And in the age of Digital Transformation, nothing stays as it was - clients change, markets change, sales expectations change. Except, there is one thing that stays: the need for profits and an operation that scales with demands. So, how?
Outsourcing and the question of "Make or Buy" has become a pivotal element of all strategic engagements. Additionally, buzzwords such as "SaaS", "Cloud" and "BPO" make a round. Companies increasingly seek to optimise their development and service capabilities globally. As a result, they are in a constant screening process for new facilities in order to grow and adjust their business. Especially in Information Technology, service providers try to mitigate risks – such as inflation risk, location risk, political risk and skill shortage risks by balancing their operations globally. This service offering helps you work out advantages and disadvantages of global offshoring approaches and assists you to select the right strategy for your company.
There are costs associated with performing an outsourcing agreement, For example: whilst setting up an outsourcing engagement, the client has to provide an organization to manage the outsourcer. Depending upon the quality of the contract, the client has to put on a “retained organization”, managing the supplier.
Combining outsourcing and offshoring, two factors come together: the outsourcing of parts of the enterprise towards a supplier who then chooses to perform the service from abroad. Additional costs and risks come to bear what need to be encompassed:
- Cultural risk: Different countries have different cultures. There is a risk and a cost associated with dealing with the different culture.
- Currency risk: If the outsourcer operates within a different currency environment, these currencies might fluctuate each other. In total, the business case for outsourcing only works if the service can be offered at a much lower cost than before. In consequence, this business case then only works if the following premises do apply:
- The infrastructure cost can be drastically lowered i.e. by better purchase conditions, sharing of resources or better utilization of capital equipment employed.
- The people cost can be significantly lowered either by a much better utilization of the people and condensing people’s work, i.e. by sharing the same skill over several clients or a higher degree of automation or by lower labour costs by using labour arbitrage and putting people off-shore.
- The risks approportioned are manageable and therefore can be lowered, i.e. by a culturally capable team and by standardization and specialization.
The service management costs from both sides – provider and client (Retained organizations) are contained and can be as frictionless as possible. Here, common standards such as ITIL as a lingua franca do play a significant role in order to reduce the service management costs.
Cultural fit, contracting construct and getting to know the "real team" are the key ingredients for a successful outsourcing transaction.
True matter of facts is, that there is no 'one size fits all'-solution. What has been a good choice some three years ago might not be the case any longer due to changes in management, business dynamics or even just because an outsourcing provider has become too successful. A constant reevaluation therefore is appropriate before making a choice.
Yesterday’s darlings are today’s wallflowers in the sourcing landscape and for the selection clients should look into the following ten key dimensions.
Here are the top factors for choosing the right provider:
Is there a cultural fit between you and the provider? Does the provider have the same understanding on how to do business as you do?
Is the contracting construct one that allows you space for maneuver or is it just inflexible? Every provider has both sides to our knowledge, so you have to negotiate and choose.
Is the provider’s business cycle just right for you? Sometimes, the provider just has a good moment where it is more than practical to put you on his platform at a low cost.
Is the engagement team one that fits to you? The local team makes the biggest difference despite all automation—and here we definitely need to put a serious focus onto it.
Is the financial model adopted towards your needs? Here, by jointly analyzing the case, it often turns out there is space to maneuver.
Does the provider still make enough profits to have a good business? One of the biggest mistakes is to enter into an agreement that needs to be managed “upwards” in terms of profitability from the first moment on because the provider has been squeezed too much. It results in bad behaviour and frequent change in personnel.
Does the provider get you the capabilities in the business and datacenter sites and countries you want to service or is it a loose bound of subcontractors?
Are the service level agreements (SLAs) the ones that fit to you?
How much experience does the provider have in your industry - and do you receive the same quality of service than your competition does already receive?
Is the delivery capability built for the future? Does he have already a good mix between on-shore and offshore? Or does the outsourcing provider rather use residual capacities of his existing operations that he "stretches" to a limit?
The provider team enters into a sourcing negotiation more often than the clients do. A client often does an outsource once every couple of years, so it is wise to make use of an experienced support.
Outsourcing and Offshoring often come together as a pair of synonyms. However, the terms are very well coined: Offshoring comprises the motion of moving parts of an enterprise away from the own shore, to foreign countries. However, outsourcing is about transferring parts of an enterprise value chain towards suppliers - the outsourcer. With this, outsourcing results in a shortening of the value chain for the client. By taking advantage of specialized firms, for production, services or development activities, cost advantages might be realized and the own strategic market position might be improved. vonGammCom Global truly suggests that ones own technologies and competencies should not be abandoned. A strategic dependency should be avoided - but they should be clearly named anyway. Other reasons for outsourcing besides cost reduction resulting into a strategic advantage are:
Improved flexibility: The outsourcer might have economies of scale which the client does not have. Enabling a fast scale-up or scale-down of the operations might therefore improve time to market and cost-dependencies.
Access to talent: As the outsourcer operates within his own core competencies, the access to talent might be easier to manage in this specialized domain skill.
Capital allocation: An operation outside of the core business might still bind financial capital that would allocated to core operations, otherwise. The capital designated to core operations might provide a higher return.
Risk transference: With the operation transferred to the outsourcer, the outsourcer then has the risk of performing and can contractually be forced to take over the financial and business risk of a service delivered.
Additionally, several benefits might occur during this process, such as further instant savings and less risk in delivery. As a part of the acquisition, an initial payment for cash-strapped organizations, and literally speaking, a hidden loan for the takeover of assets at a good-will price. In total, the savings contribution and quality improvement of an outsourcing solution might be more predictable than a do-it-yourself operation, at least it can be contractually guaranteed. However, an outsourcing company does not perform an outsourcing solution for “free”; it has associated some extra cost:
Margin for the provider: In order to perform the service, the provider wants to see a certain margin, usually between 5 and 20% of the total service delivered. This margin is typically used for business development activities, administration of the overall outsourcing operation and profit.
Transition and Transformation cost: In order to move the outsourcing operation from one company to another, several activities are incurred that generate effort, such as knowledge transfer, operations setup etc. This transition and transformation cost might be up to 10 to 15% of the total outsource.
If transfer or takeover of people is part of the outsource, then redundancy fees and termination fees need to be accounted as well. This includes the minimum stay of people transferred from one country to another, as described in German law under BGB § 613a or Swiss Law CO Art. 333.
Value added Tax (VAT): If a client is a VAT-exempt organization, such as a bank or a public sector company, then the outsourcer – usually under VAT duty - is handicapped by the VAT rate, as the previously internally performed people services from own employees then need to be burdened with VAT. In situations with high VAT, i.e. Germany, Austria with currently 19 and respectively 20%, this artificially inflates the price.
Client companies increasingly seek to optimise their development and service capabilities globally. As a result, they are in a constant screening process for new facilities in order to grow and adjust their business. Especially in Information Technology, service providers try to mitigate risks – such as inflation risk, location risk, political risk and skill shortage risks by balancing their operations globally.
Many providers employ a set of centres globally to mitigate this risk while capturing a location based opportunity, such as labour cost or improved infrastructure access. The aim of the integral service offered by vonGammCom Global is to depict several advantages and disadvantages of global offshoring approaches. We outline the right strategy for your company. Costs are still a major driver for many outsourcings - we truly believe that improved flexibility, a better capability to expand and a higher resilience towards risks are the key drivers of an outsource.
Therefore, many outsourcing engagements need revision and an adoption towards today’s needs. vonGammCom Global can cater for this by its long-year experience in the outsourcing business. Providers and clients are known through its rich knowledge of deal situations.
Most outsourcing deals are getting renegotiated after three years because of dissatisfaction from the client.
By choosing the right provider, a client can improve his flexibility and resilience dramatically.
In renegotiations, additional savings of 20% and more are possible.
Cloud Services especially can provide a leading edge now and redefine the game.
vonGammCom Global operates in IT, Telecoms, High-Tech and Banking.
vonGammCom Global provides a client a proven Five-Step Methodology to redefine and implement strategic change and enabling organisations to make more out of the current resources and capabilities an organisation posesses.
Step 1: Initial Client briefing - here, we discuss with you as client your strategic ambitions.
Step 2: We examine hotspots of renegotiations and look what can be done in order to quickly find a solution.
Step 3: We benchmark along best-in-class situations and also work out alternative routes, such as „cloud“ or „Software as a Service“.
Step 4: We prepare a joint execution plan and discuss with you a futher make-or-buy strategy. Always remember: A strategy only lives from execution.
Step 5: We provide ongoing coaching and adjustment and control the further flow.
On this engagement, we do charge clients based upon the value the outsourcing service will generate.