UK: Beyond Outsourcing – Part III - Understanding The Factors That Determine Appropriate Service Delivery Solutions

Last Updated: 31 January 2012
Article by Deloitte LLP

If your company is considering an accelerated business process outsourcing (BPO) contract without analysing the impacts of outsourcing process fragments, you are likely to leave significant savings on the table – or worse, disrupt critical operations.

Deloitte's three-part series, "Beyond Outsourcing," outlines three key actions we believe organisations should consider in their efforts to maximise savings, reduce risk and identify the optimal functional service delivery solution for each segment of a business process.

In this paper, the final in our three-part series on business process outsourcing, we will focus on the key factors that leaders need to consider when determining what processes are best suited for redesign, shared services (onor offshore), or outsourcing to a third party.

Understanding the Total Cost of Ownership (TCO)

In our first paper, we highlighted the importance of understanding the Total Cost of Ownership ("TCO") of business processes. The TCO refers to the "real and complete costs of delivering services across a global organisation" and understanding the TCO is an important first step in any broader transformation effort. In our experience, utilising a data-driven TCO approach to develop a better understanding of the full costs of end-to-end processes, can help to uncover additional business levers that companies can later pull when considering alternative service delivery options.

Understanding the global process

Our second paper stressed the importance of developing a detailed, global process view, focusing on the "what, where and how" of work performed across the organisation. In our experience a global process view should go beyond an outsourcing-only approach to determine the most appropriate selection from the range of service delivery options.

Understanding the process itself, in addition to its total cost, is critical to those companies seeking maximum savings. Viewing a business process from the highest level, such as Accounts Payable, down to a task level where an individual employee will perform a key (but sometimes overlooked) part of the process, is necessary to determine how a business process can operate at maximum efficiency.

Identifying the most appropriate solution for each part of the process

The final step is to leverage the information discovered in the first two steps; to evaluate the appropriate tasks that can readily be performed by a third-party (outsourcing), those that can be performed remotely (on- and offshore shared services) and those that can be improved or eliminated altogether through process redesign. Only after evaluating each individual piece of an end-to-end process (e.g. procure-to-pay) can companies make an informed service delivery decision regarding the end-to-end process as a whole.

In our discussion, we will explore critical factors that can help to determine the tasks and fragments of business processes most appropriate for each type of solution, including outsourcing. Most importantly, we will explore characteristics that can help to identify where work can be eliminated altogether, rather than simply moving them to a third-party provider or captive shared service.

There are two key elements necessary to understanding the most appropriate solution for each business process: A complete and thorough understanding of the process.

The first is having a complete picture of all the fundamental pieces that combine to form an end-to-end process. This includes understanding the Total Cost of Ownership (TCV) and a global view of the process. The quality and depth of these fundamental components are critical to maximising the amount of potential savings. A sequenced approach to analysing what you've learned.

The second key element is the sequence by which a proper analysis is conducted. It is important to address each of these elements in a proper sequence so that the end recommendation can be the result of a deductive analysis, rather than being driven by a singular outcome, such as outsourcing.

First, evaluate the end-to-end process across people, process & technology.

This evaluation must answer how well each process outcome compares to industry benchmarks across all three domains – people, process and technology. The evaluation must also determine how effective the service provision is to the needs of the business. Is the business getting the best, most timely information and results out of this process? If not, determining what the business requires to function efficiently becomes even more critical.

Second, leverage the results of the TCO analysis to develop a clear view of the magnitude of each cost driver associated with each end-to-end process.

This includes a thorough and complete understanding of the total cost of each process – across corporate divisions and geographies. Within each end-to-end process, understanding the magnitude of each of the following cost drivers is critical to achieving the maximum potential savings from any changes or improvements in how these processes are performed:

  • The percentage of TCO represented by labour costs.
  • A view to how efficiently that labour is utilised.
  • Magnitudes of the other cost drivers, such as technology, facilities or any overhead allocations.

Understanding each of these will provide a considerably clearer view as to where current expenditures are, and will highlight potential areas for savings, beyond simply looking at the labour arbitrage associated with outsourcing.

Third, evaluate the viability of the external market

Once a clear view of the processes and their costs are established, determining what external services are being offered in the marketplace can be focused on a specific set of processes identified in the first two steps. While today's outsourcing vendors provide services across multiple towers, having detailed depth of each process already thoroughly analysed, becomes a powerful tool for clearly identifying which pieces of each process can be performed by a vendor and, most importantly, gaining a better understanding of the current costs.

Knowing the current cost, together with detailed end state process definitions, should provide a stronger position from which a contracted set of services and price can be negotiated. Additionally, it should provide a clear delineation of who will be responsible for performing each part of the process, identify key hand-off points, and highlight important metrics to measure performance.

Fourth, and finally, understand your internal culture

Internal culture is a significant issue, especially when considering outsourcing as an option. The importance of understanding whether your culture is prepared to outsource part of a process cannot be underestimated, and needs to be fully supported by those who will be managing transition as well as managing the retained processes.

Such a decision also requires total leadership support for moving a process either away from an existing location to another, or to an outsourcer. Reaching a comfort level with a risk management strategy and having an analysis that supports the final decision are critical to achieving complete leadership buy-in.

Another area commonly overlooked during the decisionmaking process is whether the necessary internal expertise exists to successfully transition processes to a new environment. This could mean building a new, captive shared service centre or outsourcing altogether. Where companies often face unexpected risk is in overestimating their ability to manage such a transition successfully. Seemingly flawless plans can inevitability fall apart in execution and transitioning any process to a new model without the right capabilities, internal or external, can increase risk and eventually impact upon captured savings.

Once a total, sequenced analysis of these four key elements is complete, a supportable recommendation can be developed. Further, such an analysis should highlight savings across multiple business levers and service delivery options, with an holistic understanding of the risks, costs and benefits associated with each option. If your analysis fails to take a sequenced approach to understand the total costs and a global view of the process and to look beyond outsourcing-only solutions, the recommendation will then be driving the analysis. The end result will leave substantial savings on the table, or worse, result in a costly mistake.

Unclaimed savings is a common issue when broken fragments of a process are not identified and fixed, or when an opportunity to move fragments of a process to a lower-cost, shared service centre is not realised. Regarding outsourced solutions, a common area that results in lost savings involves having an inadequate understanding of the total cost of a process that results in a higher, misaligned contract price. When you don't have an accurate understanding of your current cost, negotiating a price with an outsourcing vendor with bad information almost always leads to equally bad results and lower savings.

Operational and financial risk will increase as a result of having inadequate detailed knowledge of each process, where the key hand-off points occur and what the critical inputs, outputs and measurements are. Omitting detail in these areas, or leaving them up to an outsourcing vendor, can create unnecessary conflict and result in underperforming processes, finger pointing and, eventually, higher costs. A rigorous, detailed process analysis can also support reduced transition risk, as it should help to identify in detail all of the key activities of each process and facilitate the creation of a blueprint for the future operation.

This knowledge is essential for any outsourcing negotiation, transformation effort or shared services initiative, providing the necessary depth to design and price a successful solution.

Conducting an analysis with a properly sequenced approach to help ensure the recommendation is a result, not a driver

With an accurate definition of which processes are performed globally, and detailed answers to the questions of "where" and "how" they are performed, you now have the critical tools to help maximise potential savings. These tools support an understanding not only of what mix of service delivery options is most appropriate for your business, but also in valuing those options in a sequential manner to prevent the final recommendation from driving the decision. It is important to address each of these elements in a proper sequence so that the end recommendation can be a result of the analysis, rather than being driven by a singular outcome, such as outsourcing.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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