Outsourcing Unlimited

Instead of just outsourcing disparate
functions, firms are now putting their entire business processes into shared service providers.
Sadly, however, NZ firms are users rather than niche providers of outsourcing services, says Sarah Adam-Gedge, partner with PriceWaterhouseCoopers.
In fact, she says, increasingly the services are being shared across organisations and often from offshore.
Take the pharmaceutical model. Brand offices of global players find their IT and marketing functions shunted offshore where they can pool shared resources with sister companies. More often than not, to Sydney, Melbourne or somewhere in Asia, leaving the firm with little more than salesforce in New Zealand. Even then the warehouse operation is likely to be handled by third party logistics provider.
“The inability of many organisations to achieve ‘critical mass’ alone is forcing companies to bring parts of the supply chain together and develop critical alliances to lower operating costs,” says Adam-Gedge.
So with population still shy of four million, can we ever hope to overcome critical mass issues?
If you share Adam-Gedge’s view on the impact that IT — and of course e-business — is having into long-standing business practices, the answer’s likely to be yes.
“E-business allows even smaller companies to create critical mass. It’s also challenging companies to become clearer about where their competitive advantage really lies. Consequently they’re less paranoid about outsourcing those areas which were previously deemed ‘sacred’ and could only be done in-house,” says Adam-Gedge.
It’s commonplace for NZ firms to outsource in areas where they have typically never competed; back-office, administration such as debt collection, payroll, HR and procurement, and some aspects of the financial process.
But it’s e-business that’s expanding the tail of this outsourcing curve towards more front end practices like logistics, property services, call centre management and even up into the marketing and customer services arena, especially within the consumer products and industrial sectors.
What’s driving this says Adam-Gedge is the greater flexibility that e-business offers. She adds, it’s also the by-product of prevailing view that business in the 21st century is continuum of time critical projects that don’t require full-time resource to complete.
“What e-business does is push non-core functions down the supply chain while preserving company’s interface with its customers.
“More companies realise it doesn’t matter how the service is delivered as long as it delivers effectively and meets customers’ needs. Future outsourcing trends will evolve on the back of the benefits that technology and e-business can offer.”
Michele Caminos, research consultant with the Gartner Group’s Data Quest, shares Adam-Gedge’s sentiments. “The Internet is dramatically reducing transactions costs and this can change the optimal size of the firm,” says Caminos.
“Firms are going to outsource more than ever before. Already we’re seeing this with such functions as payroll, travel and manufacturing. The next outsourcing frontier is likely to be IT-related, especially in the area of data storage, LAN and desktop management.”
She says the by-product of the corporate naval-gazing over core competencies is willingness to accept outsourcing as natural extension of their business. “A lot of companies look at outsourcing as strategic part of their business model that’s being driven by the CEO or the CIO.”
If true, how do you participate in the outsourcing revolution and if you don’t participate, will it tarnish your competitive advantage over time?
The l8 months Telecom NZ spent researching outsourcing viability suggests that’s distinct possibility. The company’s recent decision to hand most of its IT functions to IT outsource provider EDS was made on many levels. Peter Finch, general manager (information services) says outsourcing to EDS will mean significant cost reductions over time.
But what was more important, he hastens to add is the transfer of best practice. In other words, service delivery improvements will enable Telecom to compete globally in the business and e-business environment, key mantra behind its future growth.
“We saw other telcos forming similar relationships with IT organisations offshore and decided it would help rollout the IT infrastructure needed to compete in the e-business domain,” says Finch.
Telecom’s applications development, management of data centres, LAN and desktop management, plus field support are now handled by EDS.
Telecom still manages its data network internally and has retained responsibility for overall strategic direction. But Finch says keeping the reins on strategic direction requires constant vigilance on how the outsourcing relationship is maintained.
But Caminos says companies under-estimate the process of managing change and the impact on staff and customers at their peril.
“Organisations that don’t manage the changeover to third party outsource providers risk having to bring the function back inside at later stage. And more often than not it’s horrendously costly.”
Caminos says the Commonwealth Bank’s (Australia) decision to outsource its entire IT division to EDS was made for similar reasons to Telecom. They didn’t believe they would be able to remain a) as efficient in back-end processes or b) as competitive in the rollout of e-business without the global reach this third party could supply.
“There’s still lot of confusion over what approach organisations should take to outsourcing. Some formalise their outsourcing philosophy while others are more ad hoc. The biggest danger is deciding to outsource before assessing the direct impact on the internal organisation and its customers,” says Adam-Gedge.
For example, once Telecom concluded there were benefits in outsourcing IT, it spent another 12 months evaluating the two organisations (EDS and IBM) that it felt could deliver the right outcome.
“In fact, learning more about the two contenders led us to analyse our internal environment more closely. This became critical to putting the right outsourcing in place,” says Finch.
Senior management’s ongoing need for robust outsourcing analysis has spurred companies like PriceWaterhouseCoopers to establish business process outsourcing (BPO) consultancies.
Kevin McCaffrey, another Price-WaterhouseCoopers partner, says rigorous analysis similar to Telecom’s has led many firms to widen their outsourcing brief into areas mistakenly considered tributary to competitive advantage.
McCaffrey says the key to identifying and unleashing e-business opportunities is developing good guidelines for dealing with third parties. “Unlike Telecom, too many companies fail to grasp good understanding of service delivery before outsourcing. When done purely on cost basis, outsourcing can tarnish both customer and shareholder value.”
He argues the real issue is knowing what to outsource and the deliverables derived. It’s now considered OK to buy-in specialised knowledge. But what’s also made the decision to outsource easier, is migration to “best practice”.
“It means more outsource providers are regional and international players and consequently much higher up the knowledge curve than they were five years ago.”
For example, while banks are outsourcing their facilities property management, they’re also becoming out-sourcing providers of treasury services. In both cases the rationale for outsourcing is the same. If someone can do it better and cheaper and it’s not deemed core business, why do it in house?
What’s spurred the migration to outsourcing (corporate) facilities management, says John Dunn, director of Jones Lang La Salle, is the preoccupation with maximising efficiencies across the business and getting better return.
Dunn suspects that as facilities management becomes increasingly more electronic in its delivery, the argument to outsource will become even ha