The “Make or Buy” Question
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The “Make or Buy” Question

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“Make or Buy” is often one of the critical questions asked when considering how to significantly improve “back office” support service performance.

“Make or Buy” is often one of the critical questions asked when considering how to significantly improve “back office” support service performance.

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    The “Make or Buy” Question The “Make or Buy” Question Presentation Transcript

    • The “Make or Buy” QuestionSlide 1 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • “Make or Buy” is often one of the critical questions asked when considering how to significantly improve “back office” support service performance. The question is whether to move forward with setting up an INTERNAL Shared Services operation or to instead make the decision to outsource service provision to an EXTERNAL service provider. In other words, to set up (“make”) an internal service provider through shared services or to “buy” the same services from a third party.Slide 2 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • In theory any “back office” support service can be considered for outsourcing. The question is really one of cost (short and longer term, fixed and variable) versus control. The “attitude” to outsourcing also depends on other factors as well such as enterprise culture, risk sensitivity and the level of development and maturity of any existing shared service functions. Outsourcing can also sometimes be used as a “lever for rapid change”. However, be very careful of “outsourcing a mess” to achieve perceived very rapid short term cost savings. This may only achieve cost savings on paper in the short term and could result in control and compliance issues and also increased costs and clean up problems down the track.Slide 3 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • It is generally true that transaction based services are relatively easier to outsource than services further up the value chain. Having said this, in line with the experience of internal shared services, as BPO continues to develop and mature it is offering more services further up the value chain. Outsourcing has been around in manufacturing for many years and IT outsourcing has been a practical sourcing option for quite a while now as well. Back at Shared Services Week events in the early to mid 2000s outsourcing was not high profile at all, and was actually avoided as a discussion topic! Today the subject of “offshoring” rather than necessarily “outsourcing” has political elements to it again as the world struggles to come out of global recession and unemployment remains very high in North America and Europe especially.Slide 4 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Business Process Outsourcing (or “BPO”) has boomed in the last decade. BPO covers the provision of services such as Customer Support, Finance and Accounting, certain Human Resources functions and Procurement. Offshore centers (for both internal and external service providers) have been established in many “lower cost” locations around the globe – many initially in Central and Eastern Europe and India but now also in many other regions and countries such as in Latin America, the Philippines, Indonesia, China and many more. As the outsourcing model has developed many outsourcers have more recently themselves gone to a multi-shore model with their own operations having some locations back “closer to the customer” in Western Europe and the US for example.Slide 5 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Key Factors in Determining Whether to OutsourceSlide 6 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • There are a number of factors over and above the cost of labour that should be considered including: Current state of existing processes in terms of standardization, complexity, cost, degree of centralisation, stability of control environment, level of automation, etc Expertise of the BPO provider in the services being considered for outsourcing Availability of skilled labour, in particular to manage potential multi- jurisdictional labour law requirements Time zone and language requirements Possible minimum commitment levels in contracts (often five years and above, and even then difficult to extricate from if you then decide to move back in-house or to another provider) Service levels after go live if outsourcer considers you to be insignificant or not very profitable for themSlide 7 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • How to achieve continued end-to-end process re-engineering to lower costs further and improve service levels when the outsourcer handles much of the process Reputation and robustness of the potential outsource provider Political and other risks associated with the country where the outsourcing will be provided from (including disaster recovery considerations). Ability to flex up and down with volumes, required services and complexity (e.g. following an acquisition, annual pay /performance review) Communication issues, including access, security, confidentiality and the associated costs The requirement to have access to specialist HR knowledge that may not be cost effective to retain or always accessible ‘in-house’ The requirement (and ability) to provide meaningful people management metrics.Slide 8 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Does The Decision Point Change Over Time?Slide 9 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • The “Make or Buy” question is a critical one in the early decision making stages and is very often part of an initial Feasibility Study and Business Case Then over time, for any sourcing model, there come points when this question is asked again. For example, after having operated an internal captive for a while, a business may then decide to look at outsourcing to take out further cost or perhaps allow the existing captive to move up the value chain of service delivery and leverage a third party to take on the already standardized, more transactional processes that were initially taken into Shared Services. In this latter example, effectively service provision remains the responsibility of the captive Shared Services operation but the Shared Services operation itself decides to outsource certain elements of service provision to a third party. This can potentially be a great model where the organization truly maintains controls and pulls different levers to achieve the optimum sourcing mix for its host business. A number of excellent initially captive Shared Service operations have gone down this route in recent years.Slide 10 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Is There A Mix Of Options?Slide 11 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • The decision is not quite as simple as “make or buy” as there are sourcing mix options which can involve a combination of both. Indeed “selective” outsourcing has actually been around for a long while. Just think about Payroll, Benefits Administration, local Accounting and Compliance services and local IT Helpdesk support as examples of this. The large “multi-tower “ outsourcing deals that were promised in the early days of BPO have actually been limited in number But selective outsourcing along and within specified service delivery lines has become more and more relevant and popular.Slide 12 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Where Next for BPO?Slide 13 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Over time, Business Process Outsourcing as a viable alternative to, or complement for, Shared Services has and will continue to mature and grow. Shared Services and Business Process Outsourcing are becoming more closely entwined and provide a range of sourcing option alternatives. The right course and speed ultimately depends on each individual enterprise’s current cost structure, its desire for change, its attitude to risk, and how effective any existing internal Shared Services organisation is today.Slide 14 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Why Do Some Organizations Not Outsource?Slide 15 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Cost outweighs the benefit Loyalty to staff Provider cannot improve the service Unions, government regulations Can impact a company’s image Strategic importance to the company Loss of staff contribution to other areas of the business i.e. general knowledge/expertise, hard to contract/price for Market offerings and maturity Giving away savings that could be kept in-house Perceived loss of control Fragmenting the service, splitting day-to-day operations from strategy and policy direction Concern about the level of flexibility/adaptability Need to get our house in order first Building shared services is often a first step for learning about business transformation – growing capabilitySlide 16 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • When Do You Bring Back Services In-house?Slide 17 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Service Levels not meeting expectations and no sign they will improve Business unit now has a strategic importance to the company Cost of hiring is cheaper than outsourcing Concerns over service providers stability or commitment to this area Hidden costs of outsourcing become apparent and original justification/assumptions for outsourcing now in doubt Service provider’s staff turnover increasing and impacting service Service provider now doing business with competitors Your company maybe increasing/decreasing in size, again costs/benefits would have to be reviewed Expected savings have not been delivered Service provider’s contract is too inflexible, changes take too long to implement, damaging your business’s ability to respond to market forces or launch new products to market first PR challenges, loss of business due to the outsourcingSlide 18 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • What are the ‘Hidden Costs’ Associated with transition to BPO?Slide 19 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Staff who have been transferred may not be as productive or they may leave lowering the quality of service Effort/cost involved in transition underestimated, in effect you could be temporarily running 2 organizations for the same work i.e. one being trained while one does the operational work, this can take up a lot of senior mgt time The loss of the tacit knowledge held by employees when a role is transferred to someone else - knowledge may not transfer Loss of internal expertise/knowledge - service provider will now charge Loss of flexibility/adaptability of employees, now additional charges/contract negotiations PR challenges, loss of business etcSlide 20 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Some Real Life ExamplesSlide 21 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 1: When you initially embarked on Shared Services at your company did you consider the option of outsourcing, either selectively or more broadly? Answer 1: Global Drinks Company No, the target was to consolidate core financial activities into Shared Services combined with moving towards Global Processes and single ERP system (SAP). Outsourcing came on the radar some 4 years after establishment of SSC. Key reason was (1) following the success of SSC, the desire to move more value- added services into the SSC and move out the framed, optimized operational tasks (2) conclusion that copying the SSC formula into APAC would not be feasible with the limited scale, volatile labour market conditions and problems of finding appropriate talent as experienced by companies having made that move.Slide 22 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Answer 2 : Global Oil and Gas Company Yes, definitely. Indeed we chose BPO as a large part of our solution mix because we needed to “break the culture”. While we agree that “outsourcing a mess” is not in general a good idea, in our case we needed to do this to make a step change in the way services are delivered. Answer 3: UK Based Major Retailer No, cost arbitrage was not an issue as centralised finance cost base low. SSC was part of Finance so “re-badging” needed. More focus was on impact of moving Finance overseas. Some consideration made for using local BPO providers in Expenses area Answer 4: Media Company No, assumption was that 90% of SSO would be staffed by current Central Finance team. Past transactional processing in a terrible state – would need rectification prior to transfer to third party.Slide 23 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Answer 5: Global Logistics Company No, the option of outsourcing core processes straight away was not considered in any of the four companies I have done shared services in. However, some ancillary processes such as imaging/scanning and invoice printing and postage and stationery procurement was. Also, eBilling - it would not occur to me to make – I would always buy. End of cycle collections I think is always better done externally (i.e. once the normal running cycle is completed and you are now going legal with the customer). Answer 6: Global Consumer Goods and Global Media Company At the time of Whirpool in the mid 90’s there was no decent FAO service provider. The best example was Reuters in 2003. We looked at the BPO markets and decided that we had to sort out our own house first before we considered any form of BPO – they simply were not able to offer a global standardized template solution. When we got going, we started using selective BPO for Billing, Statutory and Tax compliance, Payroll, etcSlide 24 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 1: When you initially embarked on Shared Services at your company did you consider the option of outsourcing, either selectively or more broadly? Answer 7: Global Telecoms and Networking Company Yes. We looked at Outsourcing and made an assessment of its applicability and potential value actually at various stages. We chose to move forward with internal shared services across Finance and Accounting and much of HR globally but we did use “selective outsouring” as a way forward with quite significant outsourcing in IT and Facilities for example. We also selectively outsourced some local Finance and Accounting accounting and reporting in some of our smaller markets. Answer 8: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company Yes. We focused on selective outsourcing where it made sense. In most cases, we outsourced or considered outsourcing certain processes as opposed to complete services.Slide 25 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 1: When you initially embarked on Shared Services at your company did you consider the option of outsourcing, either selectively or more broadly? Answer 9: International Bank Prior to the decision to create an ‘in-house’ shared service centre, various ideas around re-engineering the HR function were considered. Outsourcing was considered to ensure the re-engineering effort reviewed all options and evaluated the merits for each, and also to look at what outsourcing providers could offer in terms of potential cost reductions. The Bank concluded that there was a strong business and technical case that its own people could ‘do it better themselves’.Slide 26 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 2: With the development, growth and maturing of the Business process Outsourcing market in recent years, are you perhaps looking at this as an opportunity in the future? Perhaps to outsource some of your existing processes that are currently insourced or to help expand scope or really not at all? Answer 1: Global Drinks Company Yes, currently PTP processing, issue resolution, payments T&E card admin, query resolution, audit and reconciliation OTC billing, processing, payments, clearing to customer ledgers, ... several Asian countries (AUS, Japan, Korea, Vietnam,...) and African countries (Nigeria, Kenya,...) are full scope with Accenture Asia.Slide 27 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 2: With the development, growth and maturing of the Business process Outsourcing market in recent years, are you perhaps looking at this as an opportunity in the future? Perhaps to outsource some of your existing processes that are currently insourced or to help expand scope or really not at all? Answer 2: Media Company Yes – have reviewed BPO twice within past 15 months Opportunity has passed for now but hasn’t gone away for ever Will be reviewed further in 2010 End 2 end processes are not available yet Compliance levels still low Business ability to deal with continuous change is LOW Haven’t exhausted internal opportunities Possible loss of income due to gain-share from BPO provider on savingsSlide 28 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 2: With the development, growth and maturing of the Business process Outsourcing market in recent years, are you perhaps looking at this as an opportunity in the future? Perhaps to outsource some of your existing processes that are currently insourced or to help expand scope or really not at all? Answer 3: Global Logistics Company We do some tactical outsourcing either to reduce cost in a non-customer critical activity or to gain technological expertise. examples are cash application, import duty/vat queries and collection and some low value high volume credit control. I would consider it firstly for existing processes preferring to expand scope onshore initially to stabilize and build trust with the business partners before engaging with a BPO.Slide 29 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Answer 4: Global Consumer Goods and Global Media Company Yes and for the principle reason that BPO enables the SSC to move up the value chain. In Whirlpool, outsourcing AP enabled the SSC to start looking at controllership and Performance Management (business support). By outsourcing the stuff we have done well, we can focus on doing other things that are of higher value and much better for the company. Global payroll solutions offer great opportunities for example. Be careful though, most BPOs make there money on tidying up a process through good governance and service management, moving activity to lower wage cost locations and applying some good tools. The question you have to ask yourself is whether you have the capability to do the same (or indeed the aspiration to grow the capability), and make similar quality and savings benefits. Massive organizational learning comes from successfully learning how to manage change – in Reuters, shared services programme template became the standard for all subsequent change projects. Reuters has fundamentally changed its business model over the past 7 years.Slide 30 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 2: With the development, growth and maturing of the Business process Outsourcing market in recent years, are you perhaps looking at this as an opportunity in the future? Perhaps to outsource some of your existing processes that are currently insourced or to help expand scope or really not at all? Answer 5: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company Yes, it will remain an option for the future. As we expand scope and plan for the future provisioning of services, we endeavor to consider the pros and cons of outsourcing for a variety of processes and services.Slide 31 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services? Answer 1: Global Drinks Company Complementary and as an extension. I see this as a valid business solution which can turn very attractive but needs thorough understanding, preparation and not be seen as a 1-off but as part of a bigger journey for improved business performance.Slide 32 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services? Answer 2: Media Company Outsourcing is suited to Transactional Processing and VOIP type processes Once these processes have been migrated, stabilised and become effective, consider more Traditional “Value Add” activities e.g. business analysis, budgeting, reporting Outsourcing depends on individual company risk profile, change capacity, marketing/ media profile, business/market operating within, FTE needs and budgetary concerns No one answer fits all See next slide for typical ITV review criteria for BPO elements Complimentary? Could be but passed on secondary option Extension? More so and can be the next stage aka logical evolution! Direct one-for-one alternative? Not really!Slide 33 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services? Answer 3: Global Logistics Company My personal view is very mixed. From a personal perspective, I feel almost treacherous exporting jobs from onshore to offshore and the socio-political considerations I think are enormous. It might be possible but is it right? From a business perspective, I think there is a huge role to be played by outsourcing. Im personally in favour of a hybrid model of service delivery based around the amount of customer intimacy thats required in any given process. Outsourcing gives you options.Slide 34 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services? Answer 4: Global Consumer Goods and Global Media Company Outsourcing is another important tool in the toolbox. It should never be seen as an end in itself – to do so is a classic misunderstanding of the value of outsourcing. BPO can be all three. In Reuters, we used a 3rd party to support the SSC provide global Statutory & Tax compliance to 140 plus countries. It became a complementary part of the service. We used a global company to provide local customer billing in each country so that we could manage the important part of collecting and allocating cash. We outsourced payroll to a global provider because they were better equipped to do it than we were.Slide 35 Grant Farrell, Managing Director of the Global Public Sector Practice.
    • Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services? Answer 5: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company. I view it as all three, depending on the scenario and the company situation.Slide 36 Grant Farrell, Managing Director of the Global Public Sector Practice.