Op2i Outsourcing Survey 2008 Exec Report

Outsourcing 2.0 - Survey 2008

Exec Summary
Full report available from www.Op2i.com

9th March 2009

Bharat Vagadia

Managing Risk – Delivering Value™ www.Op2i.com
No unauthorised reproduction without express written permission – All rights reserved – Copyright Op2i Ltd 1

Op2i
- a business improvement firm specialising in outsourcing

We provide and combine advisory, training and implementation services throughout the
sourcing lifecycle

We leverage our experience, tools and relationships to ensure clients outsource the right
processes for the right reasons, to the right location and to the right service providers

We provide intermediary services to pre-screened service providers which help clients’
go-to market quickly, at reduced cost and risk

We offer managed outsourcing solutions from undertaking programme management on
behalf of our clients to fully managing the outsourcing contract on a client’s behalf

No unauthorised reproduction without express written permission – All rights reserved – Copyright Op2i Ltd
2

Convergence the new driving force
- outsourcing will equate to globalisation

• Convergence : Interaction, overlap and absorption of different industries
converging together in a more competitive and deregulated market
• Convergence is happening in a range of forms changing the nature of
market structures, demand, competition, competitors and the ways of
doing business
• Convergence - what the world looks like tomorrow:
– Skill sets are available everywhere,
Outsourcing and Offshoring can
– Everywhere is connected, enable businesses to transform
their organisations and become
– Knowledge is ubiquitous,
flexible, dynamic and globalised.
– Everything is now,
In the future the terms
– Everywhere is here, “outsourcing and offshoring” will
replaced simply by globalisation.
– Resources are globally distributed.

3

Convergence Trends © Op2i 2008 No unauthorised reproduction without Trends © Op2i 2008 All rights reserved – Copyright Op2i Ltd
Convergence express written permission – 4

Economic downturn and convergence
- implications for outsourcing
Continuing overcapacity, increasing globalisation, the commoditisation of some services, the emergence of new
technologies and what appears to be a prolonged depressing economic outlook, one thing is clear: organisations large
and small face an era of exceptional competition – this trend is likely to continue for some time, beyond the current
economic cycle

The implications for the outsourcing industry are less clear – it is likely that Europe will see some curbs on offshoring,
given increasingly protectionist policies and trade union pressure, as unemployment rates rises

Requires organisations to become more Forcing organisations to think local and
efficient (in all its economic forms) and protect jobs, at higher costs and reduced
global efficiency

Convergence and competition are
long-term trends that will only get
more intense with time, whereas
the protectionist trends are short-
How do you persuade end users Given that a substantial number
term, a reaction to the current
to incur the substantial initial of outsourcing deals fail, new
economic slowdown
cost involved in any new and innovative business models
outsourcing contract? will be required!

5

Key messages from survey
- companies need to focus on
• Defining what and why activities should be outsourced today and in the future – definitions
of core and non-core will change over time
• Better and smarter SLAs and measurement systems – without which a contract is useless
• Selective use of specialist advisors both pre and post contract – you cannot afford the
risks of failure
• Flexible contracts – convergence implies constant change – should however not mean
lightweight contracts
• Management of relationships (partnerships) - communication and culture, especially as
clients increasing use multi-shore strategies
• Going beyond just labour arbitrage – how can partners help you in improving performance
and entering new markets
• Ensuring multi-disciplinary teams to manage the programme – outsourcing as a
transformational strategy effects the whole organisation
• For suppliers, either have scale, deep knowledge or both – competing on the strength and
depth of their talent pool, knowledge, technology enabled infrastructure and client
relationships – move towards multi-delivery locations

6

Survey findings

7

Economic downturn likely to lead to more outsourcing

The general consensus (50% of respondents) believe interest in outsourcing has increased with
the economic downturn

Which of the following best describes the main effect outsourcing and offshoring has
upon domestic businesses

50%

The majority of
40%
respondents believe
outsourcing has a
30% positive effect on
domestic businesses
20%

10%

0%
Positively helps in Helps cut costs and No real impact Detrimental to all Detrimental to the
terms of productivity improve profitability local businesses SME market in the
and efficiency local economy

8

Data protection however remains a real concern

Which of the following best describes your view of Data Protection and Intellectual theft within
off-shoring

50%
How do emerging
destinations overcome
40%
data protection
concerns?
30%

20%

10%

0%
It is a real problem and I believe it may be a I don't believe it is The government is Not sure
threat problem in some cases actually that important probably actually worse
It has been blown out
of proportion by the
media

9

Propensity to outsource and offshore business functions
- the usual suspects
Propensity to Outsource by location
Marketing, media
management, IT security and Onshore Offshore Never

virtual PA functions are the 100%
least likely activities to be
outsourced
80%

Six activities dominate the
offshoring space: 1.Software
60%
Development, Testing &
Management, 2.IT support,
3.Email customer support, 40%
4.Documentation and
Knowledge Mngt 5.Call
centres 6.Invoicing, 20%

Bookkeeping and Accounting
0%
Activities most likely to be

Development, Testing and
Marketing

Product Development

Facilities Management
Sales Lead Generation

HR – training and

HR – payroll, benefits etc

Documentation/Knowledge
Customer Support – email

IT Support

Finance and Treasury
Media Management

Logistics and Procurement

Invoicing, Bookkeeping, Ac
Customer Support – call

IT Security

Virtual PA
MKT Res / Comp
Intelligence

recruitment
outsourced onshore include:

Software , Web

functions
Management
centres

HR recruitment and training,

Mngt
c
Facilities Management, and
Logistics

10

Loss of control and conflicting management styles remains
biggest vulnerability faced by businesses
Biggest vulnerability faced by business when outsourcing on-shore

40%
30%
20%
10%
0%
The biggest vulnerability faced
Service Provider Strategic Conflicts in Data protection Compliance
by businesses when
for Performance Information management styles
Dependence outsourcing onshore or
offshore includes: dependence
on the service provider for
Biggest vulnerability faced by business when outsourcing off-shore performance and conflicts in
communications and
management styles
40%
30%
20%
10%
0%
Service Provider Strategic Conflicts in Data protection Compliance
Performance Information management style
Dependence

11

Benefits realisation and reintegration are largest financial
risks
Largest financial risk when outsourcing onshore

The greatest financial risk remains the
60%
possibility of not achieving the cost
50%
40%
benefit, followed by cost of reintegration
30%
20%
of processes on termination of the
10%
outsourcing agreement
0%
High up front capital and Cost of reintegration of Cost associated with Not achieving the cost
transition costs - e.g. IT processes on managing the service benefits
systems. termination of the provider.

Largest financial risk when outsourcing offshore

50% For offshoring, costs associated with
40%
managing the service provider rank
30%
higher than up front capital and
20%
10%
transition costs
0%
High up front capital and Cost of reintegration of Cost associated with Not achieving the cost
transition costs - e.g. IT processes on managing the service benefits
systems. termination of the provider.

12

Inadequate internal skills and expertise, together with poor
contracts and SLAs source of largest internal risks
Source of largest internal risks when outsourcing onshore

40%
30%
20%
10%
0%
Poorly constructed contracts and Insufficient internal project Inadequate skills, proficiency
Service Level Agreements management skills and experience in outsourcing
All three areas remain a
concern for many
organisations
Source of largest internal risks when outsourcing offshore

40%
30%
20%
10%
0%
Poorly constructed contracts Insufficient internal project Inadequate skills, proficiency
and Service Level Agreements management skills and experience in outsourcing

13

Partnerships approach, secondment and seeking specialist
advice are the most effective risk mitigation strategies
Most impacting outsourcing risk mitigation actions

80%
Development of a partnership
60%
relationship between customer
40% and supplier – easier said than
20% done however.. …
0%
Negotiate strong Build Partnership Manage public Impose legal Place limitations on
contract relationship relations and press obligation on subcontracting by
supplier supplier

Most effective risk reduction actions when outsourcing

60%

40%
Seconding staff and consulting
20%
specialist outsourcing
intermediary 0%
Consulting with a Obtaining professional Accessing information Seconding staff to
specialist outsourcing training in outsourcing from a trade association provider
intermediary

14

Good governance, measurement and monitoring systems
seen as being critical to success
Means of achieving low risk outsourcing project implementation

60%
Combination of a well defined
governance structure and
40%
sufficient SLA measurement and
20%
monitoring systems.
0%
Audit of vendor Shared quality Well defined SLA measurement and
processes and security management system governance structures monitoring systems
arrangements and process

Means of gaining maximum return from outsourcing investment

80%
60%
Selecting the right
40%
process and functions to
outsource in the first 20%
place 0%
Exhaustive business Prior process Selecting right Rigorous quality Reintegration plan of
plan optimisation processes/function for planning, systems and processes
outsourcing processes

15

India remains in the lead, but number of destinations on the
increase, and clients becoming more selective
India was ranked number one choice by a long way First choice destination: India - why?

China comes a very Existing track record
distant second place as
the first choice Skilled work force
destination, with UK,
Language
Poland, Costa Rica,
Philippines, Bulgaria and
Labour costs
Romania each figuring,
primarily on the basis of Access to resources
availability of skilled
workforces 0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

China competes with the Philippines for second choice, but primarily driven by the search for lower labour costs

Most organisations choose Philippines for its language capability

Ireland/UK, China and the Philippines were equal third choices. The reasons for choosing Ireland are varied and show
a degree of maturity of the country as an offshoring destination. Like the UK and Northern Ireland as destinations,
Ireland’s skilled workforce, proximity to UK, cultural alignment, language and access to resources all figure as strong
drivers

16

Most seek specialist help in accessing skills, knowledge and
developing good governance structures
Preferred mode of accessing outsourcing skills and knowledge?

Niche outsourcing specialists and
In-house resources only
management consultants ranked
highly Single domain specialists e.g. lawyer, consultant, trainer ....

Niche Outsourcing Specialist

Management Consultant

National Outsourcing Association

0% 10% 20% 30% 40% 50%
Perceived good outsourcing governance model?

Other
a) Mediated governance model
Mediated governance model provided by an experienced
provided by an experienced
outsourcing specialist
outsourcing specialist
Independently developed bespoke governance model

b) Negotiated with vendor
Negotiated with vendor

Home grown

0% 10% 20% 30% 40% 50%

17

Summary

• Outsourcing has been gaining momentum in the last decade, with the emergence of more services,
more company types engaging in and more destinations to choose for outsourcing. As Bruce noted
“outsourcing has become more interesting over time, but BPO investment has been around for many
years. If you were to choose sub-sectors to invest your money, it is a good place to put your money,
because you have contractual income, an industry where there will be growth over the long term.
However, return on investment multiples are coming down and are becoming more realistic.
• There is no doubt the outsourcing industry is still learning and has yet to mature sufficiently for there to
be a body of knowledge on what constitutes best practice - for a variety of firms.
• Deciding what to outsource, where to outsource and identifying the right provider are simply the opening
challenges. Making outsourcing happen provides further potential pitfalls – it calls for strong project,
change and governance management skills that probably don’t exist internally. Firms must start viewing
outsourcing as a strategic partnership approach, utilising advisors to complement and enhance internal
teams.
• Challenging times will call for radical changes to business practice and business models.
• Outsourcing 2.0 will require different business models, greater risk sharing, better management of SLAs
/ measurement systems and of the relationship itself
• Is your company still a dinosaur when it comes to outsourcing?

18

An appropriate African Proverb:

– Every morning in Africa, a gazelle wakes up.
It knows it must run faster than the fastest lion or it will be
killed.

– Every morning a lion wakes up.
It knows it must run faster than the slowest gazelle or it
will starve to death.

– It doesn’t matter whether you are the lion or the gazelle.
– When the sun comes up, you had better start running.

19

Contact Op2i to find out how we can help you run faster
http://www.Op2i.com

Constructive Reintegration = Outsourcing 2.0

Bharat Vagadia
CEO Op2i
Board Director UK National Outsourcing Association
Author: Outsourcing to India – a Legal Handbook

T: +44 207 193 4339
M: +44 7711 898089
E: Bharat.Vagadia@Op2i.com

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