Despite a widespread desire to shift the outsourcing agenda away from cost reduction and towards enabling enterprise agility, the immaturity of both outsourcing customers and suppliers is acting as a barrier to change.
This was one of the key findings of a panel of experts at the National Outsourcing Association’s conference in London on Friday 19 November in a discussion entitled “What are the Prospects for Outsourcing?”
David Lacey, director of information security at the Royal Mail, explains that, although many organisations consider it increasingly important for their outsourcing arrangements to be flexible enough to keep up with organisational change, the problem is that both they and their suppliers still look at things in terms of functional silos, whether that be IT, human resources (HR) or finance.
“Outsourcing contracts comprise a set of silos, but the question is how to get synergy between them, how to get common services, applications and infrastructure and how to do that across functions such as HR etc. We and the suppliers don’t know how to do it because of a lack of maturity,” Lacey says.
John Wilmott, managing director of business process outsourcing (BPO) consultancy firm, Nelson Hall, agrees, but indicates that most providers are not able to supply a full range of BPO services across different silos let alone offer cross-functional services that include an IT element.
For instance, says Wilmott, while it may currently be possible to outsource the entire IT function, if desired, the same is not true of areas such as human resources (HR), which comprises as many as “30 processes with diverse characteristics”.
“No one can look after them all yet because the HR market in itself isn’t mature at the full service level. You can see platform synergies and that things are shared in some areas, but most vendors aren’t mature enough to do everything,” Wilmott says.
The same applies for those customers wanting to undertake outsourcing at the global rather than the local level. Rob de Ridder, head of global operations for cash and payments at ABN Amro bank, explains: “There are only a few services that you can outsource globally such as IT, but others are very local. We’re constantly reviewing our outsourcing model to see where we’re good and where there are opportunities, but sometimes we just can’t find the people.”
The situation, de Ridder adds, is a very mixed one across diverse territories, however, and even though there are pockets of expertise, things are very different in different countries.
As for offshore outsourcing, de Ridder says that, while there is a wealth of suppliers in the IT space that are keen to move into BPO service provision, the same cannot be said the other way around.
However, he does not believe that “we’ve seen the end of offshore outsourcing yet” and expects providers here to move into “more knowledge-intensive” and less utility-oriented areas over time.
Although Wilmott indicates that more than 70% of all offshore BPO contracts currently deal with inbound invoices and data entry, he too believes that the undertaking of higher value tasks such as knowledge management, for instance, is likely to move abroad as providers start going after markets that are currently controlled by more traditional onshore players.
Lacey, meanwhile, says: “I see no problem with offshore companies developing proactive skills and going higher up the value chain. They’ll tend to the higher end, whether it’s IT or BPO, and the only barrier will be the imagination of the provider.”
This means, in his opinion, that “the future is in countries such as China and India”, particularly because outsourcing has not unfolded in the West in the way that he formerly anticipated.
“I was optimistic several years ago that outsourcing was the way forward for things like security, identity management and the like, but it’s not happened as no one, neither customers or suppliers, are mature enough. In fact, we’ve only just scratched the surface,” Lacey says.
But to make the offshore model work when tackling higher value tasks, Wilmott believes that players will need to set up more onshore operations, whether this involves establishing an organisation of their own or working in conjunction with other onshore players, in order to liaise with customers more effectively.
At the customer end, however, Lacey feels that it is crucial to maintain “visibility into what’s happening because for issues such as Sarbannes-Oxley, you have to take responsibility for risks.” This means that constructive relationship management is essential as is feeling able to trust your supplier.
“Trust has to be acquired and you don’t get it overnight. You start suspicious and everything is written down, but the more you get to know each other, the better you all respond,” he says.
De Ridder agrees, but points out that “if either side is overly commercial, you’re in trouble”. This means that if customers walk in and demand a 40% price cut as their opening gambit in initial negotiations, suppliers will eventually take their best people off the job when a more lucrative contract comes in, which can lead to lack of continuity and bickering.
“There’s no such thing as outsourcing without a cost element, but it’s a temporary advantage for a certain period before the cost advantage goes away. This means that there has to be a focus on quality process improvement. You simply have to work together to get through any difficulties, but if you hide from them, you’re in trouble,” he says.
As to whether recent moves by organisations such as Sainsbury’s to insource its IT operations constitutes a trend for the future, however, Lacey is ambivalent. “It works both ways and contracts move back and forth. Some people like the Royal Bank of Scotland can make things work in-house, but we were successful in outsourcing and downsizing at the same time. Both approaches can work if they’re managed properly,” he says.
But there is a definite need for innovation to start making itself felt in the outsourcing world if enterprises are to achieve the organisational agility that they require, he believes.
“We need smart ideas longer term from all outsourcing providers and we’ll listen if they’re compelling, but that’s as likely to come from the Far East as it is from the UK or US,” Lacey concludes.