The Politics Of Outsourcing

01 December 2010

Capacity’s roundtable examines ways in which organisations can best manage the difficult and sometimes emotional processes involved in moving parts of the business to a third party.

Participants:
Capacity has brought together experts, advisors, lawyers and carriers for a roundtable on the politics of outsourcing. Taking part are: Andreas Hipp, CEO of Epsilon Telecommunications; Alex Brown, technology, media and telecommunications (TMT) partner at Simmons & Simmons; Steve Sutton, vice president, head of private sectors of Capgemini Outsourcing Services; and Christian Michaud, senior vice president, marketing from Tata Communications.

Outsourcing requires companies to face up to some difficult decisions. It can mean moving jobs offshore and cutting in-house business units, or companies risking their reputation on the performance of the third parties to which they outsource their business processes. How can carriers manage both their reputation and their exposure to risk in this environment?

Outsourcing is a trend that is set to continue, but it is fraught with difficult decisions. Outsourcing business processes or departments opens the management to criticism. What steps can be taken to minimise this criticism internally? 


ANDREAS HIPP: If the move to outsource is mainly driven by buying in resources, knowledge and skill sets which do not exist within the company, then I think management is in a good position to find understanding internally.

If it is driven purely by cost savings paired with additional costs for knowledge transfer and even for management of outsourcing, then management will have to face resistance and criticism. All management can do is explain the main drivers for this move.

My advice would be as follows: explain the motivation for the outsourcing – that is the cost pressure and scalability of your own resources; explain your choice of the relevant outsourcer and the benefits to the company of this choice; take care of the affected people; report regularly on the implementation progress and success; and prove the results (cost savings, efficiency and speed of delivery) after successful implementation.

ALEX BROWN: Wins on cost savings can certainly be wiped out if the customer experiences a drop in service levels, or if an internal perception arises within a company that it no longer properly controls the operation that has been outsourced.

Another issue is that outsourcing is often predicated on the basis of there being some transformation in the relevant function so that it performs better or is better able to cope with the changing demands of the business. How therefore do you construct the contract such that cost savings are delivered, the service levels do not drop and innovation in the services is delivered? Experienced outsourcing lawyers and other professionals are used to having to deal with these issues in virtually every outsourcing contract. Things like benchmarking provisions, a properly constructed service level agreement with appropriate remedies and continuous improvement or gain share provisions can help to deliver on the initial promise of the outsourcing. However, the benefit of operating the arrangement as a true partnership where both parties win cannot be underestimated. 

STEVE SUTTON: Outsourcing can be viewed in a number of ways depending on the underlying reasons for undertaking the process. As we emerge from the recession, Capgemini is finding that telecoms companies are typically looking to achieve significant revenue growth, while they are becoming increasingly competitive; this is why many more are looking to outsource certain parts of their business.

By ensuring a well planned internal communications programme to all staff, citing the key business case for the change, and ensuring they are regularly kept informed, it is possible to diffuse the perceived threat and allow those affected to see the wider opportunities available. Also, by focussing on the more varied and innovative tasks that key employees will be asked to undertake as part of a future operating model, it is an opportune time for future telco leaders to show their talents. 

CHRISTIAN MICHAUD: As with any major business decision, clear communication within the company about the goals, motivations and success metrics of an outsourcing engagement can be critical to build internal support.

When it comes to sourcing models and outsourcing, we’ve seen a real shift over the past few years. Legacy sourcing models tended to focus purely on cost savings. Service providers "lifted and shifted" in-house functions to providers, whose proposition was to deliver the same tasks and work streams at a lower cost. What followed was a wave of in-sourcing, as telcos observed that these cost savings sometimes came with undesirable trade-offs around quality and innovation.

Today’s outsourcing decisions are much more frequently driven by access to capabilities and expertise beyond what providers can build in-house. Providers are generally calculating that they can improve the service quality they offer by partnering with a specialist, while at the same time preserving capital and resources for investment in their core areas of expertise. These improvements ideally return rewards throughout the organisation.

At a time when economic nationalism is popular and when unemployment in developed markets is rising, offshoring tasks to low-cost economies is controversial for some, and an unavoidable fact of life for others. What would be your advice to organisations which are currently weighing up the pros and cons of offshoring?



ANDREAS HIPP:
The pros and cons of outsourcing need to be clearly and objectively laid out and analysed. These need to be examined to make sure that the benefits gained from the process are real and substantial and that the risks either do not exist or are manageable, until a clear picture emerges which points strongly towards an outsourced solution.

Among the pros to consider are cost savings – usually outsourcing enables you to have a smaller headcount and smaller capex and opex, with a greater focus on your core business. You might save a lot of time, money and effort by outsourcing what is not core to your business or part of your core expertise. You can also buy in the knowledge you need instead of building it over time, and have the benefit of a contract with clearly defined deliverables with penalties and SLAs. Outsourcing should also give you operational expertise and immediate access to best practice and experience, and it should reduce the time to market as there is no need to recruit your own staff or develop processes and partnerships. Finally, outsourcing should give you scalability, so the business becomes better suited to match demand.

Against this, companies need to consider the risk to quality – quality can be inconsistent or variable if the expectations and deliverables are poorly defined. Productivity can suffer if cost savings are the main driver, and managing the outsourcer can become more cumbersome than providing the services in-house. Language skills can also be an issue when outsourcing to low-income countries or where certain geographies are not covered well by the outsourcer – remember the negative impact on the first few banks who transferred call centres to India and which then pretended to be in Scotland.

Security can be of concern where sensitive or client-related information is handled or the outsourcer is in the same business as the outsourcing company. Care should also be taken over the qualifications of outsourcers, as price pressure can cause a deterioration of the outsourcer’s skills. Finally, companies need to consider whether they have transparency and control or whether they have limited visibility and manageability.

CHRISTIAN MICHAUD: Organisations looking to emerging markets only for labour cost arbitrage are missing out on a tremendous opportunity to learn and gain from a great deal of innovation happening in these markets. Global technology leaders like Microsoft, Accenture and Cisco are all locating R&D and development centres in emerging markets, up-ending traditional offshoring models.

Our advice would be for organisations to seek out partners in emerging markets that can deliver new business opportunities and innovation advantages, improving the bottom line in a holistic fashion. 

ALEX BROWN: Whilst unemployment may be rising in developed countries and there is marked salary inflation in notable offshore locations like India, the cost differential is fairly stark. This means that there remains a significant cost imperative to outsource functions to lower-cost offshore jurisdictions. On the negative side of the equation, offshoring can, if not done correctly, have an impact on the customer’s ability to control the relevant function and get it back effectively if things go wrong. 

STEVE SUTTON:  Our experience has shown that a number of aspects should be taken into account when offshoring some business tasks.

There will always be an emotional reaction to any outsourcing discussion, therefore the logic and economics have to be communicated to circumvent emotive objections. The reasoning has to be supported by a realistic business case for service levels to be maintained alongside a list of benefits that will be realised.

There needs to be understanding of where the core competencies of a telco are perceived to be and how much day-to-day control and management is truly required. You need to recognise the impact on your customers and partners, and put a plan in place to ensure a global, connected approach for both business-as-usual and maturing company needs.

At Capgemini, we use what we call a Rightshore model (which includes off-, on- and near-shoring). As there is no "one size fits all", we have defined a way of adapting to changing business models in international operations, including those in many of our telco clients. We have found this flexible approach to be a natural fit to most clients’ needs and expectations.

How do you minimise the disruption to customers in a move to outsource? How do you prevent customers from feeling that the quality of service will fall as a result of outsourcing? 



STEVE SUTTON:If the process of outsourcing is carried out with expert transition, there should only be a limited impact on your customer base, if there is any at all. Even where staff transfer, typically the touch points to an organisation’s customers would remain the same after the process, so it is crucial to maintain the correct communications and open channels.

Any differences in the SLAs affecting customers can be clearly addressed at an early stage. A highly effective and efficient future operating model, including use of cloud computing technologies and social CRM models, will enable telco customers to benefit from an enhanced experience. This will also allow companies to free up staff to focus on embedding improvement processes in areas such as customer services. At Capgemini, we have seen a great deal of interest from all our clients in trying to understand how they can take their own journey to the cloud. Assessing a company’s readiness for the cloud is something telcos should be looking for with their outsourcing partners. 

ALEX BROWN: If there are going to be problems in outsourcing, there is a high degree of probability that those problems will emerge during transition. To help counter this there has to be a clear transition plan and a clear view of what the steady state has to look like for that transition to be seen as successful. 

CHRISTIAN MICHAUD: The most critical factor for a successful outsourcing partnership is choosing a partner with the experience, tools, processes and systems to deliver a high quality of service, backed up by SLAs that meet your customers’ service expectations. You also need a comprehensive migration plan to ensure that customers experience no service disruptions. A communications plan can help to manage customer expectations, provide dedicated touch points to address customer concerns and convey the expectation of a smooth and disruption-free migration plan.

Outsourcing may still carry negative connotations from earlier models focussed purely on cost savings. It’s important that organisations clearly communicate their goals, motivations and success metrics to demonstrate the value that an outsourcing partnership can bring to both the business and to the customer experience.

When moving jobs offshore or outsourcing business units, what steps can be taken to minimise the possible damage to reputation and to mitigate the risk involved?


ALEX BROWN: Damage to reputation will occur if the transition is not sensitively handled with impacted staff and if the outsourcing is not correctly managed, so that the quality of service drops. The contract can help this, creating a framework within which to manage the supplier, but ultimately the onus is on the customer to create and follow a proper governance structure. 

STEVE SUTTON: Reputation can be protected by choosing an outsourcing partner with a proven track record and experience in the key areas, not least in telecoms itself. If staff transfer is in scope, TUPE (Transfer of Undertakings Protection of Employment) regulations should be considered early in the process and the impact clearly communicated to staff.

Finally, the company must ensure that the comprehensive and finely-tuned change programme is implemented with the support of all stakeholders who should be consulted regularly from the earliest stages. This will allow the right messages to be cascaded in a timely manner, stabilising morale and keeping employees informed. 

CHRISTIAN MICHAUD: Avoiding one-size-fits-all solutions is one of the critical success factors for sourcing partnerships, but there needs to be a framework of best practices and experience. Best practices include: appoint a comprehensive and dedicated team with members from both parties; create a proactive team mindset; remember that project management is key at every step; break the workflow into projects and phases, so that if some parts are difficult, others can still proceed on time; involve the right experts on each workflow; communicate daily, as instant reaction and quick turnaround are critical; and build a confidence link, as core business success is directly linked to partnership success.

Topics: outsourcing, roundtable, Epsilon, Simons & Simons, Tata