Outsourcing in Asia: With the quantity and capability of service providers continuing to grow, a one-size-fits-all approach to outsourcing no longer applies, write Honnus Cheung and David Youngson.
In the late 1980s one of the largest oil companies in the world, BP Plc, decided to embark upon a radical new business model involving outsourcing its European finance and accounting processes to an external third-party vendor.
At that time, the contract was valued at US$20m per year. Today, the company continues to outsource, and sees outsourcing as integral to the way it operates and conducts business. BP's outsourced activities have continued to expand both geographically and in scope, and the annual value of its outsourcing contracts now amounts to US$1.5bn.
After BP's lead, the 90s witnessed a number of other major companies adopting the outsourcing model. As businesses became more diverse and complex, some commentators starting taking the position that outsourcing for major multinationals was more a question of 'when', rather than 'if'.
Initially conceived as a cost-saving measure, outsourcing has now evolved as an accepted business model for many companies who continually seek new areas to outsource beyond those traditional transaction-based process areas considered previously.
The quantity and capability of service providers continues to grow, allowing companies a greater palette of options from which to select different vendors for different areas of their outsourced business.
The proliferation of choice has ignited companies to think more broadly and strategically about outsourcing, and the concept of a one-size-fits-all outsourcing environment has faded in favour of the latest trend: right-sourcing.
Right-sourcing describes a hybrid solution for any particular company at any particular point in time, encompassing a mix of outsourced processes, internal processes and if appropriate, shared service centres (SSCs).
Outsourcing
In its original form, outsourcing was basic transaction processing or support services. With time, it developed into results-driven services, and finally, co-developed strategic partnerships.
The increase in outsourcing activity was driven by changes in business models and the increasing complexity of processes. As companies grew, they would occasionally inherit processes and procedures, or processes would internally evolve differently in different locations.
At some point, the company would look to standardise and align these processes, eliminating any variations. Outsourcing was often seen as a suitable solution to such a situation, allowing a company to achieve its objectives, sometimes on a global scale, and implement cost savings at the same time.
For a while now, the large tier 1 vendors (IBM, EDS, CSC and Accenture) have dominated the global outsourcing landscape, with India leading as the geographical focus.
With an ever-increasing push from the offshore vendors, it is the mid-tier players who are finding themselves under increasing pressure to hold on to their market share within the Asia-Pacific region.
Japan refuses to embrace outsourcing at the same pace as its regional neighbours, and vendors will need to address the cultural resistance to outsourcing if Japan is to become a major market for outsourcing.
Multi-sourcing
Multi-sourcing soon followed outsourcing, allowing companies the flexibility of spreading risk among more than one vendor.
While the larger vendors were increasing capability in order to provide multiple services across different business units and global locations, measuring the value of such mega-deal arrangements was becoming increasingly difficult for the companies buying those services. The growth and success of the large vendors was beginning to limit their appeal, as innovative tailored solutions were beginning to disappear.
At the same time, companies were also beginning to look beyond pure cost savings as the key driver to outsource.
Most low-hanging fruit had been picked long ago in this area and it was the search for accelerated growth and greater efficiencies that led companies to engage a varied pool of service providers in order to secure best-of-breed solutions. By engaging numerous suppliers, companies found they could better measure service delivery by process and by location. Having competing service providers also helped improve the vendors' awareness of the quality and service efficiency they were delivering.
However, engaging multiple vendors led to increased management time working on service level agreements, ensuring consistent governance across the organisation and monitoring individual vendor performance.
Within the multi-sourcing model, mechanisms also had to be established to ensure vendors could communicate with each other and work together effectively. This required additional scope and service level agreements so that if things did go wrong, the responsible party was easily identifiable.
Driving the increase in multi-sourcing was front- and middle-office business process work, which is still the largest segment of outsourcing.
Human resource outsourcing has been a growing segment over the past couple of years, and is likely to continue to grow in the short term.
Procurement outsourcing is not gaining acceptance as quickly but does provide potential double benefits from direct savings on operational costs and further savings on goods and services procured through larger global contracts and supplier renegotiation.
Finance and accounting outsourcing has been slow in recent years, as US companies have been focusing attention on compliance issues related to Sarbanes-Oxley and internal control governance.
In-sourcing, back-sourcing and shared service centres
In-sourcing refers to the situation whereby companies retain certain core processes in-house. The reasons for this could be risk- or compliance-driven processes involving decision making, or simply because the company feels it can perform the processes itself better than any available outsource provider.
With recent regulatory changes (Sarbanes-Oxley, for example) some companies have started bringing previously outsourced processes back in-house, and this is referred to as back-sourcing. A number of large outsourcing deals have also recently been brought back in-house for a variety of reasons, establishing the view that deciding to outsource doesn't necessarily need to be a one-way ticket.
Shared service centres (SSCs) were an organic development that came about as companies found themselves with a critical mass of processes retained in-house that would benefit from centralisation. SSCs allowed commoditisation and cost saving, scalability as the business expanded, and the ability to implement standard processes and procedures in a similar manner across an entire organisation.
A mix of shared services and outsourcing requires management time to ensure the process runs smoothly, similar to the communication channels and mechanisms needed in a multi-sourcing arrangement.
The shared services model also places employee recruitment and retention with a company as opposed to a third party, and this is an area that is crucial for the success of any centre. Obtaining the required skill-set can be problematic depending upon the location of the SSC.
Right-sourcing
Right-sourcing is a relatively new term describing the identification, procurement and execution of various services.
This is not necessarily the same as the current state of an organisation's outsourced activities after a period of changes, modifications and fine-tuning. Instead, right-sourcing is a defined strategy from the outset looking to mix in-house services, multi-sourced services, shared services and best-of-breed solutions in the most suitable way to optimise benefits for the organisation and provide it with a competitive edge.
As with any outsourcing strategy, right-sourcing will require a strong commitment from management, and detailed planning and investment.
ABN Amro recently spent two years planning its right-sourcing strategy, which included elements of off-shoring, in-house work, shared services and five-year outsourcing deals (to the value of US$2.4bn) being awarded to five different vendors.
Current trends –offshoring
Offshoring refers to the transfer of a business function or process to a foreign affiliate or group company in a country other than the company's major market for its final products or service.
Offshore outsourcing is the same concept but uses an external vendor to provide the service instead of a group company. Despite the obvious initial cost savings gained from the benefits of a lower cost base, offshoring remains a complex business strategy, and can be particularly difficult to manage when the vendor is located in a different country with a range of legal, regulatory and cultural issues to address. Various problems may arise that can quickly erode any initial cost benefits gained from the offshoring arrangement.
Despite these potential problems, offshoring has been around for a long time, and many multinationals shifted their manufacturing facilities to lower cost bases in China and Southeast Asia long ago.
Recent negative publicity about offshoring, particularly in the US, was due to the changing nature of the work being considered for offshoring: namely, white-collar jobs. And this was at a time when some countries were struggling to recover from recession. Introducing white-collar roles to the offshoring market also challenged traditional location choice, as the required skill-sets were now changing and were not always readily available in certain low-cost offshoring locations.
These days offshoring is rarely considered in isolation, and usually forms an integral component of most outsourcing transactions. Companies tend to engage a vendor, and the vendor is left to choose the geographical location where processing will be performed.
Call centres and back-office services remain the majority segments in the offshoring market, with most facilities traditionally located in India. China and the Philippines are increasingly being considered as offshoring locations due to the notion of cheap labour and perceived competitive similarities to India.
While positive factors exist for including these countries in any offshoring arrangement plan, other factors must also be considered:
Language: varying levels of business English are found in developing regions, especially outside the senior management levels. A limited pool of English-speaking employees should be considered early in the process to avoid potential mistakes, delayed processing and an increase in transaction costs.
Education and training: basic commercial business concepts are occasionally lacking from the work environment that many employees in China and the Philippines will have experienced.
Vendor capability: extensive due diligence should be performed on vendors to understand their legal structure, their licensing status and their staffing and processing capabilities.
Legal: vendors should have adequate legal representation and experience to ensure the interests of the company are protected.
Data privacy and security: Certain countries have limited privacy and information security laws. Companies should ensure appropriate security over all sensitive data.
The impact of the factors highlighted above is leading to an increase in offshoring to more developed markets that still manage to retain a lower cost base than, for example, the US and UK.
With international standards of service and an established regulatory framework in place, countries such as Australia and New Zealand are seeing growth in outsourcing facilities and operations.
Where to from here?
Constant development and evolution of outsourcing has helped crystallise a new right-sourcing model that allows selection of only the best parts of services on offer to match a company's needs.
The experience and sophistication of companies now outsourcing is creating transparency in deal structuring and, in some cases, deal realignment and renegotiation. This factor, coupled with the increase in service providers and offshore delivery models, is keeping pricing competitive and keeping outsourcing a buyer's market, at least for the short term.
In the offshoring market, India still leads but is losing ground as a result of other offshore locations becoming more competitive. Countries such as China and the Philippines are continually developing skills and resources to compete at an international standard. Offshoring as an integral component in any right-sourced solution. It appears to be here to stay.
With so many options now open to them, the real test is for companies to understand how they can maximise value through right-sourcing.
Why should companies right-source?
Optimum level of flexibility Adopt economic business solutions most readily adaptable for changing business models
Increased level of capabilities Place the activity in a virtual, seamless front office, leaving the company to focus on core competencies. Use somebody else's front office for non-core activities
Cost variability and decreased cost per revenue Adopt a more variable cost model for volume-driven activities
Presence in the marketplace and enabled growth Enable accelerated geographic expansion, speed-to-market and presence
Advanced compliance and enterprise risk management Place activity in a location that best satisfies risk strategy and standards
Critical Success Factors
Clear objectives on the strategic roadmap Confirmation and agreement on the business strategy Upfront involvement of all affected departments Alignment of multiple projects, budgets and phases
Commitment and clear communication Clear commitment and executive support Reduced 'noise' levels
Clear integrated implementation Alignment of initiatives for the good of the company resulting in the best possible business support model
Interim and long-term focus Interim, strategic and transformational services
Consistent follow through Known priorities and goals with follow through Management commitment Visible and focused leadership Change-management leadership Leadership in managing organisational change and business impacts
