For many companies, Process Reengineering and Transformational Services are now a fundamental way to remain competitive and/or stay in business. Companies must constantly reengineer/transform themselves or they risk falling behind the competition. Many organisations in recent years have reviewed their options for improving business processes and asked themselves if they should transform internally or consider outsourcing that part of the business to a third party service provider. Unfortunately, we know from our work with clients that the decision is more complicated than simply determining whether to reengineer or outsource. It involves deciding whether it is better to outsource business processes/functions ‘as is’ or to reengineer or transform those processes and functions before considering outsourcing them to a third party.
The added dimension of ‘timing’ of an outsourcing initiative introduces another level of complexity to the decision making process when considering how to address outdated or inefficient business processes. The questions clients typically wrestle with are:
- Should we outsource the selected processes ‘as is’, (in their current state)?
- Should we transform the processes and then outsource?
- Or should we take a ‘big bang’ approach and do both process reengineering transformation and outsourcing at the same time?
Option 1: Outsource As-Is
This means outsourcing the process and operations in their current state and delay any improvements and transformation until after the migration of services to a third party provider.
Table 1: As-Is option
This model is fairly common considering the range of outsourcing deals. The primary reason is that the benefits of labour arbitrage are more immediate and translate into cost savings for the business sooner than any other option. Delaying the beneficial impact of outsourcing until after transformation delays the benefit of labour arbitrage for typically 2 years. Our analysis indicates this represents a delay of achievable cost savings of approximately £40k per FTE per year. Those who choose to outsource immediately stand to generate cost savings over the cost of current operations in the neighbourhood of 25%. A recent manufacturing client taking this route outsourced it’s transactional finance processes and realized labour arbitrage savings of 30% in just seven months of making the decision.
Option 2: Transform then BPO
The second option means the client chooses to transform the selected process(es) and implements systems improvements in house. After these have been implemented the operations in their new ‘improved’ state are outsourced to a third party service provider. The following table shows the sequence of events and explains the benefits and drawbacks of this approach.
Table 2: Transform then Outsource Option
This model is popular in client organizations that are more technical in nature or that are engineering based businesses. In these organizations the client typically has a strong and experienced IT organization and/or performance improvement teams who routinely manage and implement complex technical projects. In a smaller number of cases the size of the client or the project is of such a scale that required changes are less complex, require lower level of knowledge or technical skills and can be manage by less robust internal organizations.
Companies considering this option should be particularly aware of the impact on costs and resources required to transform a business function prior to outsourcing. These costs will invariably be ‘in addition’ to the costs associated with outsourcing that function at a later date. The combined costs of the transformation and outsourcing effort may not be off-set by the cost savings associated with the labour arbitrage the company hopes to leverage as a result of outsourcing. Furthermore, not all companies have the in-house technical, business process and organizational knowledge required to make such projects a success.
Option 3: ‘Big Bang’ – Simultaneous Transformation and Outsourcing.
The last option is doing both the transformation and outsourcing at the same time. The sequencing of events is as shown below:
This option requires the following considerations:
- Timing
A potential benefit of this approach is that if managed well the overall length of the project could be shorter than in either of the two other options described above. Less time invariably translates to lower costs to execute the programmes and an accelerated time to benefit as it relates to labour arbitrage. The concern here though is whether the organization in question has the skills, knowledge and time to devote to such a large and complex undertaking. Most organizations simply do not.
- Risk tolerance
Most organizations do not have the tolerance for risk that this option demands. Successfully resourcing and managing two major change projects simultaneously injects a degree of risk that companies typically can not afford to support, particularly over long periods of time. When faced with spending more, and taking on additional risk or realizing more immediate savings (upwards of 25% of today’s cost) most companies opt for a shorter, less risky path to benefits.
- Cost
The cost of executing both process reengineering/transformation and outsourcing projects simultaneously rarely, if ever, are less than the immediate benefits that can be achieve by one of the other alternatives
- Investment capital
Significantly more capital investment will be required in support of this option as system investment; project management costs will be higher than they would be under the other two scenarios.
Conclusions
In summary, we have described three competing options that many companies face as they reengineer and transform themselves to remain competitive. Furthermore, we have shown that the decision is not as simple as deciding whether to transform or outsource because the dimension of time forces us to consider the tradeoffs of different approaches.
There are many aspects to consider when deciding the order of events and each option has associated advantages and disadvantages that must be taken into account. The ‘as-is’ transition model is one we see most widely and the one that is most accepted because the ‘time to benefits’ tends to be minimized as compared to other options.
Ultimately the client must fully consider these options taking into account not only the time and costs associated with the projects themselves but also recognizing whether they have the kind of knowledge, skills and experience required to manage the complexities of each option.
Finally, each outsourcing deal is unique and must reflect differences in company culture, countries involved, processes to be transitioned, number of resources involved, the company’s current strategic/financial position, etc., all having an impact on the decision. Ultimately companies need to review and understand the risks and benefits of each option before deciding how much then can afford to take on.
About the authors
Paulo Dias is a consultant and Margaret Pitt-Jones is a Managing Consultant with Alsbridge plc, the independent advisors on Outsourcing and Shared Service. Paulo can be contacted at paulo.dias@alsbridge.eu or on +44 (0)20 7242 0666. Margaret can be contacted at margaret.pitt-jones@alsbridge.eu or on +44 (0)7879 842 369.
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