FSN: Is it time for Chief Outsourcing Officers to take centre stage?

Is it time for Chief Outsourcing Officers to take centre stage?

8th May 2006
With predictable regularity, outsourcing surveys forecast rapidly growing markets and the usual litany of disasters and reasons for disappointment. Outsourcing advisors generally point to companies overriding obsession with driving down costs as the main reason for failure, but there has been a notable shift in the last few months to recognising that behavioural issues and the manner in which outsourcing relationships are managed are much more influential on outcome. So who should manage the outsourcing relationship? FSN examines the arguments.

According to Orbys Consulting, a sourcing advisory firm, the outsourcing market is now a $4 trillion per annum business and the typical outsourced budget is forecast to grow from 24-34 percent over the 12 months to the end of 2006. Indeed, the latest figures from TPI, another outsourcing advisor, says that 2006 to date has seen the largest number of outsourcing contracts ever signed in the first quarter of the year. So far this year, 83 contracts have been signed valued at over €18 billion compared with 76 deals valued at just over €13 billion at this point last year. Excluding restructurings, 64 contracts valued at €12.1 billion have been signed so far this year compared with 61 contracts valued at €10.8 billion a year ago.

This strong quarter is due in part to the rise in the number of contracts being restructured. However, even when restructurings are excluded, the number of contracts signed so far this year is still a first quarter record., says TPI.

Underlying this strong growth has been an increasing tendency towards smaller, more controllable outsourcing contracts and a sharp move away from the mega outsourcing deals which marked the last decade. Peter Moller, partner in charge of UK outsourcing advisory services, at Deloitte, the accounting and consulting firm, told FSN, that the growth in outsourcing is being driven by factors on both the demand and supply side. “There are far more outsourcing providers now than ever before. The low cost of internet technology, allied to better communications and bandwidth is encouraging a number of new outsourcing providers with niche products to come into the market. Secondly, the very low cost of labour in India ,makes it possible for outsourcers to make their margins and for clients to save money.”

“On the client side, buyers are much more sophisticated and looking to extend outsourcing beyond IT and into other functional areas of business. But they are looking at smaller deals because they are wary of being held ‘hostage' by suppliers, there has been a loss of confidence in large projects and the balance of power has not been working,” he added.

This seems to be confirmed by Orbys Consulting's latest survey of large UK companies in the finance, retail and manufacturing sectors which shows that just over half (51 percent) are managing at least 4 outsourcing contracts each of which are valued at £5 million, or more.

It remains to be seen whether smaller contracts yield higher levels of success in outsourcing. Intuitively, one expects smaller contracts to be easier to manage but overseeing a larger number of interdependent contracts sourced from different suppliers presents its own challenges and Orbys Consulting's research highlights the lack of overall governance and supervision as being a problem. Only 59 percent of the companies they surveyed had a framework in place to define the interfaces between these different suppliers and only 16 percent had any kind of multiple supplier incentive scheme.

In common with most other surveys, the Orbys work remind us that the reasons for failure are often a mismatch between supplier and customer expectations, insufficient attention being paid to governance and the relationship, and an overriding concern with cost reduction and managing the terms of the Service Level agreement (SLA) rather than creating the conditions for a partnership and extra value creation. Unsurprisingly, the most effective way of managing errant projects is to re-negotiate with “the stated intention of re-tendering”. As unusual, it is the financial consequences on both sides of the fence that are most effective in concentrating minds on the matters in hand.

Although there are countless reasons why outsourcing contracts go off the rails it is clear that management, or the lack of it, is the primary cause. Various attempts have been made to suggest management models that could be helpful in reducing risk. These tend to rely on more of a partnership principle where the parties entering the relationship set up more comprehensive governance structures and management teams which seek to build a longer term relationship under which suppliers are encouraged to add value through, for example, innovation and new technology.

Vineet Nayar, CEO, HCL Technologies, an Indian outsource provider believes there has been a radical shift in the market. He told FSN, “Large, long-term IT outsourcing worked when there was an expectation of escalating IT costs and skills were in short supply but these conditions no longer apply. We are now moving to a co-sourcing model which provides customers with a high level of control whilst still being able to produce significant cost savings.”

The co-sourcing model is about collaborative working and sees the outsourcing supplier providing much more in the way of advice as well as delivering traditional services. “By working together, HCL and its customers can save more money,” says Nayar. “Rather than simply outsourcing existing applications, we can look more creatively at whether the applications are still needed, whether, for example, they can be streamlined and consolidated and ultimately whether savings can be made on data centres and infrastructure. By working collaboratively the customer can make greater savings whilst still retaining control of the strategy and important contract variables,” he told FSN.

But in this complex new world of co-sourcing and managing larger numbers of projects, what kind of skills are needed? Nayar, prefers the term “Engagement Officer” to “Chief Outsourcing Officer”. Commenting to FSN he said, “You need to have someone who is going to engage and create value from the relationship. Co-sourcing is a conscious effort to drive more value out of outsourcing arrangements. The ideal person does not come from finance or from the contractual side but is first and foremost a business manager.”

Nayar favours the hybrid model of a business manager steeped in IT and notes that more IT functions seem to be managed by business managers. “The outsourcing market is large enough to supply the necessary skills.” But others are less convinced.

Peter Nowottny, chairman of Orbys Consulting, told FSN, “In the past, sponsorship of outsourcing followed functional lines, so that IT outsourcing was managed by the CIO. But now we are talking about multi-sourcing with activities across HR, Finance and industry specific areas. I believe that procurement directors probably have the best skill set to manage outsourcing relationships.”

Deloitte's Moller agrees. “Procurement managers have progressed from buying widgets at the lowest possible cost to purchasing very complex services and business processes. In a large scale organisation it is probably worth having a full time outsourcing professional. It's important because we have seen that along with outsourcing, a number of organisations have lost the skills they had to the outsourcer, so when it comes to re-negotiation they do not have anyone in-house who can say whether the new contract they are being offered is good value or not.”

As for the availability of skills, Moller says that there is definitely a shortage. “The problem is that organisational structures tend to lag changes in the marketplace by about three years. So the people needed now are just not in place,” he remarked.

Perhaps it is not surprising that views on who is best placed to manage outsourcing arrangements are varied. The market is extremely dynamic and much depends on the individual needs of the organisation itself. Nevertheless, it is clear that outsourcing is becoming more challenging and strategically important. Governance and conduct of these projects needs to be managed carefully if the pitfalls of the past are to be avoided. The time has arrived for organisations to wake up to need to manage these arrangements more closely and take a more professional approach.

Related FSN articles

Are the “Big Six” of outsourcing an endangered species?
Relationship management could hold the key to successful outsourcing
Interview with Guy Warren, CEO of LogicaCMG ( UK )

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