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by sourcingfocus.com

Get the outsourcing basics right and it will be fine they said. Define your SLAs, dole out responsibilities, agree on deadlines stick ‘em in a contract and you’re away. Time to sit back and relax. But it was never really this easy to start with, and it is certainly not that easy now. Of course the basics still matter, but times have also undoubtedly changed. The SLA of yesterday may not suit today, the contract of yesteryear no longer fit for purpose, likewise the entire way companies approach outsourcing deals could be changing as we speak.

Deborah Kops of outsourcing expert WNS, thinks the industry needs to take account of the current economic situation, “In good times, the outsourcing of business processes can take a year or more to go from initial concept to implementation. However, in today’s environment, time is the enemy; the process can no longer be linear. If moving quickly to implement BPO is not seen as vital to the basic survival of the company, it will not produce the desired results.”

The importance of being able to implement new outsourcing arrangements rapidly is obviously vital in economically uncertain times. But what other changes are being driven through the outsourcing relationship to cater for today’s environment and what’s moving the deals from long-term to non-linear?

“The BPO industry has moved well beyond volume-based voice and data work into highly complex industry and insight processes - think securities trades, claims management or marketing analytics,” commented Ms Kops.

Ms Kops sees a rise in complexity of services being taken on by the outsourcing industry as a key change factor but also recognises the importance of cost is increasing in tandem. But if end users are increasingly demanding more complex services, will vendors be able to move to this level while end-users and the economic environment are demanding an increased focus upon cost? Trying to offer a more comprehensive strategic offering does not immediately seem to fit with the necessity of cost reduction. Such a deal would not appear very attractive to a vendor – becoming more important to clients whilst not getting paid more does not seem to make sense.

Research from BravoSolution, a provider of supply chain management services, found that 74 percent of organisations had seen an increased need for cost savings over the past 12 months. While a somewhat predictable research result, it does indicate that end users may be looking to ‘have their cake and eat it’ when it comes to their outsourcing suppliers. End users seem to be looking to squeeze suppliers on price whilst asking for higher value partnerships at the same time.

However, while vendors would appear to be getting a raw deal here, it seems that end users are prepared to put in the man hours to make the cost/value dynamic work. The BravoSolution study found that 38 percent of the 400 purchasing/procurement heads interviewed anticipated increased strategic input in procurement over the next 12 months. So end users are prepared to step up to the plate, where increased value is concerned, to work with suppliers rather than expect all strategic value to come from the vendor side. But are suppliers ready?

End users are certainly looking for a different kind of arrangement. Another study from Civica found that virtually all of 102 UK local authorities they asked view ‘partnerships with specialist providers as high priority or significant in local service delivery’. But Peter Lunio Associate Director of Baker Tilly, a management consultancy, commented, “Client organisations, and their CEOs, still expect too much from ITO/BPO vendors, and not enough from themselves.”

The industry is expressing a clear need to redress the balance of responsibility in outsourcing relationships - the outsourcing partnership, where each ‘partner’ is more heavily invested in a deal, may provide this opportunity. Complexity and heightened strategic value has been a theme running through the entire outsourcing industry for some time now. The move up the value chain (addressed in a recent sourcingfocus.com news analysis), represents a clear strengthening of specialised outsourced expertise and the increasing realisation of vendor aims to become almost indispensible to their clients.

Sanjiv Gossain, UK MD of Cognizant, explained where he thinks the industry is today, “Today we’re seeing a fourth-generation model [outsourcing relationship], which puts long-term business impact at its core. Characterised by seamless integration between provider and customer, IT providers taking this approach combine the cost-effectiveness of offshore production and the on-the-ground expertise needed to manage projects at the highest level, delivering the revenue generation support required by today’s CEOs.”

There are various new ideas floating around the industry that support Sanjiv’s ideas. One that seems to be taking hold is co-sourcing. The co-sourcing approach displays just those characteristics the industry seems to be searching for.

“Co-sourcing is based on a collaborative approach – creating an ongoing partnership between the client and the service provider. The client retains the strategic decision making such as technology refreshing, policy definition and architecture issues, IT strategy etc. The service provider takes over the day to day running of IT operations and provides recommendations on strategic aspects,” comments a spokesperson from HCL.

HCL developed a project along these lines with major pension provider, Skandia. The company used HCL to move from a legacy network to a next-generation SOA system. The co-sourcing approach allows Skandia to retain strategic control while HCL manages the network on a day to day basis. On an ongoing basis HCL also advises Skandia on strategy and technology investment decisions. HCL explains that co-sourcing is ‘changing outsourcing from a colossal process to one that is more piecemeal and flexible, moving away from the traditional monolithic models of outsourcing’.

It’s appears that with each new partnership-focused outsourcing deal, the dynamics of relationships are changing from both an end user and vendor perspective. Strategic involvement needed from both parties is needed. However, what comes with this is the need for increased trust, less stringently defined arrangements and the ability to develop and alter relationships rapidly to adapt to the business environment.

Peter Lunio, Associate Director of Baker Tilly, commented, “In my experience contracts with well-managed relationships based on trust - rather than stringent SLAs and penalties - are more likely to lead to a ‘trust dividend’ for both parties. Real trust is not naïve. It comes from planning, is steered by the right people, structures, processes and measurement, and is earned from performance.”
Whether the end users and vendors will be able to create these high-value, low cost relationships is a question that still needs to be answered. There will certainly need to be more focus on shared goals to drive changes through. As Udayan Kelkar, Senior Vice President of Sales and Business development, at Perot Systems, explains, “Despite the challenging economic climate, this is a buoyant time for specialist outsourcers as more companies look to outsource functions to strengthen their bottom line.”

He adds, “We’ve moved on from the days when defined contractual agreements were set in stone for the lifetime of a contract. We are now seeing a lot more outcome-based pricing decisions being taken by the outsourcing company from the outset. In reality, both the vendor and the customer need to have a symbiotic relationship where joint problem solving and working in collaboration is the norm.”

As Sanjiv Gossain of Cognizant mentioned, the industry is arriving at the ‘fourth generation’ of outsourcing deals. So, while there are few clear examples of this kind of outsourcing relationship, it’s likely a fair few are being signed now. A good thing for the industry is that all parties appear to be aiming in the same direction. The path to the strategic partnership is now laid, all that remains is for more vendors and end users to walk it.


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