Outsourcing 2.0: where cost savings meet innovation
Outsourcing can be a good way to offload business processes that aren’t adding to a company’s core value. But in a world where competition is constantly intensifying, are there any ways to drive innovation into outsourcing relationships?
Accenture thinks so, but it says that we have a long way to go before we get there. Research by the company in March 2014 found that two thirds of outsourcing stakeholders, from clients to providers, were still stuck in outsourcing contracts that focused on cost-cutting alone. Nevertheless, almost half (49%) of clients expected a wide-scale transformation of their business processes within the next two years.
moving beyond “lift and shift”
Clearly, there is a disconnect between the current “lift and shift” approach to outsourcing, and one where clients and outsourcers work together to find opportunities in existing processes. Information technology will be a key tool in making this leap, argues Liv Sandbaek, chief technology officer for Accenture Operations.
“Organizations are clearly beginning to recognize the value that an outsource provider can bring to the equation and are looking to achieve more strategic business value,” she says. “We believe greater use of technology and higher level technology skills will bring this about.”
One of the biggest challenges for outsourcers and clients alike in providing that added value is a short-term focus, warns Mark Peacock, IT transformation practice leader at The Hackett Group, a global business advisory and operations consulting firm.
“As you transition to outsourcing, the outsourcer is focused on a clean transition, and delivering a clean service level and keeping everyone happy,” he explains.
Organizations tasked with slicing away 20-30% of current operating cost as part of an outsourcing deal often don’t have the time or resource to understand the client’s business meaningfully enough. This puts them behind the curve when it comes to suggesting innovative process changes.
“That kind of tactical focus on the here and now, while good and necessary, is not sufficient,” Peacock warns.
Instead, more mature relationships must be formalized in contractual terms, says Bala Pandalangat, president and CEO of the Centre for Outsourcing Reach and Education (CORE).
“I am seeing certain contracts that have been in place for the last 15 years which specifically state that 1-2% of the savings that envisaged would be in terms of having innovative business processes and ideas incorporated,” he says.
The problem for many companies is that they plan outsourcing relationships using the wrong people, warns Charles Duffett, executive vice president and CIO of the Canadian Advance Technology Alliance (CATA).
“When we outsource things we use IT professionals to write the contracts and outsource them,” he says, arguing that this isn’t an IT role. “So typically, the outsourcing work we do is poor because we have poorly-written contracts that don’t allow us to innovate.”
Formalizing innovation as a process with a line budget forces organizations to think about where and how those breakthroughs will happen.
In many cases, the processes outsourced are often commodity areas, in which clients may see little potential for added value. Generally, companies want to hold on to value-added processes that give them a market advantage.
But you can often find innovation potential at the heart of an outsourced process. When Duffett worked at Alcatel, some of the major telecommunications companies outsourced the design and development of their hardware and software to his firm, he recalls. It’s hard to think of a more innovative thing to outsource than R&D, but they did it because it was cheaper for a third-party specialist to do it, and because service provision, rather than hardware design, was their core competency.
look inside the process
Hackett Group’s Peacock says that it’s crucial to decompose business processes, exploring them at a granular level and finding the outsourcing opportunities within each of them.
“It takes an effort to decompose those activities and the hard work not to be intellectually lazy,” he says. IT is well-placed to steer things here because of its rare position, he adds. As a foundational partner providing technology systems it has a visibility into all enterprise processes.
The truly savvy outsourcing client will be adept not just at dissecting processes, but at joining the dots. Accenture’s Sandbaek says that innovation should be considered across end-to-end business processes, rather than just the part handled by the outsourcer.
“In high-performance business process outsourcing, client and provider work together on process consolidation, rationalization and standardization across business units and geographies, and this often includes centralization of services,” she explains.
In this way, outsourcers can take over the processes of the client’s business that offer little value, but the two parties will understand more intimately how those components fit together with in-house ones. They can then work together over time to find new opportunities.
solid platform for innovation
Underpinning all of this is the use of resilient digital platforms, says Sandbaek. On-demand and cloud computing have created new, efficient platforms on which these value-added relationships can be built.
Digital analytics should be a featured resource on these platforms, as this is a key way to improve business performance. And another key element is a collaboration platform of connected information workers to use these tools, she suggests.
“Manage a digital innovation ecosystem comprising multiple partners to incorporate the latest available technologies,” she advises.
This outsourcing platform sounds quite unlike many of those that we have seen in the past. But it’s a key way to gain visibility into the effectiveness of a particular process, and then to discuss ways to transform it - regardless of which parts you’re running. Welcome to outsourcing 2.0.
Find out more about how Orange Business Services works in partnership with customers to drive innovation here.