Executive Briefings

Beware of Myopic Cost Cutting: Use Outsourcing To Be More Competitive in This Economy

Companies can easily panic in this market and jump at outsourcing opportunities. The goal is usually to shed costs from the bottom line, but they may regret their decisions. Too many companies report being locked into outsourcing contracts that are miserable experiences they can't escape for years. We polled a number of companies at our recent Business Technology Conference. Few felt they were enjoying a collaborative experience with their current outsourcing provider.

Case study-- A cautionary tale:
One company we talked to--a major consumer products (CP) firm--signed a seven-year IT infrastructure and applications outsourcing contract in 2005 with a global outsource service provider. At the time, the company was offered a significant price cut if it signed up with this service provider for its entire major, IT-managed infrastructure and application service requirements. The client saw a price that was about 10% better than other competitive bids from best-of-breed providers for its infrastructure and applications services.

Two years into the contract, the service provider essentially used the same pool of delivery staff to service both its infrastructure and application requirements. While the CP company said the outsourcer performed an adequate job running the ERP maintenance and support services, its staff hadn't managed the infrastructure services adequately. As a result, the company had to retain more staff onsite. This effectively eradicated the additional 10% savings, with the service delivery falling far short of expectations.

The client now needs to bring an additional service provider into the sourcing mix or find a way to dissolve or restructure its current contract. Both options would incur significant incremental costs, ensure management headaches, and require explaining to the board about how they managed to get into this situation in the first place. The company has found itself trapped in a situation where any initial savings have been overrun by the negative implications of a poorly executed service contract into which it's locked for another five years.

Like this unfortunate CP company, many enterprises began rationalizing their infrastructures after the last downturn and are now looking further up and down their supply chains to find new business efficiencies. Engaging an outsourcing provider can help, but the decision your company makes now will lock it in for years to come--hence the need to look at outsourcing in the context of broader business strategy.

Outsourcing clients must think more intelligently and strategically about ways to create an experience that drives more business and delivers value to the top line. They can't just remove short-term costs from the bottom. If clients can use outsourcing to become more competitive, a different paradigm--one other than just "shipping jobs offshore"--will be created.

Harness four specific business goals when approaching an outsourcing strategy:
Smart businesses will survive this economic hardship and emerge more nimble, competitive, and globally integrated. Outsourcing alone is not the answer. It simply provides a vehicle for enterprises to gain access to new talent, better process acumen, new technology, and global markets. The advice below assumes enterprises venture into outsourcing engagements with the right objectives in mind. The number of service providers eager for your company's business has proliferated, with most offering attractive, short-term savings. But you must forge a partnership with a provider that will work with you to add a lot more competitive bite to your business over a multi-year contract. Consider the following goals:

Expand your global business:
One of the core differences between the current economic recession and those of the past is that today's global financial markets and economies are so much more integrated than they used to be. The Internet and global communications revolution have created unprecedented access to global talent: You can have your mainframe computers managed in Brazil, your general ledger consolidated in Hungary, and your logistics analytics performed in India.

Being able to enter new global markets quickly has never been as pressing as it is today, and the right service partners can help. Having a ready, supported infrastructure that can handle foreign payrolls, accounting procedures, and local regulations can save your company months of painful work setting up shop in new markets. For example, Accenture helped Unilever hire 10,000 sales staff in China, which has already contributed to 400% growth in same-store sales in the region.

Develop a global ERP backbone with common business processes:
Engaging an outsourcing provider that can provide common processes on a solid ERP backbone is vital. Smart companies are moving closer--the current economy is accelerating this dynamic--to developing common standards and support processes that allow them to operate and compete as global entities. When you have rapid access to your global financial, HR, supply chain, customer, and product information, you can make quicker, informed decisions: when to enter new markets or sunset dwindling product or service lines, as well as how to mobilize your resources and partners accordingly to respond to existing and future customers. ERP platforms are far more globally integrated now than they were a decade ago. Many enterprises have moved into global outsourcing relationships that entail the service provider managing the client's ERP backbone and corresponding business processes. Bristol-Meyers Squibb, for example, now employs IBM to manage its global SAP HR services, coupled with a nearshore-offshore support model for its global HR processes. Bristol-Meyers Squibb's goal is not only to reduce costs, but also to achieve access to global workforce data to support its global HR strategy.

Free up cash flow:
A good BPO provider can add discipline to your company's collections to speed up cash flow, eliminate bad debt, and provide a timelier cash supply. On the flip side, quality procurement processes help to keep the cash you currently have, which is critical in today's tough economic environment. Global drinks manufacturer InBev recently signed a finance and accounting business process outsourcing (BPO) engagement with Wipro to service from Brazil to create that discipline for its Latin American business units.

Approach cost containment as an ongoing objective:
A good outsourcing partner should be able to help your company sustain cost savings through ongoing quality and process improvements over the length of the agreement, not simply at the onset of an engagement.

For example, you may save $10M in the first year or your engagement, but how about the subsequent years? The initial costs saved will creep back if you don't constantly refine your processes across your global supply chain. One client now sets specific business targets for its service provider to meet. The provider is committed to applying Six Sigma methodology on an ongoing basis to reduce its cost base over the course of a long-term outsourcing contract.

Use this time wisely:
It's not really a good time to go to your board and demand multi-million dollars to add a new service provider to your outsourced delivery infrastructure. It's also not a good time to rip up your current contract if you rushed into an outsourcing situation without an eye on the midterm to long term. Use this economic climate to foster radical changes to your business, and be sure to consider the decision points above when starting to engage outsourcing providers.
AMR Research


Companies can easily panic in this market and jump at outsourcing opportunities. The goal is usually to shed costs from the bottom line, but they may regret their decisions. Too many companies report being locked into outsourcing contracts that are miserable experiences they can't escape for years. We polled a number of companies at our recent Business Technology Conference. Few felt they were enjoying a collaborative experience with their current outsourcing provider.

Case study-- A cautionary tale:
One company we talked to--a major consumer products (CP) firm--signed a seven-year IT infrastructure and applications outsourcing contract in 2005 with a global outsource service provider. At the time, the company was offered a significant price cut if it signed up with this service provider for its entire major, IT-managed infrastructure and application service requirements. The client saw a price that was about 10% better than other competitive bids from best-of-breed providers for its infrastructure and applications services.

Two years into the contract, the service provider essentially used the same pool of delivery staff to service both its infrastructure and application requirements. While the CP company said the outsourcer performed an adequate job running the ERP maintenance and support services, its staff hadn't managed the infrastructure services adequately. As a result, the company had to retain more staff onsite. This effectively eradicated the additional 10% savings, with the service delivery falling far short of expectations.

The client now needs to bring an additional service provider into the sourcing mix or find a way to dissolve or restructure its current contract. Both options would incur significant incremental costs, ensure management headaches, and require explaining to the board about how they managed to get into this situation in the first place. The company has found itself trapped in a situation where any initial savings have been overrun by the negative implications of a poorly executed service contract into which it's locked for another five years.

Like this unfortunate CP company, many enterprises began rationalizing their infrastructures after the last downturn and are now looking further up and down their supply chains to find new business efficiencies. Engaging an outsourcing provider can help, but the decision your company makes now will lock it in for years to come--hence the need to look at outsourcing in the context of broader business strategy.

Outsourcing clients must think more intelligently and strategically about ways to create an experience that drives more business and delivers value to the top line. They can't just remove short-term costs from the bottom. If clients can use outsourcing to become more competitive, a different paradigm--one other than just "shipping jobs offshore"--will be created.

Harness four specific business goals when approaching an outsourcing strategy:
Smart businesses will survive this economic hardship and emerge more nimble, competitive, and globally integrated. Outsourcing alone is not the answer. It simply provides a vehicle for enterprises to gain access to new talent, better process acumen, new technology, and global markets. The advice below assumes enterprises venture into outsourcing engagements with the right objectives in mind. The number of service providers eager for your company's business has proliferated, with most offering attractive, short-term savings. But you must forge a partnership with a provider that will work with you to add a lot more competitive bite to your business over a multi-year contract. Consider the following goals:

Expand your global business:
One of the core differences between the current economic recession and those of the past is that today's global financial markets and economies are so much more integrated than they used to be. The Internet and global communications revolution have created unprecedented access to global talent: You can have your mainframe computers managed in Brazil, your general ledger consolidated in Hungary, and your logistics analytics performed in India.

Being able to enter new global markets quickly has never been as pressing as it is today, and the right service partners can help. Having a ready, supported infrastructure that can handle foreign payrolls, accounting procedures, and local regulations can save your company months of painful work setting up shop in new markets. For example, Accenture helped Unilever hire 10,000 sales staff in China, which has already contributed to 400% growth in same-store sales in the region.

Develop a global ERP backbone with common business processes:
Engaging an outsourcing provider that can provide common processes on a solid ERP backbone is vital. Smart companies are moving closer--the current economy is accelerating this dynamic--to developing common standards and support processes that allow them to operate and compete as global entities. When you have rapid access to your global financial, HR, supply chain, customer, and product information, you can make quicker, informed decisions: when to enter new markets or sunset dwindling product or service lines, as well as how to mobilize your resources and partners accordingly to respond to existing and future customers. ERP platforms are far more globally integrated now than they were a decade ago. Many enterprises have moved into global outsourcing relationships that entail the service provider managing the client's ERP backbone and corresponding business processes. Bristol-Meyers Squibb, for example, now employs IBM to manage its global SAP HR services, coupled with a nearshore-offshore support model for its global HR processes. Bristol-Meyers Squibb's goal is not only to reduce costs, but also to achieve access to global workforce data to support its global HR strategy.

Free up cash flow:
A good BPO provider can add discipline to your company's collections to speed up cash flow, eliminate bad debt, and provide a timelier cash supply. On the flip side, quality procurement processes help to keep the cash you currently have, which is critical in today's tough economic environment. Global drinks manufacturer InBev recently signed a finance and accounting business process outsourcing (BPO) engagement with Wipro to service from Brazil to create that discipline for its Latin American business units.

Approach cost containment as an ongoing objective:
A good outsourcing partner should be able to help your company sustain cost savings through ongoing quality and process improvements over the length of the agreement, not simply at the onset of an engagement.

For example, you may save $10M in the first year or your engagement, but how about the subsequent years? The initial costs saved will creep back if you don't constantly refine your processes across your global supply chain. One client now sets specific business targets for its service provider to meet. The provider is committed to applying Six Sigma methodology on an ongoing basis to reduce its cost base over the course of a long-term outsourcing contract.

Use this time wisely:
It's not really a good time to go to your board and demand multi-million dollars to add a new service provider to your outsourced delivery infrastructure. It's also not a good time to rip up your current contract if you rushed into an outsourcing situation without an eye on the midterm to long term. Use this economic climate to foster radical changes to your business, and be sure to consider the decision points above when starting to engage outsourcing providers.
AMR Research