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Growing Beyond Illusions - Guidelines for Changing and Improving Outsourcing Relationships |
By VP/Managing Director, Everest Group
For more information...
Some companies are finding that they should actually spend more when the benefits of outsourcing create far more value than the added cost. Enterprise outsourcing strategies rather than selective point solutions often bring more long-term benefits, especially when it removes layers of risk and aligns common business objectives between buyers and suppliers. Doing Business in the 21st Century Using 20th Century ToolsA recent Everest outsourcing engagement demonstrates the math of paying more to get much, much more. Last year an NYSE-listed company in the Fortune 500 approached us. The company, typical of many old-line manufacturing companies, had a history of numerous mergers and acquisitions. But it never bit the bullet and fully integrated its business and financial systems. They struggled with the usual tensions between corporate control and business unit autonomy. As a result, it was difficult to capture synergies within the enterprise and even tougher to integrate and manage the business. Its executives did not view technology as an enabler and they had heard stories of unsuccessful Enterprise Resource Planning (ERP) implementations. Essentially, they found themselves in the 21st century using 20th century tools. When we first visited the company, we found lots of dedicated and hard working people doing their best to manually integrate and run the business. People rather than technology were the glue holding everything together. Their most critical technology was Excel spreadsheets and email, which they used to communicate business and financial information between corporate and the business units. The company had many subsidiaries. None were integrated into a corporate finance and accounting system. There were no consistent processes or practices. Each division had stand alone, non-integrated business systems and produced numbers the way it always did. Corporate did its best to handle and consolidate reporting. Internal bookkeeping and transaction processing had become so complex there was never enough time to think strategically. Exceptions were difficult to reconcile. The corporate finance and accounting department spent most of its time and resources fighting fires rather than helping the business move forward. The department spent two weeks of every month closing and the next two weeks preparing for the next closing. Poor Data Created The Risk Of Bad DecisionsInformation was typically late and often was neither accurate nor useful. It was difficult for them to make informed business decisions because of the difficulty of making sense of the numbers. It was a challenge to develop pro formas. Business decisions carried the risk of making poor choices since they couldn't access good information. Now this did not happen overnight. This industry had been hard hit by the recession. Having survived business cycles before, the company knew how to cut costs. Time and again, its cost cutting efforts undermined its finance and accounting, IT, and other important but non-core areas of the business. Sound familiar? The company recognized it needed to upgrade to new state-of-the art financial systems, but first had to decide if they were going to do it themselves (make) or turn to outsourcing (buy). The company chose to investigate outsourcing, believing it carried less risk since the supplier would be accountable for implementation and the on-going results. Also, they realized they could benefit from a tremendous upside and capture synergies with a BPO partner that weren't available if they attempted this themselves. After receiving the proposals, we hit a snag. The suppliers' bids were way out of line with the buyer's affordability. The buyers understood they would have to spend more money to outsource, but hadn't planned on that much of an increase. Shaping and Optimizing SolutionsAs the buyer's outsourcing advisor, we worked diligently with both the buyer's and suppliers' organizations to understand what was driving the higher costs. As a result, we found that the buyer's retained costs were too high and that the suppliers could reshape and further optimize their solution. Much like building a house, we found a lower grade of carpet and a few other tweaks could still meet the buyer's objectives at a more affordable cost. The overall cost will still be more than they are spending today; they understood outsourcing was the right thing to do for their company because of all the other benefits. The end result created value by significantly impacting all corners of their business by:
The buyer valued this long list of benefits and was willing to pay more to get them. The company understood that the value created was far worth the additional price when considering the positive impact on the business and the enterprise. That's when outsourcing can transform an organization, making it a new player in today's brave new world. Lessons from the Outsourcing Journal:
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Most companies initially turn to outsourcing as a way to save money. While that can be successful, focusing only on cost savings often leaves significant added value on the table that they can't recapture later. Don't misunderstand, cost savings are always important, but the real value is the impact the outsourcing relationship has on other aspects of the overall business enterprise.
