The adoption of Business Process Outsourcing (BPO) as an integral part of an organization’s operational and financial strategy is more than a decade old. With the advent of emerging markets, ubiquity of technology, changing demographics and compliance focus, services sourcing has evolved and taken on a new dimension though global sourcing and BPO, accessing greater cost efficiency, capability and capacity.

BPO  is now mainstream and sourcing strategy is aligned to organizational strategy and, hence, to the external economic environment. The subject of this article is how the ecosystem of client business leaders, provider companies and advisors has shaped sourcing strategy in line with the changing economic climate. Specifically, how in these uncertain times, we re-examine some of our traditional attitudes to sourcing and tweak our practices to help the businesses serve customers better, preserve profitability and remain competitive in future.

We identify the following characteristics in an uncertain economy and what it means for organizations, as relevant to sourcing. We consider a typical outsourcing cycle and analyze what these strategic imperatives could mean for global sourcing strategy in each phase of this sourcing cycle. Partnership remains key to the success of sourcing and the following principles only become more relevant now:

• Transparency — overcome barriers in traditional supplier-customer arms-length relationships to share and leverage information not just in service delivery but commercial structure and relationship management
• Share risks and rewards — align provider and customer organizations to business imperatives and strengthen the alignment with robust governance
• Investment mentality in service providers and customers to pool skills, build solutions and access the ecosystem of third-party expertise.

Sourcing strategy
The sourcing strategy needs to meet the contrasting imperatives of superior service to retain customers as well as maintain financial focus. Hence, the sourcing strategy needs to be flexible, capable of accessing customer-facing, shared services and outsourced capabilities. The most profitable and service-critical customers need to be serviced by the customer-facing business units; support services and other customer segments may be serviced through a mixture of shared services and outsourcing based on competency areas. In general, services delivered across the enterprise such as F&A, HR, IT are best serviced by outsourced partners who have developed competency through best practices across their industry sectors.
What can customers do? Customer sourcing strategy should exploit the role of the shared services organization rather than treat it as an either/or compared to outsourcing. The role of the shared services is to act as the incubator, creating standard services out of functions embedded in line organizations. Shared services teams need to be multifaceted and have the ability to bring critical/customer facing processes back in-house. This gives the business the confidence to stretch the outsourcing envelope without constantly worrying about the risk to customer satisfaction. The success of outsourcing depends on a few key change agents; this is the core competency of the shared services function

What can service providers do? Providers need to look at offering flexibility in all services. Flexibility should extend beyond making cost variable; they should be able to move processes across organizations and geographies and having the ability to support multi-provider service delivery. There may even be niche capabilities that the client acquires through M&A consolidation but cannot invest in to scale up; the ability of the provider to assimilate these capabilities and drive a set of  standard services (for example, material planning and forecasting into overall inventory planning) across geos, divisions and businesses is a win-win for provider and client.

Procure
Comparing capability, measuring price-performance equation and achieving projected value creation has traditionally been difficult and time consuming in the world of outsourced services. The need to bring greater objectivity, optimize the procurement process (typical cycles are nine to 15 months) to accelerate savings realization acquires greater importance in a downturn. We can fall back on some of our guiding principles such as transparency, investment and risk-sharing.

For back-office enterprise: Wide processes, we have seen a more standard approach work — gather benchmarks from internal, external sources and leverage subject matter expertise to screen, arrive at a shortlist of vendors that possess the track record and executive commitment to potentially meet your requirements. Spec out the technical and business case requirements to a level of detail that enables your vendor to have adequate visibility to offer a solution based on tangible commitments. The structured use of third-party intermediaries like process consultants brings greater clarity to the requirement and predictability to savings realization.

For processes that are more context-specific or strategic, the solution needs to be collaboratively built with the right subject matter expertise and partnership model to achieve success. Creation of such solutions will require significant investment appetite and contextual knowledge. Provider-selection criteria for such processes tends to accord a higher weightage to existing strategic relationships in the area or an appetite from vendors to build the same. With a small list of shortlisted service providers, a collaborative solution building exercise typically takes place to arrive at one to two providers who can be engaged with in due-diligence and contracting discussions. The traditional RFI/RFP process will have to be significantly tweaked to this extent.

The complexity of work packages and company culture will drive multiprovider scenarios. Where the vendors are diversified and have a good execution track record, the safer practice is to have relationship breadth as compared to multi-vendor scenarios.

What can customers do? In an ideal world, clients need to have proactively invested in gathering benchmark information on services and providers. Especially for companies new to outsourcing, having specialized third-party expertise on hand to spec requirements is a worthwhile investment. More experienced clients can prioritize solution creation and optimize vendor selection. Based on an evaluation of track record and executive commitment, clients could do a rapid market scan, starting with the existing partner set. Sharing detailed information about process and system landscapes in scope, engaging in-house business owners and BPM teams early in the procurement process helps build a better solution though at high cost. This, however, has the advantage of enabling the provider to invest in and drive process definition. Client sourcing organizations need to demonstrate greater flexibility in requirement identification, vendor evaluation criteria, and selection processes to ensure that business objectives are met without significantly impacting procurement objectives. The business needs to have a self-imposed ROI discipline during a downturn.

While we are accelerating the procurement process, we need to ensure that the commercials and contracting proceed with the right preliminary understanding on positions. A terms sheet could be issued and agreed upon in advance, with both parties.

What can service providers do? Providers significantly contribute to the cost of procurement in their quest to differentiate their services.

Providers should modify their marketing mix and focus on those customer segments which are a strategic fit with their capability and overall strategy. Having a list of must-have customers and building strong executive relationships there by making themselves relevant and visible is the way to go; the temptation to spread oneself thin in an uncertain market is high but counter-productive. In the contracting phase, providers also need to give customer stakeholders other than the decision makers (key influencers and future collaborators in the LoBs) an opportunity to express their views and participate in converting the solution into a process definition. This is key to eliminating the unknowns — identify key risks, incorporate the perspective of real-world practitioners and most importantly, an important change management exercise, secure their buy-in. This is also a good time for the provider sales and solutions teams to bring in its practitioner SMEs. Converting the defined processes into a detailed SoW brings greater predictability to transition.

Transition
In the traditional outsourcing model, transition refers to the lift and shift of an identified set of processes supported by a cutover plan that ensures the seamless handover of responsibilities and knowledge transfer. Success is a function of how well the scope is defined, the training is provided and the coverage is planned to ensure gradual handover of responsibilities. However, in uncertain times, the need to ensure seamless service delivery cannot come at the cost of schedule and cost overruns. Project management discipline and the flexibility to move and modify work at any point in the relationship to meet end-customer satisfaction are 2 key requirements of the transition structure

What can customers do? Customers should create an outsourcing PMO to manage outsourcing across towers and vendors, with strengths in program management and change management to execute the sourcing strategy. As the relationship matures and is poised to enter the exit or expand phases, strengths in transition and knowledge management become critical. In an uncertain economy, even a perceived dip in customer service or back-office processes can impact end-customer satisfaction; The outsourcing PMO needs to set up a knowledge management infrastructure (documentation library, process-based organization, SMEs) with the provider to ensure processes can be transitioned in-house or to another vendor with minimal impact. Also, scan the provider market to identify new trends in operating model, delivery locations, tools enablement that the relationship can capitalize on. Predictability at the beginning and flexibility at the end is the holy grail for transition!

What can service providers do? With tough economic conditions in the market as well as delivery geographies, providers are wary of getting caught in a ‘race to the bottom’ that will commoditize service as well as kill incentive to innovate. Building a dedicated, enterprise-wide Transition practice offers a great opportunity to take upside from on-time and superior migration as well as enhanced flexibility to the business. Providers can package these benefits as sourcing accelerators, learning systems, project management services with a committed value proposition aligned to the needs of the business.

Managing service delivery
Changing the structure: Service delivery today is seen as the activity of meeting and exceeding operational service levels. These SLAs tends to be at the task level as outsourced activity itself is task-based to start with. SLAs and metrics need to evolve with the relationship and with changes in the customer’s business model and external environment.

In uncertain times, we need to focus the energy and cost base of the PMO, shared services and outsourced functions on value-adding activities aligned to business metrics. Metrics such as cost of services, working capital efficiency, revenue leakage, can be linked to operational metrics such as Cycle time, productivity and accuracy for different product and customer segments through a value realization model, that providers like Infosys offer. Reinforcing this with a strong governance structure ensures that dashboards capture operations performance for senior management as well as reflect the reality of value delivery and customer satisfaction.

What can customers do? After the initial period of handholding in steady state, customers should focus on implementing a strong operational governance and reporting mechanism. Supervisors in the retained organization should move from managing people to managing service levels. Business leaders should work with the client PMO and provider management to build account business plans that deliver service excellence. Customers should involve provider personnel in client strategic initiatives that are relevant to outsourced scope and align provider transformation objectives to their own BPM objectives

What can service providers do? Providers need to bring in best practices, make strategic investments and focus their efforts on building strong relationships within the customer organization. This will position them to identify opportunities, customize solutions and create value for both parties. The service provider’s ability to innovate combined with ROI discipline can enhance the competitiveness of the client in the marketplace.

In Summary
In an uncertain economy, it is time to renew the vows of partnership. Even as we speak, customers are conferring with their global sourcing providers to revisit their outsourcing strategies, procurement processes, transition and delivery commitments for what is expected to be a soft year. Transformation and innovation has become the lever of choice for the hi-tech ecosystem to serve customers better, preserve profitability and sustain growth. While there are going to be increased challenges and risks in outsourcing, the volatile economic environment ensures that doing nothing is one of the riskiest options.  

Chris Osentowski serves as Director, Outsource Service Provider (OSP) Engagement for Ingram Micro North America (Infosys’ customer). Vijai Balachandra serves as the Lead for the Transformation Office for Manufacturing within Infosys BPO.