Thomas White, CEO of a Fortune 500 company, and his team have at last decided to take the outsourcing route.Outsourcing Sparks
After a year of joining the organization, Tom decided to explore outsourcing of business processes as a strategic option in reducing costs and improving time to market. Their rival organization had improved its supply chain and service delivery and as a result reduced costs and improved profitability. It was a planned 3-year turn-around of the company. Its stock price went up by 15% and had become a case study at B-schools.
Tom was brought in as CEO to create a similar magic in the organization. In his previous organization, Tom had initiated the outsourcing exercise and managed to significantly improve customer satisfaction scores. The cost savings had also begun to have an impact on the bottom-line by the time he had left.
After assessing the options, Tom concluded that outsourcing was not the best option for reducing costs in the medium term since his new employer had grown through aggressive inorganic growth. As a result, most of the business functions worked in silos. Integration was a cumbersome and expensive exercise. Outsourcing, if he viewed it only from a savings standpoint, would not be achievable soon. However, there was merit in initiating outsourcing since it would push functions to standardize processes. According to his plans, in about 2 years the key functions would be streamlined and their cost of operations would also reduce.
To this end he formulated a Special Task Force (STF) to manage the outsourcing initiative. The members of the STF were handpicked by Tom and comprised heads of finance, marketing, technology, legal, human resources and administration departments.The Decision to Outsource
The obvious reasons for championing outsourcing were identified as improved bottom-line, enhanced efficiencies, increased shareholder value.
In spite his experience in outsourcing, Tom is a worried man. What lies ahead is the mammoth task of implementing the decision in a company that is outsourcing for the first time.A Blind Spot
As with any change that has a far-reaching effect, moving processes to the service provider’s shores will have Tom working on ensuring that his customers, employees and business are not affected during the transitioning period. Else the issues could spiral upwards and haunt his team after the transition phase as well.
He has to address issues relating to changes affecting the internal stakeholders, doubts and worries from the operations team on their future, apprehensions of customers’ reaction to changes in service delivery and legal views on data security. If not addressed appropriately and in a timely manner, these issues can have a far-reaching impact on the outsourcing initiative.
So, what should Tom’s team consider, plan and do to ensure the outsourcing plan stays on the straight and narrow and adverse impact on the organization is minimal, if at all?Defining Directions
The key concerns after taking the decision to outsource are the more real issues that are felt across the organization for an outsourcer.
Success in offshore outsourcing largely depends on four stages. The first and the foremost is formulation of strategy for outsourcing. The subsequent stages are opportunity identification and change management. Last but not the least is service provider selection, a fluid option that can be executed as early as at the strategy formulation stage or later during the change management stage. It is dependent on the organization’s past experience with outsourcing, standardization of processes or involvement of a third party process consulting team.Strategy
Is outsourcing an effective way to achieve the organization’s business objectives? What to outsource and what not to outsource and how? These are some of the questions that need to be answered before one moves ahead. In Tom’s case, streamlining processes is an immediate priority, cost savings can come later. This would be a key parameter in the subsequent strategic choices. Chalking out a strategy not only provides answers to the questions but also gives a direction to the initiative.
The strategy is determined by two factors, location (off-shore or on-shore) and ownership (captive or third party service provider). The strategy can be a mix of various options available from the matrix thus created.
Some of the strategic considerations in making an outsourcing decision are:
Opportunity Identification (Op-Id)
- Leverage economies of scale of the service provider
- Improvement in operational efficiency
- Access to expert knowledge
- Opportunities for innovation and sustained improvements
- Enable management to focus on strategic planning and core processes
- Responsiveness to new business needs and changes in the business environment
The next logical step is prioritization of processes for outsourcing – assessing which processes should be outsourced and which ones kept in-house. Identify processes that can be outsourced in the short term and which ones require streamlining/reengineering before they can be outsourced. Assessing interlinks between processes and evaluation of risks of disruption or delays with segments being outsourced.
The operations team, a process consultant or the service provider can conduct a detailed analysis of processes that are ‘fit’ to be outsourced. The ‘fitness’ of processes would be unique for each organization. E.g., for some banking processes where technology redundancy is an issue and investments are very high, the process may be ‘fit’ to be outsourced if the service provider has made investments in the technology.
The output of this stage should be identified and prioritized processes for migration, defined phases of migration and calculation of the number of full-time equivalent employees required at the remote location.Opportunity Identification Methodology
Opportunity Identification begins with identification of businesses processes. The processes are categorized as core and non-core. Non-core processes are then graded on their remote processing feasibility. The feasibility analysis for a process to run at a third party remote location is done by considering benefits and risks associated with it. The analysis is based on both financial and non-financial parameters.
The decision factors impacting a process under migration can be broadly categorized as:
- Cost savings
- Enhancement in service and quality levels
- Scalability requirements
- Benchmarking to best standards, and
- Risk diversification
The risk factors:
- Process feasibility
- Technological feasibility
- Regulatory issues
- Financial risks, and
- Change management issues
Processes with highest benefits and lowest risk are selected for migration.Change Management
Migration can lead to dramatic changes within the organization. The magnitude of change may go to the extent of a radical modification in the organizational structure, management systems, resource requirements, and performance measurement, among others. These changes have the potential to impact the way business is conducted. Managing change is a key requirement to ensure outsourcing success. It needs maximum attention in terms of planning, execution, monitoring and resource management.Organization
The first step towards managing change and countering its adverse effects is to build a change management team. A senior management person should be a champion for the cause. A person with authority heading the task force would increase the success of the exercise, as inner resistances would be lower. In a large outsourcing exercise it is essential to establish a steering committee. The steering committee charts out an overall migration strategy and monitors its progress. Further, there are identified process owners responsible for specific processes. The team members who act as change agents are sourced from functions across the organization. The organization thus created should have well laid out hierarchy, ownerships, responsibilities and reporting structures.Communication Plan
Communication is an integral part of the exercise, especially in the early stages when the apprehensions are high and the expectations are still being set. The key objective is to provide awareness and education to people who would be affected by the change. In addition, it also keeps employees at all levels involved, informed and working to achieve the common business goal.
A communication strategy should be charted out to achieve these objectives. The strategy should also address the employees who would be affected, to clarify the reasons and communicate the protection/alternate solutions worked out for them. It should take into account the smallest details such as when and what messages to be communicated to which set of employees.Staff Retention
Staffing at the offshore location and staff retention onshore could be one of the major challenges in migration. While the offshore staff requirement is at full strength right from the beginning of the migration, the staff onshore is gradually reduced to the required level over a period, till the migrated process attains a stable state. The planning for staff retention should be done well in advance, i.e. even before migration takes off.
The organization should identify and devise a retention plan for its key staff that would protect the specialist knowledge and the skill base. In addition, it should also identify staff “at risk” that are critical for business continuity and device a retention plan for them till the offshore process attains stability. A pre-emptive re-skilling program for redeployment or assistance in finding new employment of the staff “at risk” should be planned.Business Continuity Planning (BCP)
Offshore outsourcing also requires comprehensive contingency planning for business to continue without any hiccups. At the macro level, BCP stems from the overall outsourcing strategy. Multiple service providers, a mix of captive and offshore, and multi-location strategies are primarily aimed at diversifying the business risks that may disrupt business continuity.
At the micro level, BCP looks at two different aspects – business continuity during migration and business continuity post-migration. BCP during migration is mostly about retaining the required number of personnel “at risk” who are business critical. Post migration, BCP objective is to ensure that the organization retains the number of people to preserve the knowledge and skills of outsourced processesTrade Union – A Partner in Offshore Outsourcing
The apparent result of offshore outsourcing—staff retrenchment—could lead to adverse reaction from trade unions, especially when they command considerable influence within the organization.
It is imperative for the outsourcing champions to run awareness campaigns to educate the trade unions on the reasons for taking the outsourcing route and the plans worked out for the affected employees. The unions should be involved as partners in the exercise. It is important to win their confidence and if need be the management should negotiate an outsourcing agreement with them.Culture Differences
When processes are transitioned offshore, knowledge transition should have a strong orientation towards culture. It is required in order to bridge the cultural differences between onshore and offshore sites. Acclimatization to the culture of originating geography is necessary for the service provider’s staff who would be managing the offshore operations. However, it is equally important to familiarize the outsourcing team with the culture prevalent at the offshore location.
Cultural awareness can be imparted through rigorous training. This is achieved by putting together a team with an objective of developing a culture-training module. The team identifies the obvious and not so obvious cultural elements.Service Provider Selection
Service provider selection is another critical success factor. Service provider can come into the picture at any of the three stages depending on the outsourcer’s requirement. If selected as early as strategy formulation stage, a service provider partners in planning and execution at all the three stages of strategy formulation, opportunity identification and change management. Before entering into a contract with the service provider it is essential to know what the outsourcing agreement will cover, the result expected from it, what will be the measured parameters and criteria, and the reporting requirements.Evaluation Criteria
Evaluation criteria commonly employed in service provider selection are
Tom's Path to Success
- Experience and expertise
- Financial stability
- Migration expertise
- Time proven migration methodologies
- Ongoing process improvements beyond cost savings
- Capability to execute the contract
- Resources availability with the service provider, in addition to staffing and HR policies, and
- Flexibility to adapt to the organizations requirements
Well begun is half done - sums up the significance of the four stages in getting organized and equipped for outsourcing. It will help Tom in fine-tuningthe objectives, expectation management, the timelines and provide a step-by-step guide to minimizing risks in outsourcing.
Tom’s performance bonus for the year depends on how well he manages Round One of the Outsourcing game. Minimum penalties in the game would be an asset.