Home India 2009 Outsourcing evolves

Outsourcing evolves

by david.nunes
Author's PictureIssue:India 2009
Article no.:6
Topic:Outsourcing evolves
Author:Arup Gupta
Title:Executive Director, President & Chief Operating Officer
Organisation:Polaris Software Lab
PDF size:204KB

About author

Arup Gupta is the Executive Director, President and Chief Operating Officer of Polaris Software Lab. Mr Gupta leads the global operations, delivery and sales functions at Polaris Prior to Polaris, Mr Gupta spent over 25 years at TCS – in his last executive role there as President for North America. He is a long standing member of the Institute of Electronics and Electrical Engineers (IEEE). Arup Gupta is an alumnus of the prestigious Indian Institute of Science (IISc).

Article abstract

Driven by competitive needs and the recession, the outsourcing sector is growing in size and sophistication. Outsourcing is now more than simply a way companies reduce the cost and bother of routine operations, it is a strategic option for a wide range of highly skilled services. Service providers now bring new ideas and provide unique services and products on an as-needed basis. Service providers are increasingly following the lead of their customers and outsourcing non-core services to lower-cost providers in other countries.

Full Article

The outsourcing industry is on the verge of revolutionary changes that ought to take it to the next generation of outsourcing. The recent meltdown in the global financial market and the recessionary trends are only adding further momentum to this shift. Historically, outsourcing has been considered a reactive, operational-level intervention. It has been connected to specific goals such as reduction in cost and headcount or improvements in return on invested capital. Conventional outsourcing focuses on service improvement, better performance and access to superior skills and expertise as unstated benefits. This relatively tactical approach has been effective in achieving specific outcomes, but has not necessarily resulted in creating competitive advantage throughout an organization. The ‘new order of outsourcing’ covers a new sort of thinking and approaches that need to become part of every organization’s strategic planning process-both outsourcer and service provider. Adopting some or all of the following new order of outsourcing principles would help both the outsourcer and the service provider – the organisations involved – gain significantly higher benefits from their traditional outsourcing strategy. Outsourcer – • Strategy based upon differentiators – The organizations need to ensure that outsourcing is not taken up for short-term gains, but rather aligned to seek competitive advantage from internal sources, external sources and the combination of the two. Instead of relying only on small cost differences, organizations gain when their service offerings and quality are differentiated even if it means paying a premium. Speed to market, customer experience, and unique product or service offerings are some of the differentiators to assess before outsourcing. Outsourcers tend to do well when their strategy is more pragmatic than just meeting short-term needs. • Modify the value model – The traditional outsourcing model looks at the business case based upon the project’s impact on cost, revenue and assets. The alternative is to make leverage whatever advantages the service provider can bring to the outsourcer- including its technology and people. With more and more outsourcers looking for new ideas and innovations that they can bring to their business, the greater the number of new ideas the service provider can bring to the outsourcer, the greater the reliance upon, and the need for, the service provider. • Just-in-time sourcing – Outsourcers need to analyse their outsourcing needs as continuously as they do their cash flow. Just-in-time sourcing helps them to evaluate their service partners on a project-by-project basis. This mitigates some of the disadvantages of end-to-end outsourcing wherein the commitment to the service provider is for the duration of the contract whether or not it is justified by business volumes and other needs. This frees the outsourcer from justifying changes in the services they contract in a given period. Nevertheless, it is important that outsourcers analyse their overall strategy regarding their short-term project based needs versus their long-term outsourcing needs. • Outsourcing as a management discipline – It is common knowledge that outsourcing cannot resolve all problems; outsourcers need to closely manage and discipline their use of outsourcing to be sure it is the best way to meet their needs. There are usually a broad series of activities involved in the services that the outsourcer needs. The transfer of responsibilities to the selected service provider is a critically important process that can determine the overall success of the operation. The transition involves preparing, managing and monitoring the work of the service provider. Monitoring of the service should continue for the entire duration of the outsourcing relationship. Relationship management is a key discipline; the outsourcer’s managers need to ensure the health of their business partnership arrangements with each of their service providers. • Extended partnerships as a business vertical – Outsourcers must recognize and accept that they cannot succeed if their business partners do not know enough about the outsourcer’s business to carry out turnkey projects. Using service provider staff just to fill positions and holes in the outsourcer’s organisation is generally recognized as an inefficient way to work. Tightly coupling the service partner’s business vertical as an integral part of the outsourcer’s organization will provide additional value and benefits to the outsourcing relationship. Service provider – • Outsourcing the outsourced – Salaries are the service provider’s greatest cost. With wages increasing substantially each year at major offshore destinations like India, some of the non-critical outsourcing work is further outsourced to Mexico, the Czech Republic and the Philippines among others. This tendency will accelerate in the months to come as service providers try to optimise their cost structure and boost their bottom line. Thus, outsourcing the already outsourced work to a service provider’s alternate sites in other countries will become increasingly common. • Partnerships with other service providers – Today, outsourcers must have proven expertise in many areas and with many technologies. The ability to offer a wide variety of skills and services is more of an opportunity than a challenge or the service provider. Consequently, service providers should consider partnering with other service providers whose specific experience in non-core areas can be leveraged to mutual advantage. This reduces the need to invest in and maintain people without a clear, immediate, business need. This lets service providers concentrate firmly upon building their core strengths instead of spreading themselves thin. • Explore innovative business models – With fierce competition in today’s market for the limited outsourcing work, service providers need to offer clients a compelling value proposition. One classic option is to reduce the outsourcer’s investment and total cost of ownership (TCO) by making an upfront payment to take over all of the client’s systems. Subsequently, the outsourcer can raise its usage charges somewhat to recover the cost over time. Thus, both parties agree that the outsourcer not only executes the work, but will also have a say in the day-to-day execution of the systems. This sort of agreement requires the service provider to assume a greater degree of risk. • Special needs outsourcing – Outsourcing is no longer a run-of-the-mill – just handle routine services – business. Whenever the outsourcer has a specific need, the service provider is expected to come up with viable, competitive and innovative proposals to handle it. It might be necessary to create a joint venture where both the outsourcer and service provider have 50/50 stake in a new entity. The outsourcer may need an in-house operation, but not want to be directly involved in building a new operation from the ground up. In this case, the service provider might propose creating the new operation via a build-operate-transfer (BOT) agreement with the outsourcer. Another option might be to create a special purpose operation that caters to all the outsourcer’s daily needs; the new entity would operate as an extension of the outsourcer. Obviously, these options are not simple; they generally require extensive groundwork, regulatory clearances and the like, to operate effectively. • Green Sourcing – High energy prices and cascading recessionary trends are impacting the outsourcing service market. Outsourcer CIOs and CEOs are increasingly evaluating environmental factors when selecting their technology suppliers and partners. Prudent service providers are embracing green technology and practices to stay ahead of the competition by building and demonstrating the sort of green credentials that might play a decisive role in the future outsourcing decisions. • Data centre and infrastructure outsourcing – A great many companies are reluctant to outsource their IT infrastructure and processing because of the sensitivity of the data and related privacy issues. Advances in technology, data handling and processing, transmission between the outsourcer and the remote service much more widely available than in the past and to be competitive, service providers are increasingly investing in and building advanced facilities to deal with the nuances of managing these critical activities worldwide. The financial crisis engulfing the entire global community is accelerating the adoption of global outsourcing as a strategic business option. The reach of the outsourcing industry is evolving and service providers with vision are adopting the principles outlined above. For both outsourcers and service providers, these next generation outsourcing principles are likely to become the sector’s standard in days to come.

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