Beware of Over Promise and Under Delivery in Outsourcing Deals

Small-time outsourcing service providers may be cost competitive, but many often bring with them the problems of few resources and poorly defined processes

“Why didn’t you ask for 10 days instead of three, or simply refuse to do the new module? I would have understood had you tried to explain the process to me.” [Customer, on provider not delivering within deadline due to over commitment]

“You are just too pushy. Don’t you understand, a 72-days credit period means three months? If you can’t meet your collection target, it’s your problem. You can’t load it on me.” [Customer, on provider following up for early payment release]

Managing long-distance relationships in the offshore outsource industry is not easy. It gets particularly difficult when the service provider is a small-time provider. Working with small teams and poorly defined processes, such providers are under constant pressure to deliver. Since they have few clients, they often resort to putting the same team to work on multiple projects.

While there are perfectly good reasons to outsource to a small-time provider, there are a few things that customers should watch out for. Service providers often:

•	Do not say no to unrealistic customer demands.
•	Deploy fewer people to increase productivity.
•	Deploy non-professional resources to manage the client-vendor relationship.
•	Accept more and more new businesses to meet revenue targets, without having the resources to handle the work.

Never Say No

Customers often find service providers agreeing to their ‘unrealistic’ demands and then not delivering on them. This can be seen from the sales people, who make the first contact with the customer, and goes down to operations and quality control.

In publishing and content assignments, for example, it isn’t uncommon for the scope of work to stretch mid-project. What one editor likes, the other may not find desirable. As a result, the number of feedback and modification rounds almost doubles. What does not change is the customer’s deadline. In its effort not to displease the client, a small-time provider is often not able to draw the lines and goes on accepting unrealistic demands for modifications. This leads to delay in other deliverables, heartburn and bad relationships.

Customers must ensure that their provider is not suffering from the ‘never say no’ syndrome. They need to be aware of these cultural issues and perhaps regard the provider’s commitments with a pinch of salt. Setting expectations with the provider team is not sufficient; customers need to regularly reinforce it.

Fewer People

Business pressures often lead smaller providers to accept projects with unrealistic deadlines and at very low cost. To meet costs and increase project productivity, providers often cut on manpower. As the constricted provider team works over time, it falters on deliverables and the customer-provider relationship suffers.

The more the transparency in this business, the better it works. Customers should try to work with the provider team to draw up a resource list. But, do approach this diplomatically since the provider often sees this as encroachment on his privacy. For an open-minded provider, this can become a platform to negotiate more practical deadlines and milestones, and this is how both sides should look at it. However, as with all other systems, this is likely to crumble if not monitored closely. Insist on constructively discussing resource plans and reports regularly. Most importantly, try to gain the provider’s trust in such issues.

Mis-managers

Service providers do not always invest in well-trained relationship mangers capable of taking up the customer management role without the pressure of delivery. They see them as high-priced overheads. In India, at least, where the outsourcing industry is fairly mature, it is not difficult to find capable managers. It’s just a question of how much the provider is willing to invest in a critical resource.

Customers should request to see the credentials of the relationship manager. It will also help to have an informal chat with him before the project begins. If apprehensive of the manager’s capabilities, ask for a replacement. This is the most critical resource that can cause the success or failure of an offshore relationship.

Typically, the relationship manager should not be the one managing delivery. It will be a good idea to invest some time in training the relationship manager about your expectations, mode of working, cultural differences which may crop up and possible solutions.

The Target Axe

The provider’s sales team mostly ends up over-committing to the customer due to the perpetually hanging revenue target axe. Prevarication and lies follow, exasperating not just the customer but also the provider’s management. Customers must watch out for such over commitment.

Be wary of vendors that offer rock-bottom prices or promise to do a job in half the time. A lot of startups take this route to gain entry into a new market. Chances are they will not deliver or the quality will be below standard. Putting heavy penalty clauses in the SLA can deter the provider from over-commitment. Doing repetitive business with a provider helps. It takes time to develop a provider, but the initial cost spent on training and setup brings down the overall cost in the long run. It also gives you a good idea of the commitment ratio and business style of the vendor. You stand on more solid and known grounds.

Watertight SLAs alone are not sufficient to make a relationship work. It is real people on either side who make the relationship work. So, both the customer and the provider must invest in time and money in their people; once they do that, their people will ensure that the relationship works.

Full-service Outsourcing

Full-service outsourcing is growing four to five times faster than the single-process market. Who are the early adopters, how should such deals be structured and what are the implications of this trend?

by Michel Janssen, Joe Fernandes, Kara Wyatt, Everest Group

SOURCING WITHIN THE THREE functional areas of General and Administrative (G&A) — Human Resources (HR), Finance and Accounting (F&A) and procurement — has historically been dominated by single-process deals. But the emerging trend in the G&A marketplace is of full-service outsourcing. While a single-process HR outsourcing (HRO) deal may be that of payroll-process outsourcing, a full-service HRO deal would be structured to include multiple processes, such as payroll processing, benefits administration, time/labor management, regulatory compliance and/or recruiting. Similarly, a full-service F&A outsourcing (FAO) deal might include a combination of general accounting, accounts receivable, tax and management reporting.

We define full-service transactions as those that have multiple (usually three or more) processes in scope, a term of three or more years and a size of more than $1 million in annual contract value (ACV). The size definition is adjusted for each functional area, given their unique characteristics. HR, for example, is segmented by the number of employees served; F&A by contract size; and procurement by annual expenditure on management outsourced.

We estimate the current full-service market as a $6.4 billion market segment with approximately eight percent market share. This market is growing four to five times faster than the single-process market, and should achieve a market share of approximately 24% by 2010. Given its large contribution to the overall outsourcing market, it is an extremely important area for the industry to begin to understand and develop best-practice solutions around. To facilitate this process, we will provide in this article an overview of the outsourcing occurring today across each of these areas. The questions that we will address are:

•		Who are the adopters of full-service HR, F&A and Procurement outsourcing (PO)?
•		Who are the key service providers?
•		Should customers source the individual functions together or separately?
•		What, if any, impact can full-service outsourcing have on other outsourcing markets?
•		Why should full-service outsourcing become a C-level strategic priority?

Adopters of Full-service HRO, FAO and PO

In terms of full-service transactions, HRO has matured the most, followed by FAO. Both these functions have entered the “emerging-rapid-growth” stage of market development. This stage is characterized by three key market characteristics: The emergence of operating standards, a robust set of suppliers and sufficient depth of buyer adoption. PO is still in the first stage of market maturity — pioneer stage — as it has limited emergence of standards, provider and/or customer adoption. In terms of customer adoption, the three key dimensions along which we evaluate adoption are by industry, company size and geography.

As can be expected, adoption is quite prevalent across all industry segments given the universal nature of HR, F&A and procurement. The four leading sectors are manufacturing, energy and utilities, financial services, high-tech and telecom, whose combined market share is approximately 70% in terms of number of transactions, total contract value and cumulative ACV.

In terms of company size, adoption is still a “large buyer” phenomenon, with most adopters being companies with annual revenues of greater than $5 billion. The market, however, is rapidly maturing to include smaller buyers. For example, the market share of companies with revenues below $5 billion has almost doubled in 2000, from 9% of ACV to approximately 16% in 2004. In terms of number of transactions, the smaller buyers’ market share has grown from 20% in 2000, to 24% in 2004.

Along the geography dimension, adoption is still primarily a North American phenomenon with North America (including both the U.S.A. and Canada) contributing 63% of the market share. Europe holds 30% market share (U.K. has 13%, Continental Europe another 17%) and the rest of the world has approximately a seven percent share.

Key Service Providers

As of March 2005, Everest Research Institute transaction database indicates that Accenture and IBM have signed the most full-service contracts. Their overall market-share position is driven by their presence in all three functional areas of HRO, FAO and PO. Hewitt also has a strong overall showing, although a key difference is that Hewitt’s share is based on only the company’s strong presence in the HRO segment.

Interestingly, market-share numbers suggest that this emerging full-service market is being dominated by a long list of players that are not key leaders in the traditional IT outsourcing (ITO) market. Given this market is growing quickly, the resulting new market transactions and M&A activity could alter the supplier landscape.

Sourcing Functions Together or Separately

An important adoption pattern is that more than 90% of full-service transactions are currently limited to multiple processes within a single function, HR, F&A, or procurement. In other words, while we see strong growth in BPO deals bundling multiple “processes” together (for example: multiple HR processes being placed into a single outsourcing deal), we are not witnessing a widespread trend towards bundling HR, F&A and procurement “functions” together.

Our belief is that there is currently a limited value for customers to bundle processes across the three primary functions within the GAO market. While suppliers suggest that there could be value in bundling cross-functional BPO services with the same supplier, fundamental value drivers, both early and late stage, suggest that these functions require different kinds of focus and capabilities for success.

The absence of a clear trend favoring the bundling of multiple functions is likely a disappointment to companies

like Accenture and IBM. These suppliers would be ideally positioned in an environment requiring deep business-process expertise across multiple functions, not to mention frequent deals also requiring a combination with ITO services.

Impact of Full-service Outsourcing

Besides providing a source of growth for well-positioned outsourcing firms, full-service outsourcing transactions will cause some re-shaping of the more mature ITO market. We anticipate the BPO market growth will cannibalize some of the traditional ITO market, particularly the application-management segment, as new BPO deals will encompass certain activities that historically fell into the purview of ITO deals.

Our tracking of BPO contract signings has uncovered a meaningful amount of outsourcing arrangements involving the outsourcing of business processes in combination with IT/application services. Our research suggests these “combination BPO/ITO deals” occur in 83% of HRO deals, 35% of FAO deals and 22% of industry-specific BPO deals (for example: claims processing in the insurance industry).

This trend towards combining BPO and IT services within a single contract has important implications for vendors:

•		Traditional IT outsourcers will experience some encroachment as BPO players increasingly overlap into the ITO realm
•		Given the demand for “combination deals,” ITO firms that are successful in building distinctive business-process capabilities have an opportunity to carve out leading positions in targeted segments within the BPO market.

Another key trend that will have an impact on the marketplace is the emergence of proprietary technology solutions. Many HRO and PO service providers have developed proprietary technology solutions to provide end-to-end technology and process solutions for their customers. While ERP solutions still remain dominant, we have started to see increased adoption by buyers of these integrated proprietary technology and process solutions. For example, in HRO, within the small buyer segment of less than 15,000 employees, the share of proprietary technology solutions has grown from 38% of cumulative transactions in 2003 to 48% of cumulative transactions in 2005. Even in the larger buyer segment of greater than 15,000 employees, the share of proprietary technology solutions has grown from 12% to 25% over the same period. This market also continues to evolve towards hybrid (ERP + proprietary) solutions as ERP and proprietary suppliers create new value propositions to compete in the marketplace.

C-level Strategic Priority

Given the impact of full-service outsourcing market on the industry and individual companies, it needs to become a C-level strategic priority. We are starting to see a strong emergence of this trend with many buyers investing in an enterprise-level sourcing strategy to maximize value capture and minimize risk.

C-level executives should focus on:

•		Ensuring that enterprise-level objectives are achieved, and not just functional objectives. Given that the HR, F&A and procurement functions overlap in the areas of accounts payable and payroll, deciding how best to source across these functions needs to be done at a level above the functional areas to ensure that enterprise-level priorities and objectives are addressed. In addition, these full-service areas also encroach into the IT domain of organizations as they impact the choice of technology and the manner in which it should be sourced
•		Understanding that these functions have an impact on the brand. Full-service outsourcing is more transformational in its impact on an organization than single function outsourcing. Outsourcing will have an impact on the brand of the company (as the outsourcer will now be in close contact with the key customers and suppliers), and therefore needs to be managed at a C-level to ensure that the brand is further enhanced through the outsourcing solution
•		Focusing on change management. For success in full-service outsourcing, a high degree of change management is required. For example, the biggest challenges faced by buyers, who have outsourced these functions, are how best to transform their retained organizations and to build the buyer-supplier relationship into a truly transformational program. For organizations to succeed in this endeavor, C-level leadership, intervention and support are often required.

Offshoring is as “Local” as Politics

As easy as it is to get swept up in the “offshore” side of global services, true success comes from paying closer attention to what’s happening “locally”

by Michael Corbett

Global Services

As easy as it is to get swept up in the “offshore” side of global services, true success comes from paying closer attention to what’s happening “locally”

It’s easy to get swept up in a business trend as compelling as offshoring. The potential to deliver better products and services at lower costs is hard to ignore. A wide-range of approaches now exist, including captive centers, build-operate-transfer and direct outsourcing to third parties amongst others. There are dozens of countries vying for your business and almost any business function can now be offshored. Proven advisors are in place to help manage a company’s program and to help minimize its risks.

But, as easy as it is to get swept up in the ‘offshore’ side of global services, true success comes from paying even closer attention to what’s happening “locally.” As former Rep. Tip O’Neill said, all politics is local, the same goes for services too. And it’s these local considerations that ultimately determine success or failure.

What are some of these local considerations?

The first is the customer. A business may be going global in its operations, but the customer it is serving — whether it’s a business client in Chicago, or a consumer in Phoenix — is still local. A company has to continue to deliver the products and services local customers need — in the way, at the place, and in the manner they need it. These local customers will not accept trade-offs just to support a business’s desire to “go offshore.”

The second is a company’s local management structure and systems. They continue to be the point of control ensuring that the company’s overall operations are effective and efficient. It is an oft-repeated reality that the key to success remains in the ability of the business to integrate such structure and systems into the overall management structure, regardless of the number and place they are added in.

The third is the company’s employees. Local employees are the ones most affected by an offshoring decision — even if they are not within the current scope of what’s being offshored. Local employees continue to be the foundation upon which the business’s future will be built, especially how it relates to and is perceived by its customers.

The fourth is the local court of public opinion. In the offshore location, the company will certainly be welcomed by the people as a new source of economic growth. But, what about the folks at home? It’s the local communities, government officials and press that will be most skeptical, questioning the wisdom and even the motivation for the offshoring decision.

Public opinion and local employee reactions are not just “problems” to be managed. They create a company’s brand image — an image that can be irreparably damaged if offshoring is not supported by a fully integrated “local” change and communications management program.

The fifth is regulations and laws. The Sarbanes-Oxley Act of 2002, the Health Insurance Portability and Accountability Act (HIPPA) of 1996, and various banking regulations are all examples of “local” regulatory and legal requirements that define how a business must operate — regardless of where the work is being done, or by whom. The fact that the work is done offshore or by an outsider, virtually never relieves an organization of its local responsibilities.

Then, there are the local considerations in the countries where a company will be doing business — but those are for a future column.

In the end, it’s hard to imagine any organization, regardless of its size or industry, being successful without a well-integrated, global-services strategy. But, it’s even harder to imagine any organization being successful with that strategy, unless it first ensures continued success locally.

Premier's Visit Strengthens China's Software Outsourcing Ties With Japan

Xinhua Economic News
04/12/07 7:54 AM PT

Chinese Premier Wen Jiabao's visit to Japan is expected to help expand Japan's software outsourcing trade relationship with his country. "More than 60 percent of China's software trade is Japan-oriented," said Jin Guowei, deputy director of the Dalian Information Technology Bureau in the Chinese city of Dalian.

China's growing software outsourcing Latest News about Outsourcing trade with Japan is expected to rise even faster after Premier Wen Jiabao's "ice-melting" visit to Japan.

"China accounted for more than 60 percent of Japan's outsourced software trade in 2006 and has become the country's biggest software outsourcing base," said Mine Shentaro of the Japan External Trade Organization, based in Dalian, northeast China's Liaoning Province.

Dalian Hi-Think Computer Technologies (DHC) is one of China's leading software outsourcing firms. Manager Liu Jun is proud of its big-name customers, including technology giants Hitachi (NYSE: HIT) Latest News about Hitachi, Sony (NYSE: SNE) Latest News about Sony, Mitsubishi and NEC (Nasdaq: NIPNY) Latest News about NEC.

Continued Growth

"DHC started outsourcing computer software from Japan in 1996, a time when Sino-Japanese relations were at low ebb. Political hindrances have not impeded our business," said Liu.

DHC's business with Japan has grown 30 percent annually since 1996 and now employs 2,000 people. Last year, the company exported software worth US$50 million to Japan.

"More than 60 percent of China's software trade is Japan-oriented," said Jin Guowei, deputy director of the Dalian Information Technology Bureau.

Skilled Labor

Dalian, a Japanese colony for 40 years before the end of World War II, became the outsourcing center of information technology to Japan due to its geographical proximity and its skilled labor force.

The city's software industry sales Email Marketing Software - Free Demo last year set a new record at 10 billion yuan ($1.23 billion), maintaining a 60 percent annual rise in the past six years.

Of the sales, processing outsourced software contributed 3.7 billion yuan ($456 million), of which at least 80 percent was for Japanese companies.

The city has 20,000 people working in the software outsourcing sector and 70 percent of them speak Japanese.

According to a government plan for the development of software and information services, China aims to generate $168 billion from the software sector and export $12.5 billion worth of software services in 2010.

'An Irreversible Trend'

Jin is confident in the future. "With the improvement of bilateral ties, I believe the industry will become more prosperous.

"The friendship between China and Japan is an irreversible trend. Premier Wen Jiabao's visit to Japan is good for the two countries. I hope after the visit more Japanese can put away misgivings and start cooperating with Chinese firms in the software industry. It will be a win-win solution," said Jin.

"While European and American companies are choosing India as an outsourcing base, Japanese firms prefer China because we are close neighbors and have similar cultural backgrounds." said Noshiro Yasuo, president of Fujitsu System Engineering in northwest China's city of Xi'an.

"Premier Wen's visit to Japan will give us more confidence to expand our business in China," he added.