Outsourcing Comes of Age: The Rise of Collaborative Partnering
Outsourcing Comes of Age: The Rise of Collaborative Partnering
Outsourcing Comes of Age: The Rise of Collaborative Partnering
PricewaterhouseCoopers
Contents
Introduction Executive summary Outsourcing is a maturing success story The challenges The collaboration payoff Rising to the challenge of collaborative partnering 2 4 6 0 4
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Introduction
Recent research indicates many outsourcing deals collapse before the contract ends, citing rising costs and mistrust between service providers and customers, and implying saving money is not a sound reason to outsource. Some industry analysts and media pundits further translate the findings into painful trade-offs: cost savings vs. growth, speed vs. quality, and organisational cohesion vs. knowledge and innovation. Others suggest outsourcing is in a death spiral... a decline fueled by structural risks, questionable cost savings, and multiple complexities. Their bottom line? Organisations will soon become disillusioned with outsourcing. Such predictions and assertions seem to fly in the face of an equally prominent group of influencers and media commentators continually heralding lucrative outsourcing deals, impressive benefits and uncapped growth projections. Offshore service providers are delivering 30-40% year-over-year revenue growth every quarter. Meanwhile their Westernbased competitors hurriedly expand their operations in emerging economies. Beyond rapid growth and geographic expansion, some service providers are helping outsourcing customers compete in new ways. They provide a level of strategic and operational flexibility unattainable through any other means. In the 0th Annual PricewaterhouseCoopers2 CEO Survey, released in January 2007, we found that many top global executives believe they gain major competitive advantages from outsourcing. They identified functions like logistics, manufacturing, customer support and service, research & development, and human resource management. The CEOs also described the growing importance of collaboration with suppliers and service providers as a way to mitigate complexity, reduce transaction costs, and gain competitive advantages.
We define outsourcing as the transfer of a business activity or function to a third party, usually along with people and/or know how. 2 PricewaterhouseCoopers refers to the network of member firms at PricewaterhouseCoopers
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So whats really happening here? Global research recently completed by PricewaterhouseCoopers (PwC) leads us to conclude that both perspectives have merit. Our findings indicate outsourcing is deeply established... an entrenched business strategy maturing and evolving to deliver value beyond just cost savings. On the other hand, respondents say that not all is perfect. Full benefits often remain unrealised and the outsourcing process itself in its relentless move toward specialisation, innovation and new models is not easy. To bring clarity to these issues, PwC interviewed nearly 300 executives, seeking insight into their oursourcing experience and views. The research, conducted worldwide in March and April 2007, leads us to conclude that outsourcing is alive
and well; in fact it is growing, maturing and evolving to deliver value well beyond cost savings. This report presents results of our survey of 226 customers and 66 outsourcing service providers. We set out to explore some of the current trends: the growth of multisourcing, changes in customer supplier relationships, the emergence of new stakeholders and new governance models. At its core, our research confirms the growing complexity of outsourcing. However, it also indicates sophisticated leaders dont necessarily fear that complexity. For them, it is the normal path of a maturing business strategy and a manifestation of an increasingly global environment. As the examples of Apple and Airtel illustrate (below) the complexities of innovative partnering yield the benefits of growth and
performance. Outsourcing is now as diverse as business itself, differing by country, sector, and company strategy. It is characterised by smarter suppliers, improved automation and better informed buyers driving toward long-term, sustainable outsourcing arrangements. Firms that effectively master the new complexities of outsourcing and the diverse business model innovations they make possible stand to reap the benefits and lead the way to the rise of collaborative partnering.
Cost savings can be the main driver of an outsourcing project. But as this survey illustrates, every company indeed, each outsourcing initiative within any one company has a mix of other drivers, prioritised differently in each case. Beyond cost savings, a second major theme is access to capabilities whether human talent, process excellence, or sheer physical resources. Apple designs the iPod in its Cupertino, California offices, but it outsources the manufacturing to select Chinese firms not just because they can build it cheaply, but also because of their unique intellectual property in materials science and packaging technology. It also outsources, in a manner of speaking, content creation services: to an open community of providers from multibillion dollar music publishers to amateur podcasters. A third major theme is strategic benefit freeing up ones own resources, improving flexibility, gaining access to capital, access to new markets, or changing the rules of competition
in an industry. In 2003, Bharti Airtel, an Indian mobile phone company, lacked the capital to respond to a massive growth opportunity in its domestic market. It cut an end to end IT outsourcing deal with IBM. Much of IBMs compensation in this deal depended on Airtels market growth. Airtel made other shared risk/reward deals with equipment suppliers Ericsson, Nokia and Siemens. Today Airtel has some 40 million customers and is its countrys market leader. Apple and Airtel must manage complexity every day. Their business webs of which weve only described small corners are varied and demanding. Each company must achieve an optimal balance of top-down management and collaborative partnering in dealings with suppliers, channel marketers, companies selling complementary services and customers. Each deftly illustrates that a uniquely right kind of collaborative partnering business model makes possible the squaring of many circles: cost savings with growth, speed as well as quality, and organisational cohesion plus knowledge and innovation.
Executive summary
The responses to this survey confirm that outsourcing is high on almost every companys agenda
Just about everybody uses outsourcing today, and for a variety of strategic reasons that extend well beyond cost savings. Factors that support business growth, like access to talent and capabilities and maximising business model flexibility are key drivers. For example, 70% of respondents say access to talent is an important or very important reason why they outsource. Customers of outsourcing are gaining maturity and have big expansion plans. But success and growth are not without their challenges. Customers continue to be held back by cost benefit justification (i.e., the challenge of creating a business case where benefits are measured and delivered) and their own lack of experience among others. Nearly all feel challenged by one or more aspects of the outsourcing lifecycle; and their first inclination is to blame service providers when projects fail. Service providers think the main cause of failure is poor collaboration with customers. Nonetheless, this survey provides evidence that leading outsourcing customers and service providers are shifting from traditional to collaborative business models. Customers need to rely increasingly on multisourcing, joint ventures, and open business models. Unlike traditional single-source transactional outsourcing, these approaches and the complexities they entail intrinsically require collaboration. When General Motors moved from single-sourced information technology outsourcing (with EDS) to multisourcing, it prepared the ground by bringing service providers together to define standards and processes that would enable them to work together while improving the companys ability to operate globally. Successful customers of outsourcing show good collaboration with service providers, and good collaborators tend to be effective outsourcers. Collaboration yields best practices in the capabilities and processes of outsourcing itself. Toyotas supportive and candid collaboration with myriad suppliers, from design through just-intime logistics, has yielded efficiency, quality, innovation and now global industry leadership. This report describes two of the many possible approaches to multisourcing. In a lead supplier model, one service provider functions as a general contractor who orchestrates other suppliers. In a collaborative partnering model, a collection of master partners governs relationships and deliverables for the benefit of end-customers or consumers.
PricewaterhouseCoopers
Saving money is important, but so is access to talent, capabilities and business flexibility
Top reasons firms outsource are to: Lower costs (important or very important for 76% of respondents) Gain access to talent (70%) Farm out activities that others can do better (63%) Increase business model flexibility (6%) Other reasons are also important: Improving customer relationships (42%) Developing new products or services/ market segment expansion (37% each) Geographic expansion (33%)
activities towards the second ring of nonessential business activities. For example, in the finance function, this could be a move from outsourcing payroll and accounts payable towards seeking assistance with budgeting, forecasting and management reporting. Information technology services remain the most widely outsourced activity, reported by 7% of respondents. But overall, 70% outsource one or more inherently strategic activities: 3% outsource production or delivery of core products or services 33% outsource sales & marketing (including third party distribution channels) 32% outsource innovation/R&D Key markets are embracing core outsourcing. Financial services firms, at 40%, are especially likely to outsource sales and marketing (e.g., to insurance brokers and financial planners). Because many are in infrastructure businesses, media/ telecommunications/IT companies are less inclined to outsource core work. But even 39% of these companies do it. And nearly 40% of firms in rising markets are likely to outsource innovation/R&D.
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Increasingly we are moving away from looking at cost alone. People are going to put more emphasis on how well the risk is managed, and how well the outsourcing company cater to our needs or to the needs of the industry.
Ian Brown, Director, NCS Group Marketing and Corporate Communications
Firms in medium mature markets (Australia, Canada and New Zealand) are especially aggressive at outsourcing strategic functions. 7% of them outsource core products/services, and 48% outsource sales and marketing (vs. 3% and 33% respectively for the total sample). Growing firms based in these countries have small domestic markets; this may create pressure to go outside the company for strategic capabilities that facilitate growth. Outsourcing of both core and support activities is intensifying. Respondents rate themselves as outsourcing to a significant extent (4 or on a scale of to , where means outsource hardly at all and means to a great extent) across a broad cross section of activities. Functions most widely and deeply outsourced are information technology services, core products and services, and logistics and distribution. Functions with fewer outsourcing customers, but where the outsourcing is extensive, are procurement and customer call centres.
IT
In-house
Core
Core Outsource? HR
Outsource
Non-core
Source: PricewaterhouseCoopers
Today, tight, disciplined management must be seasoned with the culture, structures, and processes of collaborative partnering and an openness to business model innovation. These become even more important as customers start to look at another type of second wave outsourcing of other functions, many of which are in the process of being streamlined within shared service centres, such as HR and finance and accounting functions. Depending on the business function, anywhere from 27% to % of respondents intend to expand their current outsourcing over the next five years. There is still growth to come in information technology
(where % of current customers plan to expand) and what we called core products or services (42% will expand). On the rise. A smaller number of companies currently outsource innovation/ R&D and customer call centres. In these areas over 40% of current outsourcing customers plan to expand. Hot spots for growth: Large mature markets: for procurement services (3% with expansion plans), customer call centres (4%) and, notably, finance/accounting (44%).
Information technology services Production or delivery of your core products or services Logistics and distribution HR services Sales and marketing including 3rd party distribution channels Innovation, research and development Procurement Customer call centres
Outsourcing this item Outsource it to a significant extent
57% 39% 53% 44% 51% 50% 35% 16% 33% 27% 32% 15% 30% 41% 25% 41% 24% 20%
Q: Which of the following products or services does your company currently source from external suppliers? Q: To what extent does your company currently source each of the following from external suppliers? Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
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Outsourcing is growing in scale... but becoming more complex to manage and requiring a new set of skills.
Eric Sorensen, President & CEO of Sun Rype Products Ltd
Rising markets: globally, the lions share of outsourcing growth in customer call centres (6%), core products & services (4%) and logistics/distribution (3%). The shift of manufacturing to emerging economies accounts for part of this growth. Financial services: core products & services (6%), customer call centres (46%), sales & marketing (40%). Media/telecommunications/IT: innovation/R&D (64%), customer call centres (73%), and finance/accounting (0%). In these highly competitive industries, firms are especially pressured to find innovation from whatever sources they can muster.
a c b
d g i
f h
Q: Which of the following products or services does your company currently source from external suppliers? Q: Broadly speaking, over the next five years, do you think your use of external suppliers for each of the following
activities will increase, decrease, or stay about the same within your business?
Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
Q: Which, if any, of these issues do you consider to be barriers to outsourcing? Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
PricewaterhouseCoopers
Id like to think that we are looking toward deeper partnerships with our clients. Do I see it happening? Definitely. When we were just starting, customers were not very open.
Marianne Fullon, Partner, Payroll Service Providers Inc.
e d c h g a
a b c d e f g
Strategy development Business case development Structuring the deal Managing the transition Ongoing managing and monitoring Mid-contract change management Introducing innovative changes mid-contract Regeneration
50 40 30 20 20 30
b f
40
50
Difficult
60
70
80
Q: How important is this phase of the outsourcing lifecycle? How difficult is it? (Customer responses only)
Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
Growing complexities
Customers and service providers hold differing views on some important issues. They tend to differ on how contracts should be structured, where work ought to be performed, margins, and some key ethical issues. Taken together, these differences underline the growing complexities that outsourcing decision makers face, and the need for better alignment between customers and service providers.
This finding reflects PwCs conversations with clients on the issue of nearshoring versus offshoring. Offshoring raises more issues for customers than the benefits of cost savings. They increasingly consider cultural mismatches in offshore-domestic communications, offshore labour and employment standards, brand impacts of job mobility, and environmental sustainability issues. This raises the need to understand and manage a complex web of stakeholders in a context of growing transparency.
service provider margins during contract negotiations. Service providers and customers agree that both sides benefited equally from this visibility. This may be an indication of more transparency to come.
Figure 6: There is still a preference amongst users for near-shoring versus offshoring
Outsourcing nearby 66% 24% 20% 52% 14% 24% Customers Service Providers
Offshore outsourcing
Dont know/Refused/Missing
Q: Which one of the following pairs works best in real life oursourcing?
Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
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offshoring locations decisions. Service providers agree that this is a key issue for customers. The second most important concern for both customers (6%) and service providers (2%) is the ethical issues perceived in the customers home market related to moving jobs offshore. This is consistent with other PwC research, including our annual CEO Survey, which shows growing executive focus on responsible business practices.
Q: Talking briefly about outsourcing to offshore locations, which of the following do you expect to have the biggest impact on your clients future outsourcing decisions?
Source: PricewaterhouseCoopers Global Outsourcing Survey 2007
PricewaterhouseCoopers
There is increasing experience with structuring relationships where there is sharing of risks, benefits and information. Business is becoming more global while at the same time becoming more collaborative.
Brian Hayward, CEO, Agricore United
use open, collaborative sourcing approaches, respondents top choices are reduced costs (68%) and better quality results (66%). This is a strong endorsement of the view that transparent as opposed to secretive styles of business engagement make it easier to innovate and improve performance. Multisourcing, joint ventures, and open business models depend on brokering several relationships at once; complex operational and performance management challenges; innovative approaches to allocating incentives; and a growing focus on intangibles like intellectual property. The response is a proliferation of new approaches to governing and managing such relationships: they all require more transparency, better communication, greater trust, and genuine reciprocity. In a word, collaboration.
never true and means always true. Listed here are the percentages of respondents who selected a 4 or for each item: Business dealings being honest and transparent 6% Matters of mutual interest being decided jointly 6% Joint governance structures working effectively 40% Competing suppliers working together well to meet your needs 3% Risks and rewards being shared 3% Suppliers being proactively innovative 27% That the first two items achieved majority ratings surprised us. On the other hand, these not to mention the other numbers really ought to be much higher. That, for example, nearly 40% of customers feel their service providers are less than honest and transparent is quite problematic. The outsourcing community needs to
explicitly undertake a best practices approach to collaboration and candour. The performance challenge is clear. To understand the collaboration issue a bit better, we compared the experience of two groups of respondents: Expert outsourcers who indicated, in response to a question in the survey, that their outsourcing has completely met its business plan goals (3% of the sample) Learners for whom outsourcing has partly met the business goals (6%) On four of the six measures listed above, expert outsourcers measure their vendors as better collaborators than do learners. The sharpest difference is on a foundational measure of collaboration honest and transparent business dealings. Small differences also arise on the ability of competing suppliers to work well together and the sharing of risks and rewards.
Other insights about expert outsourcers: 66% prefer trust-based supplier management to aggressive supplier management, vs. 9% of learners. % of experts believe that flexible business terms work better than detailed, highly specific contracts, vs. 38% of learners. Regarding their overall experience, 34% of experts say most of their supplier relationships are truly collaborative; only 2% of learners agree.
High collaborators are defined by the fact that they rate their service providers the highest overall on the key indicators of collaboration such as business dealings being honest and transparent (See Figure 8 below). Representing 27% of the total sample, they experience the most mutual engagement with their outsourcing service providers. High collaborators: Are least likely to select any given barrier to outsourcing, and 0% see no barriers to outsourcing. Support the use of multisourcing (many suppliers/providers) over limited sourcing (few suppliers/providers) far more than other respondents. Support shared risk and reward over traditional commercial terms. Are disproportionately from rising markets (66% vs 2% for the total sample). This may reflect the power of social ties in the business cultures of Asia and continental Europe, as compared with the UK, North America and Australia/New Zealand.
High collaborators pay a lot of attention to the challenges of the outsourcing lifecycle. Yet they are less likely to believe the challenges are difficult. Their perspective on the lifecycle illustrates the benefits of collaboration. Some examples: High collaborators are much more likely to view strategy development as important, but less likely to find it hard to do, perhaps because they get trustworthy support from service providers. They tend to have less difficulty structuring the deal and managing the transition. Nearly all high collaborators consider ongoing managing and monitoring to be important; nevertheless, they are less inclined than others to see it as difficult.
Q: Please rate your companys experience of dealing with outsourcing services suppliers in each of the following areas. Use a scale of to , where means never true and means always true (table indicates % who scored 4 or on each measure).
Source: PricewaterhouseCoopers Global Survey 2006
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The one thing thats starting to happen now is that collaboration is increasingly meaning that we help our clients grow and not just help our clients become more profitable.
Ashish Gupta, India Country Head & COO, Evalueserve
Figure 9: High Collaborators and the outsourcing lifecycle: focus and expertise
Total sample Important Strategy development Business case development Structuring the deal Managing the transition Ongoing managing and monitoring Mid-contract change management Introducing innovative changes mid-contract Renegotiation Average score 62 49 62 66 74 40 34 47 54 Difficult 47 31 45 37 38 28 34 39 37 High collaborators Important 77 57 69 71 82 39 48 51 62 Difficult 34 28 36 34 35 25 28 38 32
Q: How important to your business is each of the following aspects of outsourcing? Q2: What is the usual level of difficulty of achieving success with each of these?
Source: PricewaterhouseCoopers Global Survey 2006
Outsourcing is a tectonic, structural change in the marketplace that will significantly change the competitive outlines of companies. It is the mainstream of the global business ecosystem. Its here today and will continue to expand and touch our lives, both as providers and consumers, in many ways.
Sachdev Ramakrishna, VP Strategic Marketing, Mphasis (an EDS Company)
Two possible multisourcing models are illustrated in Figure 0. In the lead supplier model, one service provider functions as a general contractor who orchestrates other suppliers. The outsourcing customer may or may not be involved in the economics and governance of the subcontractor relationships. However at the end of the day, the general contractor retains accountability for the results. In a collaborative partnering model, a collection of master partners governs relationships and deliverables for the benefit of end-customers or consumers. Master providers provide the strategic and significant deliverables, and they are supplemented by a collection of specialist providers. In a best practice approach, transparent mechanisms provide explicit rules of governance, engagement, alignment of incentives and penalties, and collaborative/ competitive processes. The lead supplier model is typically an extension of traditional transactional outsourcing, and is most appropriate when desired outcomes are highly predictable. Where deliverables are hard to specify and require the creative engagement of multiple contributors, collaborative partnering is more effective.
Lead Supplier
Fujitsu LM
Master Partners
Management of multiple relationships with third party vendors and customer Coordination and collaboration wth other suppliers Clear overarching responsibility for delivery with lead supplier Ensuring robust requirements definition Managing and supporting end to end integration Use of effective methodologies and tools
Clear roles, responsibilities and territories Competitive tension Co-operation between partners Sharing knowledge Communication Coordination and collaboration of all vendors Any central lead supplier role is subject to competition Collaboration and Partnering Honest intentions and best interests of customer
Source: PricewaterhouseCoopers
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Acknowledgements Research and Editorial team: David Ticoll CEO, Convergent Strategies Chuck Degagne PwC International Survey Unit: Colin McIIheney Jill Hassan Jonti Campbell Carmel OKane Anne-Marie Brennan Karen Hutchinson
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