Home >  Articles > Outsourcing - Taking care of business

•  
•  
•  
•  

Outsourcing non-core activities has been a major trend over the last decade, starting with the IT function, where specialist companies are able to take over an enterprise's entire data centre operation. But the market has grown and evolved tremendously, to encompass a whole range of business processes. A whole host of niche service providers have emerged to handle a specific range of functions.

But do you need to outsource and what are the advantages if you do? And does it matter that you are handing a slice of your business over to another party? And if you do all of this, what are the safeguards that can be put in place to ensure that your business retains some ownership and also retains customer loyalty?

In the past, IT outsourcing involved the typical data centre operation, where huge computers fed by a host of peripherals processed large volumes of numbers that were printed out or stored on some form of magnetic storage device and then delivered to the client. These were essentially number crunching warehouses that didn't delve too deeply into the business that the numbers represented.

But with the evolution of distributed computing systems and business packaged solutions, the outsourcing industry has taken over an ever increasing portion of non-core activities and functions associated with running an enterprise. Ian Blacklaw, Director of Operations for EDS, comments, "Ten years ago the outsourcing industry started to broaden its range of services to encompass Business Process Management (BPM)."

Megan Bray, Marketing Manager for CSC, says, "With the growing trend toward focusing on core business capabilities, many companies are outsourcing selected business functions to expert partners who can perform them more efficiently and cost-effectively. A step beyond IT outsourcing, Business Process Outsourcing (BPO) includes such functions as claims processing, invoicing, payroll and customer support."

Ultimately, outsourcing, regardless of the activity, is a business decision rather than a technology issue. Quentin Von Essen, Vice President of Marketing for Teletech International Asia Pacific, says, "Outsourcing is a strategic business decision that an organisation has to make when it's had a good look at its own internal infrastructure, and finds it can significantly reduce costs by outsourcing."

"Looking at the financial services sector, a lot of the back end processes and customer facing activity, such as mortgage processing, cheque processing and credit cards, can be handled more effectively by an outsourcer," says Blacklaw. The outsource organisation has the systems and expertise to handle the actual business processes of the organisation rather than just processing its data.

The benefits in outsourcing include cost reduction, better risk mitigation and redundancy, access to greater skills and competency, and access to the latest technology and infrastructure. One problem businesses have perceived in outsourcing is the loss of control an organisation may have in managing its business processes. According to Bray, however, the problem is not with outsourcing itself but with the contractual agreement if it does not meet the requirements of the business. "Outsourcing, in fact," says Blacklaw, "can increase the level of control if you design and manage a contract to be central to your business."

Von Essen agrees, "By using a service provider with good expertise and the right infrastructure, you can centralise a range of disparate activities associated with delivering a function or a service."

The relationship an organisation has with an outsourcer should be viewed more as a partnership than as a supplier relationship, they work 'with' rather than 'for' the client.

Who's in control?

Blacklaw says, "For an in-house environment where the organisation is dependent on various divisional units for the provision of a service, control may be harder to achieve than to outsource the operation to a reliable and competent partner."

The decision to outsource is based on the expectation that the service provider has some inherent advantage over the client in producing and delivering a service. This competency can be due to superior technology or organisational and management skills, or from the economies of scale the outsourcer can achieve. It's through this competency that lower costs are generated, hand-in-hand with a higher quality of service.

"For a mid-sized organisation with a centralised facility, risk mitigation is extremely hard to manage as the costs for disaster/recovery capability are extremely high." An organisation can recover quicker if the particular systems or range of systems are managed externally and are off-site. And because an outsource organisation or service provider manages a range of different systems and operations for clients, it is far more cost-effective for them to have the appropriate disaster/recover procedures and back-up sites in case of disasters.

One of the biggest growth areas to be outsourced in the last few years has been in document and workflow management, where organisations are automating the workflow processes in their back-end operations. Blacklaw comments, "In the last two to three years the major new bits of business that have been coming through the pipeline are paper and document processing. For example, claims processing for insurance companies, mortgage and cheque processing for banks and, in retail terms, supply-chain management and procurement processes."

Banks and insurance companies as well as local government and government departments are very much paper bound organisations, where a tremendous number of documents, bills, notices, and receipts are generated.

"These organisations are investing in internal and outsourced solutions that automate the work flows and transactions associated with processing a vast number of documents," said Blacklaw. He added that typically such organisations were looking to bring about efficiencies in managing the systems while reducing the amount of money they needed to invest in infrastructure.

Keeping in contact

Other major growth areas for outsourcing are contact centres and CRMs. A vast range of specialist companies have emerged in the last few years including Teletech, Salesforce and Link to manage the telemarketing, help desk and support, and customer management functions of a business.

"A major reason for utilising such outsourcers is for one-off product launches and campaigns, where the organisation needs to handle a very large number of incoming calls and transactions for a short period of time," says von Essen. The service provider has the necessary management structure, facilities and technology to handle those customer enquiries efficiently.

A vital part of the contract between a service provider and the client is the Service Level Agreement (SLA). "Service levels need to be dynamic and have scope to change. A service level agreement may make sense from day one, but may become redundant as the business and its requirements change," says Blacklaw.

When companies are developing and designing the contract, a set of dynamic capabilities should be built into the service level agreements that can evolve with the changing demands of the business. Having a dynamic SLA mechanism will also give you a dynamic contract. As Blacklaw says, "If a service agreement states that function X needs to be completed within four hours, but a competitor can do it in two hours, you want the ability to move from four to two to be competitive, and you also need to understand the price points where four-to-two becomes prohibitive."

As well as being dynamic, service levels need to be defined in business terms. Blacklaw explains, "In the past, service levels were very technically defined such as up-time, down-time, and response time. But now the move is to have more business configured service metrics."

For example, for a bank, losing a system between 1 am and 2 am may not have the same impact as, say, losing it between 12 noon and 1 pm on Thursdays. Service providers are moving their reporting to be more business orientated and taking into account the actual impact on the business.

What to look for

There are a number of areas one should look at when evaluating a prospective solution provider or outsourcer. According to Kathy Benson, an analyst at IDC, "In appraising a service providing organisation you must ensure they have the capability, skills and experience in handling the work." Check references from other clients they do work for and appraise the type of hardware, software and general infrastructure they maintain. Also assess the range of partnerships and alliances the outsourcer has. "There's always going to be a problem somewhere with the technology. Does the solution provider have strong relationships with reliable and credible suppliers who can fix problems quickly," asks von Essen.

But also ensure the quality of the people the service provider has. Blacklaw advises, "Are they committed, appropriately skilled, and do they fully understand the business processes of the client organisation and what they are trying to achieve?"

Also, question their implementation process for projects and their record for delivering on time and to budget.

Vital in maintaining control over the process is ensuring good communication between the outsourcer and the client, and there should also be a very efficient and robust reporting mechanism in place. Von Essen asks, "Can you receive hourly, daily, weekly, or monthly reports which concisely and accurately help you monitor the function or operation being outsourced?"

One area that has been touted as the next major step in outsourcing is ASP (application service providers). "The essential premise behind ASP is to allow small companies to have access to big company technology via the Internet and to pay for it on a user by user basis," says Blacklaw. To date, the ASP model has not been received openly by the market in Australia, with demand being extremely sluggish. However, IDC predicts that globally the ASP market will grow steadily with a prediction that the worldwide ASP market will reach $20 billion worth of business by 2006.

• Share this Article:
• digg this
• add to del.icio.us
• StumbleUpon
• RSS Feeds