- United Kingdom
Nancy Gessmann, Senior Vice President Enterprise Solutions
Business process outsourcing has been getting a lot of attention as companies look for ways to navigate the recession and position themselves for success when economic conditions improve.
Some of the more common functions that companies are looking to outsource in this economic climate include capital intensive back-end functions such a remittance and lockbox processing, bill printing and presentment, lettershop activities and customer service.
This should come as no surprise. When properly executed, business process outsourcing delivers a wide range of benefits, including lower transaction costs, reduced capital expenditures and proven technologies and processes. Additionally, outsourcing allows organizations to move to a variable expense cost model, which better aligns an organization’s operations with its fluctuating volumes, and can be an effective tool for driving change within an organization.
Most importantly, it frees organizations to focus on their core competencies or mission: They can concentrate on growing their revenues versus containing costs and keeping up with new technologies.
But outsourcing doesn’t guarantee success. The challenge for organizations is to determine which processes are the best candidates for outsourcing and which provider can best meet their needs.
Many firms struggle with the concept of non-core functions – the best candidates for outsourcing.
Core functions are those activities that your organization is uniquely positioned to provide. They set your company apart from its competitors. They tie your organization with its clients and partners. And they should drive your revenues (if not, you should re-think whether they are really that unique). An organization’s goal is to find an outsourcing provider that doesn’t jeopardize that uniqueness.
Conversely, non-core functions are those activities that are important to your business. Take a nonprofit organization, for example. Processing donations are not the organization’s primary area of expertise. Rather, it’s helping those impacted by natural disasters, educating the community, funding special research projects, etc. Managing their donations processing is only taking time away from the core activities the nonprofit really wants to spend its time performing. Typically, non-core functions are back-office processes that your customers don’t really think about, as long as they are done accurately and in a timely manner.
As the economic downturn illustrated, most organizations don’t have the volume or scale to cost-effectively handled non-core functions in-house – making them ideal for outsourcing.
Moreover, continuing to process non-core functions in-house also creates potential risks for organizations, including an inability to invest in new technology or equipment, an internalized view of market trends, a lack of business process improvement, and an inability to contain costs.
Once an organization has determined which processes are candidates for outsourcing, it must calculate the costs associated with these activities and compare them to the fees proposed by outsource providers. While labor arbitrage is often cited as a key reason for outsourcing, there are costs associated with managing an outsourcing agreement that organizations must consider.
To ensure you don’t overlook key processes, involve staff working in your operations day-to-day in the RFP process. And look for hidden processes or procedures in your operations – those things that may have gotten customized” over the years but were never documented in a procedures manual.
Some best practices for determining the true scope of your existing business processes include:
Organizations then must clearly communicate the services required of the outsource provider and their service level expectations. To avoid potential confusion, be aware of technical jargon when describing the services needed. It may help to exchange internal glossaries with potential outsource providers. Also be sure to create and discuss a detailed statement of work with outsource providers and walk through the workflows related to unique processes (and fees). Be open to suggestions for improving a process or procedure; many organizations have a tendency to hold on to processes or procedures because “That’s the way we’ve always done it.” Outsourcing is an opportunity for change.
As part of any exercise to determine the costs of outsourcing, organizations must also weigh the potential risks. Have key stakeholders define the risk factors and determine which ones are true risks and which ones are fears. Be sure to document these risks and discuss them with potential outsource providers to look for potential solutions. If possible, do a pilot to alleviate concerns.
A phased approach to moving to an outsourcing provider can also be invaluable here.
Too often, the topic of outsourcing becomes synonymous with the topic of offshoring. Though similar in concept, the differences between domestic outsourcing and international offshoring can be night and day. To determine whether offshoring is right for them, organizations must think about the processes involved and consider the level of project oversight required: whether it’s important to make regular visits to the site; the potential costs of traveling to the offshore facility; whether it would be necessary to have frequent conference calls with overseas staff; how cultural and language differences will be handled; how the materials supply chain will be affected by international shipments; and whether the offshore site meets compliance guidelines.
Many of these items can eliminate the lucrative benefits of offshoring if not properly evaluated. In some cases, a U.S.-based representative of the offshore services provider can help manage the relationship and point out potential issues with the arrangement. More often than not, companies realize that domestic outsourcing provides the same – and often more – benefits than offshoring with far less risk and hassle.
Site visits are critical to validating the capabilities and claims of potential outsource providers. They give you a real-world look at the infrastructure and people in their processing environment every day.
For many organizations – and the providers bidding on their business – site visits are a reality check.
They provide an opportunity for organizations to walk through their workflow in a provider’s shop, identifying possible challenges (service gaps) and potential opportunities for improvement (new capabilities). Site visits are a key milestone in building a relationship with a provider.
One of the big criticisms of outsourcing is the potential loss of control. But there are several steps organizations can take to ensure control and good management of the processes they outsource.
The first step is to select an outsource provider that has a partner mentality. Evaluate outsource providers with an eye toward whether they could be a trusted extension of your organization. Once a provider is selected, the two organizations should strive to build strong working relationships.
Next, set clear expectations and define roles early in the process to eliminate confusion. An outsource provide can be better prepared to meet an organizations needs if they understand their business goals, growth plans and market challenges. Similarly, be sure your expectations are reasonable. If they weren’t attainable in your own operations, don’t assume that they will be attainable through outsourcing – it will depend on the process and the situation. And keep ongoing open communications between the organizations to make sure the project stays on track. Regular review and planning meetings are important, whether they are monthly, quarterly or annually. Weekly status conference calls also can be beneficial, while periodic face-to-face meetings are invaluable for strengthening the relationship between the organization and an outsource provider.
It helps for organizations to designate someone to manage the relationship with their outsource provider, not only through implementation but to handle procedures going forward as business requirements change or as service issues arise. The contact should have decision power as well as a good understanding of the processes involved and the organization’s goals. Depending on the scope of the project, it might be necessary to designate an operational and a technical contact.
Finally, implement service level agreements with your outsource provider. Keep in mind, however, that you are likely to miss key criteria as a result of oversights and unknown processing factors.
Once an organization has selected an outsource provider, the work of implementation begins.
It is critical that organizations develop a detailed implementation plan for outsourcing – and follow it. In developing their plan, organizations shouldn’t make assumptions; they should be clear on their expectations and all deliverables. For this process, organizations must engage key stakeholders and create open lines of communication with their outsource provider, establishing points of contact. They must also allow for flexibility to adjust the plan as challenges and opportunities arise.
There’s no question that more organizations are looking at outsourcing their non-core functions. The key for end users is to look for outsource providers that offer the right mix of ingredients: a track record for handling business processes like they are their own; the ability to develop strong partnerships with their clients; investments in advanced processes and technology; a commitment to finding cost-effective solutions to client business challenges; and solid expertise with proven solutions.
Nancy Gessmann
Senior Vice President of Enterprise Solutions
CDS Global
515.471.5678
CDS Global is a leading provider of outsourced business solutions to nonprofits, financial institutions, municipalities, utilities, publishers and direct marketers.