Helping Outsourcing Providers Reduce Costs

Spend Matters would like to welcome a guest post from Vantage Partners. See Part 1 in this series here.

In Part 2 of this five-part series, we evaluate the various ways an outsourcing provider can deliver cost reductions and how a buyer can enable the provider to deliver those cost reductions.

Reducing cost continues to be a primary priority for organizations that outsource their business processes. The difficulty comes, however, when buyers expect their providers to run the business exactly as they have, but at a lower cost. Providers have to do something differently in the way they manage service delivery in order to bring cost down, whether through labor arbitrage or leveraging economies of scale, for example. How you can help your provider help you will vary based on how the provider plans to generate those savings. Fail to contribute in the appropriate way, and you risk breaking the service provider's basic delivery model and the assumptions underlying your projected cost savings.

Labor Arbitrage
If your provider plans to bring overall cost down by delivering service with lower-cost labor, they will need to quickly transition work to offsite employees, and those employees will need to get up to speed on your business needs and requirements as soon as possible. This requires that you be both willing to transition to offsite delivery quickly and prepared to move to remote delivery.

To ensure that you achieve the cost savings you expect via labor arbitrage, you need to make some required investments in structures and mechanisms that allow parties to work effectively across geographies, time zones, and different cultures. You also need to have the proper resources in place to provide knowledge transfer -- whether those are people, documentation, or means for frequent and timely communication. Finally, you should also consider temporary co-location, or directly managing and coaching the offshore resources so they can get up to speed quickly.

Leveraging Economies of Scale
For a provider to take advantage of scale economies, they need to limit customization of service to some degree. For example, if you are outsourcing your global IT application maintenance in an attempt to save money through scale, you may need to move to a more standard IT platform across user types and geographies.

Many buyers, however, are unclear about what they want and vague in communicating with providers about their critical needs. For example, it can be difficult to determine, at a business unit or geographic level, which specific application functionality is critically important to the business and what is simply a product of different ways of doing things that can be changed. Additionally, many end users are naturally resistant to change and are therefore unwilling to standardize without at least pushing back. In some organizations, this is a result of the way the deal was "sold" internally -- if your business units were persuaded that outsourcing was a good idea because not much would change for them, they'll naturally resist requests to standardize. Such push-back requires the provider to negotiate every requested customization -- draining time (and savings) with each conversation about scope.

If your provider is going to deliver savings through scale economies, you need to communicate with the affected business units and end users to understand how much customization they need (or want). You also need to hear from your provider about how much their value proposition depends on limiting customization, what kind of customization they can or cannot do, and whether or not they can deliver on what your business units are requesting. From a governance perspective, you need to have an internal role in place to manage and arbitrate trade-offs between standardization and customization. Consider embedding relationship managers within each business unit so that there is clear and ongoing communication in both directions about necessary customization and the limits of customization as well.

Process Improvement
Process improvement is a primary mechanism expert service providers can bring to the table to deliver cost savings. This value proposition particularly falls apart when individuals on the buy-side who were formerly responsible for managing the function are charged with managing the provider relationship. Though these individuals are usually strong functional or operational managers, they frequently lack skills for managing service relationships. Because they are accustomed to managing a team actually doing the work, they default to what they know -- pushing the provider to run the function just as they have (often for many years).

To drive cost savings through improved processes, buyers and providers need to agree on a new way of operating. Rather than be micro-managed, the service provider needs room to do what they do best -- identify opportunities to streamline and improve processes to do more with less, so long as you have frequent and timely insight into the results they are generating.

Because managing to results is different than managing delivery, you also need to be sure that your retained managers and governance team have the skills they need to effectively manage a service delivery relationship. Consider designating a Relationship Manager to act as a conduit to the provider to ensure that key requirements are communicated and that your organization does not unduly interfere with how the provider is doing its job. This is often best done through a more centralized governance function so that managers close to the function don't default to micro-managing the provider.

Be on the lookout for Part 3 of this series, where we will explore how to enable the provider to deliver on additional outsourcing goals, above and beyond cost reductions.

- Danny Ertel, Partner, and Sara Enlow, Principal, at Vantage Partners

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