There is a lot of talk these days about the rationale
for outsourcing migrating from cost to quality. But ask the CEO or
board of most large companies for their primary motivation in
signing an outsourcing deal, and cost savings will not be far from
the top of the list.
The fact is, people do not outsource without a business case for
doing so. And whatever other elements go in to making up a business
case, cost has to be one of them – even if it is not necessarily
the foremost driver.
However, the cost equation itself can vary widely between
different deals, reflecting the wide variety of reasons why it
might cost less to have someone else handle your IT or operations
than doing it in-house. Economies of scale and standardisation can
dramatically reduce the cost base. And there is the option of going
offshore to a lower-cost environment – a cost play that can also be
a political and industrial hot potato.
In this context, it is important to remember that outsourcing
and offshoring are different decisions. Companies are not obligated
to rely on a third-party supplier to tap into the wage arbitrage
and cost benefits of going offshore. But confusion over this whole
area has created a widespread public perception that outsourcing
and offshoring are the same thing – when of course they are
separate strategies, but are sometimes used in combination in what
some call a best-shore outsourcing model.
Beyond the cost motivation for outsourcing, a second driver that
we are seeing increasingly in deals is reshaping of the business
for strategic reasons. A lot of major businesses have improved
their performance by using outsourcing to focus more tightly on the
areas where they add most value, and using third-party specialists
to handle non-core areas.
Here again, the picture is not as simple as it might seem.
People used to say you should keep core activities in-house and
outsource the rest. But some capabilities that are core and
absolutely critical to your business – IT being a prime example –
might still be handled more effectively and efficiently by someone
else.
For other instances, look at the motor industry, where the
manufacturing of vital components is contracted out, or at the
trend in financial services towards outsourcing customer contact
and distribution in order to focus on branding and product
“manufacturing”.
A further increasing driver for outsourcing IT and other
functions is the need to meet increasingly stringent and costly
regulatory requirements. Once again, financial services emerges as
a prime example. In areas such as payments, many financial
institutions lack the specialist skills in-house to comply quickly
and cost-effectively with regulations such as the Single Euro
Payments Area (SEPA) – and outsourcing is a logical way to access
the necessary capabilities.
Finally and very significantly, as major European cross-border
merger activity is at its highest in a decade, mergers and
acquisitions are becoming an increasingly prominent driver of
outsourcing decisions. Post-merger integrations present a unique
opportunity to decompose and recompose processes across the merged
entity, as well as allowing those processes to be redesigned and
reengineered to deliver higher efficiency and/or service
quality.
Increasingly, the solutions considered for this purpose include
outsourcing of enterprise-wide functions to an “industrialised”
provider of services ranging from IT, to HR and credit services.
The benefits can go beyond better and cheaper operations, since an
outsourced supplier can bring the added benefit in a post-merger
situation of being politically independent of each merger
partner.
Looking forward, with businesses’ primary focus shifting from
controlling costs to generating more revenue, we believe the
motivations for outsourcing will continue to evolve. Specifically,
outsourcing techniques are being used as a way of driving revenues
upwards and speeding up “time-to-value”.
Recently, we have seen cases where outsourcing has demonstrably
shortened the time it takes a company to achieve the business
objectives it has set itself. In doing so, outsourcing has actually
enabled these businesses to reduce the level of risk in their
operations – a far cry from the traditional view of outsourcing as
being all about cost reduction but with an increase in risk.
Having said that, the need for a robust business case means cost
considerations will always play a part in any outsourcing decision.
But boards need to look well beyond the costs trigger – and more
and more are now doing so.
Jean-Louis Bravard and Robert Morgan are authors of “Smarter
Outsourcing”. Robert Morgan is a founder director of sourcing
advisory firm Morgan Chambers. Jean Louis Bravard is managing
director at EDS Global Financial Services Industry.