 "Outsourcing in turbulent
times"
The recent economic crisis has left many organizations wondering,
what it is they need to do to prepare for the next downturn, and
respectively the next upturn. All research seems to suggest that
the volatility in the markets is increasing. Recent research from
The Hackett Group suggests that while revenues (in Europe) dropped
19.7% in Q3 2009 vs. Q3 2008, the ability of companies to adjust
their G&A cost (General and administrative cost encompassing
Finance, IT, HR, procurement and corporate services) was only 3.1%.
Organizations are therefore looking for ways to make their back
office more flexible to be able to respond to the next wave of change
requirements. Naturally, a change in the sourcing mix is one of
those components.
In G&A, the Finance function has had a forerunner role over
the past 20 years in performance improvements. This has lead to
a significant cost gap of 47% between a world-class company and
a median company (0.6% cost in % of revenue vs. 1.13%). This gap
between very good performance levels and median performance levels
is higher in Finance than in any other function. At the same time,
the performance improvement opportunity in Finance is larger than
in most other areas. When looking at this on a process-by-process
level, it is striking that e.g. in accounts payables the gap between
the best and the worst is up to 8x the cost. The process improvement
opportunity is still significant and average automation levels are
hovering around 20-40% for the median company, while the best companies
(world-class) manage double that.
When taking a closer look at the so-called “make-or-buy”
decisions, in Finance today (based on total Finance process cost)
this sourcing mix today is about 90-10, e.g. 90% is “make”
and 10% is “buy”. It does not seem much, but this 10%
slice equates to about a 30bn $ industry.
The key questions before outsourcing often deal with the desire
to save cost, and at the same time, doubts about the BPO companies´
capabilities to secure desired service levels and provide sustainable
improvements. The alternatives are in essence setting up captive
shared service operations vs. outsourcing to a BPO. Since 98% of
medium and large companies today use shared services for some part
of their back office, the delivery model decision is clear. The
remaining questions focus around the capability of the internal
organization to run the activities vs. en external provider. Risk,
working capital, speed etc play an additional role, but the “quality-cost”
equation is at the core of the assessment.
Recent research from The Hackett Group comes to the conclusion that
the cost expectations are typically met by the BPO. 63% of companies
achieve saving of 26-50% which satisfies most business cases. A
similar distribution of results can be found on the “quality”
side. BPOs exceed expectations more often than captives. On the
other hand there are also some cases on delivering below expectations.
When asked, if companies would outsource to the same provider, 83%
of companies responded in the affirmative.
In summary, turbulent times in the markets require higher levels
of agility. A significant enabler is the sourcing model, i.e. outsourcing
larger part of activities to be able to balance volume fluctuations
and cost requirements. The BPOs in large have proven they can provide
the service levels required at a cost level that most captives are
unable to achieve.
Tom Bangemann
Vice President Business Transformation
The Hackett Group
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