Matt Shocklee: Our discussion today is on the topic of outsourcing dilemma. What do you mean by value? When you asked business leaders today if they’re getting the business value that they originally contracted for and need today from their existing outsourcing contracts unfortunately, the answer that we all too often get is, “I don’t know,” or, “No.” [They are] being challenged in many cases to define what they really expect in the terms and value from their relationships. So during this roundtable discussion today, we’ve asked industry leaders to come together to explore the topic of what the contemporary value drivers of outsourcing deals really are or should be.
So from your perspective, what do you see as really the critically important value drivers in a relationship today?
Dr. Mary Lacity: I liken it to the metaphor of the elephant and the blind men. One touches the tail and says the elephant is a rope, and one touches the trunk and says it’s a tree, etc. When we talk about outsourcing value, it depends on who you’re speaking to. Typically, when we’re talking to a customer CXO, they’re mostly defining value in financial terms, particularly in lower costs.
When you talk about the end users who are actually consuming the services, they tend to talk about value in terms of service quality and supplier responsiveness. Then you talk to customer back office functions in the organization, and they’re primarily focusing on value in terms of innovation, what does the supplier bring in terms of new technologies and processes and products.
They’re just touching different parts of the elephant.
Sandeep Sen: The term value is ubiquitous. Of course, they’d like to get it cheaper. But they’re saying, “Can you provide us a good customer experience, which helps differentiate us in the marketplace?”
What About Innovation?
Michael Mensik: I think innovation is clearly one of the imperatives that the outsourcing relationship also has to somehow serve. It seems every time I ask what is important to the company, what is driving the company today, usually you hear four or five things.
The successful outsourcing relationship has to touch in some manner each of those five particular factors.
Matt Shocklee: What do you see as some of the key inhibitors and/or challenges to optimizing business value in today’s outsourcing contracts and relationships and why?
Michael Corbett: I think most organizations kind of struggle with is getting to the point where there is a common understanding of what it is the organization is trying to accomplish through outsourcing and how it’s going to understand whether or not it’s done that.
I don’t think we can overestimate just how much the financial prices and the kind of turmoil we saw in the global economy over the past 24 months has fundamentally changed the way companies are thinking about and the way they view the value proposition of outsourcing.
I think companies have come to realize is that in many ways, outsourcing may be the less risky option. I may have less risk in my system because of these outside relationships and the ability to tap those.
Dr. Mary Lacity: One of the things that I think we can all do better as an industry is trying to measure and benchmark value. It’s kind of a two-edged sword. On the one hand, what clients want are measures that are very specific to their company, so they compare with what the outsourcer does compared to what they used to do internally. But, on the other hand, if they’re too specific, you can’t answer the question of how well are we doing as far as best practices.
So there’s kind of a tug and pull between client specific measures versus benchmarks so that we can get better benchmarks in an industry.
Michael Mensik: I think the process of putting these relationships together is still much too much on cost. The time is compressed. The negotiations still too often are adversarial. That makes it very difficult for the parties to come to a common understanding, much less agree on terms, that really create a partnership that lead to this value creation long term.
Sandeep Sen: A customer has used this term: co-creation of value. They’re saying “this is our shared goal,” and before we start the negotiation or as we do the contracting, can we work around by saying what we need to do as part of the contract process in order to achieve this shared goal of co-creation of value. If you start with price, your contract is based on that.
And then after six or eight months, a client comes to you and says, “Oh, what are the insights you provided to me? What is the great customer experience that you’ve done, which I haven’t had?” But the entire discussions prior to that, the entire pricing was based by saying, “Can you do my metrics, which I am doing at a cheaper cost?” And therefore, it makes much more sense. As we start the engagement with the client by saying, “Hey, what do you want to achieve? What do you mean by value? What do we mean by value? Let’s sit across the table,” understand that and co-create value.
And that kind of gets into not just the contracting, the kind of people we need, the kind of metrics we follow, the kind of technology we use. And if that is done right from Day 1 and everybody understands that this is the value we want at the end of day end, then it’s much easier for both sides.
Matt Shocklee: As we look at the challenges organizations have to optimize value in their contracts, what are you seeing as best practices in the industry right now?
Michael Mensik: One rather interesting phenomenon is the emergence of enterprise risk management as a discipline, and the impact that that is having a bit on outsourcing relationships. The company goes through an enterprise risk management exercise that has an impact on the outsourcing relationship and then actually sits down in having identified the particular compliance risk sits down with its provider and begins to design a series of controls, communication protocols, monitoring procedures, all of which are designed to mitigate, reduce, manage that risk.
Matt Shocklee: What role do you see advanced tools and technologies taking as our industry tends to grow and globalize itself?
Michael Corbett: I think we’re kind of going through a two-step process here. One is that the industry itself is professionalizing. And the immediately behind that comes tools. And most of the tools are really going to focus on information gathering and exchange, getting everyone to see the elephant the same way or at least understand how their parts of the elephant relate to the ones that everybody else is looking at.
Michael Mensik: One that we’re beginning to see as a law firm, believe it or not, is how the provider’s technology can actually help us be innovative in ways that if left to our own devices, we would never be. To give you an example, legal process outsourcing is often thought about as we’ll take a contract review or e-discovery, and we’ll put it into the hands of a low-cost Indian provider. That’s certainly there, but what’s also there is looking to an LPO that understands technology and instead of handing over a memorandum that describes how you deal with particular compliance risks, actually provide a compliance tool, which the client can load on its system and deploy immediately around the world.
Michael Corbett: I realize the terms like cloud computing and software of service are used by some as being as much marketing hype as they are reality, but the simple fact is that more and more, these business processes are being moved out into some kind of a web based application. I think we’re going to see an acceleration of the use of the technology to manage what will become an increasingly technology based delivery environment.
Matt Shocklee: How do you see business value from outsourcing affected by an organization’s ability to manage cultural diversity and adapting to changing geo political realities that are out there whenever anyone uses the O word?
Dr. Mary Lacity: I have a bigger concern, and my concern is about public opinion. To me, xenophobia, nationalism, ethnocentricity, they’re on the rise in countries like the United States and the United Kingdom, and I just think it’s so important that we have a constant dialogue among our politicians, academics, and industry leaders that educate the population about the need for companies to source globally.
Sandeep Sen: Data provided by independent [shows] if you were off shoring to India and the economy gets better and more people are flying, what are they doing buying Boeing airplanes?
If you look at the call center agent themselves, at a micro perspective, what are they doing? They’re buying Levi’s jeans and consuming Coca-Cola. So the amount of products or the exports that the US does actually outweighs the jobs, which might be shifted as a result of off shoring. I don’t think we’ve done enough discussion or educated the public enough on the benefits.
Michael Corbett: I just got back from Columbia last week, and one of the things that was obvious is that this issue goes beyond outsourcing. Columbia is probably the best friend the United States has in Latin America, and yet we continue to drag our feet in terms of signing a free trade agreement with that country, where as other countries like China and others are very aggressively entering into free trade agreements.
It really is a general sense that is developed in the popular press and in the popular mindset that [outsourcing] is a win-lose environment.
Outsourcing & Off Shoring – Confusion Abounds
Matt Shocklee: One of the things that we tend to get confused about is really just the definitions. How often do people confuse outsourcing and off shoring as an example? One of the fastest growing sectors in the US on outsourcing is the public sector in the US. As state and local governments tend to have budget problems today, what we’re seeing is a real explosion in those states. Outsourcing activities to organizations within the state. Not moving the work maybe outside the state, but the workload in the process is more efficient companies or organizations that are actually in state.
Here is an opportunity where value to the state is enhanced by their ability outsource. Maybe not necessarily move the work offshore per se, but to reduce spend and consolidate activities with companies who do work in their own environment.
Dr. Mary Lacity: Some call it in-shoring. I’m going to call this a niche strategy. I’m still a little skeptical about how much it can scale up. But I will say that state and local governments are highly interested in this model.
Sandeep Sen: We’ve been working very closely with a couple of governments, [such as] Kentucky. We’ve been looking to set up a new center in either Hopkinsville or Lancaster, which is really an area of Kentucky, and the governments have been very proactive. We’ve been looking at some of the big companies in that region to help us, and also a little bit of government services. We are agnostic to region. We are agnostic to location.
Matt Shocklee: What do you see as far as the future of our industry?
Dr. Mary Lacity: No matter what the economic cycles are, no matter pretty much what the stock market is doing, the overall trend for outsourcing has been increasing. I don’t think we’ve ever seen a downward dip that has ever been sustained, so I see nothing but growth.
Michael Mensik: I have to agree with Mary. I think there is continued growth ahead. Really, the question is are we ever going to hit a point where the cost of doing something externally is going to exceed the cost of doing it internally again. I suppose that might happen if we add too many transaction costs and if we overlay too many regulations and legal requirements. Providers today are so adept at putting in place appropriate controls, that the line of where somehow doing things internally is going to exceed the value that one achieves to having it done externally, is still a way off.
Sandeep Sen: I think the industry is growing. But I’d like to add one more perspective which is other countries are also growing very large, and they are doing a lot of outsourcing within their country.
If you look at these large and developing markets in other parts of the world, I think the total sum of the outsourcing business is bound to grow and rise. So I think 2012 and beyond is going to be very good for outsourcing all around.
Michael Corbett: We do have a tendency to see this industry from a US or a developed economy perspective. I think we’re going to look back at the economic crisis of the past few – past year or two and come to see it as probably one of the best things that ever happened to accelerate the growth of outsourcing.
|
|
Matt is the President and CEO of Global Sourcing Optimization Services (GSOS)