to execute this Strategy? The following three elements helps address on how the Outsourcing engagements should be run:

  • Sourcing Policies and Procedures – has the purpose of making the sourcing objectives and strategy operational.
    Policy should set guidelines for LOBs in outsourcing relationships.
    • How to identify an outsourcing opportunity?
    • How to design OLA, SLA?
    • RACI matrix for outsourcing?
    • How to manage risk?
    • How to craft a contract?
    • How to initiate procurement?
    • What are the communication guidelines? etc.
  • Outsourcing Life Cycle process/framework – a framework for executing Outsourcing strategy engagements and managing vendors
  • Governance Structure – Governance enables management to make operational, tactical and strategic decisions that increase the business value derived from the outsourcing relationships, while reducing the risk associated with using a global team

Outsourcing also means internal reorganization, rationalization of processes and resources in order to achieve stated business goals and objectives. Outsourcing will almost certainly touch employees, their employment status or benefits. Clear and honest communication is of paramount importance.

Think of Outsourcing as a business strategy, not a point solution.

RFI vs. RFP vs. RFQ

Outsourcing is not easy and it’s easy to get over-whelmed with various legal terms and jargons. Enterprises that are new to Outsourcing are often confused with various acronyms like RFI, RFP and RFQ. Knowing the difference helps in crafting a good Sourcing Strategy and thereby execute Sourcing engagements well.

RFI – Request for Information
In many cases, e.g. in a market with many service providers, it may be useful to carry out a Request For Information (RFI) process prior to the RFP submission. An RFI is designed to collect information from a supplier or vendor with no commitment to engage in any particular project. Many a times, in an RFI no project details would be provided. Instead the document would focus on the vendor capabilities, skills and experience. This will enable the client organization to pre-select service providers who have the appropriate abilities for submitting a proposal. RFI also helps vendors eliminate themselves if they cannot fulfill the stated needs of Client.

RFP – Request for Proposal
The Request For Proposal (RFP) are detailed specifications on the services to be rendered by the service provider. RFP should include, among other things, the following items:

  • Requirements (Business, Technical, Operational, Security, Compliance, legal, Quality requirements etc)
  • Service Level Agreements
  • Change Management Procedures
  • Acceptance Criteria
  • Pricing Models
  • Evaluation Criteria
  • Penalty
  • Working Environment

The next step after RFP is “Contract”.

RFQ – Request for Quote
Usually based strictly on Price. The RFQ focuses on a quote that has a certain valid period. RFQ is much more likely when the primary terms of the deal are financial, and other elements of performance are not significant.

You always start off with RFI, short-list vendors and then issue RFP, seeking RFP-response from vendors. Many state and Federal agencies issue RFP (skipping RFI) only to known vendors with whom they have worked before. Still it’s a good idea to issue an RFI during initial stages of Sourcing (while the scope may not be that clear) to atleast understand what they might be dealing with from Financial perspective.

Procurement is the process of contracting and executing the contract.

Contracting is the creation of binding agreements between client and service provider, bound by law.

Sourcing, Outsourcing, Offshoring – what differentiates them?

Many a times when “Sourcing” is mentioned, people tend to think of it “Out-sourcing” or “offshoring”. The truth is that “Sourcing” is a much more holistic strategy that defines how an organization sources a unit of work.

Companies practice many different Sourcing models like In-Sourcing, Out-Sourcing, Staff Augmentation, GDC, ODC etc. Out of all these models, “Outsourcing ” and “Offshoring” have become famous due to its cost effectiveness, diverse educated labor pool, and timing zone advantages. Offshore Outsourcing is an increasingly popular business strategy. Let’s look at definitions first –

Off-shoring is mainly about sourcing specific IT functions to lower cost regions that are different from your corporate headquarters

Outsourcing means corresponding with the service provider/expert within his area of expertise and getting the work done for the same

Types of Offshore Models:
There are several offshoring models, some listed below:

  1. Onsite resource with Offshoring: Few service provider resources “onsite” and large team offshore, in countries like India, Brazil. Onsite resources used mostly for coordinating the development activities betwene client and offshore
  2. Total Offshore: Service provider takes and implements the work in totality. This model works if the scope is well-defined and the work is discrete enough to be done remotely with little supervision
  3. Global Delivery (Onsite/Offshore) Model: Similar to “Onsite resource with Offshoring” above, but at a much larger scale. Service provider effectively runs the project/program with minimal resources onsite woring with clients and pushing much of heavy lifting offshore. Most of Indian firms like Wipro, TCS, Cognizant, Infosys follow this model
  4. Multisourcing: Clients Outsourcing work to multiple vendors to reduce risk
  5. Build-Operate-Transfer (BOT) Model: Here’s how it works
      (a) Build. The service provider provides a complete solution for building a dedicated centre for a client in a particular country
      (b) Operate. The service provider provides a comprehensive set of operational management services
      (c) Transfer. The client has the option to buy the entire operation after a fixed period

    Conglomerates like GE have BOT models with companies like TCS, Wipro and others

  6. Dedicated Development Team: Service provider operates as an extension of Clients’ Development team

Three common Engagement & Billing Models are prevalent in Offshore Outsourcing – (a) Time-and-Materials (T&M) with Not-to-Exceed clause (b) Fixed-price contract (c) Milestone based engagement

Companies are spending upwards of 7% on Outsourcing and is projected to trend upwards.

Selecting a right offshoring model is a crucial aspect of developing company’s outsourcing plan. Selection depends on several factors like clients’ appetite for risk, core comptencies required for business vs. what can be commoditized, cost, professional skills, culture compatibility, timezone differences and such. Evaluate the benefits you stand to gain in terms of cost savings, process efficiency gains, quality improvements, and competitive advantages and choose a place that offers the maximum strategic benefit at the minimum risk.

What is your company doing w.r.t Offshoring?