Outsourcing to the core

What are the emerging opportunities in business support services and which of these are appropriate for your company? Outsourcing...

What are the emerging opportunities in business support services and which of these are appropriate for your company? Outsourcing and IT services analyst John Willmott offers some pointers.

When business support services first emerged about ten years ago, the emphasis was on separating businesses into "core" and "non-core" activities. "Core" activities were defined as ones that were critical to the organisation's success and "non-core" activities were defined as supporting activities that could be outsourced to avoid management distraction.

Unfortunately, there were a number of flaws in this logic. Firstly, it is difficult to decide what is "core" and what is "non-core". For example, good catering could lead to high staff retention while dreadful catering could lead to loss of key staff. Hence, catering policy and delivery could be identified as a key competitive factor.

Secondly, how does an organisation handle activities that it knows are "core" but which lie outside its capability. Thirdly, stable "non-core" functions will never be worth the board's attention and so will tend to stay in-house. The process has to be causing some organisational "pain" to be worth fixing.

Accordingly, organisations no longer attempt to separate their processes into "core" and "non core" as the basis for outsourcing. Instead current process quality and cost-effectiveness are the key criteria, and UK organisations are now planning to adopt business support services for any process where there is a considerable gap between process importance and process satisfaction, including:

Back-office support services, eg. accounting services, HR services, indirect
"The need for change has to be great enough to make the pain of contractual negotiations and service hand-over worthwhile"
John Willmott
procurement services
Middle-office industry specific service delivery services, eg. for the banking sector: cheque processing, mortgage processing, loans processing
Front-office customer management services, eg. call-centre services, contact centre management, fulfilment

However, cost reduction for its own sake is a recipe for disaster, whether carried out at corporate level or within an individual function, and can be oversold by vendors. Process improvement over time is important in even the most basic of functions, and, as we descend this list of processes, the emphasis on process improvement increases and the emphasis on cost reduction decreases.

The key drivers by process are:

  • Back-office support services: A need for (global) process standardisation, and cost reduction including the avoidance of investment by adopting a pay-as-you-go model

  • Middle-office industry-specific line of business processes: A need for service improvement, a desire to reduce process costs including use of process investment sharing, and a focus on retailing rather than service delivery

  • Front-office customer management services: A need for improved customer handling and service and hence improved customer retention. Cost reduction rarely appears as a factor here.

So what processes should your organisation seek to outsource and which areas are attractive to vendors? Some typical current scenarios by process and sector are as follows:

  • Accounting services: High interest in the manufacturing and utilities sectors, driven by the manufacturing sector seeking to develop consistent global accounting standards and the utilities sector seeking to tighten financial controls, particularly in regulated businesses

  • Line of business processes: High interest among banks and telcos. The banks wish to become retailers and will increasingly source third party product administration. The telcos need to re-establish their growth on the back of new services, but can't currently afford to finance new services internally

  • Customer management services: Many sectors need to improve their management of one or more channels. For example, insurance companies and retailers need assistance in supporting new channels to market as they seek wider customer coverage

What inhibits use of business support services? There are two main factors: inertia and lack of vendor capability. In the first case, the need for change has to be great enough to make the pain of contractual negotiations and service hand-over worthwhile. Organisations rarely outsource processes solely to shave a few percentage cost points from a static process.

Secondly, organisations purchasing business support services need to be convinced of the vendor's operational capability. Organisations typically aren't looking for consultants who talk a good game, instead they require an organisation that has proved that it can deliver operational service to a high standard day-in and day-out.

So what factors do vendors need to succeed in business support services and what criteria should users adopt in selecting a vendor? In order of priority, these are:

  • Proven operational capability and high service standards in the process being considered for outsourcing

  • Strong IT capability in the process area. In back-office support areas, this may mean strong ERP capability in PeopleSoft or SAP. In line of business processes, it may entail access to specialist industry applications. In customer management services, it may entail customer analytics and the ability to integrate channel management with the client's systems

  • Ability to add business value - typically process improvements at a reduced process cost

  • Sound commercial judgement and business practices

  • Strong team management capability

In the short-term, lack of vendor capability will be a more significant factor in inhibiting growth in business support services than lack of client demand. Overall, the acid test is not what a vendor says they can do but their current operational performance.

John Willmott is managing director of NelsonHall, an analyst company specialising in business process outsourcing and IT services. He has analysed developments in business process outsourcing for the past decade.

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