Outsourcing Overview
Technology, human resources, manufacturing, finance and accounting are among the many outsourcing options for consumer goods (CG) companies, but until recently (with a few notable exceptions) they have not been overly aggressive in doing so. Regarding IT in particular, Dana Stiffler, research director, AMR Research, says CG companies have historically preferred to utilize "packaged" applications and were interested in their strategic use, traditionally wanting to run these themselves. "The ownership of business applications is just starting to change," she says.
According to Stiffler another perceptible trend is the scope the deals being made. Although she says that we are seeing a lot more deal activity in the CG space, she does not expect to see too many more "huge" deals, like the recent Accenture/Unilever model. "Classical outsourcing" such as IBM and EDS is essentially the "rebadging" of staff (in this case IT) and transferring of assets to the service provider. She points out that there are few of those types of traditional "monolithic" outsourcing contracts now.
"Most companies today are looking to breakdown different functions into smaller pieces and to strategically source each of those," she explains. "What you see now are more managed service agreements where the CG company is signing a multi-year contract to get support for IT or business processes." The newer sourcing model has become "find the best in breed," which means multiple vendors, who offer the best cost and "most attractive terms."
One thing is true across industries, the initial motivator for outsourcing is usually cited as cost savings. In a June 2006 survey by InformationWeek, 65 percent of respondents chose this as their "outsourcing driver" (Figure 1). The Outsourcing Institute surveys new members every year and at the end of 2005 its "8th Annual Index" showed the majority of respondents had chosen "reduce and control operation costs" as their reason to outsource. In the HR space, a 2004 survey from the Society for Human Resource Management (SHRM) also indicates that a majority of its respondents, 56 percent, outsource to "save money/reduce operating costs."
UNEXPECTED OUTCOME
What has consequently been realized, is that a secondary benefit of outsourcing is an improved strategic focus. Most companies do not outsource what are considered core competencies that are under the purview of management and/or executives. Yet, such people were finding themselves so bogged down with inefficient or outmoded day-to-day processes, that they were forced to focus on this level. Stiffler affirms, "One thing that companies like is that if they outsource properly, their strategic resources and executives can focus on things that add value to the business." She adds that this and other benefits, such as flexibility and scalability, can be as attractive, or even more attractive than cost savings.
There are obvious and not so apparent factors required in a successful outsourcing relationship. Logistics are usually considered and dealt with, but the preparedness of the company doing the outsourcing is often overlooked. It really has to know and own its key issues, comprehend its own metrics and have realistic goals and expectations. Stiffler says that sometimes the executives who are leading the outsourcing initiative may have unreasonable perceptions. "The burden of these things to succeed lies really with the customer and how ready they are and what is going on internally," she explains.
COMMUNICATION IS CRUCIAL
Another imperative factor, which is actually coming more to the forefront now, is communication during implementation and/or transition. Stiffler says she gets asked a lot about best practices here. "Open, honest and respectful communication is key. You should have a targeted communications plan for the business executives, people who are leaving and people who are staying," she says (see sidebar "Talk About It") An interesting, albeit unintended, by-product of IT outsourcing initiatives in particular, is the creation of a new type of job. Stiffler points out that in many cases, employees who stay cannot make the leap from working in a traditional IT organization to one where they are more responsible for remote team management with the outsourcer. This opens the market to people who can manage these relationships. Stiffler talks about the program management level where working with multiple service providers can get very complicated. People with expertise will be sought after more and more.
What is the future of outsourcing? Stiffler thinks we are just at the beginning stages. She attended a summit recently that featured a panel with representatives from CG and pharmaceutical companies where one executive from a global CG company said she outsourced 75 percent of her IT staff. One thing Stiffler is keeping her eye on is who companies are looking to for outsourcing. Are they looking for more traditional providers or an offshorer? There is still a gap between the business process consulting capabilities of the offshore companies and the customary vendors, but they are making progress. An AMR survey reveals 38 percent use "Tier One Global (IBM Global Services, A.T. Kearney)," followed by 25 percent who use "Tier One Global Offshore (Wipro, Tata Consultancy)."
According to Stiffler another perceptible trend is the scope the deals being made. Although she says that we are seeing a lot more deal activity in the CG space, she does not expect to see too many more "huge" deals, like the recent Accenture/Unilever model. "Classical outsourcing" such as IBM and EDS is essentially the "rebadging" of staff (in this case IT) and transferring of assets to the service provider. She points out that there are few of those types of traditional "monolithic" outsourcing contracts now.
"Most companies today are looking to breakdown different functions into smaller pieces and to strategically source each of those," she explains. "What you see now are more managed service agreements where the CG company is signing a multi-year contract to get support for IT or business processes." The newer sourcing model has become "find the best in breed," which means multiple vendors, who offer the best cost and "most attractive terms."
One thing is true across industries, the initial motivator for outsourcing is usually cited as cost savings. In a June 2006 survey by InformationWeek, 65 percent of respondents chose this as their "outsourcing driver" (Figure 1). The Outsourcing Institute surveys new members every year and at the end of 2005 its "8th Annual Index" showed the majority of respondents had chosen "reduce and control operation costs" as their reason to outsource. In the HR space, a 2004 survey from the Society for Human Resource Management (SHRM) also indicates that a majority of its respondents, 56 percent, outsource to "save money/reduce operating costs."
UNEXPECTED OUTCOME
What has consequently been realized, is that a secondary benefit of outsourcing is an improved strategic focus. Most companies do not outsource what are considered core competencies that are under the purview of management and/or executives. Yet, such people were finding themselves so bogged down with inefficient or outmoded day-to-day processes, that they were forced to focus on this level. Stiffler affirms, "One thing that companies like is that if they outsource properly, their strategic resources and executives can focus on things that add value to the business." She adds that this and other benefits, such as flexibility and scalability, can be as attractive, or even more attractive than cost savings.
There are obvious and not so apparent factors required in a successful outsourcing relationship. Logistics are usually considered and dealt with, but the preparedness of the company doing the outsourcing is often overlooked. It really has to know and own its key issues, comprehend its own metrics and have realistic goals and expectations. Stiffler says that sometimes the executives who are leading the outsourcing initiative may have unreasonable perceptions. "The burden of these things to succeed lies really with the customer and how ready they are and what is going on internally," she explains.
COMMUNICATION IS CRUCIAL
Another imperative factor, which is actually coming more to the forefront now, is communication during implementation and/or transition. Stiffler says she gets asked a lot about best practices here. "Open, honest and respectful communication is key. You should have a targeted communications plan for the business executives, people who are leaving and people who are staying," she says (see sidebar "Talk About It") An interesting, albeit unintended, by-product of IT outsourcing initiatives in particular, is the creation of a new type of job. Stiffler points out that in many cases, employees who stay cannot make the leap from working in a traditional IT organization to one where they are more responsible for remote team management with the outsourcer. This opens the market to people who can manage these relationships. Stiffler talks about the program management level where working with multiple service providers can get very complicated. People with expertise will be sought after more and more.
What is the future of outsourcing? Stiffler thinks we are just at the beginning stages. She attended a summit recently that featured a panel with representatives from CG and pharmaceutical companies where one executive from a global CG company said she outsourced 75 percent of her IT staff. One thing Stiffler is keeping her eye on is who companies are looking to for outsourcing. Are they looking for more traditional providers or an offshorer? There is still a gap between the business process consulting capabilities of the offshore companies and the customary vendors, but they are making progress. An AMR survey reveals 38 percent use "Tier One Global (IBM Global Services, A.T. Kearney)," followed by 25 percent who use "Tier One Global Offshore (Wipro, Tata Consultancy)."