The future of the outsourcing industry appears to be a reasonably bright one. It will continue to be one of the top business trends. The slow economic recovery will cause information technology companies to outsource more to facilitate cost savings.
But outsourcing is a very controversial issue due to matters to do with business ethics. There will always be winners and losers when then there is outsourcing. The main problem is that the winners do not adequately compensate the losers. Outsourcing might not work out for everyone. For instance, it might prove very costly if procedures are not written out properly for the third party providers.
It may also prove very expensive if the workforce employed by the third party provider is not adequately trained to handle the operations. Outsourcing might not work out in the short run if there is misalignment of the skills set. It is essential for companies that are considering outsourcing their operations to follow the right steps and perform a thorough due diligence process.
Business process outsourcing (BPO) is the contracting of a specific business task, such as payroll, to a third-party service provider. Usually, BPO is implemented as a cost-saving measure for tasks that a company requires but does not depend upon to maintain their position in the marketplace. BPO is often divided into two categories: back office outsourcing which includes internal business functions such as billing or purchasing, and front office outsourcing which includes customer-related services such as marketing or tech support.
BPO that is contracted outside a company’s own country is sometimes called offshore outsourcing. BPO that is contracted to a company’s neighboring country is sometimes called nearshore outsourcing, and BPO that is contracted with the company’s own country is sometimes called onshore outsourcing.
An entrepreneur can entrust a task to a third party web page designer. This will allow the entrepreneur to concentrate on his core operations. Outsourcing allows a firm to perform two tasks concurrently while allowing a company to leverage for growth. It allows an entrepreneur who has started a business to experience growth at a faster pace. It is also a chance for firms to have access to resources that they might not have access to in their own countries. Outsourcing too gives companies access to diverse talents and helps in innovation and is the catalyst for change. It helps in reducing the time lag for introducing a product in a new market.
The outsourcing industry has become highly competitive with many new entrants. It has also become highly commoditized. Purchase decisions are predominantly driven by price, recently fueled by pressures of the struggling global economy. Branding, which is often overlooked in the outsourcing industry, is a very helpful tool to break through the clutter and elevate a company away from commodity price comparisons. In addition, a strong brand can help secure new customers, grow the business franchise and improve margins. Buyers of outsourced services today expect more than tactical support and inexpensive labor.
Today, companies look at outsourcing as a strategic imperative to grow on a national and global scale. So providers must address the customer’s needs in unique new ways. Said another way, a strong brand can help communicate a unique value-added aspect of a business and generate great interest.
Mutually beneficial contractual relationship in BPO
Armed with data and a sense of the incumbent provider, an outsourced customer can achieve better contractual terms while still maintaining a mutually beneficial relationship with its provider. As the end of an outsourcing contract’s term approaches, the customer needs to begin the process of deciding whether to renew or restructure it with the incumbent provider, recomplete the work, or take the work back. It is not surprising that many customers choose the renegotiation/restructuring approach which is generally cheaper, faster and less disruptive to the business.
Few companies, once they have made the decision to outsource a back-office function and gone through the often difficult process of divesting themselves of the personnel and infrastructure to perform that function have the appetite to reconstitute the outsourced function in-house and for a good reason. It is somewhat less rare, but by no means common, for outsourcing customers to change service providers. While doing so may not be as expensive or time-consuming as in-sourcing previously outsourced functions, it’s not exactly a walk in the park.
The sources of customer unhappiness with their outsourcing relationships are many and include issues to do with technology, service performance, relationship failures at the account management or operational levels, perceived or real pricing asymmetry with “the market” and perceived or actual lack of attention from the provider. Any one or a combination of these factors can and does drive customers to call for a new deal, literally.
Bear in mind that we are talking about a circumstance where these relationship problems are not severe enough or chronic enough to propel the customer to abandon the relationship. Although a significant percentage of outsourcing customers cite some degree of dissatisfaction with their outsourcing relationships, it is very rare for the relationship to be irretrievably broken or to have wholly failed from its essential purpose. More often, outsourcing customers concede (even if reluctantly) that the service provider is doing an adequate job of performing the core services, while complaining that it isn’t seeing any added value or is being overcharged for certain aspects of the services.
It should not surprise anyone that outsourcing contracts have a tendency after a few years to get out of alignment with the customer’s business imperatives or current market conditions. After all, outsourcing contracts are based on prevailing business and market conditions at the time of signing. Try as we might to infuse outsourcing contracts with mechanisms specifically designed to address change, it is nevertheless exceedingly difficult for an outsourcing contract to strike just the right balance between definitiveness on the one hand and dynamic flexibility on the other. The simple truth is that many legacy outsourcing contracts have been overtaken by unforeseen intervening events.
While the reasons why a customer might wish to renegotiate a BPO contract mid-term are self-evident, what, you may ask, would motivate the service provider to agree to a mid-term renegotiation?
The fact of the matter is that outsourcing customers typically have more sources of renegotiation leverage at their disposal than they realize. First, many outsourcing contracts contain a number of provisions that give the customer a right to re-open the contract (or at least the service provider’s prices) under various conditions or even to terminate some or all services. In other cases, the service providers are undergoing the same sorts of business and economic upheavals as their customers and, as a result, they, too, may be interested in a mid-term renegotiation. However, even in cases where the above factors do not create a compelling basis for renegotiation, the more savvy providers will realize that an unhappy customer will not remain a referenceable customer for long. For that reason, they will be motivated to cooperate with a customer-initiated renegotiation if they have reason to believe it will be conducted in a fair and principled manner.
It is important to remember that companies and individuals only ever act in what they perceive to be their own best interest. What this means is that you cannot reasonably expect your service provider to do (or refrain from doing) something that is not in its interest just because the contract says so. You are much more likely to receive the behavior you desire if you can find ways of creating mutual alignment between your interests and those of your service provider. To accomplish this, don’t bring the most guns to the table; bring the most data, the most ideas, and the most open mind. This applies to both customers and providers. Return openness and creativity with the same.
As the customer, if you are not seeing your best efforts reciprocated, it is a good sign that you may need to re-compete the contract. Don’t seek to take unfair advantage, but if you sense that you are being taken advantage of, do not hesitate to broaden your vision and shop around for a better relationship.
Renegotiation is a major fact of life in the outsourcing industry. It is important to realize that the same “art of the deal” in contract structuring and negotiation applies to renegotiation as well as first-time negotiations. Renegotiation, in some ways, is more challenging because the parties usually know each other well by the time of the renegotiation. There is more information to work with, historical data, and knowledge of cultures, interests and orientations of the parties.
Successful renegotiation is the process of leveraging what has been learned in the past to build a future relationship that will best align the goals and interests of both parties to create continuous value for both. Don’t miss the opportunity to make a renegotiation more than an exercise in renewal of vows. At its best, a renegotiation is an opportunity to extend and most importantly to make a good relationship more flexible, transparent, resilient and valuable to the parties. If so, renegotiation holds the promise of creating a “built-to-last” relationship between the customer and service provider.
Success factors for business process outsourcing
The market for BPO is growing, and fast. Many industries outsource part of their (customer-facing) processes. Insurance companies outsource their claim handling processes. Banks outsource part of their mortgage requests. Telecom companies outsource their customer care and other back-office functions. Multi-national corporations outsource their pay-rolling. Besides cost savings, BPO increases the flexibility of companies. Outsourcing business activities adds a flexible layer around companies that can absorb fluctuations in demand, both up and (with the current economic downfall) down as well. It also allows companies to better focus on their core activities.
Successfully outsourcing your business processes requires you to keep an eye on the following five success factors:
1. Define a set of key performance indicators (KPIs).
Measure, analyze, draw conclusions and adjust where necessary. Create a simple dashboard where you can constantly monitor the effects of BPO on your cost and revenue structure.
2. Select your BPO vendor carefully.
Ask for references. Look for growth, as growth is an important signal that a BPO vendor is doing its work well. Visit the vendor prior to signing the BPO contract, to get a feel if the culture matches or aligns with your own corporate culture. If not, look for another BPO vendor.
3. Make an impact analysis.
Carefully draw a map of what will be the impact on your own personnel, and what other business risks may be involved if you decide to outsource parts of your processes. Also consider time zone differences and differences in language (if any) – are your own employees capable of explaining or discussing in-depth their work details in a non-native language?
4. Draw clear process boundaries and make these explicit.
Make a very detailed write-up of what the BPO vendor should do versus what parts of the process you will continue to handle yourself and share this upfront before starting to outsource anything. What input data will the BPO vendor receive, and what output do you expect back? What to do in case of exceptions? It is extremely important to reduce all unclarity, vagueness and fuzz about who should do what.
5. Do not outsource what you do not control
Probably the most commonly made mistake is when companies decide to outsource a process they don’t yet fully oversee nor control themselves. This is the ideal recipe for disaster. If you don’t know exactly how things should be done, don’t start outsourcing it!
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