Posts filed under 'Why Outsource?'
T leaders can’t expect to have the upper hand in an outsourcing negotiation. Whether you’re negotiating the initial contract, an extension or a change order, the outsourcer normally has the advantage.
That’s because outsourcers are involved in just such negotiations all the time. They understand the internal cost structure and frequently negotiate for the same set of services using the same pricing mechanisms and contract. You might level the playing field a bit if your company is large enough to have a dedicated IT vendor management group, but you will still be at a disadvantage. Your vendor management group does indeed focus entirely on negotiating pricing, but it does it for everything from toner cartridges to complex outsourcing arrangements. Its focus is much more diffuse than that of the people on the other side of the table. And since pricing mechanisms, sales channels and service levels vary by outsourcer, it’s difficult to master the nuances of every vendor’s contract terms.
But one way to get the best outsourcing deal you can is to make it clear to the vendors that you understand how they make money. That sort of knowledge can position you to make intelligent decisions that can lower your costs by lowering the outsourcer’s costs.
So what are some of the cost-reducing techniques that outsourcers use? They include the following:
- Purchase aggregation. The large amount of products and services that outsourcers purchase in support of their clients allows them to obtain lower prices than all but the largest enterprises. Software manufacturers typically offer significant discounts on volume sales. Hardware manufacturers that are also outsourcers may reduce hardware prices to near cost when they want to close a particular deal. Outsourcers also benefit from aggregating supplies, shipping and other services. For example, companies that fix computer equipment in a repair depot obtain excellent freight rates based on the large amount of equipment that moves from the customer to the repair facility and back.
In addition to products and services, outsourcers hire architects, database analysts and other technical specialists, which they spread across multiple clients. While very large organizations can justify the cost of technical specialists, small and mid-tier organizations often struggle to match specialist capacity with demand.
Evaluate which products and services could benefit from volume pricing when deciding which tasks to outsource. Some organizations, particularly smaller ones, will find it beneficial to expand the outsourcing scope to take advantage of expensive but hard-to-find technical specialists.
- Internal efficiency. Outsourcers streamline internal processes and technology platforms wherever possible. Ruthless standardization reduces internal labor costs while making it easier to deliver consistent, high-quality service. Internal operations are typically based on industry-standard practices such as ITIL, ISO 27000, PMI’s certifications or virtualization. All are well understood by IT professionals, easily explained to executive management and supported by numerous tools.
Embracing the outsourcer’s practices and tools promotes efficiency in both the outsourcer and the client. If you are unwilling to adopt the outsourcer’s practices, you are unlikely to get all of the hoped-for benefits from outsourcing. Discuss process standardization before signing the contract. If your processes need revamping, work with the outsourcer to decide if it will be cheaper for you or the outsourcer to do the work. There is no point in redesigning your processes twice.
- Facility costs. Some outsourcers allocate insurance, taxes and other facility costs proportionally across current customers. This works well when the data center, service desk or repair center is operating at capacity but can result in higher costs when customers leave or contracts are completed.
Evaluate the cost of doing business in the area in which your services will be performed. Labor, power, land, and other costs vary widely. And be careful to limit pass-through cost increases during negotiations.
- Technical resource leverage. IT organizations require a variety of specialized skills such as architects, database analysts and network analysts. Technical tools required may include perimeter security, communications equipment and network discovery appliances. Very large organizations can justify the cost of both the staff and the tools. Small and mid-tier organizations, often struggle with both. Since most employees prefer full-time employment, demand for technical skills rarely matches the exact capacity of staff. As a result, technical specialists are frequently either overworked or searching for projects to avoid boredom. Similarly, even if specialized technical tools are available, they are often used infrequently or significantly below full capacity.
Outsourcers spread people and tools across multiple clients, better matching capacity to demand. In addition, since outsourcing is the business, technical staffers are offered more diverse career opportunities. Unless you are large enough to justify a deep technical bench, consider insourcing the design of your technical environment but outsourcing the day-to-day operation and maintenance of that environment.
- Salary arbitrage. Many outsourcers staff positions not requiring face-to-face interaction in low-cost parts of the world. Typically this works best with well-structured processes requiring interaction with other technical staff (e.g. CMM Level 4-5 or Service Desk Level 2-3 support.) It is minimally beneficial with less structured processes or when the outsourcer must communicate regularly with nontechnical staff. Before accepting support from a low-cost part of the world, make sure your processes are well structured and ascertain that no language, time zone or cultural differences will hinder performance.
Clearly, lowered cost is only one consideration in an outsourcing decision. But if you pursue outsourcing, you obviously want to negotiate the best price possible. Don’t mindlessly beat your outsourcers to lower their prices! Allow them to assume responsibility for parts of your operation that enable them to leverage their scale, expertise and cost structure. Doing so can ultimately reduce costs for both of you, and your outsourcer will be grateful for being able to negotiate win-win pricing. Don’t start your long-term relationship as adversaries; show from the beginning that you intend to be collaborative partners.
Bart Perkins is managing partner at Louisville, Ky.-based Leverage Partners Inc., which helps organizations invest well in IT. Contact him at BartPerkins@LeveragePartners.com.
June 18th, 2015
The number and value of IT and BPO outsourcing contracts signed in Europe in the first three months of 2014 grew at the fastest rate for four years, according to the latest figures from market watcher ISG.
Three-quarters of the deals signed involved new scope.
Contracts signed in the quarter year period were worth €2.4bn, which was 29% higher than the same period a year ago. The number of contracts signed was 165, a 21% increase.
IT outsourcing accounted for 127 deals in the quarter worth €2bn of total value, an 18% increase. BPO value was about €370m, which was lower than the same period the year before.
Five large outsourcing deals, worth over €80m each, were signed in the quarter. Over 50% of the global outsourcing value was in the EMEA region.
In the UK, 59 contracts were recorded, worth €1bn. This represented a 66% increase in value and the highest number of contracts in a single quarter for three years.
John Keppel, president of ISG North Europe, said activity remains high and the return of large relationship awards boosted the market.
Despite the return of large deals, Keppel re-iterated ISG’s previous report, that stated that customers are moving to smaller contracts.
“Although these larger contracts have a strong role to play in the market, the smaller deal size brackets will continue to grow more sharply as enterprises opt for greater flexibility and more specialised services from a greater number of providers,” he said.
“Multi-sourcing, increasing competition among providers and lower technology costs will continue to be the factors that drive the market for the foreseeable future.”
Keppel said global IT and BPO outsourcing is expected to grow 15% in the first half of the year and a “high single digit” figure for the full year.
April 16th, 2014
Call center outsourcing customers are looking for more than just cost cutting from their deals today. They want providers that can help them deliver business outcomes.
The inclusion of value-added services, such as customer retention, multi-channel management and customer analytics is on the rise, according to outsourcing consultancy Everest Group’s contact outsourcing annual report.
“With our global economy being more in a growth mode than it has been in last couple of years, companies are focused more now on creating a differentiating experience for their customers,” says Katrina Menzigian, Everest Group’s vice president of research relations. “And they’re expecting the same thing from their service providers.”
Call Center Services Making a Comeback
After hitting a low in 2009, buying activity has picked up with the U.S. market for call center services revenue growing 7 to 8 percent in 2012 from $65 billion to $70 billion, according to Everest Group. (The global call center market was worth $300 billion to $350 billion.)
“Customers also understand more than in the past that the customer interaction opportunity is huge in terms of driving growth,” Menzigian says. “They want to be smart about how they spend, but they understand that there are other things they need to offer their customers.”
One of those things is a seamless experience no matter what channel the consumer uses — online chat, 800 number, social media, mobile app. “Buyers want to create a positive and productive multi-channel experience for their customers,” says Menzigian.
“What we are finding is that it’s becoming more prevalent to outsource by channel not by consumer need,” says Menzigian. “So you might see outsourcing happening by line of business or product or geography. Service providers are working very hard to position themselves as being able to support that integrated channel experience.”
While voice remains the dominant customer service channel, non-voice channels grew 35 to 50 percent in the last year, according to Everest Group. In particular, call center clients are looking for social media management from their providers.
“It’s not so much the technology itself as how it is used to effectively shape the customer experience,” says Menzigian. “That requires dedicated effort.” One service provider, for example, had invested in a social media response center — a kind of innovation lab that would enable it to move beyond social media monitoring to social media response. Another conducts internal exercises simulating the customer experience across channels.
Call Center Outsourcing Contracts are Broadening in Scope
The Everest Group report, which examines more than 400 call center outsourcing contracts, found a broadening of contact center contract scope over the last two to three years. “In order to create needed differentiation in the market, more service providers are focused on offering clients end-to-end service,” says Menzigian. “They’re moving beyond the customer interaction touch point to helping fulfill the value chain of that industry.”
Service providers are also investing more in analytics beyond basic reporting with a goal of offering predictive modeling for their clients. Outsourcing clients themselves are focusing more on their call center relationships in order to achieve more of the business outcomes desired.
“They realize they need to invest in the relationships they have with their service providers,” says Menzigian. As a result, many are rationalizing their provider portfolio and working more closely with a core group of vendors.
The industry is also seeing a shift in pricing models, according to the report. While pure headcount-based, fixed-fee and transaction-based pricing are all on the decline, hybrid pricing (which incorporates a combination of pricing mechanisms) is on the rise. “Clients are taking a much more detailed look at the activity within the contract and trying to identify how to better align the desired outcomes through pricing.”
Customers — particularly those inking new contact center deals — are also looking for more onshore support, according to Everest Group, resulting in a more balanced geographic support model.
Author: Stephanie Overby
February 19th, 2014
This year, the IT services industry saw customers doing more of their own IT services deals, testing the service integration model, and continuing to struggle with outsourcing transitions. CIO.com again asked outsourcing observers to tell us what they think is in the cards for the year ahead. And if they’re right, 2013 could be the year customers–and a few robots–take greater control of the IT outsourcing space.
1. The Rise of the Machines
Say hello to the latest IT services professional: the robot. “2014 will see significant growth in the development and implementation of robot-like technologies that will automate many tasks currently performed by full-time employees in [outsourcing] deals,” says Shawn C. Helms, partner in the outsourcing and technology transactions practices at K&L Gates. “Given the rise of robots replacing people in manufacturing and logistics, it is not a stretch to predict that robots will move up the intellectual value chain as artificial intelligence continues to develop.”
“The rise of smart machines will have a radical effect on the IT and outsourcing environments,” says Jonathan Crane, chief commercial officer for IPsoft. “What is still unclear is what either of these industries will look like in the end. Will these tumultuous changes have a lasting effect? Could this be the beginning of the end of the labor arbitrage era?”
At the very least, expect an increase in automation generally. “With the cost benefits of labor arbitrage being largely harvested and labor costs inevitably on the rise, CIOs will need to look for alternative opportunities to reduce or contain operating costs,” says Joe Nash, principal in Pillsbury’s global sourcing group. “That means looking for ways through automation to reduce the amount of work it takes to complete an IT function or service, not the cost of the labor to do it.”
Process automation will become integrated with service provider solutions this year, says Chip Wagner, CEO of IT outsourcing consultancy Alsbridge.
2. Hybrid Offshoring Heats Up
“In 2014, offshoring to a supplier will not be the default,” says Atul Vasithsha, chairman of outsourcing consultancy NeoGroup. Rather, a hybrid model, combining insourced and outsourced offshore services, will gain attention as an alternative.
“Companies are starting to invest more in global business services models, [which combine] the best of shared services and outsourcing under a common governance model. This is seeing processes being offshored in captives by industries that have traditionally been reluctant, such as media and entertainment,” says Vasithsha.
Indeed, this year will see a mix of outsourcing models overall. “Most companies need to get the right combination of best talent and most-cost-effective IT services,” says Scott Staples, president of Americas at IT service provider Mindtree. “The best sourcing strategies treat outsourcing and insourcing as complementary not competitive, and leverage onsite, onshore, offshore and nearshore options all in the same model.”
3. An Increase in Insourcing
“Of the IT services historically outsourced, 20 to 30 percent will be brought back in-house as buyers are more comfortable to create retained organizations that not only govern the services, but start to move more into operational control of the services,” says Stan Lepeak, global research director for KPMG Advisory. Companies will rely on IT service management frameworks like version three of the Information Technology Infrastructure Library to manage the increased insourcing.
But expect the industry press to make a bigger deal about such backsourcing than it deserves, says Wagner of Alsbridge.
4. Service Integration Comes Home
IT leaders have given third parties a shot managing their multi-sourced environments in recent years. In 2014, they’ll take on service integration themselves. “Following a period of experimentation with various outsourced models, client organizations will increasingly focus on service integration as an integral core competency and take key functions back in-house,” says Lois Coatney, director with outsourcing consultancy Information Services Group (ISG).
“In outsourced models, clients have found they lose visibility and direct control of service management effectiveness, and that they become too remote and unable to fill their fiduciary responsibility. Clients are recognizing that a solid internal service integration capability provides better flexibility and knowledge of the business required to onboard new and specialty service providers,” says Coatney.
5. The Cloud Gets Grounded
There’s little doubt that cloud computing is here to stay, but businesses have struggled to managed such IT services effectively. “In 2014, we expect clients and service providers to further define their strategic objectives for cloud services, applying consistent metrics to quantify their return on investment and navigate a rapidly evolving contracting environment,” says Scott Feuless, principal consultant with ISG. “One key will be progress towards normalized measurement frameworks that enable meaningful comparisons of alternative solutions.”
Ultimately, companies will be able to perform apples-to-apples comparisons of different cloud options, as well as comparisons of cloud vs. traditional solutions. “The result will be significant progress in reaping the benefits of cloud services, as buyers avoid the mistakes of early adopters,” Fueless says. “Service providers will adjust their offerings to meet the needs of a more cautious and educated market.”
6. Contracts Compel Inter-Provider Cooperation
Why can’t they all just get along? This year, they’ll be legally required to. “As organizations continue to implement a multi-sourcing, best-of-breed strategy customers need to find a way to force competitive service providers to work together to achieve common goals,” says Helms of K&L Gates. In 2013, some outsourcing customers implemented outsourcing “cooperation agreements” that contractually obligated service providers to cooperate at an operational level. “I predict that 2014 will see an increased use of outsourcing cooperation agreements,” Helms says.
7. A Lower Cost Consulting Model Emerges
This year, an increasing number of experienced IT outsourcing customers decided to forego the pricey third party consultants and set up their IT services deals on their own. Look for outsourcing consultants to adjust their approach in the year ahead. “In 2014, we’ll start to see more consultants offer light-touch services for clients, often on annuity subscriptions, to service clients wanting ongoing relationships with less intense financial commitments,” says Phil Fersht, CEO of outsourcing analyst firm HfS Research.
8. India Goes After Infrastructure
India Inc. made its reputation on application development and business process outsourcing. This year, they’ll increase focus on infrastructure deals. “It would have been unheard of 10 years ago for an India-based provider to beat out an IBM, EDS, or CSC in an IT infrastructure deal in the United States or Europe,” says Helms of K&L Gates. “I predict that 2014 will be the year where Indian-heritage providers become the biggest competitive threat for traditional U.S.-based infrastructure powerhouse providers.”
Fersht of HfS Research forecasts a good year overall for Indian providers. “Many clients prefer the flexibility, work ethic, innovation, and cost-friendliness of many of the Indian IT services firms to the stagnating services of many of the Western incumbents, many of which will continue to lose market share in 2014,” he says. “We expect this trend to continue apace in 2014.”
9. Big Deals Get Smaller. Small Deals Get Bigger
Multi-sourcing continues to be the name of the game. “Prior mega-deals will continue to be disaggregated and resourced in smaller pieces,” says Wagner of Alsbridge. At the same time, however, many smaller deals will be rolled up into midsize deals as customers seek more leverage with their vendors, Wagner says.
10. Governance Gets Harder
“With increased adoption of global business services and the growing complexity and diversity of vendor portfolios, the governance function will become an even more critical capability that enables organizations to manage performance, risk and compliance,” says KPMG’s Lepeak. “However, most organizations will face challenges in recruiting and hiring skilled resources due to a talent shortage in the governance arena.”
Author: Stephanie Overby
February 19th, 2014
Process optimisation and shared services are now seen as a higher priority than IT outsourcing as businesses attempt to fend off recessionary pressures.
IT outsourcing spending globally will only increase by 4% in 2014, according to Ovum, while contract renegotiations and restructuring will increase as $146m of contracts come up for renewal at the end of next year.
Ovum expects further acceleration of multi-sourcing and predicts that smaller contracts and cloud services will expand the market in terms of overall activity.
“Despite all the negative headlines around the sharply declining total contract value of publicly announced contracts, culminating in some commentators insinuating the death of outsourcing, outsourcing will continue to be a strategic management tool,” said Thomas Reuner, principal analyst at Ovum.
“However, there are fundamental challenges ahead, especially in the US and UK public sector, after the upheaval brought about by the financial crisis,” he added.
Ovum predicted that demand in Europe will remain subdued as the UK public sector reforms its procurement processes and the Eurozone crisis continues.
Reuner said there will be strong growth in certain areas: “While infrastructure will continue to show subdued growth, we expect significantly stronger growth in business process outsourcing as the offerings are maturing and more projects become process-led.”
October 8th, 2013