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TalkingPoint: Current Trends In Outsourcing « Back
July 2012
FW moderates an online discussion on current trends in outsourcing between Larry Calabro, a principal at Deloitte Consulting LLP, Alistair Maughan, a partner at Morrison & Foerster, and Joshua Konvisser, a partner at Pillsbury Winthrop Shaw Pittman LLP.

FW: In the current economic climate, are you seeing an increase in companies seeking to outsource certain functions to reduce costs? What advice would you give to companies in terms of developing an effective outsourcing strategy?

Calabro: Outsourcing of non-core business functions has continued to increase in the current environment. However, while the first couple of waves were focused on leveraging the labour arbitrage, suppliers are now looking to outsource greater proportions of a process and have the supplier take responsibility for the business outcomes. For developing an effective outsourcing strategy, a company should address two fundamental dimensions: First, selecting the ‘appropriate processes’ that are ready to outsource, i.e., have a baseline, defined outcome and appropriate documentation. Many critical functions are often deemed core – but if they do not create differentiation in the market, they can be outsourced – for example, 100 percent uptime on a retail website. Secondly, selecting the ‘appropriate/specific provider’ that is able to understand their business drivers and address their core business needs. They should establish a transparent and flexible relationship with the provider and set clear expectations and metrics to measure their effectiveness.

Maughan: Cost reduction has never gone away as one of the main reasons why organisations outsource. It has always been one of the top two items on the list of reasons to outsource – along with ‘raising quality’. Over the past few years, we have seen a lot of outsourcing restructuring projects where the overt target has been to reduce the costs of existing outsourcing transactions. This involves removing some of the higher cost elements and risk factors as part of an informed discussion with an existing outsourcing service provider. Whether in relation to first-time outsourcing, second generation outsourcing or outsource renegotiation, clear understanding and communication of the reasons underpinning a project remain key to developing an effective outsourcing strategy. Embedding that rationale in the business case and outsourcing relationship is a fundamental part of any successful outsourcing project.

Konvisser: Conventional wisdom is that when there is significant economic pressure, companies will look to outsourcing as a way to reduce costs. In fact, the economic climate does drive companies to explore outsourcing. That said, putting in place an outsourcing tends to be itself a material project that needs to be funded. Although one ‘needs to spend money to make money’, when budgets are tight, it actually becomes harder to complete an outsourcing transaction. Moreover, in addition to the project costs for an outsourcing initiative, there is also usually an up-front transition cost that again requires investment in the near-term for mid- to long-term savings. While providers used to be willing to finance this up-front investment into the ongoing rates, increased accounting scrutiny has made this practice less common and, where it is done, the financing charge may not be attractive to the client. In contrast, we have been seeing an uptick in traditional IT investment where incremental automation efforts can bring efficiencies without all of the inherent costs of a transformational outsourcing. In addition, as the economy opens up, we are starting to see a resurgence of outsourcing activity.

FW: How should companies go about selecting the right outsourcing partner? What background checks and due diligence would you recommend?

Maughan: Size matters a lot less than it used to. Selecting the right outsourcing partner is all about fit and feel. It seems like a lifetime ago since we saw full scope end-to-end outsourcing of a range of diverse services to the same outsourcing services provider. Most outsourcings now are targeted to particular sets (towers) of services in which the selected service provider has a great track record in that particular service scope. Obviously, verifying the outsourcing partner’s background and expertise in that tower is essential. We still see clients conduct reference checks with existing clients. It’s important to assess the service provider’s management approach as well as its service delivery history. Also, more than ever, doing suitable financial stability checks is important to make certain that you chose a long-term viable partner.

Konvisser: An adviser can be very helpful in narrowing the field of outsourcing providers. In addition, references are indispensable. One mistake we have seen is that a request for proposal will require the prospective providers to list references, but the client does not actually follow up with the references. These calls can be invaluable as most references—even very positive ones—will identify potential areas of weakness. Clients should also think carefully about the scale of their provider—bigger is not always better – the provider should have sufficient size and scale to address the client issues, but should be of a size that the client will be an important enough account and not become lost.

Calabro: A factor to outsourcing effectively is finding a partner who can execute not only on cost but on business objectives. The vendor should be able to demonstrate the breadth of qualifications in similar situations for that scale. The vendor should be able to relate to the client – industry, process, people – and build flexible models to map to business requirements. It is important for the vendor to demonstrate that they can help reduce ‘total cost of ownership’ as opposed to ‘unit cost’ while maintaining the ability to innovate and improve your applications and processes. Site visits, reference checks outside of those provided by the supplier, and drilling down on industry experience are all very useful. To gauge senior level commitment from the vendor it is important to get beyond the sales team and understand in detail how the delivery team will be structured as well as the team members’ capabilities and fit with the company’s need and culture.
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