Value Leakage in Outsourcing Contracts

Outsourcing provides client organizations access to a broad range of specialized technical skills, the ability to control and manage operating costs, and the realization of improved efficiency, speed and agility to deliver services. However, studies indicate that the ability to sustain high value realization over the complete lifecycle of the outsourcing contract is a major challenge.

For example, during the initial transition and transformation portions of an outsourcing strategy, the focus is on contractual terms, conditions, and pricing. As the relationship matures, the client and the provider must shift their focus to factors impacting operational effectiveness and relationship management if they expect to minimize value leakage and realize the full benefits of their outsourcing contract.

There are many forms of value leakage in both government and private sector outsourcing contracts. One form of is the inability to achieve efficiencies through key operating metrics and Service Level Agreements (SLAs). Other examples include nonperformance in innovation deployment and in the use of emerging technologies, or non-compliance to regulatory requirements or agency expectations resulting in the inability to support goals and objectives.

Additionally, value leakage may begin to occur when outsourcing contract terms become unworkable because of industry or regulatory changes or as a result of operational challenges caused if the client fails to fully leverage the provider´s talent.

Value leakage may also result from relationship management challenges where unresolved cultural differences get in the way of effective communications and the operational goals of the outsourcing strategy.

However, stopping value leakage carries with it a huge return. If issues surface early and regularly, and have an underlying fact-based diagnosis, then the client and provider are able to address issues, remedy the situation and avoid costly and laborious interventions.

This white paper discusses several key signs of value leakage that client organizations should assess to achieve the most out of their outsourcing contracts. By monitoring and preventing value leakage throughout the duration of the outsourcing contract, both the client and provider can better serve end-users and keep costs to expected levels while continuing to improve service performance.

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The IT outsourcing price wars are on

Outsourcing customers are seeing some IT services prices dip as much as 40 percent. But industry experts advise caution during this period of industry transition.

The amount of IT outsourcing business up for grabs, coupled with an eruption of emerging technologies and delivery models, has made 2015 a buyers’ market for IT services. As a result, IT service providers are engaged in a price war the likes of which hasn’t been seen for nearly 15 years, says Steve Hall, partner and global application development and maintenance lead at outsourcing consultancy Information Services Group (ISG).

While Indian providers, whose value propositions have been based on the cost savings generated by labor arbitrage, are most at risk, the downward pressure on prices is affecting all multi-national outsourcers, says Hall.

ISG Research estimates more than $100 billion of annual outsourcing contract value will be renegotiated over the next 24 months fueling increased competition among buyers.

In addition, “to a large extent the price wars reflect the growing impact of robotic process automation, autonomics and cognitive computing,” says Jeff Augustin, managing director of outsourcing consultancy Alsbridge. In the last few months, some providers have been submitting bids as much as 40 percent lower than their competitors thanks to the incorporation of autonomic solutions into their deals. “Today, virtually every engagement we see has an element of autonomics included, and that is significantly driving down pricing across the board in the marketplace,” Augustin says.

Every major provider is creating offerings to cut costs in infrastructure support, application maintenance, and business process outsourcing, says Hall of ISG. “Each of these activities eliminates labor and the need for large armies of offshore skills. Global delivery is following a similar path – speed, agility, automation, and flexibility will be the new differentiators that require a significantly different approach to deliver.” And buyers are eager to reap their share of those savings even as providers will need to recoup their investments in these areas.

Meanwhile, rapid advancements in cloud broker technologies, mature offshore markets, and broader adoption of public and hybrid cloud environments gives buyers a number of new deliver options today with varying price points and risk profiles, says Hall of ISG. “Production environments shifted into cloud much faster than was expected,” Hall explains. “Scope that may have been included in an infrastructure deal was shifted to cloud spend.”

Who wins?

Cloud-based firms like Amazon, Google and Rackspace stand to benefit most. “As with the automation trend, significant dollars are shifting away from one supplier to a different set of suppliers as the price point to deliver these service also drops,” says Hall of ISG. “The large number of outsourcing contracts up for renewal may act as an accelerator or serve as the tipping point for broad cloud adoption.

To succeed in this new environment, outsourcing providers must adopt radically different business models. And that shift may come too late. “Some established, deep-pocket companies have not responded fast enough to market changes, because in the past they haven’t had to—a tweak or two, and they were back on track,” Halls says. “But now some appear to have missed the signals of a fundamental market shift, and they’ve lost share as a result.” Hall expects to see further consolidation among the Tier II infrastructure providers and a shift to digital and engineering services for many of the other providers.

“The real differentiator is the provider’s strategy and readiness to adopt automation and newer operating models,” says Hall, noting Accenture’s evolving digital services, Cognizant’s industry-specific solutions, and IBM’s growing SoftLayer and Bluemix services. “The suppliers most at risk are those that do not have clearly defined strategies and are still relying primarily on labor arbitrage or antiquated infrastructure support models.”

There are huge opportunities in the market, particularly around the next wave of digitization, as the Internet of Things becomes reality. “The digitization opportunity suggests a massive amount of software needs to be built, calling on those with strong capabilities in the applications space.”

Those providers that want to move beyond the prices wars will need to make investments in automation, analytics, and design thinking that could cannibalize their existing revenues in the short term, says Phil Fersht, CEO of outsourcing analyst firm HfS Research.

“The more processes can be automated, the more manual labor cost can be removed and the higher margin of the delivery,” says Fersht. “While greater automated deals may get smaller in dollar value, they will get more profitable.” A $10 million dollar deal that delivers a 20 percent margin becomes a $7 million dollar deal at 50 percent margin, for example. Service providers also need to reorient their talent around analytics skills and creative problem solving.

“The traditional value drivers remain relevant,” says Augustin of Alsbridge. “Clients are still seeking superior vertical market knowledge, new offerings, innovation and outcome-based pricing. Providers that can successfully deliver on these areas can stay ahead of price wars.”

IT outsourcing buyers beware

The providers bear most of the risk during these price wars. “They are betting on robotic process automation and autonomics, and they are on the hook to deliver the lower pricing,” says Augustin. But while lower prices would seem to be a boon for buyers of IT services, experts advise that IT leaders consider the long term before locking in a low-cost deal.

“If their providers struggle to implement the RPA solutions, the deals could become unsustainable and eventually that will lead to a lose-lose situation,” says Augustin. “Customers must also be mindful of proprietary solutions from providers that are emerging, as they can limit the flexibility to switch service providers over time. At this point, the robotic process automation and autonomics solutions are still relatively untested and unproven, so it is indeed still a period of transition with some risks for all parties.”

Clients should be clear about their long-term as-a-service strategy as the being part of negotiations over the next 18 months, says Hall of ISG. “This includes broader movement to hybrid and public cloud environments, quicker adoption of Software-as-a-Service solutions, and movement to more agile delivery models that includes extending enterprise applications with services and container technologies that ease the deployment of applications to alternative environments.”

“My advice is to be careful only making decisions based on lowest price,” says Fersht of HfS Research. “They’ll get sucked into years of purgatory with the service provider’s ‘c-team’ if they squeeze them too hard.  This is not a new thing either; it’s happened to many customers on many deals which simply failed to deliver any value beyond very operational delivery.”

Source: CIO.com-The IT outsourcing price wars are on

How the Theory of Constraints Applies to Robotic Process Automation

Or how automation without a plan and approach is a quick trip to chaos

Ian Barkin and David Brain, Symphony Ventures

In search of something new to say about the oncoming freight train that is Digital Labor, the team at Symphony, a professional services firm, has gone back to the fundamentals. And, in doing so, we’ve rediscovered the underpinnings of this new labor revolution that have always existed as part of the way we study complex systems in order to improve upon them. These underpinnings are constraints. In other words, automation is a new (and better) way to address enterprise constraints.

Our inspiration was a book we read nearly 15 years ago – The Goal by Eli Goldratt. For those not familiar with the premise, the book is about new principles of manufacturing in which Goldratt introduces the “Theory of Constraints” as a way to manage complex systems. Written in 1984, The Goal became a widely read business tome. So, why is it relevant for Shared Services Centers (SSC) and customers of Business Process Outsourcing (BPO)? A few reasons. First, its subtitle, – A Process of Ongoing Improvement – succinctly sums up what the entire SSC industry has branded itself around for the last decade. Second, the book and the approach was a mission for Goldratt to “change manufacturing from an art to a science.” This, we believe, is the role that Robotic Process Automation (RPA) will play in shared services and outsourcing. Finally, the ultimate lesson is about avoiding future constraints caused by inertia. This one will most certainly rear its head as a concept in the next 18-24 months and is worth exploring now.

A Process of Ongoing Improvement

As we’ve articulated in a Symphony blog titled “BPO = Business People Outsourcing,” the BPO (and SSC) industry has had a great run at improvements and evolutions from simple arbitrage to continuous improvement to analytics and insight, and so on.  At every stage, BPO and SSC providers have evolved to address the next pressing challenge. At first, it was high labor costs (arbitrage). Next it was inefficient processes (continuous improvement). Then it was a lack of a holistic understanding of a system and the resulting strategic blinders in place (analytics and insight).

In his novel, Goldratt uses his Theory of Constraints to highlight that the success of an entire factory (or any process at all) is determined by the choke point that constrains the overall output. In other words, the whole factory can only move as fast as its slowest resource. This bottleneck can occur at the beginning, middle, or end of a process. It could be an outdated machine, an inefficient worker, or a poorly designed company-wide policy. Goldratt suggests that, whatever the bottleneck is, every action should be taken with it in mind, and every resource should be directed at eliminating it. And this process should never stop. Once the worst bottleneck is identified and eliminated, the next culprit of inefficiency must be identified.

The general fervor around RPA in SSC would suggest that the next bottleneck in everyone’s crosshairs is ‘people.’ However, we believe that the approach of Digital Labor as human replacement is too simple, and frankly not very creative. We are more inspired by the role RPA can play in alleviating bottlenecks of Process and Technology. Process bottlenecks exist in the form of poorly built workflow, undefined business logic or simply heterogeneity of process resulting from acquisition, rapid growth and lack of process design mindset. Technology bottlenecks exist in the form of a spaghetti of legacy and homegrown systems struggling to work together to achieve business needs. In the process and technology bottleneck scenarios, an enterprise that thoughtfully deploys RPA is given a chance to not only emulate human tasks, but alleviate historical complexity inherited over time.

Art to Science

Here we share a particular kindred spirit with Goldratt. For too long, the design of workforce solutions has been a creative and flexible art – productivity levels, output volumes, retention rates, over-hire percentage, stabilization runways, knowledge capture methodologies, and more. The list of solution design components is long, and the rigor and precedent by which they are sculpted is loose. The last decade will be seen as the ‘art of (services) work’ decade. We dare say that Digital Labor has the ability and the momentum to change SSC and the outsourcing industry from one of art to one of science.

As we’ve seen, when we design a solution for a digital workforce (robots), we can no longer afford to be vague. It is incumbent on the solution design team to model, map and capture each end-to-end process to the most minute detail. This perhaps is where we are most fanatical. In working with our clients we must see, touch, record, and model every ounce of a process in order to clearly articulate judgment versus rote tasks, understanding the interplay between each branch of business logic in a process. It’s not good enough to do this for a discrete ‘automatable’ task. If an enterprise is not looking end-to-end, it’s laying the groundwork for convolutions and complexities in the near future.

Beware the next system constraint

The final warning in Goldratt’s Theory of Constraints is to not allow inertia to cause a system constraint. In other words, don’t let the work done previously coast on unchallenged so that it becomes a future choke point. This is particularly interesting, and why we believe orchestration in this new Digital Labor environment is as (or more) crucial than the careful design of the first robots in a system. The RPA-based ‘work’ industry (in both BPO and Shared Services) is unquestionably in its infancy. There are pilots, proofs of concept and in-house developments creating a maelstrom of press, promotion and promise. Without much doubt we can assume that the big BPO and Shared Services operations are test-driving numerous vendors. And, just as predictably, some of the big BPO houses are pretending to be software development shops, crafting their own robot code. While this exploration is healthy, the result of all this will be a robot Babel scenario. Choose any taxonomy – processs silos, business units, service contracts, delivery centers – the  story will be the same. There will be a lot of robots. Robots that will not be able to talk with one another. And unless good orchestration is in place from the beginning, the inertia of ‘automate everything’ will become our next bottleneck. And, perhaps fodder for our next hype cycle.

Eli Goldratt passionately pursued the conversion of ‘art to science’ by addressing constraints in order to unleash business potential. We believe, and have seen, how RPA can be a catalyst for this same ‘art to science’ shift across the enterprise work environment. However, in our work advising clients on their Digital Labor strategies, we have found that far too often, the rigor needed to succeed is not put in place at the very beginning of the journey. By following a modern approach, working with expert advisors and by requiring solution design to be specific and accurate, automation is enabling the adoption of the ‘Future of Work’ and driving a new level of process focus that will color a generation of task design and execution.

Source: How the Theory of Constraints Applies to Robotic Process Automation By: David Brain and Ian Barkin, Symphony Ventures

Seattle IT Company Reveals IT Strategies That Enable Business Scalability and Growth in Recently Released Downloadable Guide

For C-level executives and other managerial staff experiencing IT problems, PacketDrivers IT Outsourcing has released a download that reveals their cutting-edge IT strategies that can keep a company’s operations functioning ahead of the curve.

Falling behind the times is every company’s nightmare. As technology develops, business operations and IT functions must change along with it. It sure isn’t every day that you see a Windows XP interface, and Cloud technology is expanding exponentially, allowing for more scalable business solutions for both users and data storage.

However, it’s not just cloud computing that PacketDrivers IT Outsourcing discusses as a strategy for scalability. Their recently released downloadable white paper guide to IT solutions explains how companies can strategize as they anticipate future growth.

Decisions about hardware and tech are important to be made while considering business needs that will arise as the business continues to scale and become more successful. If IT solutions are not developed to expand as they function within a scalable business model, the growth of the business will inevitably be hindered when past tech solutions become inadequate over time.

The white paper download also discusses the necessity of building proper IT infrastructure that is supports the company’s internal goals and needs. The majority of dissatisfied c-level executives, landed with the job of managing the company’s IT support personnel, will find themselves frustrated with IT teams that obsess about tech and hardware that don’t align with the business’ goals and needs.

More importantly, however, there are often issues with communication. A growing majority of IT teams use an inordinate amount of ‘tech speak’ that their managers and executives simply don’t understand. This is a source of frustration and tension on both sides, resulting in misaligned and mismanaged IT infrastructure and exasperated personnel. But it doesn’t have to be that way.

PacketDrivers IT Outsourcing makes it their goal to fully communicate with business partners that choose to work with them, ensuring that they leave ‘tech speak’ at the office and explain their strategies in a way that helps decision-makers to confidently make IT management choices. They also establish a flexible IT infrastructure that can expand as the business grows, and they keep business tech, hardware, and software up to date with recent updates, upgrades, and the latest, efficient IT solutions as needed.

Source: prweb.com-Seattle IT Company Reveals IT Strategies That Enable Business Scalability and Growth in Recently Released Downloadable Guide

How Benchmarking Can Improve IT Outsourcing Deals

As IT outsourcing has evolved so have IT outsourcing customers’ benchmarking needs. As a result, a new approach to benchmarking is necessary. Kathy Rudy, partner with outsourcing consultancy ISG, discusses pros and cons of benchmarking for transformation and how to do it right.

Traditionally, IT services customers have approached periodic benchmarking of their outsourcing deals as a hammer to tamp down on vendor pricing. But as outsourcing itself has evolved so, too, have outsourcing customers’ benchmarking needs.

“[Customers] are upping the ante on the providers and pushing the envelope on benchmarking suppliers,” says Kathy Rudy, partner with outsourcing consultancy Information Services Group (ISG). IT leaders don’t just want to know that their costs are in line with the market. Increasingly, they may want to see where they stand in areas of innovation, agility, standardization and quality.

That requires a new approach to benchmarking, says Rudy, one that’s approached not as a way to tighten the screws on the way things have always been done, but as a method for establishing new and better ways of operating.

CIO.com talked to Rudy about the drivers behind benchmarking for transformation, its benefits and drawbacks for customers and providers, and how to do it right.

Read more at: How Benchmarking Can Improve IT Outsourcing Deals By Stephanie Overby

The real cost of outsourcing IT

Businesses can gain insight into the real price of outsourcing their network by calculating and balancing security risks with rewards

Gartner’s latest forecast predicts the worldwide IT services market will exceed $980 billion in 2015. With information technology outsourcing (ITO) contributing to more than half of that market growth, the industry is poised to reach $1.1 trillion by 2018.

A booming offshoring market has bolstered the trend, with domestic leaders like HP starting to lose market share to India-based outsourcers and cloud-based service providers. Overall, Forrester Research predicts 542,000 IT jobs will move overseas by 2015, and that number is widely seen as conservative. Clearly, outsourcing is here to stay.

The IT skills shortage, as well as pressure CIOs feel to executive new digital demands within the limitations of tight budgets, has solidified outsourcing’s role. These days, it’s rare for businesses not to outsource at least one aspect of their IT organisation.

See also: Hot source: the rise of outsourcing

With the new digital technology growing on a global scale, no one person can be a master of all trades, making outsourcing unavoidable. But growing cyber security concerns demand a second, more detailed inspection of the cost associated with risk. After all, in theory, you are opening your network to a partner who works independently of your organisation.

When CFOs and CIOs strictly look at salaries, outsourcing IT can seem very enticing. But how many of those executives have looked at the hidden costs of subcontracting? What are the costs, in terms of additional security and risk, to sending these jobs outside the enterprise? Gartner research conducted in 2014 found that all nine countries it studied in the popular Asia Pacific region were rated either ‘poor’ or ‘fair’ on the data/IP security and privacy criterion.

Until an organisation assesses its entire application infrastructure, these savings may be part of a false economy; something that saves money at first, but costs more over time. It’s time to evaluate remote logins, remote and virtual desktop programs, integrated security applications and the risk associated with each enterprise application.

How much are these cost-saving measures really costing?

Finding the real price tag

If outsourcing work is the status quo, it’s time to reevaluate the norm, starting with the risk and liabilities presented when contracted employees access your network from outside its parameter.

Respondents to PwC’s 2015 Global Information Security Survey reported the total number of detected security incidents in 2014 exceeded 42.8 million, a 48% increase over 2013. Moreover, the survey found security breach-related financial losses to be 34% higher than the year prior.

So ask yourself: when you open your organisation’s perimeter to let outsourced employees in, what’s been done internally to protect the information? Is your partnering organisation holding itself to the same standards of security? Furthermore, does your organisation have the capacity and capabilities to make the evaluation, or is the first step finding a partner to complete the security assessment?

In the end, it’s vital to understand the enterprise’s entire application portfolio, sprawling between internal functionality and external access, and then aligning that with risk and security metrics.

Once an enterprise creates a comprehensive map of its IT assets, specifically the ones outsourced employees can access, consider the asset’s cost and maintenance, risk and cost to secure the IT asset, cost associated with a potential breach, and function and potential redundancies with existing assets.

Evaluating these components together shows the true cost associated with doing business with an outsourcer or overseas organisation.

See also: Rise of the outsourced CIO

The most poignant and overlooked step in this equation is the evaluation of a potential data breach from opening the network. According to the PwC report, other than current and former employees, there is no higher cyber security threat than service providers, consultants and contractors.

And the cost of an incident is increasing. Globally, the average financial loss associated with cyber security incidents in 2014 was $2.7 million, a 34% increase over 2013.

Do the math, and find the real price tag of outsourcing. And ask the tough questions: would you buy beef from a butcher that refuses to eat his own meat? Would you still outsource IT work after finding just a few hundred dollars in savings, taking risk and security into consideration? Probably not.

Read more at: www.information-age.com-The real cost of outsourcing IT

5 Ways to Elevate Your Business with Outsourcing

Entrepreneurs of small to medium-sized businesses often wear many hats during startups. More often a business necessity than a strategic decision, entrepreneurs would take on many roles—and be good at them—while leaving their most powerful role up in the air: being the main decision maker, strategist, and planner. While expanding operations in-house might not be feasible yet necessary, entrepreneurs still have one viable solution: outsourcing services.

Seen as an option reserved for big businesses before, technology has made outsourcing a more accessible option for small businesses and it has made a powerful impact on growth, productivity and service delivery.

How Can Outsourcing Elevate Your Business?

1. It frees up your time so you can focus on generating income

Most entrepreneurs think they can do it all, then save big money on their business and still move forward and progress. In reality, this mode of thinking can really stall business growth.

Outsourcing means you are delegating tasks someone can do for your business (even better) so you, as a business owner, can free up your time to focus on generating income. There are especially repetitive but essential operational tasks that can be outsourced with minimal supervision and low risk.

2. You hire qualified experts that you won’t get to hire if you do it in-house.

Gregg Landers, director of growth management at CBIZ MHM, the 8th largest accounting and business services provider in the US categorizes three kinds of tasks you can outsource: highly repetitive (accounts payable, data entry, shipping inventory), highly skilled (financial analysts and bookkeepers) and specialized knowledge experts (IT support, data scientists, internet marketing).

By choosing to outsource, you are opening up your business to qualified professionals that bring more value to your business. Technology has opened up avenues for professionals who have decided to leave the corporate world but still want to offer their services in an environment they choose, time and location wise. We are talking about highly skilled, very qualified experts in different fields—information technology, finance, customer service, web and graphic design, accounting and a lot more.

David Walsh, entrepreneur and author of Source Control, an e-book on effective small business outsourcing, says, “Progressive entrepreneurs realize the unstoppable power of outsourcing to handle aspects of their business that are essential but simply don’t make sense for them to deal with personally. Small businesses, augmented by a global pool of human capital, can compete directly with the biggest players in their space, and win.”

You can use state-of the-art technology for your business without necessarily investing in it.

By outsourcing some of your business operations, you save not only time and human resources – you also save money when it comes to investing in technology. Outsourcing specific tasks mean your business doesn’t necessarily need to stay updated with technology in a specific operation (like finance software programs, IT infrastructure and necessary equipment for customer service or research and development). The outsourcing provider takes care of all of that. It is their core business to stay updated with the trends in technology.

4. Your business is re-engineered through outsourcing.

For businesses to stay competitive in their respective industries, they must constantly look inward and identify opportunities to improve their processes and systems to gain better results, and subsequently, more profit. Mike Hammer in his article, “Re-engineering work: don’t automate, obliterate” in the Harvard Business Review, defines re-engineering as the radical redesign of business processes for dramatic improvement.
Outsourcing provides businesses a quicker and more effective way of achieving the same goal with even better results and less overall effort.

5. Outsourcing can be a way for you to expand business, discover new target markets and be close to the end users.

Entrepreneurs also see outsourcing as one way to expand their business reach. They either take operations closer to their end users (manufacturing or research and development) or take on a whole new area to introduce their business to.

Outsourcing doesn’t end with the decision of what and when to outsource. For you to reap the biggest benefits outsourcing can do for your business, the act of choosing the right providers, securing your data, making it work and continually improving the business provider relationship and processes should be an ongoing cycle. While business needs and strategies vary, it is clear that outsourcing has become a core component in business operations and strategic planning, extending from the smallest business owners (one-man team hiring a virtual assistant for example) to big companies (corporations outsourcing their customer support or IT support).

Summary

Having the right resources — whether it be skills, technology, or time — available to you at the right time as your business develops is the key to growing intelligently. By outsourcing, you can have the right talent, the necessary equipment, the valuable time, when you need it

Source: 5 Ways to Elevate Your Business with Outsourcing