Develop a Sound Financial Case for Outsourcing

(10706) Michael Corbett says:

Building the business case for outsourcing is simultaneously complex andn simple.

The simplicity comes from comapring the current “as is” costs with those of the proposed outsourced operation. Usually these benfits will be easy to quantify.

The complexity comes from the fact most organizations have no idea of their true current costs. There are usually a number of different financial models in use, each of which portray a different picture.

With this in mind, to assess the true value of outsourcing and articulate this in a business case analysis,

1. Get everyone in the organization to agree to a standardized methodology for capturing current costs, something that will capture true costs at the activity level. This will be a matter of aligning the organization’s business processes with the actual costs of the resources utilized and all relevant overheads. Once this is done, you can establish a baseline for what currently goes on, including the current performance of each process.

2. Develop a method to forecast as accurately as possible what the organization’s vlume drivers and costs will be in the future so everyone understands what costs would be incurred if the outsourcing arrangement is not entered into, or if some up-front investments will take several years to recoup. Doing this allows everyone to know with as much confidence as possible what the total cost of the outsourcing proposal will be and how that compares with doing everything in-house. Be realisitic and include the planning costs, one-off start-up costs, transition costs and oversight costs of the outsourcing arrangement in your analysis.

3. Make all the intangibles of outsourcing tangible so that you can capture all the drivers of the outsourcing arrangement. This will be difficult, but you may try:

Estaimating what the most likely economic benefit of outsourcing will be in terms of costs, assets or revenue.

Develop a reasonable economic calculation for the size of this impact and its probably flow-on effect on shareholder value. In this way, an actual financial benefit figure can be assigned to the intangible benefits of outsourcing like improved focus, greater flexibility, access to skills, improved quality, conservation of capital, more innovation, etc.

4. Put everything into practice by letting the organization decide which financial analysis technique it wants to use to create an overall pictures of the decision at hand. Every organization is different and wil have preferences on how financial information is captures and analyzed. Work with what is generally accepts to develop a business case that everyone will be able to live with. And then be consistent in using that same analysis to gauge the success of the relationship in the future.

Outsourcing: Engage the Marketplace

(10705) Michael Corbett says:

By definition, organizations establish relationships with service providers because the providers know more about how to do something than the organization does itself. Therefore it makes little sense for an organization to try and select an outsourcer on the basis of tightly defined specifications. Instead, outsourcing is more akin to establishing an ongoing strategic partnership, which must evolve and mature for the full benefits to accrue.

The key to building a vibrant outsourcing relationship is to select a service provider on the basis of being a good strategic fit rather than the lowest bidder. In many ways its more like hiring a senior executive who will come aboard and use his or her own initiative beneficially than it is to simply buy something.

The key characteristics of a well-crafted outsourcing relationship are:

1. A good relationship will look to the future and spell out how the organization and the service provider will work together to meet changes in the general business environment, markets, competitors, technologies, etc.

2. The organization’s needs from the relationship will be couched in clear, complete and measurable terms so both sides know unambiguously what they are working towards.

3. Scenarios will be developed cooperatively so both parties will get a feel for how the other party will act in the event of different marketplace conditions arising. It will also allow joint solutions to be developed in advance.

4. The organization and its service providers will engage in an ongoing dialogue so as customer preferences change, new technologies emerge and competitors enter the marketplace, the best ideas of both entities will be considered and applied.

5. A scorecard will be crafted which will allow the organization and its outsourcers to measure success on common unambiguous criteria. In essence, the scorecard will define what’s important and how it will be measured. As well as measurement metrics, the scorecard should also detail how data will be collected.

Most organizations will evaluate the service provider on the basis of several key indicators:

1. The competitiveness of the solution offered by the service provider.

2. The competencies, scale and scope of the service provider’s operations as reflected in its people, processes and technologies.

3. The service provider’s total capabilities — financial strength, infrastructure, management systems and other resources.

4. The relationship dynamics — whether the organization enjoys working with the service provider and so on.

5. The relative size and importance of the organization to that service provider which will indicate how much the service provider will be prepared to invest in the relationship.

The Outsourcing Revolution

Create and Lead Highly Successful Project Teams

(10704) Michael Corbett says:

 Successful outsourcing efforts and initiatives never just happen by chance. Instead, support and leadership will be required from the top of the organization. That means to get viable outsourcing arrangements in place, effective well-managed teams will be required to plan and implement.

Outsourcing is usually a five-stage process with each stage being centered around a key business question, in this way:

1. Is the opportunity appropriate?

Will this outsourcing opportunity make us more competitive in the marketplace, or will it dilute our uniqueness?

2. Is this opportunity real?

Can we develop a business case which will confirm quantitatively that genuine benefits will be delivered.

3. Can we craft a good deal with a qualified provider?

That is, can we reach an agreement with a good service provider that will be consistent with the benefits we anticipate will come?

4. Can we execute?

Will we be able to modify our internal processes to integrate this outsourcing arrangement beneficially?

5. Can we provide onoing management for this agreement?

Once the outsourcing arrangement is in place, will we be able to keep it moving forward or will it stagnate?

Most outsourcing projects will require a series of teams, which will evolve over the life of the agreement. The early planning and evaluation is typically handled by an ideas team. As the project moves toward implementation, more operational people usually get drafted in. Then a transition team may be required, followed by an assessment and management team who will analyze and adjust the project long term. External advisors and consultants may also be called on as required.

As with most business activites, the role of the project team leader is critical. A strong outsourcing project leader:

Will have the ability to embrace and champion change.

Will have previously earned credibility within the organization.

Will have a desire to manage others, not simply do things.

Has the ability to build trust in others.

Has good communication and negotiation skills and aptitudes.

Possesses good strategic management skills.

Knows how to manage and market new processes.

Has very good process expertise and know-how.

The Outsourcing Revolution

Optimize Your Opportunities to Outsource

(10703) Michael Corbett says:

Using the top-down and bottom-up approaches, or a combination of the two, you will probably have identified several potential new outsourcing opportunities for your organization. To prioritize these in terms of impact, benefit and risk, look closely at three key questions:

1. For which of these activities is there a robust pool of providers already in the marketplace and a track record of success? If your competitors are already outsourcing extensively, you may need to do liewise to remain comeptitive in your markets.

2. What customer processes could be outsourced to generate the greatest return at the lowest level of risk? These opportunities should be pursued first. Pay particular attention to areas where you can embed a service provider’s offerings right into your own customer-facing interfaces. Doing this can substantially enhance your ability to execute and generate significant cost savings and other benefits.

3. What are the risks involved in outsourcing your key business activities, and can these be offset by the amount of resources you’ll need to invest if you don’t go down the outsourcing path? When companies consider outsourcing, they typically balance perceived risks and projected benefits. Risks may be strategic (loss of control), operational (loss of performance) or result-oriented (will the anticipated benefits actually be realized). To offset these risks, you should analyze what level of internal resources will be needed if you choose to perform these activites in-house. The level of investment required to stay state-of-the-art in this area may also be considerable.

In general, most organizations will only outsource when managers feel the risks involved are well understood and manageable. You should regularly prioritize your outsourcing opportunities and revisit that list frequently as the marketplace evolves. This will especially apply to any organization’s most cirtical interface — that between the company and its customers. Even when activities arond this customer interface are outsourced, it should be ovcious you’re not delegating responsbility for creating a great customer experience. Rather, you’re trying to create the conditions within which your own assets can be optimally applied. Leveraging the assets of a service provider is ideal and desirable as long as you maintain full responsibility and control of the experience.

The Outsourcing Revolution

Develop a Global Process Outsourcing Strategy

(10702) Michael Corbett says:

 For outsourcing to be truly effective, it needs to be integrated right into the firm’s overall bsiness strategy. This way, outsourcing becomes proactive rather than solely a reactive business tool. This integration of strategy can be achieved through either a top-down or a bottom-up approach.

Top-Down

This approach treats outsourcing as the main strategy by which an organization will derive competitive advantage. Outsourcing becomes an integral part of the strategy. There are seven steps involved in a top-down approach:

1. Segment: the organization’s marketplace by geography, by product line or other criteria.

2. Project: what changes will occur in these segments over the next two to three years.

3. Assess: the overall size of each segment, the level of competition, potential for growth, etc.

4. Decide: which segments your organization will pursue and what will be required to dominate each.

5. Source: map all your competitive advantages and specify where and how each will be sourced, either internally or through external relationships.

6. Forecast: your revenues, costs, profitability and other financial indicators based on your sourcing decisions.

7. Invest in execution: that is, allocate your capital, your operational funds, your people and your intellectual property assets in alignment with your strategic plan.

Bottom-Up

The bottom-up approach does not mean decisions are made at lower levels of management. Rather, it is a zero-based sourcing approach designed to identify which activities can be sourced more efficiently externally. It is built around three key questions:

1. If we were starting from scratch today, would we build this capability inside the firm?

2. Are we so good at something that others would hire us to do it for them?

3. Is this an area of our business where we would expect our future leaders to come from?

If the answer to these three questions is “yes”, then the activity is a course of competitive advantage for your firm. If the answer to any one of these three questions is “no”, you would do better by looking at what external service provides have to offer.

You can then align your organization’s value chain with an applicable sourcing strategy. Keep those areas which are part of your competitive advantage internal and outsource all other areas. For example, for a credit card company, a sourcing blue-print might look something like:

Value Chain Activities	Sourcing Strategy
Strategy devlopment (brand, risk management)	Unique competitive advantage — internally sourced
Market research and product development	Mix of internally sourced (product development) and externally sourced (market research)
Design and production of marketing materials	Externally sourced from whoever offers the best deal
Warehousing and distribution of materials	Externally sourced from whoever offers the best deal
Sales (Direct or telemarketing)	Mix of internally sourced (direct marketing) and externally sourced (telemarketing)
New customer processing	Extenally sourced from whoever offers the best deal
Transaction processing	Extenally sourced from whoever offers the best deal
Customer servicing	Extenally sourced from whoever offers the best deal

The top-down and bottom-up approaches are not mutually exclusive. The bottom-up approach can quickly identfy where external sourcing can be well utilized, and where it simply cannot. The top-down approach ensures outsourcing gets integrated into the business strategy. Your organization differentiates itself in the marketplace by the unique combination of which value chain activities you choose to outsource and which you provide internally. In this way, sourcing becomes an important management decision and not just an afterthought or casual matter.

The Outsourcing Revolution

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