Business

The changing shape of outsourcing

Shamus-Rae Shamus Rae, global lead partner in KPMG’s Strategic Sourcing Advisory Practice, outlines how outsourcing is evolving into high skilled activities and the scope for efficient shared solutions inside government.

Outsourcing is no longer the preserve of low value transactional services but is increasingly the method for delivering high skilled support for a company’s objectives, provided that the right partner can be found.

A mass drive for offshoring and outsourcing, mainly to India, took place in the early 2000s but as cost was the predominant driver, governance arrangements were weak in comparison. The promised benefits, in terms of labour arbitrage, were generally not realised.

Now, the major significant change is the rebalancing between offshoring and onshoring, accompanied by a determined focus on improving the service.

Senior managers can take a well-rounded view of these concepts by considering the cost of labour arbitrage and the internal costs of ICT and other functions. The key question is: “Where is the talent and what is the agency requirement for our business?” As this question becomes more central, the conversation around outsourcing (and the related expectations) becomes more mature.

Outsourcing is moving up the skills continuum. As many of the low value transactional business processes have already been outsourced, the focus is turning to higher value activities. Financial reporting and human resources, for example, are best outsourced in an environment with similar capability, skills and business culture. Ireland therefore stands out as an optimum location.

While offshoring is relevant to businesses of all types, significant opportunities are found in financial services and the public sector.

Financial services were among the early adopters of outsourcing, starting with insurance and then moving into investment banking and retail banking. In this sector, the focus has been on driving up the quality of transactional processes with institutions seeking to automate or remove this function so that they can concentrate on higher value (and therefore higher skilled) functions.

A similar trend is under way in public services. The ‘core’ and ‘non-core’ differentiation of functions, though, should be avoided as this can be used as a reason to avoid outsourcing i.e. classifying as many services as possible as ‘core’.

Facilities management, for example, is regularly outsourced as a ‘non-core’ service but vetting is retained as ‘core’ for security reasons. However, governments can also look inside their core activities and create common processes. This will be a significant new trend in outsourcing, with governments around the world sharing best practice in this area.

In the UK public sector, background security checks are carried out by the Foreign and Commonwealth Office, the Ministry of Defence and the police services. Despite three different authorities being responsible, around

80 per cent of those checks are identical and a shared service solution inside government would deliver a significant cost saving.

The sensitivity of data and the quality and consistency required, in terms of outcomes, mean that a third party provider would not be appropriate but services can be re-modelled within government to create a more efficient solution.

Within the private sector, Irish companies should not limit their focus to standard processes such as accounts payable and invoicing but instead seek out opportunities as outsourcing moves towards high value and multi-functional shared services.

Outsourcing started in the back office, moved into the middle office (e.g. sales) and now supports front office functions.

For one of KPMG’s clients, a top 20 company in the FTSE 100, outsourcing has moved beyond the standardisation of processes to taking a single view of the whole organisation for risk management purposes. This is just one example of the shift from labour arbitrage and value added to identifying the wider corporate benefits of outsourcing.

Smart investments

That said, two mistakes are often made.

The first is uncertainty over who owns the process and has responsibility for making changes. A good governance model can make this clear. While this appears simple, it is uncommon.

The second is poor planning where the operating model is designed for a transition and early stage performance and does not take into account how the model should operate post-stabilisation 12 or 18 months down the road.

Recognising and dealing with these challenges at an early stage will avoid more serious difficulties in future. Crucially, a company must make sure that it has a constructive working relationship with its outsourcing contractor, that they are both clear about how the handover process will work, and that the contractor is clearly rewarded. As ever, thinking ahead can help to make smart investment decisions here and now. For example, if you are considering the outsourcing of accounts payable in next 12 months, there is little rationale in investing in a bespoke OCR processing platform. It will become obsolete as the contractor will already have its own platform.

Independent advice matters. As the largest outsourcing advisory group in the world, KPMG brings an in-depth knowledge of the sector, including the track record of the organisations involved. Where a company has embarked in outsourcing and seen little change, we will give an honest and mature assessment of the situation and can negotiate a solution, as a third party.

In certain high value contracts, re-negotiation can save clients £10-15 million. In other cases, the contractor bids at the lowest cost possible to win the tender. Our insight can reduce the risk of change and help clients to draw up improvement plans where errors have been made.

As outsourcing moves up the skills continuum, Ireland is increasingly being viewed as a hub for shared service centres for global business services. Large companies are keen to explore onshoring and near-shoring solutions; the latter involves high value Irish-based operations supporting financial services in the City of London.

On a purely practical level, when problems arise, it is much easier to go to Ireland and work out a solution than to fly to India. Decreasing costs and a well-educated workforce also bolster the State’s case as an investment location.

In summary, Ireland is well-placed to take advantage of the global trends in outsourcing, which have the potential to drive up efficiency for businesses and public services alike across the whole spectrum of corporate operations.

Shamus Rae was named Outsourcing Professional of the Year in the UK National Outsourcing Association’s awards for 2011.

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