Op2i Survey 2010 Exec Summary Final

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Op2i 2010 Outsourcing Survey Report Executive Summary

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Op2i Survey 2010 Exec Summary Final

  1. 1. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework EXECUTIVE SUMMARY Op2i’s Annual Outsourcing Survey 2010 Deep into the recession and during the climb out, albeit slowing, one thing appears clear from the 2009-2010 survey: interest in Download your free outsourcing has increased, whilst focus has yet again shifted to cost reduction, with suppliers pressured to deliver more for less - this copy of the full however doesn’t necessarily mean more offshoring. report: Advisors have also felt the pinch as more customers attempt to go it www.Op2i.com alone and utilise internal resources to plan, transition and manage outsourcing programmes. Op2i London This report summaries the results of the Op2i survey, highlights +44 (0) 207 193 4339 trends from last year’s survey and important themes for the www.Op2i.com outsourcing industry for the coming year. No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 1
  2. 2. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework © Copyright 2010 Op2i Ltd All rights reserved. No part of this publication may be reproduced, by any means whatsoever, without the prior written permission of Op2i Ltd No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 2
  3. 3. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework Context of survey This is the second in the Op2i outsourcing survey series, the first being published in March 2009. Whereas the previous survey was themed outsourcing 2.0 – capitalising on innovation within business models within the outsourcing industry, this survey gauges what impact the recession has had to outsourcing plans, requirements and risk reduction approaches. The survey sought views from individuals from various parts of their organisation who are: key decision makers, implementers or advisors for outsourcing within their organisation, together with industry advisors and suppliers within the industry. The online survey has been complemented with interviews with industry leaders and specialist commentators. This report will contribute to industry best practice and aid firms in making better, informed decisions on their outsourcing activities. With best wishes, Dr Bharat Vagadia PhD, MBA, LLM, B-Eng, DipM No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 3
  4. 4. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework Executive Summary During 2009, organisations around the world, including those in the emerging economies which had been somewhat protected from the recession, feared a deep global recession brought on by the banking and credit crisis. For the outsourcing market, this presented both risks and opportunities; more budget constrained clients, but a real impetus for organisations to cut costs and restructure balance sheets, with outsourcing featuring high on the board agenda. However with a sharp focus on reducing costs, this inevitably meant the broader benefits from outsourcing, such as flexibility, service / process reengineering and transformation, dropped down the agenda – something that may well have longer term consequences. Today, although there are, as politicians would say, green shoots of recovery, it is not clear whether the cold frost of consumer pessimism and the lagged affect on job losses will kill off these green shoots and result in the long awaited up-turn, turning into a short term blip of hope. Although emerging countries have not been as hard hit as the Western world, they have nevertheless, suffered from a drop in international demand for their products and services. Just when organisations from these countries started moving up the value curve, beyond cost into business transformation, customer demand has turned the clocks back by a decade and yet again expectations are focused on lower costs, while the fancy value add services remaining a pipe dream of the outsourcing service providers marketing departments. Although the primary driver for outsourcing and certainly offshoring has always been cost, what we have seen is a dramatic shift in focus towards cost, with transformation, concentrating on core competencies, and time to market being down played during the period 2009-2010. Business transformation was the mantra a few years back – vendors claimed to enable their client’s to be more flexible, innovative, and respond to market changes more quickly and efficiently. However, the mantra hasn’t really materialised…some vendors just jumped on the bandwagon without the necessary domain expertise, or indeed the resources to be able to commit to large scale transformations, without concrete financial returns from the contracts – outsourcing relationships in the vast majority of cases are still very transactional. Without suppliers embedding themselves within the customer organisation, it will not be possible to do business transformation. But to allow a vendor to embed themselves, means the customer must open up itself and allow the vendor to see its crown jewels; that is, its core competences and sources for competitive advantage….. This is not to say that (some) vendors cannot deliver transformational change, but that it requires a very different relationship and a very different approach to the whole outsourcing decision – an approach which both parties and their respective stakeholders agree and commit to. However as the survey demonstrates, nobody wants business transformation, they all just want lower costs. No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 4
  5. 5. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework Another dramatic change has been the expectations of cost savings. Whereas organisations were happy to outsource and offshore investing upfront in transition activities with payback within 3 to 5 years, customers now expect payback within 18 months, and ideally don’t want to invest / spend any money upfront – not quite fitting the business model that vendors and indeed advisors are familiar with…. With the success rate of outsourcing somewhere in the range 40-60%, it will be really unfortunate if this focus on costs extends to governance; both decision governance as well as programme governance. This focus towards costs, hasn’t just affected new outsourcing service users. Those organisations that have outsourced, are now demanding suppliers live up to the partnership hype that they emphasised during the sales and negotiation phase, and share the pain and pressures that customers are facing – many have sought to renegotiate their contracts during 2009 – asking suppliers to deliver more-for-less, whilst also seeking to deliver substantial cost reductions from the previously agreed rates (figures between 15-20% have been claimed). Certainly, there have been other contractual changes within the market; relaxation of volume commitments, service levels, and bringing forward the financial benefits of transformation projects etc. It has not been such a bad year for outsourcing lawyers… In a bear market, most suppliers felt they had no real choice but to respond (some may well have lived up to the partnership model, others forced) to customer demands. Most suppliers secured longer term contract extensions in exchange for short term pain – where suppliers (e.g. offshore call centres) have profit margins between 20-30%, they could afford to give a little... However, what this period has shown is that the longer term contracts, typical within the outsourcing industry, can themselves lead to less flexibility – contrary to the common perception that outsourcing delivers greater flexibility. There will no doubt be pressure on the industry for shorter term contracts. Lawyers may well argue that it is possible to have longer term contracts that are flexible, but as one lawyer said, from a legal perspective, flexibility comes at a cost. The pretence of flexibility can be easily done with woolly clauses, “agree to agree”, but without real teeth, they remain just that – pretence. Given the key mantra of our times, “prudence”; organisations have also sought to cut out expensive, and what they may have deemed unnecessary, advisory support services. Many have reverted to the long dispelled belief that outsourcing is just another form of procurement and therefore something that can be done quite adequately within the organisation. This may well save costs in the short term and the organisation may well find suppliers that can deliver some cost savings, but the likely longer term impact will be a dysfunctional organisation, with narrowly focused decisions being imposed by one department or sponsor on others. The wider organisational benefits will be brushed No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 5
  6. 6. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework aside; all the potential options that could deliver substantial benefits in the longer term will be ignored in favour of immediate readily identifiable cost savings. Within this environment, all the risks and possible risk mitigation strategies will not be fully evaluated or clearly communicated with the wider stakeholders and intransigent outsourcing fiefdoms will reign supreme. This communication challenge has also more than ever, influenced the decision to outsource; “how will the market react to us outsourcing, how will our employees react to outsourcing and possible job losses, the unions, the public….”. Many would-be outsourcers who can see real benefits in outsourcing, have been constrained by this force of public opinion. This however is unlikely to stop public sector organisations, especially local government looking hard at their sourcing options – outsourcing within the local market and TUPEing employees is likely to be preferable to redundancies, in the eyes of public opinion anyway…. Looking forward, an uncertain recovery in economies is expected in 2010. Within the outsourcing industry, we will see an upturn, as many customers take that leap of faith and head down the outsourcing route hoping for significant cost savings and process efficiencies. Customers will still continue to put pressure on suppliers for lower prices, but suppliers are more likely to hold firm, as general demand picks up. Demand will not only be driven by new initiatives, but re-invigorated initiatives that may have been put on hold during the last year. There will continue to be difficult choices to make between partnerships (requiring longer term contracts) and the requirement for flexibility (shorter term contracts). A movement away from partnerships towards short term, adversary relationships with emphasis on strong legal contracts, may well perpetuate the poor historic success rate of outsourcing deals. Adding ghee to the fire (as our Indian suppliers say) will be a general reluctance to use outside help or best practice advice; with preferences for in-house resources – focus yet again shifting to the cheapest suppliers ticking all the procurement boxes – with the procurement departments driving the organisational reigns. Yet again, we predict a dramatic shift in business models – outsourcing will “not be the be all and end all” – other sourcing options will increasingly be explored, from shared services to bureaus. Offshoring will be a mixed picture – some may well increase their activities offshore – getting greater cost benefits, others will be restrained by the weight of public opinion. No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 6
  7. 7. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework About Op2i A Business Improvement Firm Specialising in Outsourcing We provide and combine advisory and implementation services throughout the sourcing lifecycle. Advisory services to get the sourcing decision right and implementation services to get the most from outsourcing, complemented by training to ensure our client organisation’s personnel are fully abreast of the outsourcing process and equipped to drive the outsourcing programme within the organisation. We provide advice, thought leadership and professional management services (including strategic review, advisory, training, implementation, and managed external sourcing solutions) associated with the implementation of sourcing strategies. We have experienced business improvement practitioners and process consultants with deep consulting, operational and business experience within global strategic sourcing – from both client and supplier perspectives.  We ensure our clients fully understand the risks and help develop approaches to mitigate these risks wherever possible.  We have developed innovative proprietary sourcing models and tools which ensure clients, make the right decisions supported by quantitative analysis and get the maximum return possible on their investment.  We are acknowledged for our objectivity and efficiency.  We work with clients to develop solutions, complementing their skills and experience – we believe in developing a partnership with our clients. We leverage our experience, tools and relationships to ensure clients outsource the right processes / functions 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 with services ranging 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 2010 Op2i Ltd 7
  8. 8. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework About Op2i has developed Governance Director, a web based real time decision support system, offered as a service to help organisations model and evaluate strategic decisions and options, whether they be alternative scenarios, policies, strategies, or vendors. Not limited to outsourcing, Governance Director provides a workflow solution to complex and important decisions where the rationale and factors that inform the decision need to be retained in the corporate memory. No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 8
  9. 9. Op2i Outsourcing Survey 2010 – Best Practice Decision Framework More Information If you would like to discuss the survey findings in more detail, discuss sourcing support, or would like to learn more about Governance Director, please do not hesitate to contact a member of the team on: Tel: + 44 (0) 207 193 4339, or email: Bharat.Vagadia@Op2i.com. More on Governance Director: www.GovernanceDirector.Com More on Op2i’s expertise and services: www.Op2i.com No unauthorised reproduction without express written permission – All rights reserved – Copyright 2010 Op2i Ltd 9

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