Sourcing Viewpoints Part Three: The Disadvantages and Trade Offs of Outsourcing
By Randy Vetter
with Dennis Winkler and Mia Nylund
In this final part of a three part series, Alsbridge addresses the often asked question: “What are the pros and cons of outsourcing and shared services?” An explanation of the build, operate & transfer (BOT) shared services is also provided.
In part one of the series, it was emphasized that the company needs to assess the reasons for a new sourcing strategy and take a “one size fits one” approach to meet the unique needs of the company.
Considerations should include:
- Scope
- Functions
- Provider/model preference
- Financial drivers
Three delivery models to consider:
- Outsourcing
- Captive shared services
- Build, operate & transfer (BOT) shared services
One of the benefits most often overlooked is the high degree of scrutiny of the total costs. Functional deficiencies can be uncovered that either the shared services model can improve or a service provider can correct.
As covered in the previous parts of the series, there are many inherent advantages and disadvantages to outsourcing. By utilizing the “one size fits one” approach, pros and cons can be assessed with greater clarity as they apply to specific individual needs of the company.
Shared Services
The shared services model is an in-house center that is set up as an independent entity. Select functions from different divisions and business units are consolidated into the shared services center. The respective divisions and business units become customers of the shared services center and can:
- Leverage lower cost locales
- Reduce redundancy
- Migrate processes from diverse and disparate legacy systems
- Operate with greater efficiency as an autonomous business unit
Advantages:
Area |
Pro |
What does shared services bring |
Process |
Greater control and flexibility |
Can change and customize services provided without contractual issues that could be encountered in outsourcing. |
Retention of IP within organization |
All IT staff are employees, all historical HR and payroll knowledge is kept in- house etc. |
|
|
Performance |
Less risk |
Perceived as less risky from a regulatory compliance perspective, especially in highly regulated industries |
|
|
Cost |
Reduce costs |
Typically achieved by consolidating in a low cost location |
|
|
Disadvantages:
Area |
Con |
What does shared services bring |
Process |
Knowledge transfer |
Can be as challenging as in an outsourced model due to standard procedures and lessons learned not built in to the practices of the client organization (lack of experience, skills and procedures) |
Documentation |
Outlining scope, responsibilities and processes is often less precise than in an outsourced world |
Ongoing process improvement harder to achieve |
Internal SLA’s have no economic penalties |
Limitations with ramp-up/ ramp-down |
Internal lack of flexibility |
Building process maturity will take some time |
Learning curve will be longer; additional overhead |
Performance |
Limited skill pool |
Not able to tap in to a wider skill pool of resources or shared best practices and lessons learned across clients (as an outsourcing provider may do) |
Cost |
Hard to implement with high transition costs |
Requires creation of a new infrastructure along with changes in business process and corporate culture |
Ongoing savings harder to achieve |
Effort needed to get to world-class requires significant investment |
Build, Operate & Transfer (BOT) Shared Services Model
Leveraging the experience of an outsourcing provider to set up a center for a company to eventually take back the control is a viable option. In the BOT shared services model, the outsourcing provider is selected to do the heavy lifting that the company cannot do internally.
The outsourcing provider’s experience in the host nation and the successful deployment of new centers creates a smooth, rapid, and efficient transition:
- Familiarity with compliance and regulatory requirements of the new locale
- Experience in implementing new IT infrastructure and migrating data from legacy systems
- Transitioning FTE’s
- Talent pool in new location
- Ability to ramp up/down as needed
- Greater understanding of business culture
The initial consolidation and transitioning of functions and processes to the new center usually spans a period of six to 18 months. During this period, efficiencies increase and clarifications on service levels evolve to align with the individual business objectives of the company. The business will be steadily scaling the learning curve of the operation through the mentoring of the service provider.
Over time, the knowledge of the company will mature as it grows into adjusting to the differences and nuances of the new center and its locale. Individual processes can be transitioned back to the company in a measured fashion. A more defined and sophisticated business case can optimally be made concerning what functions and processes can be reverted back to the control of the company and when.
All three models have potential advantages and disadvantages. The key to success is understanding that every company is unique and has different needs. To get to the right sourcing solution, the company needs to take a “one size fits one” approach based on a proven sourcing methodology.
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