Sector Expansion

Many organisations have looked seriously at what really constitutes core business activity and are responding to their findings by channelling both effort and funding from non-contributory functions into areas that will deal better with competitive challenges.

In 2003 the outsourcing sector is growing and is set to continue to expand, significantly in some areas.

Vehicles, fulfilment and distribution, catering, security are only a few of the examples of well established outsourced services where – apart from the savings opportunities – managing these areas has become increasingly specialist, with technology, legislation and scale driving management demands.

As experience in managing outsourced service grows and confidence builds in the Companies using them, so the search intensifies for further non-core candidates in the business to transfer to specialist shared service providers.

The often promised savings of up to 25% are generally realised by those organisations not already running at optimised levels. 10% gross might be a more realistic target. But, as the Outsourcer has profits to make, so a nett of 5% may be more typical where full Service Vendor Management is not applied.

Given that activities for outsourcing are big cash drainers, however, that 5% may mean a lot to the bottom line. But the real benefits may come in other areas. Like leasing or renting, the opportunity to divert capital to competitive activity and new product development is considerably more attractive than funding a utility activity like Distribution or Security.

A further, and often the biggest benefit - is the removal of the distraction factor. Non-core activities do not just demand cash but Management time too. Experience shows that the intervention demand for –say Distribution – is often higher than Marketing. But rarely does Distribution in-house give competitive advantage.

Outsourcing is set to continue to grow, with a Forrester report indicating that in 2003, a further 3% of very large companies will outsource processes such as supplier payments, billing and collection and 84% will spend more on web services already in use. These, in addition to the traditional outsourced functions.

The performance of Capita, the company behind London's congestion charging scheme, supports this growth scenario. In a year bleak for most, the Company reported exceptional financial results for 2002. Proving its position as a leading player in the UK business process outsourcing (BPO) market, Capita announced a 36% rise in pre-tax profit to $156.8 million, on revenue up 30% at $1.4 billion with new contracts signed in the year up from $1.2 billion to $1.8 billion

A key enabler in all of this growth is emerging in the Internet. As security improves and skills in managing the web increase, cost and pressure for effort efficiency are pushing companies to extend the boundaries into outsourcing things like Business Processing – like sales orders, billing, collection, inventory management and accounting.

To support this, the Technology Sector is gearing up to meet what will probably be a doubling of service demands for Outsourced Business Processing. In the US alone aggregate spend of $225Billion in 2006 is predicted – over twice the 2002 figure.
This level of spend in one sector of outsourcing alone raises suspicion in most CEOs who may see this as another raid by the Technology Industry on investment budgets already laid bare by the most recent technology and telecoms led gold rush.

And, as outsourcing initiatives grow in complexity, as the potential rewards grow – for both the outsourcer and the service providers – managing these opportunities requires a secondary level of expertise that is building in Vendor Management.

Vendor Management

In the same way that the best Service providers tend to have excellence in Relationship Management – excellence in Service Vendor Management (SVM) is the key to Client success, getting the best out of the Service Provider and securing confidence in those once bitten CEOs.

Typically, those Companies who are getting the most from their outsourcers are employing the best elements of US-born Vendor Management – directing service providers in much the same way that best-practice Manufacturing procurement has been run for many years – but with the high level technology twist.

These Vendor Management functions build and control infrastructures to monitor and regulate services and where Internet based services are applied they will be securing and validating the base technology and imposing operating standards to routinely track business flows.

Many organisations have, historically, not evaluated the impact of outsourcing following initial contract award and are now seeking help in doing so to leverage the strategic decision to have someone else do the work, to and to on the initial promise and – very important - manage internal expectations.

Managing Outsourcing is still a challenge for many but audit skills are growing, where accurate inventories of performance and costs are carried out not only against the original commitment but also to benchmark against sector best practice.

RoI tracking systems, often Internet based, using a process led approach to securing the original commitment, are becoming increasing commonplace, extending the value and effectiveness of the Service Level Agreement into a financial instrument.

All of this is becoming critical as the Outsourcers themselves are becoming larger and recommend progressively more bundled and larger projects – often greater than the digestive capability of the organisation.

Companies are shying away from fully loaded end to end solutions often proposed to secure compatibility with technology like SAP and Peoplesoft but where the transition risk is understated, as is the ongoing cost of management. These solutions often ignore the more feasible alternative of a deconstructed, phased approach where risks, cost, distraction factor and implementation load are reduced.

Again, this is where the Internet is scoring high. Internet based tools manage these component projects well in, for example, some accounting processes where there is often a reasonable reluctance to replace or disintegrate the results of years of enterprise wide application assembly and binding.

A further development of outsourcing – of a type – is the concept of Application Service Providers [ASP] where technology can be provided at greater scale and capacity, generally with a faster solution but where initial capital outlay is very low and ongoing maintenance should be cheaper.

However, the ASP route is not without risk. Accessibility to service – at appropriate levels or at all, integration with other applications, vendor integrity, data protection, and the fear that there is an unbreakable binding to the ASP have so far put a brake on Companies going this route.

The ASP market will grow once vendors can provide evidence that these barriers can be overcome. In the meantime, the highest performing providers can use ASP as a great way to reduce sales cycle time and lower implementation costs through hosting demonstration systems and providing implementation infrastructure.

Web-based services are extending the offering with, for example, tools for managing sales and revenue forecasting. But Companies typically use Business Process Outsourcers [BPOs] for those high volumes, non-core transaction processing activities where the benefits kick in quickly and the transition risk is low. Often the alternative would be to upgrade existing technology with high fixed cost steps.

Many outsourced services were born out of the need for companies to lower costs and where the sharing of capacity also provided non competing companies with the benefits of scale and cost reduction – Companies like American Express viewed this in a variety of ways with not only products with a card based offering but also where their expertise and scale in accounting for their own business can be marketed to other large multinationals as an outsourced service.

Other organisations like Accenture have developed their outsourcing capability on a more strategic basis through Joint Ventures and acquisition, like the recent purchase of the Swiss Financial Services Company Systor.

Outsourcing often provides the opportunity to consolidate existing in-house operations, taking the double benefit of scale through assembly and scale from the Outsourcer. Occasionally, this can also accommodate more fundamental company restructuring – taking advantage of beneficial taxation environments like Free Trade Zones or Tax favourable locations like Switzerland where Union Carbide recently consolidated inventory ownership and client invoicing.

So – Outsourcing is becoming much more strategic. Bigger and more complex – and more rewarding for both Parties. Projections for the next decade show continuing growth in both Outsourcing itself and the Management skills in getting the best out of those Specialists entrusted with activities that may be non-core but that are often, nevertheless, business critical.

Copyright: AMG Limited