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| Focus on Outsourcing |
September 1, 2005 |
A Valuable Business Option, Outsourcing Can Also Be Tough To Manage Well
Outsourcing is a rapidly growing business practice that is reshaping the global economy. According to IDC, outsourcing globally will be a $1.2 trillion dollar market by 2006, and it is growing at a compounded annual growth rate of 11 per cent.
This means it is now a key business issue, affecting almost every organization in both the public and private sectors.
Outsourcing has evolved. Many organizations now have core, mission-critical aspects of their business done by others. These include manufacturing, supply chain, human resource management, transaction processing, entire information technology operations and accounting. Recently, the issue of offshoring—outsourcing to a service provider in a country with lower labour costs—has become an option for organizations to consider.
However, most organizations are struggling with the complexity of the process, and many that have already outsourced acknowledge they could have done it better, with more knowledge and experience.
Governments, too, are realizing outsourcing has important public policy implications, as more and more work can be done anywhere that the requisite skills exist. Research has shown Canada has probably been a net winner to date in this global repositioning of work, but what is needed to keep Canada a net winner in attracting the right kind of work?
To help further the understanding and effective application of outsourcing in Canada, the Centre for Outsourcing Research and Education (CORE) has been created by a number of major corporations, governments and academics.
CORE will offer comprehensive, high-quality education and research on outsourcing in conjunction with the Rotman School of Management at the University of Toronto. CORE’s vision is to become the definitive source of education and information about outsourcing.
CORE is conducting launch briefings across Canada:
Toronto Sept. 15
Halifax Oct. 4
Ottawa Oct. 6
Calgary Oct. 13
Vancouver Oct. 14
To find out about becoming a member of CORE or about launch briefings, visit our Web site at core-outsourcing.org or contact our President, John Simke, at 416-869-2449
or jsimke@core/outsourcing.org.
DRIVING VALUE FROM OUTSOURCING
Outsourcing is changing.
From the relatively simple arrangements dealing with IT infrastructure and various non-core activities, organizations are now entering Business Process Outsourcing relationships to have others perform key core functions—often involving in excess of $1 billion in fees over their term.
Organizations today recognize the importance of designing and implementing an operating model that will serve customers best and optimize results. Outsourcing can deliver
this strategic and operational value to organizations but the route to these benefits is fraught with risks and challenges. The key issues most organizations are grappling
with include:
- Should we outsource; what should we outsource; and why?
- Should we “offshore” and how?
- How do we go about scoping an outsourcing relationship—what should be in and what should be out of scope of the outsourcing?
- How do we effectively execute an outsourcing transaction, including choosing the right partner and developing an agreement that makes sense?
- How do we make the relationship work for the long term, making sure there is accountability for performance and a way of addressing disputes?
- How do we address employee concerns, particularly when employees are transferred to the service provider organization?
- How do we deal with mature outsourcing relationships coming to the end of their initial term? Can we realistically terminate or find another service provider, and how?
Pwc Point Of View
How can organizations gain maximum advantage from outsourcing? PwC has a very clear point of view on what enables outsourcing relationships to succeed.
Here are 12 considerations when entering an outsourcing relationship:
1. The decision to outsource must be taken in light of the overall business strategy.
2. Outsourcing driven purely by economics almost never delivers desired cost savings.
3. The business case is key, and it must address both economic and broader organizational effectiveness objectives.
4. Once the decision to outsource has been made, it takes almost as much time as a major merger or acquisition transaction.
5. Outsourcing is a relationship, not a transaction. Successful outsourcing entails effective relationship management on both sides.
6. Good service management, contract management and active risk management are critical to success.
7. Forgetting the basics such as legal, regulatory, tax, accounting and pension issues is a recipe for disaster.
8. People are key, both in terms of allocating the right resources to implementing the relationship, as well as getting the change management right.
9. Governance of an outsourcing relationship is key—both with the partner and internally in the organization.
10. Outsourcing is not for life. Organizations must have a view as to what happens after the term of the agreement and must keep their options open.
11. International outsourcing multiplies the issues and complexity.
12. You cannot outsource management responsibility—even if you outsource. You must maintain an ability to exercise legal, regulatory, financial and operational responsibility.
PwC’s Outsourcing Advisory team works with organizations from across Canada throughout the outsourcing lifecycle—from strategy to ongoing performance management. Our focus is on helping organizations drive value from relationships, not just getting the deal done. We have a full range of outsourcing services including:
- Strategic analysis
- Business case development
- Transaction structuring
- Partner selection and negotiation
- Service level agreement development
- Governance and risk management
- Performance measurement design
- Analysis of renewal and terminationoptions
With advance planning and proactive assessment of outsourcing performance over the life of the contract, organizations will gain the maximum benefit from their outsourcing relationships.
For more information on outsourcing best practices visit http://www.pwc.com/ca
COMPANIES TO OUTSOURCE MORE HR FUNCTIONS
Organizations are looking for ways to increase efficiencies while managing costs.
As a result, some IT professionals may find themselves developing expertise in a new area—human resources.
While almost all of the respondents to a recent Hewitt Associates survey, HR Outsourcing Trends and Insights 2005, already outsource one HR function (outplacement services, employee assistance programs and pension administration in particular), they expect to outsource more—and in more areas—by 2008. Look for outsourced administration of leave management, learning and development, payroll, recruiting, healthcare benefits and global mobility to gain momentum.
The same rationale that has prompted companies to outsource IT services to third-party providers has spread to HR functions. According to the Hewitt survey, HR outsourcing is on the upswing as organizations realize the benefits: significant cost savings, new capabilities and services for employees, and the freeing up of IT and HR staff to focus on more strategic work that is integral to the business. Earlier this year, the Yankee Group stated that large companies can cut their HR administration costs by as much as 20 per cent by outsourcing—provided the deal is well-managed.
This proviso is important. Outsourcing deals—whether for IT or HR services—can fail to live up to their potential if organizations don’t fully understand their role under the new arrangement.
Outsourcing does not mean handing off the entire responsibility for specified services to a provider; rather, it signifies the beginning of a true partnership.
What does HR outsourcing mean for an organization’s IT professionals? They have a key part to play, particularly in evaluating the technology capabilities of potential outsourcing partners. After all, if a provider cannot offer service that is more effective and less expensive than what could be done in-house, there is no reason to outsource.
Once an outsourcing provider has been selected, IT assumes an advisory role in the outsourcing relationship, helping the provider’s technology experts understand the complexity of the business so as to ensure systems are implemented that offer maximum efficiency. Even though an experienced HR outsourcing provider will have considerable expertise, the ability to consult with an “inside” expert during the implementation phase is invaluable. On an ongoing basis, input from internal IT professionals will help with further refinements and upgrades.
The responsibility for overseeing the HR outsourcing relationship does not rest solely on the shoulders of IT executives at the organization, of course.
In fact, the most effective outsourcing relationships involve multidisciplinary teams on both sides of the partnership. On the company side, HR representatives should obviously be at the table alongside IT professionals, as should those with expertise in finance. It is also helpful to have access to legal experts, particularly during contract negotiations.
On the provider side, in order to achieve maximum benefit from HR outsourcing, it is essential to have a team with not just the technological expertise, but also in-depth knowledge of human resources. In truly successful outsourcing relationships, the external and internal teams work in tandem, developing a true partnership focused on the same goals.
With more than 60 years of experience, Hewitt Associates (NYSE: HEW) is the world’s foremost provider of human resources outsourcing and consulting services. The firm consults with more than 2,300 companies and administers human resources, healthcare, payroll and retirement programs on behalf of more than 300 companies to millions of employees and retirees worldwide. Located in 35 countries, including Canadian offices in Toronto, Montreal, Vancouver, Calgary and Regina, Hewitt employs approximately 20,000 associates.
For more information, please visit: http://www.hewitt.com/canada
MAKING LOGISTICS OUTSOURCING RELATIONSHIPS WORK
The CEO says build for growth and improve service but you’ve cut your supply chain costs and your capacity for growth to the bone. What’s next? Increasingly, many companies are outsourcing key supply chain activities to support corporate strategy, improve service and manage costs. Well-managed outsourcing partnerships leverage the capabilities and investments of logistics experts to support these seemingly impossible executive demands. There is no free ride though.
World-class service levels and seamless transition between the client and logistics service provider don’t happen overnight.
They require significant investment in people, planning and time, and the commitment of executive and operations staff. The most successful outsourcing relationships are built on well-articulated and proven relationship models.
Progistix’s relationship governance framework helps clients face strategic challenges. The framework is where goals are communicated, along with the need for change and recognition for achievement.
The relationship governance framework:
- maximizes value to both our client and Progistix
- manages the relationship effectively
- measures performance, in terms of relative cost and value of service.
Progistix’s relationship mechanism is founded on:
- value and alignment: clarity on joint measures of success, shared incentives to perform and strong working relationships.
- scope and frequency of meetings: from annual strategic-level meetings to weekly/daily coordination, planning meetings determine priorities and define specific initiatives.
- measurement: Key Performance Indicators (KPIs) are monitored and reviewed regularly and review cycles provide a forum to discuss required changes.
- innovation and synergy: joint project teams drive alignment and focus on improvement initiatives.
For more information please visit http://www.progistix.com
THE MISSION OF THE CENTRE FOR OUTSOURCING RESEARCH AND EDUCATION (CORE) IS TO FURTHER THE UNDERSTANDING AND EFFECTIVE APPLICATION OF OUTSOURCING.
To accomplish this CORE will offer comprehensive, high-quality education and research on outsourcing. CORE’s corporate education programs will be delivered in conjunction with the Rotman School of Management at the University of Toronto. In addition, CORE will conduct or commission independent research and benchmarking studies to assist stakeholders in the market to understand the issues associated with outsourcing.
CORE’s vision is to become the definitive source of education and information about outsourcing.
CORE is a non-profit organization, governed by a Board drawn from its sponsoring organizations, which have deep outsourcing expertise.
The initial sponsor group represents the private and public sectors, as well as outsourcing service providers, advisors and customers:
- Blake, Cassels & Graydon
- CIBC
- Cisco Systems
- Hydro One
- Innovatia
- PricewaterhouseCoopers
- Progistix
- Serco
- Solutions B.C. of The Government of British Columbia
- IBM
- St. Joseph Communications
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