So you have decided to take the leap into the world of outsourcing. As the sourcing leader in the company, you have your arguments ready — cost advantages, better quality, better control over process, direct impact on bottom-line and the works. And what’s more, the top management has given you a green signal to begin the process of global sourcing. But where do you go from here?
Should you engage a sourcing advisory company to guide you through the entire process? The last time you did, you had an awful experience. It was like paying a cabby who gave you the directions but did not give you the ride. But the task at hand is no easy. You have to outsource critical processes in finance and accounting to full regulatory compliance, and you have 180 days to demonstrate value to the top management.
The nagging worry is that the advisors can also exceed budgets kept aside for them. According to a recently published research report titled Sourcing Professionals Can Use Advisory Firms to Help Architect Healthy Deals by Forrester, 54 percent of the respondents spent $500,000 or more on advisory firms for their consultations. In fact, 22 percent of the respondents said that they spent more than $1 million on such engagements for their most recent, significant IT and BPO sourcing deals. There are only 7 percent customers who spent less than $100,000.
Advisory firms can turn out to be costly, if the consulting engagements are not managed carefully at the customer’s end. There could be two reasons for this. First, when the customers hire wrong third-party advisory partners, who cannot offer the required assistance to the customers. Even though customers themselves do a lot of research before signing on an advisory firm, some times it can happen that they end up with the wrong choice. “Every conceivable problem arises when you don’t hire a good firm for advisory services,” Stan Lepeak, Partner, EquaTerra, an IT and business-process advisory firm. “And, the problem of cost overrun is one of them.”
And, second when the scope and the value of the deals get extended, you keep extending your advisory engagement because of the obvious dependency that the relationship has created. But “the cost of retaining advisory partners can vary widely. Hence, it should be factored into the overall return on investment of sourcing,” according to Forrester’s study.
“Well, advisory firms can be expensive, if customers choose wrong advisory firms,” says David Rutchik, Partner, Pace Harmon, an advisory and management-consulting firm. “If a deal gets stretched for too long, the fee to retain such an advisory firm can affect your savings. In fact, they can run over a million depending on the length and scope of transactions. It is only expensive when the value is not maintained. There is always a fee to pay for services and more of this is recovered by the structure of the deal and the savings,” adds David.
Recently, a study conducted by Compass Management Consulting, an independent management-consulting firm, highlighted how advisory firms can be expensive for the customers from the public sector. The study reviewed many outsourcing deals by the public-services industry. The findings of the study revealed, “there was an excessive use of procurement advisers rather than managers who will work with suppliers once the contract is in place. This leads to ‘bid it thin and get it in’ strategy of many outsourcing providers who price contracts at up to 18 percent below market rate on day one rising to 30 percent above market rate by year three of the contract.”
But all said and done, third-party sourcing advisors certainly add value to customers’ outsourcing transactions. Outsourcing in itself is a complex phenomenon that needs to be handled carefully. There are stages that need to be studied well before the actual implementation of the strategies framed under the guidance of advisors — such as neoIT, Everest, TPI, EquaTerra, Tholons, Pace Harmon, KPMG, PA Consulting, Pillsbury Winthrop Shaw Pittman among others. Dealmakers should also understand that the devil lies in details. So the chosen advisory firm should be experienced and specialized. In fact, one should keep the options open and go for boutique advisory firms, which are either part of large consulting firms or are independent. These firms provide various consulting services for framing sourcing strategies, selecting and managing the service providers, processing the transition, reviewing the process, benchmarking, governing and research services. And, most importantly, these companies can also add an unbiased view to outsourcing contracts. Ironically, as customers are getting matured, and are involved in multiple deals, they are expected to seek more such third-party advisory assistance.
Just a week before when Global Services’ May issue was getting ready for print, FAO Research, a research firm focused on the Finance and Accounting Outsourcing (FAO) and procurement outsourcing markets, recognized 10 most referenced FAO engagements that have undergone renewals, and scope increases, to expand their long-term FAO partnerships. Four of these best engagements involved sourcing advisors’ guidance. The study also found that more than 65 percent of large FAO engagements went to providers with third-party sourcing intermediaries. For instance, to underlie the economics of an outsourcing model and the dynamics of the FAO market, the best FAO dealmakers — Unilever Europe and IBM — of the year 2008 hired EquaTerra.
In fact, the customers, who tie up with third-party advisory firms for supporting their outsourcing deals are more satisfied than the ones who don’t go for these intermediaries. That said, those who did use third-party advisors for their recent IT and BPO deals, “there is clearly a sharp drop-off in satisfaction between pre- and post-contract work,” according to Forrester’s study. “This can be due to weaknesses from either the customer or the sourcing provider, but regardless of ‘fault,’ this ultimately becomes customer risk and the root of dissatisfaction. Sourcing customers should not overlook the focused attention, and expense, required for healthy sourcing deal implementation and governance.”
