Recent data from Forrester Research predicts that there
will continue to be a stream of large outsourcing deals despite the
global recession. The same report also highlights that clients who
impose their legacy processes, systems and applications on the
outsource vendor, at the expense of good deal architecture,
implementation, and ongoing governance, are often disappointed by
results, writes Harry McDermott, CEO of Hudson &
Yorke.
These findings are consistent with the reality of the current
outsourcing landscape. Organisations undertaking outsourcing
programmes vary widely in terms of experience and expectations.
Generally speaking, candidates for outsourcing deals fall into two
camps: first generation outsourcers and second generation
outsourcers .
A first generation outsource (1GO) deal, which applies to
organisations that have not previously outsourced, is usually
driven by cost optimisation. Executed correctly, taking into
account the challenges of managing business change and the
transition of people, assets and third party contracts, a 1GO deal
can generate savings of 20%-30%, and sometimes even more, against
the operational cost baseline over a five year contract term.
Second generation outsourcing (2GO) applies to organisations
that have previously signed a 1GO deal which is approaching the
expiry date, and who wish to put a new outsource contract in place.
The crucial point to emphasise is that a 2GO deal will never
deliver the same cost savings as a 1GO deal because most of the
cost savings will already have been delivered during the first
generation of outsourcing. As such, the goals of a 2GO deal must be
different to those of a 1GO deal, focusing on governance, operating
model, service quality and innovation. The client should not expect
a 2GO deal to deliver another step-change improvement in the
operational cost run rate.
A major factor in maximising business benefit from 2GO
outsourcing contracts hinges on the decision whether or not to
continue working with the incumbent 1GO vendor. The implications of
this decision are significant because of the many challenges in
placing a new contract with a new vendor.
These challenges include the competitive sourcing process to
select the new 2GO vendor and the business interruption of
transitioning from the 1GO vendor to the 2GO vendor. In addition, a
2GO deal may involve disaggregation of the original 1GO deal, for
example splitting a 1GO 'mega-deal' into selectively sourced 2GO
modules.
For these reasons, first generation outsourcing represents a
tremendous platform for a successful client-vendor relationship. If
implemented successfully, the outcome is a high degree of
client-vendor interdependency and tangible realisation of business
benefit.
In this scenario, the reasons for the client to execute a 2GO
deal with the incumbent vendor are compelling. In contrast, a
poorly implemented 1GO deal can leave a deep scar in the client
organisation, potentially even putting the client off the concept
of outsourcing for the long term. This can result in a complicated
reversion to insourcing, thereby undermining years of effort
invested by client and vendor alike to deliver the benefits of the
original outsourcing business case.