outsourcing - Harvey Nash

Business Guide
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The FD’s Guide to Outsourcing
harvey nash plc
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The FD’s GUIDE to
outsourcing
From choosing the right partner to
taking the plunge, we offer insights into
one of the most challenging decisions
your business will ever take.
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business guide
The FD’s Guide to Outsourcing
in collaboration with
2007
The magazine for UK Finance directors
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The
FD’s
GUIDE
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introduction
Outsourcing
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BUSINESS GUIDE
CONTENTS
6 To outsource or not?
Outsourcing is engrained in our
corporate culture – but has it
become business as usual? And
is it really delivering success?
By Robert Heller
13 viewpoint
John Stansfield, Group FD, Hornby
14 Making the decision There are a range of factors to
consider when making the decision
to outsource, from performance and
cost-cutting to brand image and the
impact on staff.
By Philip Thornton
21 viewpoint
ohn Ainley, Chairman,
J
AVIVA Global Services
23 Preparing the ground
Careful forward planning and making
sure the right people are in the right
place are fundamental to the preoutsourcing process.
By Rhymer Rigby
30viewpoint
Colin Waudby, CEO, Clear Edge
42 Managing risks
From your brand to your data, from
compliance to communication, the
risks associated with outsourcing
are many. It’s vital that your business
both identify those risks and manage
them, now and in the future.
32 CHOOSING A PARTNER
A good relationship with the
outsourcing provider is as essential
a price and capability. But finding
the perfect partner remains as
challenging as ever.
By Mick James
41 viewpoint
Simon Mindham, FD, Blueheath
BUSINESS GUIDE
By Lesley Meall
49viewpoint
Stuart Bernau, Executive Director,
Nationwide Building Society
51 Managing outsourcing 57 Measuring success
If you’re going to outsource any
part of your business, you need to
monitor and manage the process.
That means devoting valuable time
and resources – including those of
the finance department.
By Stuart Lauchlan
56 viewpoint
Stuart Bridges, Group FD,
Hiscox
The only way to be sure that you’re
getting what you paid for when it
comes to outsourcing is to measure
the results. A “contract scorecard”
can help companies keep track.
By Sara Cullen and Leslie P. Willcocks
64viewpoint
John Packham, Head of
Finance Shared Services,
Zurich Financial Services
BUSINESS GUIDE
introduction
For finance directors in the UK, the issue of outsourcing is ever-present.
Whether it involves joining the flood of Western businesses to cash in on the untold
riches of the east (opening a call centre or software office in India) or simply getting
those time consuming back office functions off the desk, outsourcing is a fact of life.
This guide is designed to offer a series of perspectives on the evaluation, selection
and management of outsourcing projects. We’ve talked to finance directors with direct,
“at the sharp end” experience of outsourcing in all its forms. And what comes across
is that the finance director is the key executive in driving a successful outsourcing
drive. The vision, attention to detail and long term planning and management will fall
squarely on the FD’s shoulders – and judging by the FDs’ comments in the following
pages, it’s a job not to be taken lightly.
At Real FD, we always look to offer impartial, practical advice. And this guide, with
the help of Harvey Nash, aims to do just that: to place outsourcing in the context of
the wider business culture, and how its challenges can be met. We’ve touched on how
companies can best mitigate their risks – and asked the question: is the reduction in
cost worth the reduction in control?
It remains true that, managed carefully, the benefits of third-party expertise to some
of your business processes can bring enormous benefits. In a time-poor culture, exporting some of the less critical business functions to the experts can free up the FD –as well
as the rest of the board – to concentrate on the real task: adding value and driving their
business forward.
Christian Doherty
Editor, Real FD
BUSINESS GUIDE
Foreword
Since outsourcing has become “mainstream” for a whole generation
of business leaders, Chief Executives and Finance Directors have come to rely on
the benefits of using external strategic partners to deliver expertise to help drive
competitive advantage.
Outsourcing is often misunderstood and management are frequently expected
to negotiate and deliver value from outsourcing projects in which they may have
no formal experience.
Harvey Nash has an enviable track record of delivering successful outsourcing and
offshore software projects as part of our global portfolio of services. With this in mind,
we have brought together leading commentators and experts on outsourcing to discuss
the pitfalls, opportunities and impact that outsourcing can have on the business, its
staff and of course, its brand.
We believe that finance directors are ideally placed to take calculated risks in this
area forming the basis for future value creation for their organisations. Outsourcing
has grown in complexity in recent years and is no longer simply seen as a way to simply
lower costs. As workforces in countries such as Vietnam, India and China constantly
improve their IT and commercial literacy so more sophisticated processes can be
outsourced and more value can be added to the bottom line.
It is in this context that Harvey Nash is proud to present The FD’s Guide to
Outsourcing. We trust that it proves to be a valuable and enduring resource both for
up-and-coming leaders and those already at the helm of major outsourcing ventures.
Albert Ellis
CEO, Harvey Nash
BUSINESS GUIDE
chapter one
Outsourcing is so engrained in our
corporate culture that it has almost
become business as usual. But is it
really delivering success?
By Robert Heller
To oursource or not?
W
hatever happened to the
virtual corporation? That was
the title of a much mentioned
book, which supposedly sounded the
death knell for traditional management.
Instead the authors, William H. Davidow
and Michael S. Malone, hymned a new,
revolutionary corporate life form: “To the
outside observer, a virtual corporation will
appear almost edgeless, the interface between company, suppliers and customers
permeable and continually changing”.
But the revolutionary dream has
dwindled, superseded by a far less
visionary reality and practicality. The
new life form turned out to be merely
the apotheosis of a long familiar business
strategy: outsourcing or entrusting to
BUSINESS GUIDE
outsiders those activities which the
outsourcer believes are better performed
outside the boundaries of the firm. Never
mind the lyrical enthusiasm of Davidow
and Malone; outsourcing has become
business as usual, but on a vast scale.
More bang per buck
Even among its advanced users, the outsourcing boom has not changed the essential character of corporations. Rather,
its availability and rising effectiveness
have enhanced the bang per buck on a
huge array of corporate functions. In
Silicon Valley, an outstanding exponent
is Sun Microsystems, which long ago
farmed out distribution, chip and component manufacture and servicing. That
more or less left only design (and the notso-little matter of management) to Sun
itself – but design can be imported, too.
Even Apple Computer, the cynosure
of electronic design, turned to an outside
consultancy, Ideo, for a new mouse.
Its latest i-Mac, moreover, announces
proudly that it is “designed in California”,
from which you may safely conclude that
it’s actually made somewhere else – and
not by Americans.
What works in the special high-tech,
high-speed world of microelectronics
is equally relevant to other more sedate
industries. The same forces that gave
digital watchmakers the nickname of
“Mickey Mouse” businesses, selling the
same outsourced entrails in different
casings, now drive most businesses as
they pursue the ideal of LIMO – least
input for most output.
Back in the Valley, following in
Sun’s footsteps, Dell Computer long
ago adopted the principle of “virtual
integration”. Outsourcing taken to Dell’s
pitch, with the supplier becoming an
ting costs by turning to outsiders who are
negotiated into accepting lower prices
than the previous internal cost level.
Cost cutting and
competitive advantage
According to the Gartner consultancy,
however, cost-cutting is a false god: 80
per cent of firms that turn to outsourcing
just to save money will fail to do so. An
outsourcing supplier, Quocirca, says that
such companies are often the ones who
then lay the blame at the provider’s door,
“saying the savings weren’t sufficient (if
they existed at all), that the outsourcing
company was inflexible, that it didn’t respond to the client’s needs and so forth”.
Of course, it’s in the provider’s selfinterest to reverse the proverbial tailor
plugging his cloth and to say “never mind
the width, feel the quality”. But in reality,
though few firms outside the Valley are
ready to travel into virtual integration,
outsourcing has continued to grow and
spread for solid strategic reasons. Thus,
the competitive pressures to follow suit
lower delivery costs allow new customer
segments to be targeted. For certain
activities, such as credit card servicing,
outsourcing is becoming the norm
intimate part of the corporate processes,
reduces the expansion (and cost) of your
own workforce; increases your growth capacity; transfers to suppliers the costs of
carrying inventories; and cuts lead times.
Perhaps most compelling, however, is a
much more old-fashioned motive – cut-
have increased. When a car firm like
Ford advances from buying in dashboard
sub-assemblies to outsourcing complete
assemblies, the competition can’t afford
to lag behind this enhanced efficiency.
As for the rewards, Boston Consulting
Group (BCG) reports that “companies
BUSINESS GUIDE
chapter one
30%+
that have offshored
agement consultants
successfully are
PA reported that unindeed realising cost
der half of outsourcsavings” – of more
ing companies had
Percentage savings enjoyed by
than 30 per cent.
achieved the expected
companies that have offshored
successfully
Crucially, the economies
gains: 39 per cent had
Boston Consulting Group
are often accompanied
mediocre results; and
and enabled by significant
a mere five per cent had
quality improvements. The link
achieved Dell-sized bonanzas.
between cost-saving and competitive
PA was only one of several Jeremiahs.
rewards is also highly significant. You
Yet, a decade on, it appears that moaning
can hope for greater margins as “lower
may be misplaced. Another management
delivery costs allow new customer segconsultancy, KPMG International,
ments to be targeted. For certain activities,
reported in March this year that only 13
such as credit card servicing, outsourcing
per cent of the firms in its survey agreed
is becoming the norm” – and offshoring is
that “as many as half of all outsourcing
sharing in the advance.
deals fail”. There was, however, a sting in
Among financial companies, for
KPMG’s tail. The survey also showed that
example, while few have yet significantly
“42 per cent of outsourcing arrangements
offshored, “some have more than 12 per
are not supported by a formal strategic
cent of their global workforces located in
measurement framework”.
India – a figure that will continue to rise”.
Roughly translated, this means that
In BCG’s view, “tomorrow’s leaders in
the outsourcing managements simply
financial services will be the companies
don’t know what benefits (if any) are
that have the capability to use all the
flowing from their contracts. In the light
resources that the global business landof this ignorance, the overall happiness
scape has to offer”. The others face the
reported by the outsourcers suggested
risk of being left at the post. And there
to KPMG that “the problems which they
are very many others: despite all the
experience are mainly peripheral – or are
publicity surrounding offshore ventures,
simply glossed over”. It’s also probable
less than five per cent of outsourcers have
that experiences vary greatly from good
actually gone abroad.
to bad – hardly surprising, given the
many forms covered by the umbrella
Variable success
word “outsourcing”.
For most companies, outsourcing has
remained a selective strategy, to be apTypes of outsourcing
plied cautiously, rather than a corporate
In manufacturing, the nexus is so vital
or strategic revolution. The caution has
that sub-contracting multi-client specialbeen reinforced by discouraging news
ist manufacturers have become highly
from the front line. Back in 1996, mandeveloped and very rich – and not just
BUSINESS GUIDE
in electronics. Outsourcing is so vital to
Johnson & Johnson that it owes its leadership in soft contact lenses to a supplier,
Nypro, which actually built lens plants
next to the customer’s factories. Contract
manufacture is the essence of globalism
and theoretically makes economies of
scale available to all competitors.
That’s the front-line of outsourcing.
But it’s the back office around which
most controversy has burgeoned. How
much of intimate processes like HR
and finance can be safely and profitably
delegated to outsiders? If you take Logica
as an example, the answer is an awful lot
– to be precise, “finance and accounting,
payroll, HR administration, training,
procurement administration and supply
chain management, customer contact
and special industry-related processes in
areas such as banking and insurance, and
information and content management”.
All the above come under the imposing
title of business process outsourcing
of the Fortune 500. Yet this is important
business for both parties. Looking at the
Logica list, it’s small wonder that both
giants and specialists have given BPO
so hard a sell. But does it make sense to
hand over the whole nervous system of
the company to outside contractors for
sweeping revision and implementation?
Where it works best
Companies obviously risk a great deal
by passing on customer-facing activities,
such as call centres and service enquiries,
to organisations that have no relationship
to the final customers – and some such
outsourcers have suffered.
One survey claims that 60 per cent
have lost out through customer defections
and other hidden costs. But is the outsourced call centre inherently inefficient?
Clearly, such anxious questions cannot
be answered without extremely thorough
analysis of the client’s need and the outsourcing tender.
tomorrow’s leaders in financial services
will be the companies that have the
capability to use all the resources that the
global business landscape has to offer
(BPO). Logica is not one of the first
BPO names to spring to mind – not with
giants like IBM and Accenture in the
game. But several of the 2006 winners
of the National Outsourcing Association
Awards are also unfamiliar – like Liberata,
winner of the BPO Project of the Year
award, which had Hounslow Council as
its client, both being far from the world
On the other hand, there’s no reason
to suppose that outsourcing is any less
competent than other business functions.
The NOA Awards for Best Practice cover
a broad range – including Best Use of
Outsourcing by an SME, which went to
Quantum Plus and its client, Maperley
Estates. Then again, the SME sector
has been in no hurry to outsource on a
BUSINESS GUIDE
chapter one
significant scale, even for the IT purposes
that predominate in the awards – and for
good reason.
The digital revolution could never
have swept through the private and
public sectors so fast and comprehensively if every IT user had tried to
in-house every project and programme.
It made – and makes – complete sense to
seek a supplier who has the technology,
the technologists, the experience and
the know-how to undertake successfully
work like IBM’s for Defra, Antenna’s for
Pitney Bowes, or Capita’s for the Mayor
of London’s congestion charging.
That scheme, which could have been
a most public disaster, has worked well.
The basic argument for outsourcing of
all kinds is that a business, let alone a
Mayor, should only house activities that
cannot be supplied more economically
and efficiently by outside agencies.
An outsider specialising in IT should
be well able to supply such services at a
profit to itself and the satisfied customer,
with both benefitting from lower costs.
The outsourcing management also gains
from the removal of an extraneous but
burdensome responsibility.
Identifying core competencies
The fundamental issue, however, is how
far and how much responsibility can be
safely, or responsibly, transferred. The
digital inventor Sir Clive Sinclair was a
pioneer of farming out both marketing
and manufacture, but the failure of his
projects showed that quality of execution
cannot be put at risk without jeopardising
the whole enterprise.
10
BUSINESS GUIDE
The question of “core competencies”
remains paramount. The core functions
have to be identified and ring-fenced,
leaving non-core activities as candidates
for outsourcing.
Payroll processing – probably the
first widely popular form of outsourcing
– is only “core” for its suppliers. That’s
easy to decide. But at the other end of
the financial spectrum, how much of the
finance director’s traditional work can be
devolved without causing acute bouts of
panic? The answer will vary from firm to
firm, a stipulation that must, of course,
be applied to all outsourcing.
However, Steve Sleight, writing on
Developing Your E-Business (Dorling
Kindersley), poses three questions that
apply to all managements considering
the outsourcing solution:
1 I s this system or process a core
competency?
2 D
oes this system differentiate us
from our competitors?
3 C
an we provide this system more
efficiently than a specialist?
If the answers are Yes, the conclusion
is clear: you keep the work in-house.
Even with three Nos, however, you only
advance to “consider outsourcing”.
Economics and location
This is the time for some thorough research on the vital matters, such as location and economics. Unfortunately, much
of the research done on both these key
factors has been superficial to a degree.
KPMG’s strictures on the lack of exacting
examination have already been mentioned – and they cannot be brushed off.
The lack of reliable measurement of the
relationship with the provider, prevalent
in “far too many businesses”, leaves them
“floundering in the dark somewhat” when
trying to establish the real value of their
arrangements. Indeed, 79 per cent of
the surveyed firms didn’t even have an
accurate picture of the costs of selecting
a provider. Half of them took longer to
request a proposal than the six months
KPMG regards as the maximum desirable time. The major source of troubles,
according to respondents, were “almost
always” people-related: from which
KPMG’s Shamus Rae sensibly concludes
that people and “cultural fit” may have
been considered as “secondary matters – if
at all” during the selection process.
As for location, the knee-jerk decision
for many firms has been to head for
the Indian sub-continent. As Harvey
Nash has demonstrated from its own
experience, painstaking research by an
intelligent management may remove
India from “most favoured nation” status.
In Harvey Nash’s case, Vietnam came
decisively out on top.
However, that account illustrates an
important trend in outsourcing: while
potential clients may well be completely
new to the process, consultants of many
shapes and sizes have built up a large and
still growing body of expert knowledge.
This is part of what KPMG calls “a
maturing of the market”. The ripening
explains why 89 per cent of survey
respondents expect to maintain or
increase their current sourcing levels,
while “significant misalignment” between
client and provider was reported by only
14 per cent. While a fair way from Rae’s
objective for outsourcing – “universal acceptance as an effective strategic business
tool” – it is certainly a major and hopeful
advance, whether onshore or off.
Going offshore
Expert advice has obvious necessity if
the would-be client is planning to use
offshoring. The variables in outsourcing
from an overseas location are more numerous and the hazards greater – India is
a very long way from Britain and not just
in geography.
Three authors from Boston Consulting
Group, writing in The Thinking CEO
website, lay down ten pertinent rules:
1 Ensure full support from the CEO.
2 D
evelop a clear vision of the value
at stake.
3 Derive an optimal sequence.
4 Evaluate locations with care.
5 Select the right business model
– captive, outsourced or hybrid.
6 Move inefficient processes before
fixing them.
7 Appoint the right financial
leadership.
8 Design efficient governance
structures.
9 Know your service benchmarks
before going offshore.
10 Don’t use pilots to decide whether
offshoring works.
The above rules, however, leave unanswered the primary question of whether
you should actually go offshore yourself,
either as insourcer or outsourcer; there’s
no reason why an in-house operation
cannot gain the benefits of offshore
BUSINESS GUIDE
11
chapter one
operation. Hence the captive offshoring
referred to above. There are, however,
special benefits to outsourcing offshore.
According to Sujay Chohan of
Gartner, the advantages range from
better economies of scale and access to
better and continually enhanced technology; from inherent incentives to improve
the process to the ability to benchmark
to industry and global standards. On
the other hand, you lose some control
over process delivery and get confronted
“with still nascent and unproven service
offerings, with limited industry and
process knowledge”.
insourcing, etc) and to whatever
functions are involved (with HR, learning
and training, customer relationship
management and finance and accounting
emerging as the big four – along with the
IT that powers all the applications).
Accenture has created a “relationship
compass”, a guide to BPO management.
The four key questions are:
The importance of
relationship management
However, the gains increasingly overmatch
the losses. For all the disappointments
and disasters (like Britain’s ill-fated efforts
to computerise the NHS), outsourcing’s
expansion in activity and expertise is the
major and fastest moving trend. It has
been reinforced by an advance in client
sophistication – not least in managing the
relationship. More companies now recognise that relationship management over
the long term is crucial to success.
That applies to all choices possible
(onshore or offshore, multi-sourcing,
As David Andrews, chief executive of
Xchanging, says: “IT-led transformations
and expensive solutions will never prevail
over dealing with people.” The relationships may well go beyond client/provider.
In several cases, such as BT’s deal with
IBM, announced as long ago as 2000, the
partners have set up a joint venture.
Such partnerships obviously enhance
the upward momentum of outsourcing
as it becomes a great industry in its own
right, not just a useful adjunct.
And maybe that elusive virtual
corporation is simultaneously coming
into sight – at last.
1 How deep should the relationship be?
2 How broad should it be?
3 T
o what extent will we transfer our
way of working to the outsourcing
provider?
4 To what extent will we transfer our
assets to the outsourcing provider?
Robert Heller is Britain’s best-known author on business management. His first title,
The Naked Manager, passed into the language. Some 50 books later came The Fusion
Manager. Highly successful magazines launched by Robert Heller during his long association with Haymarket Publishing Group include Management Today, Campaign, Computing
and Accountancy Age. His teaching has achieved wide circulation through the best-selling
Dorling Kindersley Essential Manager series, the www.thethinkingmanagers.com website
and the Letter to Thinking Managers series, co-written with Edward de Bono.
12
BUSINESS GUIDE
viewpoint
The decision to outsource
manufacturing to China
was first made back in
1996. We were finding it
difficult to recruit labour in
the UK and were struggling
to achieve the quality we
wanted within the necessary cost parameters. We
also needed to consolidate
our product range after a
period of diversification.
We wanted to become a
smaller, more virtual company focused on our core
products, Hornby model
railways and Scalextric car
racing sets.
While our diversification strategy had initially
been very successful, the
toys market consolidated
during the nineties and our
products were no longer
cost-effective to produce
in the UK.
We needed a different
model that would cut the
cost of manufacturing,
while maintaining quality.
Moving manufacturing
from Ramsgate to China
also allowed us to simplify
operations and ramp up
our value-adding activities
– we are now better able
to concentrate on R&D,
new product development,
sales and marketing.
john stansfield, Hornby
It’s important to retain
control over the intellectual side. We design
the products we want to
model, using computeraided design. We provide
these templates to our
suppliers in China, who
then make and assemble
the components.
Outsourcing has been
a major factor in the turnaround in Hornby’s fortunes.
We’re roughly seven times
more profitable than we
were in the mid-nineties.
Not only have we cut costs,
but we have increased our
sales and volumes. And
we have been able to add
new products successfully
– something that was difficult during the previous
high-cost regime.
At the time, we were
unsure what the ramifications in the marketplace
would be. Initially the trade
press touted the move as
the death-knell of Hornby.
In fact, the quality of our
products has improved
through outsourcing.
When we were manufacturing in the UK, we had
to restrict the time spent
on this activity, because of
the high labour costs. But
in the Far East, more time
can be spent testing all the
components and adding
extras. We have better
products with greater
attention to detail. For
example, we repeat the
product decoration process twice in the Far East,
which improves the quality
and depth of the finish.
We had thought that
our market was shrinking.
We had competition in
the Far East and Europe,
and were struggling to
achieve the requisite quality cost-effectively. But we
have actually increased
the market size – and our
market share – now that
we have outsourced to
China, including through
acquisition. While many
of our European competitors struggled, we moved
towards a different cost
base, while continuing to
develop quality products.
John Stansfield,
Group FD, Hornby
BUSINESS GUIDE
13
chapter two
Making the decision
From current performance and cost-cutting
opportunities to brand image and the impact
on staff, there are a range of factors to take into
account when deciding whether to outsource.
By Philip Thornton
T
he decision to outsource part of a
business is one of the most difficult
and far-reaching choices many
directors will have to make in their career.
There can be tremendous rewards for the
winners, but there are deep pitfalls for
those who either make the wrong decision
or implement it poorly. Anyone who has
been through the process or has advised
on major outsourcing projects will say
that it is impossible to underestimate
the amount of preparation and research
needed before taking that decision.
14
BUSINESS GUIDE
The reason is simple – the company
is making several decisions all at the
same time. Some are financial, some
are practical, some are short-term and
others are questions about the long-term
implications. Which part of the business
should we outsource? Do we want to
outsource all or part of that operation?
Does it matter whether it is outsourced
at home or abroad? Should we keep the
operation within the business’s “family”
or hand the business over to an outsourcing supplier?
Cost cutting and
service improvement
There are two main criteria for evaluating
the potential for outsourcing. The first
is the potential for cost savings and the
second is the gain in service quality. The
principal danger for a finance director is
to be tempted to focus on the bottom-line
benefits for the profit and loss account.
There is no doubt that cost reduction is
one of the greatest potential benefits of
outsourcing, but there are lots of other
considerations, too.
John Willmott, CEO of NelsonHall,
the business process outsourcing (BPO)
firm he founded nine years ago, says even
domestic outsourcing can deliver savings
of 20 per cent, while savings from offshoring can be in excess of 40 per cent. “Bear
in mind that while you want a healthy cost
reduction, it is equally important that the
service improves rather than deteriorates,”
he says. “It is a potential recipe for disaster
if cost saving is the only benefit you want
to get out of it.”
Around 30 per cent of all outsourcing
projects fail, according to analysts IDC
– usually because they are based on false
assumptions, poorly specified requirements, ill thought out business plans and
false expectations on behalf of both the
company and the outsourcing supplier.
Choosing functions
to outsource
In parallel with assessing the potential
for cost savings and service improvement, it is wise to examine the current
performance level of the operation under
consideration for outsourcing.
If it is performing extremely well, then
it is likely to be a mistake to outsource
it, for risk of throwing the baby out with
the bath water. On the other hand, if
there are problems with the department’s
performance, outsourcing is unlikely to
provide the solution. As Penny Bousfield,
outsourcing director at CM Insight, a
customer management consultancy, says:
20%
Savings that
domestic
outsourcing
can deliver
40%
savings that
offshoring
can deliver
“Anyone who tries to outsource a headache is likely to find that pain might go
away for a short time but will return with
renewed ferocity.”
Nelson Hall’s Willmott cites the
example of an airline that decided to
outsource baggage complaints, because it
was the area it least liked handling itself.
“How foolish,” he observes. “Don’t try to
BUSINESS GUIDE
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chapter two
stitch up your service provider, because it
will come back to bite you.” However, done
well, outsourcing can give a company
access to world-class capabilities in areas,
such as basic manufacturing, call handling
and finance and accounting, that may not
be seen as a core part of the UK business.
Charles Tilley, chief executive of the
Chartered Institute of Management
Accountants (CIMA), agrees that such
areas are often ripe for outsourcing:
“Companies can now plug into the skill
sets most able to deliver the results,
whether those are technology, expertise
or infrastructure, and whether they are
based in China, India or central Europe.”
The criteria for deciding whether
to outsource a function will vary from
department to department. Thanks
to technological innovation, almost
anything can be outsourced. But it is
essential to evaluate what parts of a
function are ripe for external expertise
and what parts are core to the business.
For example, when GlaxoSmithKline
The real question is how relevant the
operation is to the core business and
how closely interlinked it is with other
functions. Some areas such as finance
and accounts can be treated as a “lift and
shift” operation. In other words, where
the function is self-contained, the jobs
and the processes can simply be moved to
another location. This is also most likely to
deliver the cost savings with the least risk
of deterioration of the service. At the other
end of the scale is human resource (HR)
management, which involves outsourcing
people relationships, rather than just
computer processes.
Is it right for the company?
Cost savings, service improvement and
core/non-core processes aside, there are
two fundamental questions at the heart of
any outsourcing: first, what effect will it
have on staff and their levels of buy-in to
the company?; and second, what effect will
it have on external perceptions of the company, most fundamentally, the customer?
Companies can now plug into the skill
sets most able to deliver the results,
whether those are technology, expertise
or infrastructure, and whether they are
based in China, India or central Europe
the pharmaceuticals giant, decided on a
major outsourcing and offshoring of its
finance and accounts operation, it made
a positive decision to retain higher-risk
elements, such as expatriate workers’
payrolls, in-house, as well as keeping the
governance structure in the UK.
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BUSINESS GUIDE
Roger Barker, finance director of
Muntons, a UK-based malt manufacturer, has examined the potential of
outsourcing on several occasions for
a range of business functions, but has
always come down on the side of keeping
payroll, sales and distribution and
manufacturing, etc, in-house. He sees the
problem as one of culture and buy-in.
“For medium-sized businesses such
as ours, I think there is a strategic
barrier to the success of outsourcing,”
he says. “In order for an enterprise to
be successful, it is vital that all employees feel part of the vision and have
personal objectives which help further
the corporate objectives of the business.
This goes for every area of the business
– from sales through to manufacturing
and administration. Fundamentally,
everyone buys into and helps to achieve
the objectives of the company, but when
something gets outsourced, that vision
will always be diluted to some degree.
The outsourcing supplier will have their
own objectives to fulfil and their own
vision to follow, which will ultimately
compromise the strategic coherence of
the company that has outsourced.”
Barker cites the offshoring of call
centres as an example. He says that
problems with data security, be they
perceived or actual, and problems with
customer service and communication
all have the potential to compromise
the strategic objectives of the business
– and that this is why there has been
something of a backlash against certain
forms of offshoring with companies
pulling these so-called “peripheral”
activities back to the UK.
But there is a world of difference
between outsourcing a back office
function, such as payroll, and farming
out customer-facing activities and this is
widely acknowledged among outsourcing
users and suppliers alike. Certainly it is
wise to consider the market – and customer impact – of a potential outsource
before making the final decision.
Failure to do so can result in a wave
of negative publicity. Take Burberry – the
“luxury brand with a distinctive British
sensibility” – which recently announced
the closure of its polo shirt factory in
the Rhondda Valley and its intention to
outsource manufacturing to China.
It has been rather taken aback by
the strength of opposition from workers
at the factory, who have made their
displeasure very public, whipping up support from a variety of quarters, including
celebrities such as Charlotte Church and
Tom Jones, to help fight their corner.
Whether the media furore will have any
negative impact on this most British
of brands – and its (largely overseas)
customer base – remains to be seen, but
one can’t help thinking that Burberry
has been caught unawares.
Contract, partnership
or joint venture?
One way of addressing concerns about
buy-in to the outsourcing company’s
vision is to look at different models for
supplier arrangements. Peter Brudenall, a
partner at law firm Simmons & Simmons
who has advised on outsourcing deals for
companies such as Aon and Pearl, says
there has been a growing trend towards
enterprise partnership deals to ensure
that the outsource company “buys in” to
its partner’s vision.
“Having a discussion about the
contract with legal advisers is fairly
fundamental, as it is too late after the
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contract has been signed to try to
incorporate new concepts,” he says.
“You should establish a long-term
contractual relationship.” This includes
thinking ahead and including the
flexibility about the need to renegotiate
the contract if circumstances change.
The deal between Aon, an insurance
broker and risk management specialist,
and Xchanging, the BPO company, is
a good example of partnership. The
deal announced in August 2006 was
for an initial ten-year service contract
that involved the outsourcing of Aon’s
client operations division, handling
current and legacy insurance claims
administration and processing, as well
as accounting and settlement for clients
within Aon’s reinsurance division and its
specialist and wholesale units.
of success and joint vision – not least
because both the outsourcer and the
supplier are incentivised from the outset.
The threat to skills
Establishing a partnership can also help
minimise the threat of a transfer of technical skills, as well as people, from the outsourcing company to its contractor. Nigel
Parslow, executive chairman of Harvey
Nash, the global executive recruitment
firm that has an offshore software development outsourcing business in Vietnam,
says this should be a real concern for hightech manufacturing companies.
He says it is essential for those types
of companies to see outsourcing as more
than a tactical cost-cutting decision and
to consider the long-term ramifications
for its human capital.
When you use offshoring, the risk might
seem to be with the supplier, but at the end
of the day, it’s a reputational risk for my
company. In my experience, the ones that
are most successful are the companies that
keep a hands-on approach
The two companies said at the time
that the partnership would enable them
to exploit the talents and capabilities
of the transferring employees to create
a platform for market-facing services
to the London market and the larger
insurance industry.
Although it is relatively early days,
perhaps the very fact that that this
business opportunity is embedded into
the partnership increases the likelihood
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BUSINESS GUIDE
“If you look at the ability to design
and innovate within manufacturing
companies, by outsourcing primary
design, they are losing the design and
product development capability in the
medium term,” says Parslow.
Furthermore, losing essential
intellectual property – the very essence
of growth and sustainable business – to
overseas partners where the legal systems
are less robust, is a genuine concern.
50%
Offshoring:
“When you use
Piloting
offshoring, the risk
a smooth
might seem to be
course
with
the supplier,
Potential labour
overseas
but
at
the end of the
cost benefits
When it comes to
day, it’s a reputational
due to outsourcing,
offshoring, the stakes are
risk for my company,”
in some cases
even higher than simply
he points out. “In my
outsourcing. The potential
experience, the ones that are
labour cost benefits – as much as a 50 per
most successful are the companies that
cent saving in some cases – make it a very
keep a hands-on approach.”
attractive financial option. But the negaHe says he knew some of the bidders
tive publicity, as Lloyds TSB found in the
were bound to include an offshore base.
run-up to its decision in March 2007 to
Having never gone offshore himself,
bring back some call centre functions
he decided to run a pilot call centre in
back from India, can be hard to handle.
Bangalore. In a nifty piece of finance
But two UK companies shine a light on
footwork, he made it self-funding by
the path to a smooth transfer.
agreeing with an existing supplier to
Chris Scoggins, chief executive of
move a chunk of calls to the pilot and
National Rail Enquiries (NRE), has
pay it the same amount, giving it the
overseen both types of outsourcing in his
incentive of the labour cost saving.
four years at the helm of the organisation
“I wanted to know that the work could
that was born out of rail privatisation a
be handled correctly,” he says.
decade ago. NRE handles 50 million calls
In the end, Ventura won with an
a year from passengers on behalf of the
offer that included a Mumbai site: “We
train operating companies, which also
saw others that were very cheap, but we
own the business. The Office of the Rail
did not feel they would deliver the right
Regulator sets tough quality standards
level of outputs,” he recalls. “We had one
and has the power to impose severe fines.
bid from a company that offered partial
He is in an unusual position. First,
offshoring – but it turned out they had
he inherited an almost 100 per cent
never done it before!”
outsourced operation with a phalanx of
He would urge any FD to spend
UK call centres. Second, the choice to go
money if necessary to fund a pilot before
overseas was taken by the winning bidtaking the plunge in foreign waters.
ders for a retendering of his call centre
“Most boards [of directors] value their
operation rather than NRE. He was
relationship with the customer, so if you
aware of the pitfalls of a badly conceived
want to carry the board with you it is
offshoring decision, and went through a
easier if you run a pilot.”
meticulous process he believes any CEO
Budget, the UK’s third largest
or CFO should undertake.
independent general insurer, has shown
BUSINESS GUIDE
19
chapter two
how the publicity problems with offshoring can be turned to its advantage. Budget
said last year it would increase the number
of seats at its centre from 200 to 700
over the next two years, but has pledged
commitment to its three UK call centres.
Adam Winslow, director of Fusion South
Africa, Budget’s outsourcing subsidiary,
said that wages were 35 per cent lower
than in the UK, but insisted cost was not
the single driving force, as wage costs were
lower in other countries, adding it has
rejected India and the Philippines during
the selection process.
It also turned out that the 500 new
workers would include more than 200
unemployed South Africans who are being
trained by a government scheme specifically aimed at boosting the country’s share
of the call centre market. This allowed
them to benefit from a generous tax break
and gain positive media coverage. Budget
is committed to its three UK call centres in
Peterborough, Coventry and Sunderland.
“What Budget has done, compared with
other companies, is that we have no job
losses,” says Winslow. “We are recruiting
for the other three sites. However, it is
difficult and challenging to recruit and
retain staff due to UK pay and flexibility
demands, all of which are recognised by
UK operators.”
Conclusion
The decision to outsource has multiple
dimensions that need to be addressed.
The financial case, with savings in excess
of 40 per cent on the table, will always be
compelling, but it’s not the only factor.
“Deciding to outsource isn’t just a
cost-cutting tactical decision, it is a fundamental strategic decision,” says Parslow
of Harvey Nash. “There are stakeholders
to be engaged in any final decision. The
customer is king, and maintaining essential brand and product DNA is critical to
long term health of company. If you have
built your business on customer service or
product innovation, you must protect it.
Don’t grab short term profit at the expense
of long term business growth.”
The challenge for FDs is bring the rest
of their directors – and employees – on
board by tackling the other issues that
arise. These include the nature of the contract or relationship, the scope of the areas
to be outsourced, whether those operations
are ready to be outsourced and the potential impact on the company’s reputation.
As Charles Tilley of CIMA says:
“Outsourcing is a fantastic opportunity for
the finance function, because by realising
the value of [outsourcing], valuable
management time can be freed up and
better placed to drive shareholder value.”
Phil Thornton is lead consultant at Clarity Economics, a consultancy and freelance
writing company. Clarity Economics www.clarityeconomics.com looks at all areas of
business and economics, including fiscal policy, tax and regulation, macro-economics,
world trade and financial markets. Most recently Phil was Economics Correspondent at
The Independent between 1999 and 2007. He has also been transport correspondent,
business news editor and night editor at The Independent and business editor at the
Press Association.
20
BUSINESS GUIDE
viewpoint
We first outsourced some
of our operations to India
in 2003. Since then, our
offshore outsourcing has
developed in two ways.
Firstly, it has grown in
terms of staff numbers
– from 150 in 2003 to
5,800 in 2007. Secondly,
the type of work we have
outsourced has shifted.
Initially we outsourced
fairly straightforward
work but, as we have
grown more confident
with the quality of our
Indian suppliers, so the
complexity of outsourced
work has increased.
For example, we now
have a small India-based
team analysing our processes in the UK to see how
they might be improved.
We wouldn’t do this kind
of work in the UK, because
the labour cost is too high.
But because of the cost
differential in India (which
is roughly three people for
the price of one in the UK),
it opens up opportunities
to do other types of work.
We developed our
operations on a “build,
operate, transfer” model.
This means that a third
party builds the operation,
operates it to our satisfac-
john AINLEY, Aviva Global Services
tion and then transfers it
to back to us. In August
2006, we announced that
we were transferring some
5,800 business process
outsourcing staff to AVIVA
by the end of 2007.
The benefit of this
model – the first of its
kind in India – is that
it gave us immediate
access to suppliers with
the requisite experience
to develop operations.
But we always wanted to
transfer staff to AVIVA –
in order to achieve a
higher level of engagement with our values.
Good human resource
management has been
vital to the success of
our operations. There is a
high demand for skills in
India and it is a competitive labour market. If you
don’t manage your people
proactively, then you will
experience a high attrition
rate. There is a strong
desire for development
among Indian staff, so you
have to provide them with
a good career structure
and conditions of service.
There are also cultural
differences between the
UK and India, which have
to be taken on board.
For example, family is of
paramount importance in
India, so we run parents’
days, in which employees’
parents visit AVIVA to see
where their children work.
It would seem absurd for a
25-year-old UK employee
to have their parents vet
their workplace, but these
factors are important in
India, so we cater for this.
At AVIVA, we feel that
the perceived backlash
against India-based call
centres have been largely
a media invention. We
haven’t seen much evidence of it. Okay, so there
has been a tiny minority
of customers who have
objected to dealing with
Indian employees, and
we have taken steps to
deal with this, but in our
experience, this has been
the exception rather than
the rule.
John Ainley, Chairman,
AVIVA Global Services
BUSINESS GUIDE
21
LEADERSHIP TALENT, ESSENTIAL
FOR BUSINESS SEARCH
Harvey Nash has a reputation for quality created through thousands of
successful assignments and has grown, both organically and through
acquisition, to become a leading recruitment consultancy.
Established in 1988 and operating in the UK, Europe, USA & Asia Pacific,
Harvey Nash delivers a unique portfolio of recruitment and outsourcing
services through five distinct, yet complimentary business units:
International Executive Search
Interim Management
IT Executive Search
IT Technical Recruitment
Offshore Software Outsourcing
For more information contact us at [email protected],
tel: +44 (0)20 7333 0033
www.harveynash.com
IT Resourcing
-
Executive Search
-
Interim Management
-
IT Outsourcing
chapter three
Preparing the ground
Communicating the decision to outsource requires sensitivity and careful
planning. Organisations also need to ensure they have people with the right
skills to lead the change.
By Rhymer Rigby
M
ention the word outsourcing
and the first thing many of your
employees are likely to think is:
“Oh my God, my job’s going to Mumbai
or Shanghai”. In fact, in terms of the
shock it is likely to cause, an outsourcing
announcement is probably second only
to announcing mass redundancies or
closures – and, in the minds of many
staff, it may amount to the same thing.
For these reasons, companies need to
prepare the ground carefully before they
start an outsourcing process that may
stretch many years into the future. They
need to communicate with staff; they need
to involve them; they need to find people
who will lead and champion the process;
and they need to seek out those with the
necessary skills to manage what can be a
very difficult transition. It is by getting the
foundation right that the successful future
of an outsourcing programme is ensured.
How and when to
communicate the decision
“The thing you have to remember is that
everyone hates change,” says Christine
de Largy, managing director of Impact
Executives, the interim management
division of Harvey Nash. “They hate the
fact that something is being done to them
that they can’t control. So you need to
be honest and straightforward and say
this is what is being done and why.” But,
while being open and honest may seem
relatively easy, it is not always so simple.
“Most clients say that they want to be
completely and utterly open with their
staff, because that’s the best way to bring
them along the journey,” says Jen Powell,
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chapter three
a senior consultant at Towers Perrin. “But
in almost every outsourcing deal, there
are significant commercial sensitivities
that make total transparency impractical
or impossible.” This may sound counter
to accepted best practice, but Powell’s
point is a trenchant one. If you set up the
expectation of total openness, you will
almost certainly fail to deliver at some
point down the line, potentially damaging your credibility.
Of course, none of this is to say you
shouldn’t communicate clearly and
honestly and it is a case of striking the
right balance between the need for good
staff communication and commercial
sensitivity. Outsourcing is a delicate
juggling act that has an organisation
trying to meet the requirements of
multiple stakeholders. What you should
be transparent about, however, is the
process by which staff will get information and the sequence of how it cascades
down the organisation. “You have to
be absolutely clear about who gets the
information when and why,” says Powell.
Steve Owen, partnership and operations director at NS&I (National Savings
and Insurance), knows a thing or two
about outsourcing. The organisation has
outsourced so much of what it does that
it is now more or less a virtual organisation. It outsourced some 95 per cent of its
headcount to Siemens Business Systems
and the company’s remaining staff now
concentrate on managing the brand and
marketing.
“We started our process two years
before we did the actual outsourcing,”
says Owen. “When we began, we weren’t
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BUSINESS GUIDE
clear about what we were doing. So we
didn’t communicate a great deal in the
early stages and that was the right thing
to do. We’d have frightened the life out of
people. But as soon as the shape of things
became clear, we told them.”
GlaxoSmithKline did things differently when it decided to outsource its
finance and accounts operation. Paul
Blackburn, the company’s senior financial
controller, knew that staff would have
varying reactions to the news. “Some
people see it as an opportunity and
some people don’t like it all,” he says.
“But rather than beaver away and then
come out and announce it, we told staff
in 2003 and said it was an opportunity
for them to get involved. So they had a
two-year warning.”
Communicating your motives
For those confused about where to begin,
a good place to start is by telling people
exactly why you are doing it. If you’re
being honest, this almost always means
showing them the business case. “People
are sophisticated and giving them the
facts shows them respect,” says Tower
Perrins’ Powell, although she cautions
that “you do need to go about it in a
sensitive way with respect for staff ’s
feelings”. In other words, if you’re talking
about people’s livelihoods, it’s probably
better to deliver news face to face, so that
questions can be asked rather than in a
group email.
So, for example, you should tell
your IT department that it is being
outsourced, because you believe that
IT isn’t your core competency and that
cost and efficiency savings can be made.
You shouldn’t tell them you’re doing it
because they’re incredibly important to
you and because it’s a brilliant opportunity for them. If you try and sugar the
pill, employees won’t believe you.
Incidentally, this doesn’t mean that
there isn’t an upside. Indeed, if your IT
staff wind up at a business whose raison
tell staff too. They might not like it, but it
does build credibility.
Winning people over
Organisations seeking to outsource also
need to realise that they can’t necessarily
talk to their workforce as a homogenous
mass. Indeed, those affected split broadly
into three camps: first, those who get it
there are those who will actively make it
happen and work passionately for success.
You need to focus on them, as they can
become change agents
d’etre is IT, rather than one where it is an
afterthought, they might find that there
are more opportunities. But they’re more
likely to appreciate this if you’re honest
about your motives from the outset.
Consulting with staff
Once you’ve laid it out, you then need to
start a consultation process, as required
by law. Once again, the same sort of honesty applies. Consultation is a great way
to make staff feel as if they have a stake in
the process rather than just a passive role.
But you can’t over-promise and underdeliver. There’s no point in saying you’re
seeking their views on something if it’s
already set in stone. You need to tell them
what can be changed and what can’t: it
has to be a meaningful consultation.
Equally, when you give feedback, you
need to be straightforward, by saying:
“This is what you said to us and this is
what we’re doing about it.” And, if there
is feedback you can’t act on, you need to
and are likely to be supportive; second,
those who don’t get it or don’t care; and
third, those who don’t want to get it. “You
need to realise that you’ll never win everyone over,” says NS&I’s Owens. “But by
talking to people, you can usually change
some minds.”
You should focus your energies on
where they have the maximum impact,
says Tower Perrins’ Powell. “For example,
there are those who will actively make
it happen and work passionately for
success. You need to focus on them,
as they can become change agents.”
Conversely, there may be a large number
of people who are fairly blasé about the
whole thing: it may not be a good use of
time and energy to put huge efforts into
turning them from cool on outsourcing to
lukewarm.
As for the last group, well, that’s an
interesting one. If you have someone who
is passionately against outsourcing and
who is also a valuable employee, then of
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chapter three
course you should work hard to change
their minds. Indeed, the question of
talent that doesn’t like what’s happening
is a rather vexed one. Although it is
something of a gamble, one path you
could take is to allow them to try the
new regime, but to give them an exit
window during which their right to take
redundancy remains unaffected. How far
you are prepared to go really depends on
how much you want to keep them.
As for those who could be made
redundant, you need to be honest with
them, while offering them as many realistic options as possible and talking them
through the various possibilities. “People
won’t always like what’s happening, but by
listening to them, you can sometimes take
the sting out of it,” says Owens.
Methods of communication
Powell suggests that the best way to get
through to people is through focus groups
and team meetings. “You want to find out
the fear factors that will block people’s
buy in and what really matters – the
hygiene factors, like don’t mess with my
car, don’t mess with my pension.” But,
she adds, these concerns can come as a
surprise. “For example, we worked on an
outsourcing project with one organisation where people loved a certain symbol
on their badge. They felt it summed up
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BUSINESS GUIDE
what their job was about. We would never
have known this if we hadn’t asked.” Had
Towers Perrin not asked, this seemingly
trivial symbol could have been dispensed
with without anyone having ever realised
how central it was to employees’ self-image and sense of belonging.
As well as getting feedback from staff
on what you’re doing, it’s also a good idea
to get feedback on how you’re communicating. One way of doing this is to
have a core group who will become change
agents and early adopters and who you
can use to test your communications. But,
odd though this may sound, you probably
need to include some cynics here as well.
For while you don’t want to sound too
downbeat, you don’t want to sound like
you’re spouting propaganda either – you
need that all-important “authenticity”.
Running whatever you’re going to say past
those who are likely to be cynical will help
you achieve this balance.
While you should never underestimate
the importance and influence of cynics,
you shouldn’t be blind to the damage that
gossip can cause either: it may be wrong,
but that doesn’t stop people believing it.
As well as being clear and factual, the
best way to counter hearsay is to run a
kind of rapid response unit. Put down
potentially vicious rumours by tackling
them head on.
Staff sensitivities
Another interesting soft factor that affects outsourcing communication is the
way that people feel about their jobs.
Most people need to feel good about
what they’re doing and this is especially
important in the the public sector, where
many still feel as they’re doing some sort
of communal good. So what you must
not do is denigrate people’s current jobs
when you talk about outsourcing. It is
very easy to imply – without even intending to – that you are outsourcing a function because it is sloppy and inefficient.
There is probably no ideal way around
this one, as something that is brilliant is
rarely outsourced. But it can be helpful to
listen to people’s frustrations with things
as they are and explain how the outsource
can help to address this. In fact, this
may well be the case: better to work for
an organisation (the outsourced service
provider) where payroll or HR is core than
a bank where it is can be a marginalised
and neglected support function.
Dealing with unions
A constituency that some organisations
find they need to talk to, especially as
so much outsourcing is in the public
sector, are the unions. Unsurprisingly,
they can be a little less than warm
when it comes to outsourcing.
“Outsourcing is almost always
problematic and usually results in people
losing their jobs,” says Tim Page, a senior
policymaker at the TUC. “So a union
perspective is very much one of damage
limitation.” The TUC, says Page, would
encourage employers to talk to unions
and come up with a package that protects
those who are going to lose their jobs.
It also suggests involving the workforce
at an early stage in the decision-making
process. “Although these consensus type
decisions can take longer, companies
often find themselves in a better position
down the process.”
For all this, there have been some
notable win-wins. Hugh Jones-Glass,
sector secretary at Amicus, speaks of
a great success in this area being the
Outsourcing Principles Agreement
Amicus reached with CFS (Cooperative
Financial Services) over its decision to
outsource functions to Capita and Xansa.
The union, he explains, was involved at
every stage and negotiated agreements
safeguarding pensions and the working
framework. It also interviewed the
front runners, had the right to make
presentations to the boards and make a
recommendation as to which business it
thought was the most suitable candidate.
But if this is an example of best
practice, there are plenty of examples of
BUSINESS GUIDE
27
chapter three
what not do. The absolute worst thing that
can happen with this or any other sort of
news affecting people’s jobs, says Page, is
for them to hear it on the news. Indeed,
crass though this sort of thing is, examples
of appalling communication to employees
abound. Take the AA, which last year
sent text messages out to staff, suggesting
that they might want to take redundancy. Understandably the company was
of thing: they will have done it before and
what you’re paying for is their experience.
“The difference between interim
managers and consultants is that IMs are
usually functional experts,” says de Largy.
“Consultants may have a good overview,
but they are unlikely to have that operational experience and are often not very
good at counselling and coaching people
through change.”
There are all sorts of weird feelings.
Those who aren’t affected often feel
guilt and worry – it’s a sort of survivor
syndrome. You need to ensure that the
people you keep feel positive about
staying in the organisation
slammed by both employees and the GMB
union alike. Clearly staff need to be treated
with a degree of sensitivity and respect,
and the way you communicate is almost as
important as what you communicate.
The skills to lead the change
As well as communication, you need to
ensure beforehand that your managers
have the skills necessary to implement
the change. In some cases, says Campbell
Robertson, director of outsourcing for
the UK and Ireland at HP, all that is necessary is to provide the existing executive
management with sufficient support. But
in others, more is needed.
In terms of specific skills, says Impact
Executives’ de Largy, companies may want
to consider interim managers. There are
a number of compelling reasons for doing
this. First, they are old hands at this kind
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BUSINESS GUIDE
The other reason to use interim
managers is that they aren’t emotionally
involved. Any manager who has been at a
company for years will have a network of
friends, colleagues and allies; they will also
have personal likes and dislikes. Plus, of
course, they will be looking after number
one as it’s not just the rank and file that
outsourcing affects. “Interim managers
can act as the conscience for the company,
they can offer support and advice, they can
manage risks and benchmark – and they
can do it all objectively, because it won’t
affect their careers,” says de Largy.
Looking after staff
Campbell Robertson suggests that businesses seeking to build a lasting relationship will also want to ensure that there is a
decent cultural fit between the companies
involved in outsourcing and that those who
are moving are not just dropped in and left
to fend for themselves. According to the
Transfer of Undertakings (Protection of
Employment) Regulations 2006 (TUPE),
employee rights must be protected when
all or part of a business is bought or sold,
or when a “service provision” change
occurs in outsourcing situations.
“When someone is TUPEd into HP,
we like to run an induction,” he says.
“It’s important that people are enthusiastic about working for businesses and
you can’t just move someone from one
company to another and expect them
to continue as they were.”
HP, he says, also uses a buddy system
where someone who has transferred
in from outside has a colleague who
performs a similar role at HP and acts
as a mentor, guide and sounding board
for the first few weeks. “It’s not rocket
science, but it’s very effective,” he says.
This cultural acclimatisation works
the other way too: “We have people who
have never worked for bank X and who’ll
have to spend five days a week on site,”
says Robertson. “That company needs
to show them very early on how the
business works.”
It is this sort of thing, he says, that
builds lasting relationships between
outsourcing suppliers and clients and this
is what makes the difference between a
partnership and a contract.
For all the concern about those who
are affected by outsourcing, there is
one group that is often ignored from
the very start. This isn’t those who are
made redundant or those who move. It is
those who are left behind. Just because
outsourcing doesn’t affect them directly
doesn’t mean it doesn’t affect them at all.
Those who keep their old jobs will
probably need an aftercare strategy,
says de Largy. “There are all sorts of
weird feelings. Those who aren’t affected
often feel guilt and worry – it’s a sort of
survivor syndrome. You need to ensure
that the people you keep feel positive
about staying in the organisation.”
Conclusion
From first to last, the real key to preparing the ground for outsourcing is good
communication. And, while you will
probably find it impossible to be completely open throughout, you need to be
at least honest and credible. Ultimately,
your employees probably won’t like what
it is you’re going to do; unsurprisingly,
most people are change-averse. But if you
talk to them like adults and listen to their
concerns, they’ll be far likelier to accept
the change – and may even embrace it.
Rhymer Rigby writes about business, travel and lifestyle; he has covered topics ranging
from employee fraud to eating tarantulas in Cambodia. He is a regular contributor to
the FT and has also written for the Telegraph, the Independent and the Observer. He is a
columnist on Management Today and Human Resources and also writes for titles such as
GQ and Conde Nast Traveller. Prior to going freelance, he spent four years on the staff of
Management Today and a year on Business 2.0 as a features editor.
BUSINESS GUIDE
29
viewpoint
Like other manufacturers,
we have lots of customers
moving their operations to
low-cost economies, such
as China and South East
Asia. If we wanted to grow,
we knew we would have to
get organised in these territories to achieve greater
economies of scale and to
follow the market. There
are two strands to our
activities: sourcing of raw
material and outsourcing
manufacturing processes
to take the cost out of
our operations.
As manufacturers, we
are in the technical textiles
business. Our industrial filtration products are
made from a variety of
materials, but particularly
from woven synthetics,
and our core manufacturing technique is weaving.
Both China and India have
highly developed textile industries, so we are looking
to source weaving yarns in
these countries.
Since 2005, we have
had a professional office
in China, whose role is to
identify sources for supply
and qualify them. Although
we can purchase fine yarns
for half the price they are
in the West, one of our
30
BUSINESS GUIDE
Colin Waudby, Clear Edge
deals fell down on quality.
We were buying container
loads of yarn from a
particular Chinese supplier
and then the wheel came
off. Our automatic weaving machine picked out
a problem with the yarn,
which was sub-standard.
We went back to the supplier, only to discover that
a member of staff on their
line had been replaced
and didn’t understand our
quality requirements.
We also looked at
developing a joint manufacturing venture in China
with a company that is
already a customer of
ours. But we decided that,
from the point of view of
location, it was important
to be able to incentivise
and control the new entity, so we backed off. We
decided to set up a wholly
owned operation instead,
which is now eight months
into operation, making fil-
ter products from woven
synthetics, using locally
sourced fabrics.
We also have a joint
venture in India, created
by bringing two agents
together. After two years
of working with the
agents, we decided to
engage them in a joint
venture to build a factory
in Jaipur. We wanted to
incentivise them more:
if they had some ownership of the business, they
would be more inclined
to grow it.
My advice would
be to assume nothing.
However much research
you do won’t prepare you
for the reality of trading
in another jurisdiction.
We used advisers and
consultants, but the
legal environment in
countries is radically
different from what you
have typically experienced, particularly in
China, where it is still
evolving. And however
long you think it will take
to set up operations
abroad, double it – there
are so many hoops to
jump through.
Colin Waudby, CEO,
Clear Edge
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IT Outsourcing
chapter four
32
BUSINESS GUIDE
Choosing a partner
Successful outsourcing is as much about a good relationship with the outsourcing
provider as it is about price and capability. But how to find the perfect partner?
By Mick James
O
nce the decision to outsource
has been made, a company is
committing itself to a long and
sometimes intimate relationship with
an outside organisation. Defining the
scope and the nature of that relationship
and getting the right supplier on board
become as important as getting the right
price or level of capability.
Developing the business case and
defining the scope of the outsourcing
are areas in which the finance director
should play a key role. “The FD has a
broad understanding of the financial
heartbeat of the organisation,” says Phil
Morris, managing director at outsourcing
advisers Morgan Chambers. “From
the point of view of building a detailed
business case for outsourcing, the FD is
best placed to understand the base cost
to the business. However, he or she also
needs to understand how outsourcing
will touch other parts of the business
and the implications for other long-term
commitments, such as building leases.”
From doing to managing
It’s all too easy for organisations to outsource in ways that leave them without
enough control over the outsourced
process or that mean they lose the skills
they will need to manage the relationship
– or even to rebuild the function should it
need to be brought back in-house.
“Most organisations overlook their
own staff,” says Martyn Hart, chairman
of the National Outsourcing Association
(NAO). “Organisations employ a lot of
experts that they’ve nurtured, but when
you outsource something, your staff
have no things to be expert over, only a
relationship to manage.”
As department heads become customers for what they used to manage, this
fundamental cultural change can lead to
problems with implementation. “The FD
can become someone who spends their
time answering detailed queries about
how to set up this supplier, or what to
do with this or that invoice,” says Fred
Edwards, MD of MyFD, which provides
finance director and financial controller
teams to small businesses. “Suddenly it
becomes a big process where everything
has a query number, and there are
multiple reports on outstanding queries.”
Outsourcing is often sold on the
premise that retained staff will become
more “strategic” but, as Edwards points
out, “often the people running internal
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chapter four
finance are not the right people to
become strategic FDs. There can also be a
frustration for divisional FDs in that they
are expected to contribute strategically
but don’t have access to the information
they need.”
This is why it’s vital to think about
the end-to-end processes that are being
outsourced. Issues at the “back end”,
such as late payment, can often arise at
the front end, perhaps with an unpaid
invoice. So it’s important to think about
how the retained operation will interact,
not just with the supplier, but with the
other departments to whom they are now
the supplier’s representative.
Defining the scope
“You can’t outsource an organisational
silo and expect an end-to-end process,”
says Anoop Sagoo, a senior executive in
Accenture’s business process outsourcing
practice. Organisations need to carefully
consider how the process will operate
both inside the provider company and
high-level stuff,” says Sagoo. “You need
to reskill and retrain your organisation
to do outsourcing. It’s an area that’s
often overlooked and it’s a fundamental
mistake to do so.”
Often the scope of an outsourcing
deal is so wide that the organisation loses
control of vital areas of stewardship and
intellectual property. “The FD should be
looking ahead to how the organisation
can get out of the outsourcing relationship and what elements it needs to retain,
such as rights to names and addresses,”
says the NAO’s Hart. “For example, you
need to make sure you have copyright
to your own database and that it’s not
locked into a proprietary format.”
There’s technically no limit to what
can be outsourced, but the decision over
what to retain should be grounded in
the fundamental identity and strategy of
the business. “I’m not aware of anything
that is at the heart of our business that is
outsourced,” says Karen Hendry, director
of admin at accountancy firm, Moore
It’s not always just about cost and cost
savings; you’re looking for a little bit
extra. You may know what you want them
to supply, but you’re not the expert.
So you’re looking for new ideas, things
that you wouldn’t think of
where it touches their own business:
what is left behind is as important as
what is outsourced.
“You can’t take an organisational
chart, cut off the bottom and say you do
all the low-level stuff and we’ll do the
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BUSINESS GUIDE
Stephens, which outsources reception,
catering and printing. “These support
services are outsourced, because we can
control them – if something goes wrong,
the damage is limited or contained very
quickly.”
But while outsourcing salesmen will
always try to extend the scope of the deal,
the tender process should not be drawn
so tightly as to restrict the ability of the
supplier to add value. “You need to give
some leeway to the supplier to show what
benefits they can bring to the business
and not narrow it down too much,” says
Hendry. “It’s not always just about cost
and cost savings; you’re looking for a
little bit extra. You may know what you
want them to supply, but you’re not the
expert. So you’re looking for new ideas,
things that you wouldn’t think of.”
Selecting suppliers
With literally thousands of outsourcing organisations operating across the
world, physically choosing a supplier can
be hard work. Add to that the new tier
of third-party advisers spawned by the
growth of outsourcing, and companies
can be faced with a bewildering array of
choices. But although advisers can help
to cut down the legwork, it’s important
not to rely on them too much.
“Third parties can drive formality
into the process and force you to make
a decision,” says Accenture’s Sagoo.
“But they are only there to facilitate
the decision – you can’t outsource the
decision itself. Another thing to beware
of is over-engineering the process and
taking so long to make the decision that
by the time you execute, everyone’s run
out of steam.”
Even before getting into the detail of
a tender or request for proposal (RFP),
it is crucial to set a few basic criteria.
“When you’re offshoring, don’t be a
sheep or a lemming, but do go where
others fear to tread,” advises Paul Smith,
managing director of Harvey Nash
Offshore Software Services. “Many people
look at where they want to go first and
who to outsource with second. I think
that’s nonsense – how can you compare
the vastness of India and China with
the smallness and uniqueness of the
Phillipines? It’s better to find the perfect
supplier first.”
Smith also warns against over-determining the choice of supplier through
a standardised “tick box” approach to
creating the RFP: “You can have a whole
series of template-based questions that
still may not ask the real questions,” says
Smith. “RFPs tend to ask how big the
supplier is, how much profit it makes,
how many people it employs, what its
skill base is and so on – that makes it
almost inevitable that you’ll end up with
the biggest and most expensive supplier.”
The RFP should be seen as a way to
help suppliers engage with the business,
not to outwit them: “You need to make
the supplier analysis as transparent as
possible to allow people to do the best
job they can,” says Accenture’s Sagoo.
“The more you can be transparent about
weightings and evaluation, the better.
Procurements that are run like that
always produce the best result for the
client.”
Unearthing hidden costs and
the value of references
In drawing up a tender, the finance
director has a vital role to play – not just
in establishing the baseline costs in the
BUSINESS GUIDE
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chapter four
business but in analysing the suppliers’
bids. “You need to understand what the
true cost of offshoring is, and when the
bids come in, you need to assess whether
they make physical sense for the bidder,”
says Harvey Nash’s Smith. “That’s something an FD can analyse – he or she can
look for hidden costs and determine what
the costs of a supplier will really be.”
Smith says hidden liabilities can range
from the cost of creating the internal
governance structure and recruiting and
retraining staff to the loss of production
during handover – even the expenses of
physically visiting the supplier. “These
things are frequently overlooked,” he
“Suppliers often package references
up as a big testimonial, but it’s much
better to pick up the phone and ask how
non-standard transactions get processed,
for example,” says Edwards of MyFD.
“That sort of information is what makes
the decision much easier.”
Even simple questions, such as “what
would you have done differently?”,
can lead to valuable insights into a
supplier. Asking a supplier to reference a
customer they’ve lost to the competition
or released, even though there was no
break clause in the contract, may be wise
and is the sort of request outsourcers are
increasingly making.
We want business owners to treat us as
special, to allow us to grow with them
and to influence their direction as they
grow. We try to make sure it’s an equal
partnership, so that they get enough out
of the relationship and we’re not screwing
them down on price every five minutes
says. “What about health insurance and
the loss of staff through health problems
picked up abroad? When people
outsource, they don’t understand what a
challenge this might be.”
While there’s now a lot of objective
analysis of outsourcing suppliers available from analysts like Gartner, there’s no
substitute for personal references. The
most valuable references will come from
suppliers who’ve experienced problems
or even failures, but these can be tricky
to get to.
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BUSINESS GUIDE
Cultural fit
As outsourcing relationships reach deeper
into organisations, achieving the right
cultural fit becomes more important than
simply getting the right price. While many
low-level services can be treated as “black
boxes” where the user neither knows nor
cares about what happens between input
and output, this becomes less feasible as
outsourcing becomes more embedded.
“There’s a fundamental tension in
outsourcing, in that the outsourcing
provider will talk about managing a
45%
process: the transacnesses and try to
tion enters here and
assess their beliefs in
exits there,” says
a couple of meetings,”
Edwards. “But the
he
says.
Percentage of BBC’s
success or failure of the
“With
our accounts
overall spend that goes
contract is very much
supplier, TopSource,
toward outsourcing
about the relationship.”
that’s been a remarkable
(see p39)
Nigel Hopkins, finance
success, but we’ve been less
director at Remploy, a company
comfortable with other suppliers
that prepares disabled people for work,
– what they say are their values aren’t
agrees: “Find a partner that you genualways what they deliver.”
inely share values with. If you don’t have
Stoddart says he goes for smaller
that, you will never be able to convince
firms, because of the need to be flexible
people inside your own organisation.”
and to be dealing with like-minded
But this is something both suppliers
businesses: “We don’t know when we’re
and customers need to work hard to
going to grow and we don’t know where
achieve. “We place a lot of emphasis on
we’ll end up in five years’ time,” he says.
cultural fit, but it’s one of the critical
“We want business owners to treat us as
criteria people often don’t look at,” says
special, to allow us to grow with them
Accenture’s Sagoo. “These are large deals
and to influence their direction as they
and it’s important that the organisational
grow. We try to make sure it’s an equal
styles and cultural values of the compapartnership, so that they get enough out
nies have some alignment. Finance, for
of the relationship and we’re not screwing
example, is at the heart of the organisathem down on price every five minutes.”
tion; it touches everything. It’s impossible
And it’s important to keep working on
to put it into a ‘black box’.”
cultural fit as the relationship develops.
Hamish Stoddart, company-founder
“You have to build up good relationships,
and finance director of gastro-pub chain,
particularly with employees, such as
Peach Pubs, is a “huge believer” in cultural
receptionists, who work for someone
fit. His organisation runs a “virtual head
else but are the ‘face’ of the company,”
office”, having outsourced functions like
says Moore Stephens’ Hendry. “We work
accounting and IT from the word go.
hard to make the outsourcing company’s
“We run the business on vision and values
staff feel part of Moore Stephens and to
and I believe no supplier is safe unless
include them in things that involve our
they fit our culture,” he says. “How we
other staff.”
work together has to be close, because
they’re an extension of our business.”
Internal compliance issues
For Stoddart, this means that
As the ultimate steward of the company,
selection is done very much on “gut feel”:
the FD also needs to be vitally aware of
“We deal with owner-managed busithe implications that outsourcing will
BUSINESS GUIDE
37
chapter four
have for internal compliance. While outsourcing, say, the company secretary role,
is relatively low-risk, the penalties for
non-compliance in areas such as employment and health and safety can be huge
or even involve custodial sentences.
“At the end of the day, the service
provider is obsessed with the detail of
processes not wider business performance.
To the extent that it’s a process, you can
outsource its administration, but you miss
out on the ‘eyeball test’,” says Edwards.
He cites the example of a coffee bar chain
where one manager was running a payroll
fraud supplying fake timesheets to a
payroll outsourcer. “What stopped that
was a fairly junior person who noticed that
these staff were working very long hours
and went down to speak to employees.
A lot of it is common sense, but a service
provider is never going to have the same
feel for the business that the employee or
the customer has themselves.”
Compliance requirements will vary by
industry, with different implications for
outsourcing. In financial services, for example, there are major compliance issues
and multiple regulators to please. “You
need to explain in detail the implications
of what you are doing for your business,”
says Morgan Chambers’ Morris. “The
supplier community are aware of what
the customer issues are in their markets,
but the CFO needs to take a broadbrush
point of view of the challenges, set the
day-to-day requirements for financial
reporting and know from an exceptions
point of view what is happening. Once
that level of business as usual is achieved,
the CFO usually steps away.”
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BUSINESS GUIDE
However, many firms are not aware
of the risk posed by the proliferation
of outsourcing deals throughout the
organisation. “Firms need discipline
about how to engage in outsourcing,”
says Paul Morrison, legal counsel to the
NAO, and a senior manager at outsourcing advisers Alsbridge. “For example,
if the procurement of outsourcing is
delegated throughout the entire firm,
there’s no one view of what the liabilities
or exposures are. People assume nothing
has changed and old compliance regimes
are sometimes simply cut and pasted to
new scenarios.”
Increasingly firms are creating an
outsourcing office as a place where all
these exposures and relationships are
centrally tracked, with either the head
of IT or finance director taking the lead
role. “The CFO and the CIO are the
two keepers of the company in terms
of treasury and security and the two go
hand in glove,” says Harvey Nash’s Smith.
“If you have compliance issues, you need
sound advice. So if you have to go to a big
law firm, the cost of that becomes a factor
in the cost of the outsource.”
The need for flexibility
All outsourcing negotiations end in a
legal contract, and it’s important that this
offers the right balance of protection and
flexibility. As the NAO’s Hart says: “You
can’t write contracts for a future no-one
knows about.”
Peach Pubs’ Stoddart says that in
hindsight he would have drawn up more
robust contracts. “We started out with
quite loose contracts, because we were
in a hurry and we trusted the owners,”
he says. “That’s not good and I don’t
recommend it. The contracts I want now
are focused on the risk management side.
You’ve got to have change as a feature.”
According to the NAO’s Morrison,
creating the contract should be an
iterative process that starts with the
initial desire to outsource. “You need to
legislate for change without being vague
– five years ago such change mechanisms
were simply glossed over. But now it’s
imperative to have that stuff to hand,
if, for example, a new CEO wants to
change the firm’s strategy.”
While day-to-day operational changes
should be handled through a regular
review of service level agreements, it’s
important to establish “dead bands”,
upper and lower levels at which a bigger
change is required. “You need to establish
at what stage you’ve moved outside the
original deal,” says Morrison. “It can
be a useful thing for both parties – if
something isn’t working, it’s often not
working for both sides.”
BBC’s experience of choosing a supplier
Tom Fussell was deputy group financial controller at the BBC when the
corporation decided to award its first ever offshoring contract to Xansa –
an £85m ten-year deal for finance and accounts that is expected to deliver
savings of £20m a year. Although the BBC is no stranger to outsourcing –
45 per cent of its spend is outsourced – this was the first time it had effectively used UK licence fee money to move an operation overseas.
Seven bidders were whittled down to four who were all put through the
competitive bidding process that involved 25 meetings with each bidder.
Fussell says that while that added to the cost of the process, it brought
benefits in being able to understand better the merits of each bid. The BBC
hired PwC to help with the process, which involved the retendering of a tenyear contract held by Medas.
Eduard (CORR) Murray, senior commercial adviser at the BBC, describes
it as “watching a diamond-encrusted baton being handed over between two
runners without knowing who the other runner will be”. Fussell, now finance
director at Random House publishers, says it was vital to carry out research
and to scope the market, even for a second-generation contract.
“It is very important to do the research – ten years ago the market was
very different,” he says. He and his team used a five-grade marking scheme
– nought or red for “below BBC limits” and five or blue for “meeting or
exceeding the BBC’s opening position” with three colour grades in between.
Any bid that received a red for any aspect was automatically rejected.
BUSINESS GUIDE
39
chapter four
External benchmarks can also be
factored into the contract, for example
to set prices. “Benchmarking depends
on how mature the market is,” says
Morrison. “For example, in IT, the price
of a server can be determined by analysts
or inflation rates. In newer areas like
BPO, it’s less well established.”
Meanwhile, Morrison says the use
of scenarios is becoming increasingly
common: “You could have an option to
roll out the deal to the US in which case
the customer would invoke agreed base
terms,” he says. “It’s not contractual, but
it gives the bare bones of what the new
deal will be.”
Pinning down the
right contract
Defining a contract is a complex process
that needs senior ownership from both
the outsourcer and the customer, as well
as legal counsel and external advisers,
relatively early in the process so that it
can be controlled.
“It’s important to capture what’s
discussed,” says Morrison. “If you don’t
get it written on paper and agreed, then
you will have to have that conversation
again in a few weeks’ time.”
With some outsourcing contracts
running into hundreds of pages, plus
schedules, Morrison says it’s important
to strike a balance between being specific
and considering how the contract will
govern the relationship.
“It needs to be simple and accessible,”
he says. “Otherwise it becomes a cottage
industry in its own right.”
Conclusion
As outsourcing has evolved, so has supplier selection beyond simply finding
someone with the capability to do the
job at the right price. What makes the
partner the “right” match is now a complex mixture of factors in which so-called
“soft” issues such as cultural fit are as
important as price – if not more so.
Outsourcing means entering into
a long-term relationship with another
organisation. It will require careful
management, as well as attention to
how the new way of working affects
issues such as compliance.
Finally, it is vital that the effort and
attention put into creating the partnership
is captured in a contract, which also allows
flexibility for the relationship to evolve.
Managing the selection process and the
subsequent relationship will add to the
costs of outsourcing, and for some users
diminish its appeal.
However, effort put in at this stage
will be amply repaid in the elimination
of problems further down the line.
Mick James is a freelance journalist and contributing editor of the weekly e-zine
Top Consultant, specialising in the fields of consultancy, management, marketing and
finance. He is the author of several guides in Policy Publications’ Winning New Business in
Professional Services series and works with corporate clients on thought leadership and
other communications projects.
40 BUSINESS GUIDE
viewpoint
Founded in 2000, we are
an internet-based grocery
wholesaler, serving small
retail outlets and convenience stores. Our proposition is that, by using
technology, we can strip
out unnecessary supply
chain costs and pass on the
benefits to the customer.
From the very outset,
our low-cost business
model meant that we
needed to minimise
capital investment. We
decided to outsource all
activities that didn’t involve either finance, IT or
purchasing. We had two
contracts for logistics outsourcing: one with British
Bakeries, the UK’s largest
baker, which involved us
using their spare vehicles
once their early morning
deliveries had been made;
and one with Gist, which
managed our warehouse
near Birmingham.
Our business model is
all about volume, so the
more we buy from our
suppliers, the better prices
we will get, and the more
we put through our supply
chain, the more efficient
it is. We had invested in
our infrastructure, but we
weren’t growing quickly
simon mindham, Blueheath
enough to break even.
So we decided to supplement our organic growth
by acquiring two regional
wholesalers in 2005.
As part of the acquisitions, we inherited
transport and warehousing
facilities, so we decided to
end our relationships with
Gist and British Bakeries. In
both instances, we made a
clean and amicable break,
although we had to pick
up the cost of redundancies for 80 staff at the
Tamworth warehouse.
The problem with
logistics outsourcing is
that most contracts are
structured on a cost-plus
basis. This means that the
supplier charges you for
the costs it incurs plus a
management fee. The issue is how you incentivise
suppliers to run operations
more efficiently, when the
more they spend, the more
management fees they
receive. With hindsight,
I would have structured
a fixed management fee
with greater incentives
built in for performance.
It is also important that
you select the right outsourcing partner. You need
a company that is flexible,
shares your values and
understands your business.
And be flexible, because
things can change. We
never planned to insource
logistics; it just happened.
Whatever the state of your
business when you go in,
build in the fact that you
may need to exit.
One of the advantages for us now that we
do the last-mile delivery
ourselves is that we have
greater ownership over
the customer relationship.
When we surveyed the
customers of one of the
companies we acquired,
they said that they liked
the fact that they knew
the drivers and that this
resulted in better service.
Now that the drivers are
employed directly by us,
we have greater opportunities to build on these
relationships.
Simon Mindham, FD,
Blueheath
BUSINESS GUIDE
41
chapter five
Managing risks
From brand damage and insecure data to non-compliance and poor
communication, the risks associated with outsourcing are many. The important
thing is to identify them, and then review and manage them on an ongoing basis.
By Lesley Meall
R
isk is part and parcel of doing
business. Whether you are recruiting a new chief executive, launching a product or service, or expanding your
operations overseas, a successful outcome
is never guaranteed – and there is no
reason why outsourcing a business process,
project or function should be any different.
With adequate preparation, you can
minimise and manage the risks associated
with outsourcing; but before you can do
42
BUSINESS GUIDE
this, you need to know what they are.
“The biggest risk is failure,” says Tom
Bangemann, a senior business adviser with
The Hackett Group, a strategic advisory
firm. The way you define this failure will
depend on what you are trying to achieve.
Clarity of objectives
“You need to be very clear about your
objectives,” continues Bangemann. “The
company that is outsourcing needs to be
honest with itself, the service provider
and other stakeholders. A proper assessment of the situation is vital, because
the business needs to know where it is
and where it wants to be, if is to have any
chance of getting there.”
Risk mitigation is also about deciding
which parts of a function are and aren’t
appropriate for outsourcing. Take
Eazyfone Group, which has developed
software to comply with EU regulations
on Waste Electrical and Electronic
Equipment (WEEE). The software is
used to manage all of the company’s
processes and is sold on to customers to
help them handle compliance.
“This software is central to our
business, so we would not consider
outsourcing its development under
any circumstances,” says Dave Wilson,
CFO, Eazyfone Group. “Although we
are comfortable outsourcing non-core
processes, such as international logistics,
we have to retain direct control of all our
systems and software.”
Taking the long view
While clear objectives are important,
it is also helpful if organisations try to
anticipate their needs going forward.
This prevents outsourcing arrangements
becoming inflexible and no longer reflecting business strategy.
This is a lesson that James Stronach,
finance director of Group Lotus, has
learned. The luxury car manufacturer
found that its existing IT outsourcing
contract was something of a straitjacket.
“When we first outsourced our IT
systems and processes five years ago,
Logica CMG simply took over our staff
and the systems we had in place and
handled things more efficiently,” recalls
Stronach. “But this meant that we
couldn’t adapt our use of technology to
take advantage of emerging trends. The
days when everyone wanted a laptop and
dial-in access are gone; sales staff today
need a smart phone and access to email
and the office.”
When Lotus recently renegotiated
its outsourcing contract, it made sure it
offered a lot more control and flexibility,
and it took back responsibility for buying
hardware. “We’ve thought about where
we want to be in the future and how to
get there and we decided that this meant
working more closely with the service
provider,” says Stronach. “We are now a
lot more involved and have a much better
governance system in place, helping to
reduce the risk of problems occurring a
few years down the line.”
For Harneck Chilemba, director of
finance at Tower Hamlets Community
Housing, a crucial part of managing the
risks of outsourcing is about ensuring
that the project fits in with your organisation’s long-term objectives as much
as possible. But he believes that gaining
acceptance from key people and ensuring
that everyone affected knows what is
going on is also vital.
“Our decision to outsource was a
process,” he explains. “We started by
identifying what was wrong with our existing arrangements, through a thorough
independent review, and shared those
with the existing organisation.” Only when
the feedback indicated that outsourcing
BUSINESS GUIDE
43
chapter five
was the way forward did the organisation
decide to outsource its IT function to
Sovereign Business Integration.
Managing customer needs
Not being in control of outsourced processes can expose organisations to all manner of risks, as some of those who opted
to use overseas call centres have realised
to their cost. Online insurance company,
Esure, started offshoring calls to India in
2004, but in 2006, it brought the work
back to its own call centre in Manchester.
“The original decision was taken because of staff shortages,” says Adrian Web,
head of corporate communications, and it
also saved the company money. But when
customer service was compromised, the
insurance company did a U-turn.
Powergen, Newcastle Building Society
and Norwich Union are among a growing
number of companies that have also
abandoned their offshore call centres
because of problems with customer service. Indeed some companies have even
used the virtue of their UK call centres
as a selling point – NatWest’s advertising
campaign guarantees that customers will
be able to speak to people in Barnsley or
Cardiff, rather than Bombay or Calcutta.
Research and anecdotal evidence
indicates that the British have a tendency
towards xenophobia: “When we listened
back to calls people had complained
about, often they were fine,” says Esure’s
Web. He says it seemed as though some
people almost wanted the staff member
to fail, because they were in India. But he
adds that “when customers start voting
with their feet, you have to respond.”
44 BUSINESS GUIDE
Graham Hales of global branding
consultancy Interbrand believes that
businesses would reduce the risks of
outsourcing if they did more to manage
customers’ expectations: “I think
people have been uncommunicative,” he
explains. “They need to be more open
and transparent, and make sure that
stakeholders understand the benefits.
If it’s all about saving money, be honest
about it, so that if the alternative is a rise
in prices, people are aware of it. That
way, even if customers feel the service
isn’t quite as good, they know what they
are gaining from the deal.”
Ensuring security of data
This sort of approach will only take you so
far, of course. When Citibank customers
were defrauded of $350,000 by workers
employed by one of its service providers, the issue of who benefited from the
economics behind the decision became
incidental. Customers are extremely sensitive to anything affecting the privacy and
security of personal information, and in
the UK, this is reflected in data protection legislation. “A UK-based business
outsourcing its data processing abroad
remains legally liable for any failings,”
warns deputy information commissioner
David Smith, “and could face legal action
even if a breach takes place overseas.”
The potential risks in this area should
not be underestimated. As the experience of Citibank highlights, you cannot
be too careful. The company had not
neglected due diligence when it selected
its outsourcing centre: the service provider
had two third-party security certifications
Top ten risks
1
6
2
7
Failure: By far the greatest risk is
failure. Not enough consideration
is given to whether or not outsourcing
is the right way to deal with an issue
– or to the due diligence process once
a decision to outsource has been
made. Organisations also need to think
about what will happen if the service
provider does not deliver.
Expectations of cost-savings:
Ensure that decisions about
outsourcing made on the basis of
cost go further than labour arbitrage.
Analyse all potential models for hidden
operating costs – and don’t forget to
factor in the retained organisation.
Safety and security of data:
It is not enough to look at a list
of certifications such as BS 7799 and
ISO 9001. Organisations also need to
see for themselves how the vendor
deals with issues such as data security
and operational disruption.
The human resource: Consider
everything from how to best
handle people who are changing
employers or losing their jobs, through
identifying and managing retained staff,
to ongoing knowledge transfer. Good
communication is vital.
Brand damage: Brands are owned
by the people who consume
them, not the people who produce
them, so it is important to manage the
perceptions of as many stakeholders
as possible – without forgetting that
the customer is king.
3
4
5
Loss of control: It is more difficult
to control the transparency and
privacy of outsourced processes,
and bringing them back in-house can
become progressively more difficult
with time. Plan an exit strategy and
revisit it repeatedly during the lifetime
of the outsourcing contract.
Intellectual property: Organisations
must think long and hard about
outsourcing information or processes
that are proprietary or offer competitive
advantage – and how to protect them
if they do. This should be a strategic
decision, not a financial one.
Quality concerns: Outsourcing can
improve the quality of a service
by increasing availability, flexibility or
responsiveness, but if quality is being
traded-off against cost reductions, it
is best to be open and honest about it,
particularly with customers.
Culture clash: Do not underestimate the significance of cultural
alignment. Different is not automatically
better or worse, but variations in value
systems, accent and perception need to
be acknowledged and managed.
Legal consequences: When
you outsource a task, you
don’t outsource the responsibility and
accountability for that task, or the
liability for third-party actions. Legal
obligations, such as data protection
legislation, Basel II, TUPE and so on,
must be complied with and the cost of
non-compliance carefully calculated.
8
9
10
BUSINESS GUIDE
45
chapter five
and had conducted background checks on
the employees (which revealed no criminal
records). But perhaps the bank could have
been a little smarter.
“It is not enough to rely on security
certifications,” suggests Paul Smith,
managing director of Harvey Nash
Offshore Software Services. “Make sure
that people aren’t just talking about risk
management, but are doing it. Protect
your data and systems by choosing a service provider with more than one site, ask
to see a full disaster recovery plan and
take references. Be sure that someone has
seen the documentation and can verify
that the second site really exists.”
business is bought or sold or when
a “service provision” change occurs in
outsourcing situations. TUPE compliance
can be complex and time-consuming,
but in most situations the risks of noncompliance are relatively clear-cut.
“There is always going to be some
risk,” says Stefan Martin, a partner in the
employment group with solicitors Allen
Overy, but most organisations can easily
calculate the potential financial impact,
and use this to make informed decisions.
According to Martin, as far as
the law is concerned, there are two
principal areas of TUPE-related liability:
failure to meet the obligation to inform
Protect your data and systems by choosing
a service provider with more than one site,
ask to see a full disaster recovery plan
and take references
When you are putting your business
and its reputation on the line, consider
the way any problems will impact on your
service provider.
“You need to think about what’s at
risk for the business you’re dealing with,”
says Smith, who suggests working with
a service provider that has a reputation
you can damage and assets you can
pursue in the UK. “This can help you
mitigate the risk.”
Dealing with TUPE
Under the Transfer of Undertakings
(Protection of Employment) Regulations
2006, better known as TUPE, employee
rights are protected when all or part of a
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BUSINESS GUIDE
and consult; and unfair dismissal arising
in circumstances where employment
is terminated during TUPE transfer or
where employees claim constructive
dismissal due to detrimental changes to
terms of employment. But TUPE-related
liabilities don’t arise automatically; they
depend on the claim being brought.
If an employer doesn’t even try to
inform or consult, then employee representatives or, if there are none, employees
and ex-employees have the right to bring
a claim. But there is no automatic entitlement to compensation. “They have up to
three months from the date of the TUPE
transfer to bring a claim,” says Martin,
“and the amount is capped at 13 weeks
pay for each employee affected.” If there
are mitigating factors, the court may
decide that the employees are entitled to
less than 13 weeks’ pay.
Employees whose employment is
terminated also have the potential
to bring a claim for unfair dismissal
– within three months of their dismissal.
“The compensatory award for an unfair
dismissal is capped at £60,600 per
claim,” says Martin, but most claims are
settled for significantly less. “The guiding
principal for unfair dismissal claims is
‘what has the employee lost?’, and this is
relative.” The average award for an unfair
dismissal claim is under £5,000.
Before TUPE was updated in 2006,
there were some grey areas. In some cases
where processes were outsourced, it was
possible to argue that no economic entity
was being transferred, so TUPE didn’t
apply, but this is no longer the case.
People and legislative risks
Although security issues loom large on
the outsourcing landscape, according to
the National Outsourcing Association,
the mishandling of people issues is just as
big a risk. If staff opposition to the decision to outsource affects the organisation’s work and reputation, it can impact
on the outcome of the project.
Burberry’s recent decision to close
its factory in the Rhondda and to move
production to China has resulted in a
very visible public furore, which seems to
be damaging the brand of the company
and making Wales a less attractive place
to do business. Meanwhile, when Bank
of Ireland staff went on strike over a
proposed £340m outsourcing deal in
2003, it led to seven months of painful
and protracted high-profile negotiations
with unions.
As well as managing the expectations
of outsourced and retained staff, and
their representatives, businesses also
need to consider legislative issues.
“A lot of people focus on TUPE
compliance, but it’s just one of many
factors that need to be considered
relating to employees,” says Tom Roberts,
HR manager for new business with
Fujitsu Services. Roberts has been
involved in the transfer of staff for
numerous outsourcing deals and believes
that complying with the legislation
surrounding pensions can be even more
of a challenge than TUPE. “There’s a
cottage industry that has built up around
pensions,” he says. This is particularly
the case in the public sector, where final
salary schemes proliferate and expectations can be difficult to manage.
a balanced view of risks
The due diligence process can also have a
much broader scope in the public sector
than it does in the private sector.
“Central government is influencing
diversity via its outsourcing arrangements,” says Roberts of Fujitsu Services,
so service providers need to show that
their diversity processes are up to scratch.
“Corporate social responsibility is also
an issue and environmental matters are
coming into play now too,” adds Roberts.
“It wouldn’t surprise me to see publicsector bodies building things like carbon
footprints into the bidding process.”
BUSINESS GUIDE
47
chapter five
All of these additional layers of complexity add cost. As Kevin Lavery, CEO of
Serco Solutions points out, public-sector
bodies can become so focused on rules
and the need to create a level playing
field that the process can take over:
“A risk-averse set of bureaucrats can cost
the tax payer a lot of money,” he observes.
But focusing too much on cost is
also a risk: “Companies often decide to
outsource because they want to cut costs,”
says Bangemann, so they go for the solution with the fastest payback, and this
can be a mistake. “Outsourcing should be
a re-engineering exercise, where you end
up with a better output and lower costs.”
And remember that any outsourcing
arrangement is a partnership, which
should be mutually beneficial: “I think
you can drive too hard a bargain,” says
Eazyfone’s Wilson, “and if you do, there
is a risk that it will come back to bite you.”
Conclusion
When you are considering the risks associated with any outsourcing deal, it is
a good idea to take a holistic view, considering the implications for as many stakeholders as possible. Once the risks have
been identified, they can be factored into
contract negotiations, and monitored and
reassessed on an ongoing basis.
Lesley Meall is a business
journalist and editor specialising
in finance and technology. She has
written for publications including
Accountancy, Best Practice, Director
and Finance Systems News.
48
BUSINESS GUIDE
Dealing with risk
1
Identify possible risks:
Use a combination of
assumption analysis, checklists,
questionnaires and experience
of past projects (if appropriate);
and involve all parts of the
organisation that are affected.
Analyse and quantify:
Consider the potential impact
and probability of each area of
risk, then categorise them as
negligible, marginal, critical or
catastrophic.
Make tracks: Once risks
have been quantified,
develop mechanisms for
tracking and controlling them,
using benchmarks, pilots and
simulations.
Develop a plan: Create an
integrated risk management
plan, detailing actions to be taken
to prevent risks, reduce their
likelihood, minimise their impact
and manage them if they occur.
Monitor and manage: Change
is a constant, so potential
risks must be monitored and
re-prioritised repeatedly during
the life of a project.
Communicate: The service
provider, their staff
and members of your own
organisation must understand all
potential risks, and be kept up-todate on any changing priorities or
new areas of concern.
2
3
4
5
6
viewpoint
Nationwide is committed
to keeping its call centres
in the UK. Our relationship
with our customers is at
the heart of our business
and is the key to our success. Retaining ownership
of our interaction with our
customers enables us to
understand our members better, capture their
feedback first-hand and
continuously improve how
we work. Keeping our call
centres and administration in the UK also gives
us greater control and
ensures the most vital
aspects of our business
remain fully integrated.
Research* shows that
UK contact centres answer
more calls, resolve more
enquiries first time and
achieve higher customer
satisfaction scores than
overseas call centres.
Research** also shows that
91 per cent of people feel it
is important that their calls
are handled by UK-based
call centres. The call centre
experience is instrumental
in forming customers’ impressions of Nationwide.
By keeping the process
UK-based, we can keep
a close eye on recruiting
people with the right quali-
stuart bernau, Nationwide
ties, and on offering the
right training. This ensures
that our employees empathise with customers, have
solid product knowledge,
understand risk and controls, and are fully aware
of the issues that concern
the UK customer.
Nationwide has invested in sites in Swindon,
Northampton, Swansea,
Sheffield and, most recently, Wakefield. As well
as supporting employment
in these areas, we try to
mirror the local communities – for example, there
are Welsh speakers in the
Swansea call centre. We
employ over 1,000 people
in our call centres, and
turnover is lower than in
any other UK financial
services call centre. While
outsourcing abroad may
bring short term cost savings, the financial model
will change, as will the
outsourcing hot-spots.
Overseas call centres are
already seeing high turnover as some of the best
performers are poached
by competitors. Turnover
inevitably has a detrimental impact on customer
service and trying to reduce turnover at overseas
call centres could become
expensive. While India is
currently a popular option
for UK companies seeking
to outsource overseas as
costs here creep upwards,
UK companies seeking an
apparently cheap option
have already started looking elsewhere.
In addition, several companies have now
moved their call centres
back to the UK from overseas, after discovering that
there are many pitfalls to
outsourcing abroad.
While outsourcing
overseas may work for
some companies in certain
industries, for Nationwide
it really is not an option.
Stuart Bernau, Executive
Director, Nationwide
Building Society
*Source: Far Pavilions: Offshore
outsourcing in financial services,
LIMRA Europe, September 2004
– taken from news release 12
November 2004
** Source: Research commissioned
for Nationwide in 2005
BUSINESS GUIDE
49
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IT Resourcing
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Interim Management
-
IT Outsourcing
chapter six
Managing outsourcing
The ongoing success of outsourcing requires careful monitoring and
management, and that involves devoting valuable time and resources,
including those of the finance department.
By Stuart Lauchlan
O
utsourcing used to be a lot
simpler. It used to be all about
money. In the late eighties
and through most of the nineties, it was
something that organisations did to save
money and put a smile on the finance
director’s lips. But things are changing.
It’s becoming universally accepted that
successful deals are as much about wider
organisational and operational strategy
as they are about saving pennies.
That’s not to say that cost-containment is not still a major factor, but
contracts that are based purely on the
idea of knocking something off the
balance sheet are the ones most likely to
fail to deliver genuine business benefits
in the long term. While this realisation
is welcome – and indeed long overdue
– it does make life more complicated,
especially when it comes to the question
of governance of the ongoing contract.
A neglected area
The problem is that ongoing contract
management is sometimes neglected and
the necessary resources aren’t always
factored in from the outset.
“People spend a lot of money on
lawyers to produce a 300-page outsourcing document that is then signed off and
stuck in a cupboard,” says Simon Shooter,
partner with law firm, Bird & Bird. “If
you’re going to get value out of a contract,
then you need to get everyone, including
the finance director, involved in taking
delivery of the service.”
This means that the relevant
people in the business, probably from a
variety of functions, need to sit down and
BUSINESS GUIDE
51
chapter six
regularly review the contract, comparing
its progress with the original intentions
set down in the legal documents and
measuring performance against service
level agreements. Is the outsourcing
arrangement measuring up? And is it
delivering what you set out to achieve?
If the company has conducted the
outsourcing process rigorously, then it
will be able to go back to the original
goals to assess success.
Clarity of goals
The trouble is, however, that many
organisations were not clear enough
about why they outsourced in the first
place. Having a clear sense of purpose
and goals is crucial, and the finance
department is ideally placed to play a
major role in setting out expectations for
success – and alerting the organisation
if they are not being met in practice.
“It’s often the case that outsourcing
deals don’t achieve what they set out to,
because people haven’t identified what
their goals are going in,” says Shooter.
“They’ve piled in to outsourcing, because
they’ve somehow heard that it’s a good
thing to do and that’s enough. No-one
has sat down with the entire decisionmaking team to decide what the goal is
and what the aims are.”
This lack of clarity of goals is one
of the most common causes of failure.
“There have been many outsourcing
failures and these get lots of publicity,”
says Sir Brian Pittman, senior adviser to
Morgan Stanley and outsourcing veteran
from a long career at Lloyds Bank that
began back in 1952. “These failures
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BUSINESS GUIDE
usually come from not receiving enough
planning in the first place. People in the
company often just think it is the right
thing to do without a rigorous enough
decision-making process.”
The role of the FD
The finance director is likely to have
played a vital role in the original decision
to outsource – not least in evaluating the
potential cost savings. Cost-cutting may
have been an important pull for the FD,
but everyone needs to be signed up to
outsourcing for the right reasons.
“The important thing is that all parts
of the business buy into outsourcing and
why you’re doing it,” says Shooter. “The
decision to outsource may be taken by
the CFO who can see that the company’s
direct competitor has outsourced payroll
to India and saved 40 per cent on costs,
but if the payroll people are opposed to
it, then there’s a problem. If everyone has
signed up to the goal in the first place, then
it provides you with the breast plate to beat
when you have to have difficult conversations with other parts of the business.”
Beyond this, the finance director
may well have been involved in the
run-up to the contract, during the
tender process and right up to the point
of signing. But the role of the finance
director thereafter is less clear. If it’s
an accounting or financial outsourcing
deal, then an argument can be made for
ongoing day-to-day involvement. But if
it’s an IT outsourcing contract, isn’t it the
responsibility of the IT director? If it’s an
HR outsourcing deal, then surely it’s up
to the HR director to take charge?
There can be tensions within organisations about where the responsibility lies
and it’s important to identify those who
are best equipped for the job. According
to a survey published by Indian outsourcer, HCL Technologies, only one per cent
of finance directors thought IT directors
should be trusted with responsibility for
managing an outsourcing deal, while
only two per cent of IT directors thought
finance directors were up to the job – a
classic case of mutual mistrust.
of the business, even if those areas are
resistant and perceive it as unnecessary
meddling in their affairs.
Working at the relationship
Whoever takes up the mantle for managing the relationship has a substantial
job on their hands. You’ve looked for the
ideal partner, that partner has wooed you
with their charms and now you’ve made
a commitment to one another in the fond
expectation that you’re going to be good
Finance directors should be ready to
“meddle” in other parts of the business to
ensure that outsourcing contracts work,
particularly if cost-cutting was
the primary driver
Responsibility at
multiple levels
Certainly the function being outsourced
must have some responsibility, but that
shouldn’t mean that the buck stops there.
While there is a danger that some FDs
may think all they have to do is pay for the
service by writing a cheque every month,
this is a recipe for disaster. The CFO or
another senior executive must have ultimate responsibility for the contract, even
if the day-to-day management is done by
someone who is more conversant with the
area that’s being outsourced.
Finance directors should be ready to
“meddle” in other parts of the business
to ensure that outsourcing contracts
work, particularly if cost-cutting was the
primary driver. This may mean being
bold enough to look into other areas
for one another. But there’s no guarantee
of happy ever after. The relationship has
to be worked at by all parties – and that
means constant engagement.
This is certainly the experience of
Doreen Davis, finance controller at Age
Concern, which outsources its payroll
processing to Northgate.
“With outsourcing, you really want an
excitement-free experience,” says Davis.
“If you want anything to work, it’s only
going to work through people.”
However, Davis is careful only to
get involved at the right level: “It’s not
necessary as finance director to know
everything,” she says. “You need to set up
relationships at junior as well as senior
levels between you and your provider.
I have a co-ordinator who keeps me in
touch and lets me know certain things if
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I need to be told them. That way I remain
involved in the outsourcing contract.”
Davis says that her keen sense of
involvement is partly about the person
that she is and partly about previous
experience: “I tend to work on the
basis of person-to-person relationships
anyway, so I suppose I have something
of an advantage,” she suggests. “But with
payroll, it is so crucial to the organisation
that you can’t afford to make mistakes.
Five years ago, a previous provider
managed to pay all of our staff twice on
one occasion. You try getting that back
from 1,200 people!”
Remaining flexible
The close involvement of finance directors is also crucial in pulling the plug or in
adjusting arrangements when they aren’t
fulfilling the company’s needs or expectations. This is illustrated by the experience
at off licence chain, Thresher, where the
finance function was closely involved in
ongoing monitoring of IT outsourcing.
When it became apparent that greater
efficiencies could be achieved elsewhere,
the company retendered its contract and
is currently in the midst of a transition
from the incumbent provider to a new
five-year deal with Xansa that will also
see it venturing offshore for the first time.
Harvey Ainley, finance director at
Threshers, explains his role: “Obviously
there was a financial aspect to the decision
to outsource and any investment proposal
that goes to the board has to be rubberstamped by the finance department,” he
says. “But the IT department had to be
able to say that this is a good idea as well
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and that it could be properly managed.
IT needed to give the business the comfort
that it would be able to manage the
transition to outsourcing.”
As a mid-tier retailer, Thresher
re-evaluates its business model on a
regular basis, so a measure of flexibility
is essential in all its outsourcing arrangements. “Whoever we choose to work with
in outsourcing has to be willing to have
a flexible business model and to adapt to
changes in the way we work, rather than
try to force their way of working on to us,”
says Ainley. “We need to know that, as
we evaluate and implement new ways of
working, we are going to be covered
in the future.”
Morgan Stanley’s Pittman concurs and
says that lack of flexibility has been a major
factor in outsourcing failures in the past.
“Outsourcing used to be just about price
and that was the biggest mistake. The
result was that companies got into totally
inflexible contracts. But they couldn’t
anticipate five years ahead and didn’t give
themselves enough room to move.”
When things go awry
If there are concerns about performance, it’s better to try to address them as
early as possible, advises Bird & Bird’s
Shooter: “Suppliers make the most profit
in the latter stages of a contract, not the
early part. If there are concerns about
performance, you are going to want to
resolve them early in the life of the deal,
not once they’ve gone wrong.”
There’s often some revisionist thinking that goes on when contracts go awry
and companies realise that they have not
achieved any savings or cut any costs at
all. Unfortunately what often happens is
that half of the decision-makers then turn
around and say, “That’s not why we did it
in the first place’” Hence the importance
of clear objectives from the outset.
It is easy for mistakes to be made
and the criticism they attract can be
damning. In 2006, Siemens Business
Services (SBS) acquired BBC Technology,
the BBC’s commercial IT unit, for an
undisclosed sum as part of a ten-year
outsourcing agreement. The BBC
originally pitched its expected savings
from the deal to be around £35.2m, but
later had to admit that it overestimated
the cost of running its IT in-house by
£7.7m after mistakenly including a
one-off cost in its calculations.
Not that this has put the BBC off the
idea of outsourcing. It has signed Capita
as its preferred supplier for a ten-year
HR services contract and Xansa as its
preferred supplier in an £85m finance and
accounting services deal that will cost the
BBC around £8.5m per year over the next
ten years – but generate savings of £20m.
“There’s a tendency to think that we
must be experts in outsourcing, but over
ten years, huge changes have happened
in the market,” says Tom Fussell, former
deputy group financial controller at the
BBC. “All organisations like to think that
they are complex and the BBC is no different, so it’s very important to agree what
the overall mission is when you start out.”
Fussell worked with the incumbent
outsource partner to ensure that it
continued to hit its targets during the
bidding process – such was his level
of ongoing involvement in monitoring
outsourcing. But all parts of the organisation need to be committed.
“We had senior level and user
community buy-in for the outsourcing,”
says Fussell. “Having set the evaluation
criteria and critical success factors, we
shared those with the bidding community
and identified stakeholders across the
whole business. It’s vital that all parties
remain committed and involved. That’s
how you ensure success.”
Conclusion
Clearly, it is crucial to devote sufficient
resources to manage outsourcing on an
ongoing basis, while ensuring that people
at the right level of the organisation,
including finance, are involved. This ongoing management attention can be the difference between success and failure, and
is particularly pertinent should organisations need to adjust – or pull the plug on
– their outsourcing arrangements.
Stuart Lauchlan is a journalist with 17 years’ experience of writing about the technology, management and business sectors, both in Europe and the US. Beginning his career at
Computing newspaper, he also worked in San Francisco as one of the launch team for the
VNU Online Newswire service. Returning to the UK, he was editorial development manager
for CMP Media, working on a range of titles including Information Week and Computer
Reseller News. For the past nine years, he has been freelance, contributing to a variety of
print and online publications on both sides of the Atlantic, including as managing editor
of Outsource, the UK’s only dedicated outsourcing publication.
BUSINESS GUIDE
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viewpoint
The key to successful
outsourcing is to identify
what you are good at and
where you can add value.
Our insurance underwriters
add value by using their
brainpower and expertise
to underwrite risk. The
skills involved in managing a team of underwriters
are very different to those
involved in managing an
administration team.
We have examined how
outsourcing can help us
to conduct administration
more efficiently. It is crucial
for our competitiveness
that administration is as
cost-effective as possible.
A lot of our outsourced
activity is on the processing side of insurance.
Tasks from debt collection to policy production
are performed by Capita
Insurance Services on
our behalf. We also have
a direct selling operation within our insurance
business and a call centre
for this, which is run by
Plus One Services. Finally,
on the Lloyds side, we
outsource a lot of our administration to Xchanging
Insurance Services.
The ongoing management of outsourcing is
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Stuart Bridges, Hiscox
handled by our operations
team. However, I am always
closely involved in new
decisions about outsourcing. The first consideration
is always, will we achieve
the quality we need?
Of course, there are
different considerations,
depending on whether
you are outsourcing a
customer-facing operation
or a back-office process. If
it is customer-facing, the
supplier will be required
to present to customers in
the way that we want our
company presented. But
you can only achieve this if
you work closely with the
supplier, as we have with
Plus One Services.
The second question is
whether the outsourcing
is cost-effective and scaleable, and the third is how
are we going to measure
it and then how we exit
the relationship if things
go wrong. I get involved in
the decision to outsource
and analyse the business
case and the potential
risks. But you need people
running the project with
the requisite expertise. You
need a range of skills in the
team to give a balanced
view of suppliers and to
monitor the relationship
on an ongoing basis.
Monitoring is one of the
interesting things about
outsourcing. You measure
the performance of outsourcers much more than
you would an in-house
team. So by definition, you
tend to get more streamlined processes, because
you are always looking to
increase efficiency.
The other big debate
we have about outsourcing
is whether you should outsource processes that are
running well or those that
need improving. Our view
is that you should strive to
get your internal processes
right first before you outsource. Outsourcing isn’t a
solution to a problem process. But whichever way you
do it, the process should
show improvement as part
of the outsource.
Stuart Bridges,
Group FD, Hiscox
chapter seven
Measuring success
The “contract scorecard” provides a way for companies to measure the
success of outsourcing, as well as offering a tool for supplier selection and the
development of contracts.
By Sara Cullen and Leslie P Willcocks
O
rganisations that are veterans
of outsourcing know that the
success of a deal is dependent
on many factors. They know it is not just
the cost, but also the quality of the service
that matters. They also know it is about
more than just getting what you pay
for; it is about whether the relationship
between the client and the provider is rewarding or dysfunctional. Furthermore,
they know that outsourcing is not an end
goal in itself – rather it is a way to achieve
a focused number of strategic goals.
To identify and track the myriad of
outcomes sought from an outsourcing
deal, organisations are now recognising the value of applying a balanced
scorecard approach to outsourcing
arrangements, called the contract
scorecard. Here we draw on 15 years
of research into over 500 outsourcing
arrangements studied over time
– through successes, disappointments
and failures1 – to suggest the content of
such a contract scorecard and its role in
tracking and leveraging performance.
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The role of the
contract scorecard
The contract scorecard helps the parties
not only establish how the quality of the
service will be evaluated, but also how
the financial outcomes will be judged,
how the relationship is to be conducted
and if the outsourcing deal is achieving
its strategic aims – in sum, defining and
then measuring the overall success from
a holistic perspective.
The contract scorecard enunciates
the goals in order to guide the parties
towards the desired outcomes. It further
articulates these goals in a measurable
form, providing clear expectations as
to what is driving the deal. As such,
the scorecard provides a key design
mechanism for guiding the detail within
key governing documents (contract
conditions, service level agreement, price
schedule, etc), as well as for selecting the
right provider. It then provides a key tool
for tracking, assessing and driving the
results of the deal.
Contract scorecard vs
balanced scorecard
The contract scorecard takes its conceptual origins from the balanced scorecard.
The balanced scorecard hit the corporate
scene in the early nineties, courtesy of
Kaplan and Norton in a study capturing
the attributes of successful US companies.2
The success attributes were categorised
as financial, internal business processes,
learning and growth of staff, and customers. The balanced scorecard has since
proliferated into many forms and spawned
an entire consulting industry.
Service Quality
Relationship
z Effectiveness
z Precision
z Reliability
z Speed
z Satisfaction
zC
ommunication
zC
onflict resolution
zC
reative solutions
zF
airness
z I ntergration
zP
ositive Interaction
zP
roactivity
zT
ime Investment
Financial
Strategy
z Historical
z Baseline
z Budget/target
z Competitiveness (benchmarking)
z TCO (total cost of ownership)
zO
bjective achievement
z I nnovation
zB
usiness contribution
zA
lignment to client business
practices
Figure 1: Contract scorecard – quadrants & contents
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While the balanced scorecard is a
useful tool for an organisation’s internal
operations, a different scorecard is
required for the organisation’s outsourced
operations. Both scorecards share the
same aim – to design and evaluate success in a holistic and balanced manner,
thus encouraging organisations to think
more strategically.
The contract scorecard was developed
as a result of a PhD study by one author,
examining 100 outsourcing arrangements
over the last decade. Part of the research
categorised the key attributes in which
success was sought. The result was the four
quadrants shown in Figure 1 (including
possible contents of each quadrant).
Service quality
Service quality is a key component of
the contract scorecard and the most frequent measurement in most outsourcing
arrangements. Service quality metrics
are the operational metrics representing the key deliverables of the provider’s
services. There are five types of service
quality metrics:
zE
ffectiveness – the degree to which
the services produce an end result that is
outcome-focused as opposed to processfocused. Service quality KPIs involved
include: utilisation, vacancy levels, call
reduction and customer retention.
zP
recision – the degree to which services are error-free and done in full. KPIs
are accuracy/ error rates, compliance, fit
to specification and completeness.
zR
eliability – the degree to which the
services are consistently dependable.
KPIs are availability, abandon rates,
failure/fault rate, rework, shrinkage
and deadlines.
zS
peed – the swiftness with which the
services are performed. KPIs include
response rates, queue time, processing time/volumes/ throughput, cycle
time, turnaround/resolution time and
backlog clearing.
zS
atisfaction – the degree to which
users, customers or other stakeholders
are pleased with the services. Service
quality KPIs include: end users, customers and other stakeholders.
The detail of the agreed service quality
metrics is most commonly articulated
in the service level agreement (SLA),
a schedule to the contract, which is an
evolved form of the more traditional
statement of work or specification.
Financial
Financial metrics are the monetary
metrics most commonly comparing
amounts paid to the provider to different
fiscal points or comparatives. These fiscal
points can include past periods, such as
last month; baseline costs under previous
service delivery regimes, such as insourcing or a previous supplier; and current
market rates.
Another type of financial metric can
assess the impact of contract performance
on the overall costs to the organisation,
known as total cost of ownership (TCO)
or its variants (total cost of asset, total
costs of supply/production, etc). There
are four types of financial metrics:
zH
istorical – current cost compared
to previous periods (ie last month, last
year) or a baseline (typically against the
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chapter seven
cost when the services were in-sourced
or when performed by an earlier supplier). The financial KPIs include: maintaining costs to a percentage under the
historical baseline; an ongoing annual
reduction or a limited increase such as
Consumer Price Index (CPI).
zB
udget/target – current cost compared to planned or targeted expenditure (often both against the original
budget, as well as revised budgets as
appropriate). Financial KPIs are: a percentage goal under/ over budget; within
a percentage of agreed target figure.
zM
arket – current cost compared to
current market rates (typically assessed
through some form of benchmarking). KPIs include: achievement of no
less than a specified per cent of agreed
benchmark; within specified quartile of
the benchmarking sample.
zT
CO – influence (either reducing or
escalating) the entire supply chain, total
asset or total technology costs. KPIs
include: portion of total cost represented
by the contract; impact of performance
on downstream processes/asset life.
The financial metrics are most
commonly part of the pricing schedule.
In that schedule, for example, an
organisation may, along with the quoted
prices, set a KPI for reducing the level
of reimbursable expenditures by five per
cent per annum or keeping to plus or
minus five per cent of the budget.
Should a market rate comparative be
desired, it is most commonly performed
through benchmarking. The processes
around what metrics will be benchmarked,
by whom, how and when, and what will be
60 BUSINESS GUIDE
done with the results, tends to be written
up in the price schedule. Meanwhile, it
is quite common for those that employ
sophisticated benchmarking techniques to
have benchmarking as a separate contract
schedule. However, a cautionary note
about benchmarking between contracts
– it is more difficult than benchmarking
between internal operations, as one must
consider the unique constraints of each
contract (for example, insurances, liability
levels, warranties) to get an “apples for
apples” comparison.
Very few organisations have sophisticated enough data collection to assess
the impact of the contract on the total
cost of ownership, supply chain and/or
asset. Those that do will often have the
financial metrics, calculation techniques
and effect of results specified in a separate
contract schedule as well. Total cost to the
organisation – not just monies paid to the
provider – are well worth considering, as
the following case study highlights.
The IT department of a retailing
company had been transferred to the
corporate services division with a
general manager who had a background
in procurement. It was her belief
that commodity functions should be
outsourced, so that the division could
focus on adding value to the operational
business units. She went out to tender
for the IT data centre operations. The
emphasis was placed on price, as she
believed the services and providers were
undifferentiated. The lowest priced bid
was awarded the contract – with the
winning bid at 30 per cent below the
nearest bid.
Things began to go awry very quickly.
Variations were the norm; in fact, a
person within the retailer had to be
dedicated to variation management.
Service quality KPIs, set up as targets
and not as minimum standards in the
contract, were rarely achieved, as there
was no incentive to meet them, nor was
there any recourse if they weren’t met.
In addition, the provider had capped the
number of resources they would provide
in the contract and the general manager
had to hire specialists to work in the data
centre to raise service levels back to what
they had been. Within a year, the total
costs were higher than the highest bid,
higher than the in-house baseline and
the division’s remaining IT people were
focused on firefighting, not adding value.
Relationship
Getting the right values and cultures
between the parties is often one of the
most difficult aspects of an outsourcing
agreement. One natural instinct is to make
sure there is a watertight contract that is
imposed to every last detail. One must,
however, be clear that poor or onerous
contracts can severely damage commercial relationships. In practice, a contract
can’t predict and cover every eventuality,
and active relationship management on
both sides is required to sustain effective
outsourcing performance. Poor contracts
can make for poor relationships, if you
aren’t careful.
Case in point: a manufacturing client
agreed to a contract clause stipulating
that “all costs of transfer of software
licensing agreements will be borne by
the client”. The first few transfers cost
relatively little, but the next ten virtually
eliminated the client’s cost savings from
the five-year deal. The provider knew that
it was a standard clause that he needed in
the contract if he was to make any money
at all, meanwhile the client felt that he
had been duped.
The contract is an important but
relatively superficial driver of day-to-day
behaviour. What matters are underlying
values held by the individual parties and
the people involved in the agreement.
Smart organisations measure outsourcing
relationships through KPIs representing
the desired values.
Relationship KPIs measure behaviours exhibited by one party, as seen
through the eyes of the other. This is a
“soft” measurement, in that the parties
agree that what they are measuring
is the opinion and perceptions of the
other party. Typical types of relationship
metrics include:
zC
ommunication – the degree to
which the parties communicate frequently and honestly. KPIs involved
include: frequency, openness and the
correct method and protocol.
zC
reative solutions – the degree to
which the parties continuously search
for better ways of doing things. KPIs
involved include: idea generation and
a continuous improvement mindset.
zC
onflict resolution – the degree
to which there is a focus on solving
problems, not apportioning blame. KPIs
involved include: problem-solving focus,
collaborative with no blame, no abdication and personality-independent.
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zF
airness – the degree to which the
parties act fairly towards each other.
KPIs involved include: empathy to
other party, win/win mentality.
z I ntegration – the degree to which
the service value chain appears
seamless to the end customer. KPIs
involved include: seamless supply
chain, end-to-end focus.
z Positive
interaction – the degree
to which the parties enjoy working together and have respect for one another.
KPIs involved include: enjoy working
together, display mutual respect, strong
interpersonal relationships.
zP
roactivity – the degree to which
the parties are proactive with each
other. KPIs involved include: anticipate each other’s needs, early notices
and warnings.
zT
ime investment – the degree
to which the parties provide management time and focus for each other.
Relationship KPIs involved include:
provision of management time,
demonstrable dedication and
appropriate prioritisation.
Organisations that design and track
the effectiveness of supplier relationships
have adopted a form of agreement, called
a relationship charter or code of conduct.
This is typically set out as a schedule to
the contract and specifies the behaviours
all parties are expected to exhibit during
the course of the contract.
Note that this approach is different
to the one found in one-sided agreements, where only the provider’s
behaviour is detailed and the client
has no explicit obligations.
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Strategic
Strategic KPIs measure results that go
beyond the letter of the agreement and
represent more of an alliance-type situation. There are a wide range of potential
strategic metrics that an organisation can
apply, especially if the deal is more than
a basic fee-for-service exchange, such as:
zO
bjective achievement – the degree
to which the strategic reasons for the
outsourcing initiative are being met (for
example, core focus, standardisation).
Strategic KPIs include: the degree to
which strategic goals in the business
case have been achieved3.
z Innovation
– the degree to which
better practices and assets have been
introduced. KPIs include: Number of
improved practices introduced; number
of enabling online applications introduced; R&D investment in the services
under contract.
zB
usiness contribution – the degree
to which the parties have achieved
more out of the deal beyond the fundamental exchange of money for services.
KPIs include: level of knowledge transfer provided; number of mutual business initiatives created and completed;
number of joint product offerings
created, royalties earned.
zA
lignment with wider corporate
goals and business practices – the
extent to which the provider conducts
business in line with the organisation’s
broad corporate goals. Strategic KPIs
include: safety (injuries, workplace incidents); use of SMEs (small to medium
enterprises); employment created (direct
and indirect); positions filled by mi-
norities and triple bottom line reporting
(financial, societal, environmental).
Most clients have some form of
anticipated strategic goals, but often
leave these unarticulated – perhaps
only mentioning them in background
information contained in the tender
documents. Strategic goals mentioned
purely incidentally in this way rarely have
any chance of being achieved.
They may be mentioned in the main
terms and conditions of the contract
(typically in a recital clause or in a
strategic intent clause), but these tend
to be quite high-level goals and are more
to help a contract reader understand the
context of the deal.
If a client is really serious about its
strategic goals, these may be outlined
in a separate contract schedule.
For example, if the organisation is
in the public sector and has industry
requirements to be met by the provider,
such as the use of regional contractors,
the contract may have a separate
schedule detailing those requirements.
Conclusion
Outsourcing – whether of IT or business
processes, be it onshore or offshore – continues to raise expectations and
pose challenges for private and publicsector organisations alike.
Since outsourcing is rarely a reversible
option, at least without high switching
costs, the ability to drive and demonstrate
success will become more of a basic expectation of management.
Nonetheless, once the decision
to outsource has been made and the
deal signed, many organisations take
a slapdash approach and just let the
deal run, never ensuring that they have
achieved their original outcomes.
A contract scorecard is a proactive
tool that can help address some of
these issues. It provides a key design
mechanism for guiding the detail within
the contract, as well as for selecting the
right provider. It then provides a tool for
tracking, assessing and driving the results
of the deal.
References:
1
Our research can be found in Global Sourcing of
Business and IT Services (Willcocks and Lacity,
2007, Palgrave); and Intelligent IT Outsourcing:
Eight Building Blocks To Success (Cullen and
Willcocks, 2003, Butterworth).
2
Kaplan, R. and Norton, D. (1992), “The Balanced
Scorecard: Measures that Drive Performance”,
Harvard Business Review, Jan-Feb, 71-79.
3
Most organisations have at least one strategic
goal, but may have as many as 14.
Dr Sara Cullen is MD of The Cullen Group www.cullengroup.com.au, a specialist
organisation offering consulting, training and methodologies for commercial agreements.
She can be contacted at [email protected]
Leslie Willcocks is professor of technology work and globalisation at the London
School of Economics, heading up a major global sourcing research centre there.
He has co-authored 27 books and 170 plus journal articles. He can be contacted at
[email protected]
BUSINESS GUIDE
63
viewpoint
We signed contracts
and agreements with
Capgemini in 2005 to
manage and support
a range of finance and
accounting processes from
the US, UK, Switzerland
and Germany. These
services are being handled
from Capgemini’s dedicated Financial Services BPO
centre in Poland. There
were three business drivers behind the decision.
First, we wanted to drive
finance transformation and
standardisation across the
group to allow us to work
from common platforms.
Second, we wanted to
achieve lower transactional
costs. Third, we wanted
to facilitate investment in
higher value-added functions within finance.
Deciding to outsource
is not easy, of course.
First, you need to define
the core elements of your
business which cannot
be outsourced. These will
typically be significant
value-adding activities, the
differentiators, or areas
where legal or regulatory
requirements make them
core. When we were looking at our finance transactional activities we came
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John Packham, Zurich Financial services
to the conclusion that
they could be outsourced
as these processes were
straightforward, repeatable and rules-based.
We focused on processes that were well
documented and easily
measurable and monitored, so that we could be
sure that what we have
asked to be done is being
done and done well.
The second issue is
scale. The business function you’re thinking of
outsourcing has to be
large enough to allow for
significant changes to
the cost base. This tends
to be at the transactional
level, where there’s clearly
a volume of cost. Third,
you need to assess the
business for areas where
there is an opportunity to
develop and start to leverage common platforms.
In addition, you need
buy-in across the business.
It’s all well and good to say
that something is sponsored from the very top,
but you need buy-in from
all levels in order for the
process to go smoothly.
There is risk in any
outsourcing agreement,
of course. For Zurich, a
significant risk was finding
the right partner. To mitigate that, we brought in
external expertise to help
us through the process.
Zurich is a global
company with businesses
in many countries, and historically these businesses
have processed work differently. This is changing.
Our transactional finance
processes now have clear
service levels, are well
documented and we
monitor service delivery
in a cohesive way. We’re
now far more in control of
these processes than we’ve
ever been before. That’s
one of the real benefits of
outsourcing in this way.
Ultimately, successful
outsourcing is about the
right partner, the right contract, the right ownership
and the right governance.
John Packham, Head of
Finance Shared Services,
Zurich Financial Services
Business Guide
T: +44 (0) 20 7333 0033
F: +44 (0) 20 7333 0032
E: [email protected]
W: www.harveynash.com
caspian publishing ltd
198 Kings Road
London
SW3 5XP
The FD’s Guide to Outsourcing
harvey nash plc
13 Bruton Street
London
W1J 6QA
The FD’s GUIDE to
outsourcing
From choosing the right partner to
taking the plunge, we offer insights into
one of the most challenging decisions
your business will ever take.
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rs poi he
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p ew m t D’s e
vi Froeal Fectiv
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T: +44 (0) 20 7368 7100
F: +44 (0) 20 7368 7201
E: [email protected]
W: www.caspianpublishing.co.uk
business guide
The FD’s Guide to Outsourcing
in collaboration with
2007
The magazine for UK Finance directors
£15
REALFD