How “Vested Outsourcing” is Changing the Way Companies Do Business

January 6th, 2012

Recent research by Kate Vitasek and the University of Tennessee has created a new way of looking at outsourcing that is poised to transform the way businesses partner with providers.

“Vested outsourcing” is now being studied by government agencies as well as top commercial companies, who are eager to implement changes that promise to bring better results than traditional ways of outsourcing.

Here are some of the key differences in vested outsourcing as compared to current outsourcing practices:

  • Typically, companies pay for vendors to perform specific business activities. When following the vested outsourcing model, companies will look at the final results of those activities based on the value each vendor is actually contributing to the company and its bottom line. To that end, both parties must agree on “clearly defined and measurable outcomes.”
  • Companies have been accustomed to focusing on finding the lowest priced provider, but the vested outsourcing solution would have businesses consider the larger picture and carefully structure each vendor contract to eliminate hidden costs. Transparency is vital if you are to realize real value from your vendor partnerships.
  • With conventional outsourcing, the chief consideration has been based largely on a “What’s in it for me” attitude. Vested outsourcing allows the provider to reap increased financial benefits as well, based on their contribution to the company’s growth.
  • Traditionally, businesses outsource to expert providers who fill gaps in the company’s knowledge and skill base by completely taking on the processes involved in these areas. Vested outsourcing, on the other hand, advocates a governance structure that “provides insight, not merely oversight.”

According to Outsourcing Institute CEO Frank Casale, “Vested Outsourcing is a game-changing approach that will quickly become the new gold standard for advanced outsourcing relationships. It is a critical enabler for Outsourcing 2.0.” It is certainly something we’ll be keeping our eye on.

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Ten Tips for Mastering the Initial Phase of Outsourcing

December 2nd, 2011

Getting off to a good start will pave the way for success in outsourcing.

Research firm Gartner recently offered advice for a winning initial phase strategy. Here is a summary of their tips:

  1. Establish your framework and define your goals. This involves setting priorities and outlining the principles and rules that will guide each sourcing decision and action. “Define specific business, service and technical goals for sourcing initiatives and relevant measures of success,” Gartner advises.
  2. Evaluate the company’s current service delivery.  Conduct a thorough assessment of the provider’s capabilities, considering the cost as well as the service levels of the organization’s existing contracts. Will this partner’s enterprise architecture enable it to deliver at the level required to achieve your objectives?
  3. Assess the company’s multi-sourcing management competencies. Find out the level of the provider’s knowledge and expertise for managing service delivery on business, application and infrastructure processes.
  4. Evaluate possible constraints and opportunities. Consider business forces, overall economic cycles, disruptive technologies, regulatory compliance requirements and internal organizational issues. Build risk profiles and a risk management framework.
  5. Analyze gaps. Measure your defined needs and objectives against the current situation and consider alternative approaches and ways to fill any gaps. Weigh and compare the drivers, goals and risks of each given scenario.
  6. Consider the external market. Evaluate the current vendor landscape as well as your competitors’ strategies.  Assess the availability, maturity and stability of service offerings, and use this analysis to help you decide what services you will use and when. Then, says Gartner, “Refine the alternative sourcing scenario to drive business value and stay ahead of competitors.”
  7. Use scenario planning. Compare the value and potential risk of various sourcing models. Does the sourcing solution fit your business objectives, gap analysis and company culture, for example? How will it impact retained competencies?  Use this information to find the best fit for your company’s objectives.
  8. Analyze your risks. Identify possible risks using a detailed risk-reward analysis for specific scenarios. Use tools and guidelines to assess and manage vendor risk, adapting your risk evaluation standards to different types of vendors and services.
  9. Create a business case. Analyze the total cost of sourcing (TCS) for the scenarios you’re looking at. Consider the costs of the transition and how workloads and service requirements will likely evolve.
  10. Develop an action plan. Define the agreements and the anticipated time frames, as well as a communication and change management plan, and develop an action plan to implement the strategy.

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Three Types of Business Processes: How Each is Affected by Outsourcing

November 14th, 2011

Outsourcing non-core activities can allow you to focus your energy on areas in which your company has a competitive edge, while saving money on the processes you’ve outsourced.

Before taking this step, however, it’s important to analyze which activities would be ideal for your company to outsource.

For most companies, business functions fall into three main categories:

Core activities are your company’s indispensable central activities. These are the services you provide or the products you create. Delegating these essential activities to an outsourced provider would, in effect, create a competitor for your own company.

Critical but non-core activities are the strategic types of functions that can have a major impact on the success of your business, depending on how well they are performed. Activities such as marketing, information technology and logistics operations are excellent examples of the type of critical, non-core strategic functions that are vital to your company and, if outsourced, should be carried out by a capable, skilled and trusted provider.

Non-core and non-critical activities are those necessary tactical functions that would have a minimal effect on your business if performed poorly. Janitorial, payroll, security and grounds maintenance are good examples of this type of function. If you are dissatisfied with the level of services from an outsourced vendor of such non-core activities, you can find a new provider with relative ease and negligible financial loss to your company.

Typically, companies have viewed non-core, strategic functions as activities that contribute little to their bottom line. This notion is changing, however, as outsourced processes help companies save money or increase productivity, according to Sergei Tiunov, General Director of the Outsourcing Division of BDO Russia.  “In other words,” he notes, “a non-core business process may start to contribute to the bottom line by being outsourced.”

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Six Mistakes Businesses Make When Outsourcing

October 20th, 2011

Forbes recently listed the six most common mistakes companies make when outsourcing.

Knowing in advance what these pitfalls are can help you to avoid them, so we have provided a brief overview of each.

1. Underestimating the cost and complexity of managing relationships with outsourced partners.

Most companies greatly miscalculate the amount of time, money and talent it takes to effectively manage outsourced functions. Forbes states that “companies must invest in overseeing the partnership for the long term. This includes establishing a dedicated team of people, on both ends, to ensure compliance and adherence to agreed-upon service levels.”

2. Overestimating your cost savings from outsourcing.

Although labor costs may be lower in many countries, wages will continue to rise, as much as 10 percent each year, as is the case in India. A region can maintain highly educated leadership at a low cost for only about 20 years.

3. Choosing a country without having a clear understanding of your objectives.

Before selecting a country or service provider, first establish the cost of operating your business processes and set forth your objectives. Forbes recommends that you “study the expertise of each potential partner, considering proximity, costs, cultural and language barriers, telecom infrastructure and tax laws among other factors, before making a decision.”

4. Neglecting to communicate with your employees regarding the changes you’re planning.

Let your current employees know how much you have valued their service, and help them train for a new role within the company or elsewhere, to the extent possible. Be sensitive; don’t expect your employees to train the person who is to replace them.

5. Choosing a single source provider.

Whenever possible, distribute your risk by using a variety of service providers in different countries. You can also increase your company’s efficiency, by having providers in different time zones working around the clock on your projects.

6. Failure to provide retention programs for your best talent.

Competition for outsourced talent is intensifying, as more American and European companies send some of their work to offshore providers. The article’s advice? “Work with your service provider or offshore subsidiary–many American companies have established international development centers–to maintain your best assets.”

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Five Best Practices for Business Process Outsourcing

September 7th, 2011

“Supply chain executives are starting to apply more comprehensive analysis to outsourcing decisions, such as factoring in agility, responsiveness and cost,” says Michael Dominy, research director at research firm Gartner.

“Companies must focus on what they can do best and appropriately outsource activities that value chain partners can do better.”

To help companies leverage the expertise of outsourced partners, Gartner recently published a list of best practices in business process outsourcing (BPO). Here are some highlights from that list:

  1. Align your outsourcing strategy with the corporate and supply chain strategy; if your business is accustomed to providing a high level of personalized customer service, you should choose a provider with a record of highly responsive service delivery. If your company features very competitive pricing, you will need to work with vendors that offer efficiency along with lower pricing.
  2. Be sure to include strategic and tangible elements as well as cost when deciding which processes to outsource.  Giving due consideration to factors such as vendor reputation, responsiveness and performance will help you select reliable partners who will contribute to the success of your company.
  3. Define and track service levels and key performance indicators (KPIs). Make sure your service level agreements (SLAs) and KPIs are aligned with your business goals from the outset. Companies who do this are more likely to experience success in their relationships with BPO providers. Gartner offers details on supply chain metrics to help you identify what to measure.
  4. Maintain a continual flow of information and ideas. Keep your partners informed regarding promotional plans or any other decisions that will affect them. Any significant changes in customer orders or inventory levels, for example, should be promptly communicated. Regularly share and discuss ideas that can lead to performance improvement.
  5. Leverage the outsourcing partner’s processes, technologies and capabilities. Outsourced providers often have access to enhanced technology and may handle certain processes more efficiently than you would be able to using your own resources.

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How “Transformational Outsourcing” Translates to More Jobs for Americans

August 13th, 2011

Outsourcing still has its detractors, but a more enlightened, strategic, view is leading many businesses into a new era of “transformational outsourcing.”

Companies are actually creating more jobs for Americans as the ultimate result of offshoring some processes. A case in point, Paper Converting Machine Co. of Green Bay, Wiscoinsin, was recently featured in Business Week magazine.

According to Vasant Bennett, president of the company’s engineering services unit, PCMC turned to offshoring in order to slash development costs, win orders and keep their production operations in Green Bay.  ”We can compete and create great American jobs,” says CEO Robert Chapman says. “But not without offshoring.”

Many executives are coming to realize that offshoring is actually about creating growth for U.S. companies. While savings in labor expenses can be significant when companies take advantage of  a global talent pool, offshoring also results in substantial gains in productivity, efficiency, quality, and revenue.

The Heritage Foundation, a conservative think tank, also laid to rest some of the concerns about the reduction in American jobs due to outsourcing. The group reported that many organizations in other countries are also outsourcing to the U.S. According to the Organization for International Investment, the number of jobs outsourced to the United States has increased by 82% while the amount of jobs the United States outsourced overseas grew by only 23%. Moreover, jobs coming into America typically pay more than U.S jobs outsourced overseas.

The Business Week article went on to describe how such organizational transformations work, ”Genpact, Accenture, IBM Services, or another big outsourcing specialist dispatches teams to meticulously dissect the workflow of an entire human resources, finance, or info tech department. The team then helps build a new IT platform, redesigns all processes, and administers programs, acting as a virtual subsidiary. The contractor then disperses work among global networks of staff ranging from the U.S. to Asia to Eastern Europe.”

Former General Electric CEO, Arthur H. Harper, states, “Once this transformation is done, I think we will end up with companies that deliver products faster at lower costs, and are better able to compete against anyone in the world.” Such transformation cannot help but foster prosperity and create more jobs, both onshore and off.

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Choosing the Right Merchant Account Vendor

July 20th, 2011


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The Pros and Cons of Outsourcing: What You Should Know

July 18th, 2011

A Deloitte study of 300 executives recently brought to light some important pros and cons to consider before outsourcing. Fully 83 percent of respondents reported that their outsourcing projects had met their ROI goals of slightly above 25 percent.

Obviously, outsourcing has its advantages, such as reduced labor costs and access to highly specialized expertise and experience that may not be available in-house. You will also save on related costs such as computers, equipment, office space, training and benefits for each employee.

Companies that outsource report greater productivity, especially when using offshore providers in a different time zone, in effect extending a company’s hours of operation.

Outsourcing can also allow you to reach beyond the confines of your budget and leverage the latest developments in technology that your provider offers.

Despite the benefits you can expect, it’s best to begin outsourcing with an awareness of some possible drawbacks.

Only 34 percent of the execs in the above survey felt that their service providers had contributed innovative ideas or that outsourcing had significantly improved their operations.

Recognizing the missed opportunities to make such improvements, 49 percent said that if they could start the project over, they would define service levels that are better aligned with their business goals.

Other issues you may face when outsourcing include security concerns, having less control over projects, and decreased customer satisfaction.

Most of these difficulties can be overcome in advance by careful vendor selection; do your research to ensure you’re partnering with providers who are best qualified to meet your organization’s needs.

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Ensure Successful Outsourcing by Testing Vendor Performance

July 1st, 2011

Are your outsourced vendor relationships contributing to your bottom line? How can you be sure? Regularly testing and assessing vendor performance can give you a reliable picture of how your service providers are measuring up.

As the Aberdeen Group states in Benchmark: Scorecarding Suppliers, “almost all best-in-class firms scorecard. The best of the best are now experimenting with predictive analytics to spot inflection point and KPI correlations that identify capacity issues, lead time variability, financial viability or quality issues long before they would show up on a quarterly scorecard. They are evolving the scorecard into a forward-looking risk management instrument.”

Testing vendor performance will be easier if you have guidelines established from the outset. If you work with a variety of vendors, consider compiling a vendor handbook to define basic guidelines and expectations. You should also draw up a “Scope of Work” document, tailored specifically for each vendor and clearly outlining key responsibilities and service requirements. This will serve as a valuable reference for resolving issues when they present themselves.

Metrics should be measured in three vital categories:

Operational service level metrics measure the operational performance of business processes. These are the foundation of any outsourcing relationship. These are outlined in detail within the contract and typically involve penalties and incentives for vendor performance. Quality, timeliness, and satisfaction examples of operational service level metrics.

Key Performance Indicators (KPIs) are detailed metrics that should be outlined in your contract or the scope of work document. These will include key factors necessary for a successful vendor relationship, including adherence to set schedules, invoice accuracy, adequate employee training, and staffing accuracy. You will also want to periodically evaluate the vendor’s financial stability and business contingency planning.

Which KPIs you choose to measure will depend on your organization and the processes you are outsourcing. It is not necessary to measure everything, only the factors that are most vital to your business goals. You should plan to perform weekly, monthly and year-to-date KPI assessments.

Transformational metrics are related to your overall business outcome objectives. These include process performance goals, project milestones and implementation objectives. To encourage optimal performance, you can offer contractual incentives for vendors who reach these goals and milestones. It’s important to strike a balance; avoid focusing too much on KPI and overlooking transformational metrics.

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How to Choose a Direct Marketing Provider

July 1st, 2011


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