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Global Outsourcing

Outsourcing comes o age:The rise o collaborative partnering*


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PricewaterhouseCoopers

Contents

Introduction 2

Executive summary 4

Outsourcing is a maturing success story 6

The challenges 0

The collaboration payo 4

Rising to the challenge ocollaborative partnering 9


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2 Outsourcing comes o age: The rise o collaborative partnering

Recent research indicates manyoutsourcing deals collapse beore the

contract ends, citing rising costs andmistrust between service providers andcustomers, and implying saving moneyis not a sound reason to outsource. Someindustry analysts and media punditsurther translate the ndings into painultrade-os: cost savings vs. growth, speedvs. quality, and organisational cohesionvs. knowledge and innovation. Otherssuggest outsourcing is in a death spiral...a decline ueled by structural risks,questionable cost savings, and multiplecomplexities. Their bottom line?Organisations will soon become

disillusioned with outsourcing.

Such predictions and assertions seemto fy in the ace o an equally prominent

group o infuencers and mediacommentators continually heraldinglucrative outsourcing deals, impressivebenets and uncapped growth projections.Oshore service providers are delivering30-40% year-over-year revenue growthevery quarter. Meanwhile their Western-based competitors hurriedly expandtheir operations in emerging economies.Beyond rapid growth and geographicexpansion, some service providers arehelping outsourcing customers competein new ways. They provide a level ostrategic and operational fexibility

unattainable through any other means.

In the 0th Annual PricewaterhouseCoopers2CEO Survey, released in January 2007, we

ound that many top global executivesbelieve they gain major competitiveadvantages rom outsourcing. Theyidentied unctions like logistics,manuacturing, customer support andservice, research & development, andhuman resource management. The CEOsalso described the growing importance ocollaboration with suppliers and serviceproviders as a way to mitigate complexity,reduce transaction costs, and gaincompetitive advantages.

Introduction

We dene outsourcing as the transer o a business activity or unction to a third party, usually along with people and/or know how.

2 PricewaterhouseCoopers reers to the network o member rms at PricewaterhouseCoopers


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PricewaterhouseCoopers 3

Cost savings can be the main driver o an outsourcing project.But as this survey illustrates, every company indeed, eachoutsourcing initiative within any one company has a mixo other drivers, prioritised dierently 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 inits Cupertino, Caliornia oces, but it outsources themanuacturing to select Chinese rms not just becausethey can build it cheaply, but also because o their uniqueintellectual property in materials science and packagingtechnology. It also outsources, in a manner o speaking,content creation services: to an open community oproviders rom multibillion dollar music publishers toamateur podcasters.

A third major theme is strategic benet reeing up ones ownresources, improving fexibility, gaining access to capital,

access to new markets, or changing the rules o competition

in an industry. In 2003, Bharti Airtel, an Indian mobile phonecompany, lacked the capital to respond to a massive growthopportunity in its domestic market. It cut an end to end IToutsourcing deal with IBM. Much o IBMs compensation inthis deal depended on Airtels market growth. Airtel made othershared risk/reward deals with equipment suppliers Ericsson,

Nokia and Siemens. Today Airtel has some 40 million customersand is its countrys market leader.

Apple and Airtel must manage complexity every day.Their business webs o which weve only described smallcorners are varied and demanding. Each company mustachieve an optimal balance o top-down management andcollaborative partnering in dealings with suppliers, channelmarketers, companies selling complementary services andcustomers. Each detly illustrates that a uniquely right kindo collaborative partnering business model makes possiblethe squaring o many circles: cost savings with growth, speedas well as quality, and organisational cohesion plus knowledge

and innovation.

So whats really happening here?Global research recently completed by

PricewaterhouseCoopers (PwC) leads usto conclude that both perspectives havemerit. Our ndings indicate outsourcingis deeply established... an entrenchedbusiness strategy maturing and evolvingto deliver value beyond just cost savings.

On the other hand, respondents say thatnot all is perect. Full benets oten remainunrealised and the outsourcing processitsel in its relentless move towardspecialisation, innovation and new models is not easy.

To bring clarity to these issues, PwCinterviewed nearly 300 executives, seekinginsight into their oursourcing experienceand views. The research, conductedworldwide in March and April 2007, leadsus to conclude that outsourcing is alive

and well; in act it is growing, maturingand evolving to deliver value well beyond

cost savings.

This report presents results o our surveyo 226 customers and 66 outsourcingservice providers. We set out to exploresome o the current trends: the growtho multisourcing, changes in customersupplier relationships, the emergenceo new stakeholders and new governancemodels. At its core, our research conrmsthe growing complexity o outsourcing.However, it also indicates sophisticatedleaders dont necessarily ear thatcomplexity. For them, it is the normal

path o a maturing business strategy anda maniestation o an increasingly globalenvironment. As the examples o Appleand Airtel illustrate (below) thecomplexities o innovative partneringyield the benets o growth and

perormance. Outsourcing is now asdiverse as business itsel, diering by

country, sector, and company strategy.It is characterised by smarter suppliers,improved automation and better inormedbuyers driving toward long-term,sustainable outsourcing arrangements.

Firms that eectively master the newcomplexities o outsourcing and thediverse business model innovations theymake possible stand to reap the benetsand lead the way to the rise ocollaborative partnering.


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The responses to this surveyconrm that outsourcing is high on

almost every companys agendaJust about everybody uses outsourcingtoday, and or a variety o strategic reasonsthat extend well beyond cost savings.Factors that support business growth,like access to talent and capabilities and maximising business model fexibility are key drivers. For example, 70% orespondents say access to talent is animportant or very important reason whythey outsource. Customers o outsourcingare gaining maturity and have bigexpansion plans.

But success and growth are not withouttheir challenges. Customers continue tobe held back by cost benet justication(i.e., the challenge o creating a businesscase where benets are measured anddelivered) and their own lack o experience among others. Nearly all eel challengedby one or more aspects o the outsourcingliecycle; and their rst inclination is to

blame service providers when projects ail.Service providers think the main cause o

ailure is poor collaboration with customers.

Nonetheless, this survey provides evidencethat leading outsourcing customers andservice providers are shiting rom traditionalto collaborative business models.

Customers need to rely increasingly onmultisourcing, joint ventures, and openbusiness models. Unlike traditionalsingle-source transactional outsourcing,these approaches and thecomplexities they entail intrinsicallyrequire collaboration. When GeneralMotors moved rom single-sourcedinormation technology outsourcing(with EDS) to multisourcing, it preparedthe ground by bringing serviceproviders together to dene standardsand processes that would enable themto work together while improving thecompanys ability to operate globally.

Successul customers o outsourcingshow good collaboration with service

providers, and good collaboratorstend to be eective outsourcers.Collaboration yields best practicesin the capabilities and processes ooutsourcing itsel. Toyotas supportiveand candid collaboration with myriadsuppliers, rom design through just-in-time logistics, has yielded eciency,quality, innovation and now globalindustry leadership.

This report describes two o the manypossible approaches to multisourcing.In a lead supplier model, one service

provider unctions as a general contractorwho orchestrates other suppliers.In a collaborative partnering model,a collection o master partners governsrelationships and deliverables or thebenet o end-customers or consumers.

Executive summary


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Important details about this survey

This report provides key ndings o the PricewaterhouseCoopers2007 Global Outsourcing Survey. It directly compares theexperiences and opinions o customers and service providerso outsourcing, on a global scale 292 respondents in total.This survey was urther inormed by in-depth interviews with23 senior executives at major outsourcing customers andservice provider rms in Belgium, China, India, Netherlands,Philippines, Poland, Singapore, UK and US.

Customer survey

PricewaterhouseCoopers conducted telephone interviews with226 senior operating executives o private sector corporationsthat are customers o outsourcing services in 9 countries

during March and April 2007.% o respondents are in customer rms with revenuesgreater than $ billion US, including 6% with revenues greaterthan $0 billion.

We have classied the customer responses into three groups,based on our analysis o the maturity o the outsourcing marketin various countries and similarities o responses to the survey:

Large mature market:United Kingdom and United States(78 respondents, o which 63% have revenues greater than$ billion).

Medium mature market:Australia, Canada, New Zealand(3 respondents, o which 84% have revenues greater than$ billion)

Rising market:Bahrain, Belgium, Brazil, China, Germany,India, Italy, Japan, Kuwait, Mexico, Russia, South Arica,Sweden and the United Arab Emirates (7 respondents,o which 3% have revenues greater than $ billion). Eacho the listed rising market countries provided at least , andas many as 2 responses. Three other countries provideda total o our responses.

Service provider survey

O the 66 service providers we surveyed, 43 are in our countries:US (20), China (9), India (9), and UK (). The remaining 23 serviceprovider respondents are in dierent countries on every continent.


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Outsourcing is becoming new again.

There was a time when businesses even

delivered their own mail. Then theyoutsourced it rst to the post oce,then commercial couriers, and now theInternet. Whats new is the explosiveoutsourcing o services, increasinglydened down to precise unctions thatcan each be perormed in the mostoptimal location anywhere in the world.

Outsourcing is delivering results.A large majority o customers (87%)say that todays outsourcing delivers thebenets projected in the original businesscase, whether partly or completely.

3% say they got the benets completely which is remarkable, considering thecomplexities and unknowns that areinvolved. In nancial services, 46%completely met their goals.

And 91% o respondents, whether happy

or not, say they will outsource again.

Saving money is important, butso is access to talent, capabilities

and business fexibilityTop reasons rms outsource are to:

Lower costs (important or veryimportant or 76% o respondents)

Gain access to talent (70%)

Farm out activities that others cando better (63%)

Increase business model fexibility (6%)

Other reasons are also important:

Improving customer relationships (42%)

Developing new products or services/market segment expansion (37% each)

Geographic expansion (33%)

A move towards core activities

Many respondents (3%) indicated theyoutsource activities that they consider tobe core. The denition o core activitieswas let to the respondents interpretation,and could mean dierent things to dierentrespondents (depending on what they

dene as core to their business). It isclear that companies are moving romthe outer ring o non-core non-essential

activities towards the second ring o non-essential business activities. For example,

in the nance unction, this could bea move rom outsourcing payroll andaccounts payable towards seekingassistance with budgeting, orecastingand management reporting.

Inormation technology services remainthe most widely outsourced activity,reported by 7% o respondents. Butoverall, 70% outsource one or moreinherently strategic activities:

3% outsource production or deliveryo core products or services

33% outsource sales & marketing(including third party distributionchannels)

32% outsource innovation/R&D

Key markets are embracing core

outsourcing.Financial services rms, at40%, are especially likely to outsource salesand marketing (e.g., to insurance brokersand nancial planners). Because manyare in inrastructure businesses, media/telecommunications/IT companies are lessinclined to outsource core work. But even

39% o these companies do it. And nearly40% o rms in rising markets are likely tooutsource innovation/R&D.

Outsourcing is a maturing success story


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Firms in medium mature markets(Australia, Canada and New Zealand)

are especially aggressive at outsourcingstrategic unctions. 7% o them outsourcecore products/services, and 48% outsourcesales and marketing (vs. 3% and 33%respectively or the total sample). Growingrms based in these countries havesmall domestic markets; this may createpressure to go outside the company orstrategic capabilities that acilitate growth.

Outsourcing o both core and

support activities is intensiying.

Respondents rate themselves asoutsourcing to a signicant extent

(4 or on a scale o to , where meansoutsource hardly at all and meansto a great extent) across a broad crosssection o activities. Functions mostwidely and deeply outsourced areinormation technology services, coreproducts and services, and logistics anddistribution. Functions with eweroutsourcing customers, but where theoutsourcing is extensive, are procurementand customer call centres.

Increasingly we are moving away rom looking at cost alone. People are going toput more emphasis on how well the risk is managed, and how well the outsourcing

company cater to our needs or to the needs o the industry.Ian Brown, Director, NCS Group Marketing and Corporate Communications

The Finance Function

Outsource?

In-house

Outsource

Essential non-core

Core

Non-coreFixed Assets

Expenses

Accounts Payable

Payroll

Cash & Banking

Accounts Receivable

Decision Support

Tax Planning

Business Support

Analysis

Management Reporting

Consolidation and reporting

Budgeting/Treasury Management

Core

IT

HR

Essential

non-core

Non-core

e.g.

Finance

Function

Figure 1: Core vs Non-core in the Finance Function

Source: PricewaterhouseCoopers


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Outsourcing is expanding intosecond wave areas like

innovation/R&DThe rst wave o IT and business processoutsourcing depended on long term,exclusive one-on-one contracts. Thesewere largely zero sum games betweencustomer and service provider; certainlythe customer was locked in, and in manyrespects so was the service provider.

Today, as we move into the second waveo outsourcing, with many initial IT contractscoming to maturity, customers recognisethat new approaches present a rich array

o opportunities, i done right.

Today, tight, disciplined management mustbe seasoned with the culture, structures,

and processes o collaborative partnering and an openness to business modelinnovation. These become even moreimportant as customers start to look atanother type o second wave outsourcingo other unctions, many o which are in theprocess o being streamlined within sharedservice centres, such as HR and nanceand accounting unctions.

Depending on the business unction,anywhere rom 27% to % o respondentsintend to expand their current outsourcingover the next ve years. There is still

growth to come in inormation technology

(where % o current customers planto expand) and what we called core

products or services (42% will expand).

On the rise. A smaller number ocompanies currently outsource innovation/R&D and customer call centres. In theseareas over 40% o current outsourcingcustomers plan to expand.

Hot spots or growth:

Large mature markets: or procurementservices (3% with expansion plans),customer call centres (4%) and,notably, nance/accounting (44%).

Outsourcing this item

Outsource it to a significant extent

Information technology services

Production or delivery of your coreproducts or services

Logistics and distribution

HR services

Sales and marketing including 3rd party distribution channels

Innovation, research and development

Procurement

Customer call centres

Finance and accounting

57%

39%

53%

44%

51%

50%

35%

16%

33%

27%

32%

15%

30%

41%

25%

41%

24%

20%

Figure 2: Outsourcing is intensifying

Q: Which o the ollowing products or services does your company currently source rom external suppliers?

Q: To what extent does your company currently source each o the ollowing rom external suppliers?

Source: PricewaterhouseCoopers Global Outsourcing Survey 2007


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Rising markets: globally, the lions shareo outsourcing growth in customer call

centres (6%), core products & services(4%) and logistics/distribution (3%).The shit o manuacturing to emergingeconomies accounts or part othis growth.

Financial services: core products &services (6%), customer call centres(46%), sales & marketing (40%).

Media/telecommunications/IT:innovation/R&D (64%), customer callcentres (73%), and nance/accounting(0%). In these highly competitiveindustries, rms are especially pressured

to nd innovation rom whatever sourcesthey can muster.

Figure 3: What organisations outsource and plan to expand

Q: Which o the ollowing products or services does your company currently source rom external suppliers?

Q: Broadly speaking, over the next ve years, do you think your use o external suppliers or each o the ollowingactivities will increase, decrease, or stay about the same within your business?


Outsourcing is growing in scale... but becoming more complex to manageand requiring a new set o skills.Eric Sorensen, President & CEO o Sun Rype Products Ltd

Information technology servicesproduction or delivery of your core

Products or services

Logistics and distribution

HR services

Sales and marketing including 3rd party distribution channel

Innovation, research and development

Procurement

Customer call centres

Finance and accounting

a

b

c

d

e

f

g

h

i0 10 20 30 40 50 60

0

10

20

30

40

50

60%

%Have expansion plans (y axis)

OutsourcingCustomers(xaxis)

a

bc

de f

g

hi


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Sorting the barriers

We asked outsourcing customers which,i any, in a list o issues they considered tobe barriers to outsourcing. On average,each person identied 3 to 4 barriers: ormost companies, the barriers tooutsourcing are many and varied.

The main barriers that customers ace arediculties with proving the cost benet andlack o experience (each selected by 48%).Others are:

Company values avour using in-houseemployees (4%)

Lack o skills to manage outsourcing(37%)

Need to clean up operations beoreoutsourcing them (37%)

Least picked were ethics o moving jobsoshore (22%) and concerns about publicreaction (2%). Outsourcing customers aremost challenged by their own outsourcingskills (including business casing) and internalemployee issues; they are least concerned

about public perceptions.

We also posed this question to outsourcingservice providers. They have similar views onmany issues, but signicantly dierent viewsrom customers on some important ones.

For customers, cost-benet is thenumber one challenge. For serviceproviders. cost-benet is much less oan issue; though perhaps no surprise,this may refect lack o sensitivity to areal issue that customers ace.

Nearly hal the service providers seeemployee opposition as a barrier to

outsourcing, but two thirds o customersdont see it that way. The question is,whos right? Are vendors blamingemployee opposition when the real issueis the business case? Or is this aproblem that customers are insensitiveto or believe they can manage?

In general, service providers tend to seecustomers as blocked by a diverse arrayo internal barriers to outsourcing.

Customers need more help on the businesscase and implicitly with obtaining proothat benets will be realised. They also

need to look in the mirror and consider thetrue impact o employee opposition.

The challenges and varying user-providerperspectives are revealing

0% 10% 20% 30% 40% 50% 60%

Customer cost-benefit

Customer lack of experience

Company values favour in house

Customer lack of skills

Clean up operations before outsourcing

Other priorities

Employee opposition

Offshoring ethics

Public reaction

NONE

Customers

Service Providers

Figure 4: Customers and providers differ on the obstacles

Q: Which, i any, o these issues do you consider to be barriers to outsourcing?


Success and growth are notwithout challenges. Customers ooutsourcing ace barriers o costbenet justication (i.e. producinga business case that stands upto scrutiny), and their own lacko experience among others.Nearly all eel challenged by oneor more aspects o the outsourcingliecycle. And their rst inclinationis to blame service providers when

projects ail. For their part, manyservice providers think the issue isthe customers inability to manageoutsourcing projects.


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Outsourcing liecycle isa dicult challenge

Customers see challenges and needhelp throughout the outsourcing liecycle.We asked them to rate the importanceand diculty o each liecycle steps on ascale o to where is very importantor very dicult.

Every phase is seen as dicult by a thirdto hal o respondents. In reviewing allthe responses we nd that nearly everyoutsourcing customer encounters dicultieswith one or more phases o the outsourcingliecycle. This speaks to the need ora better approach to conducting therelationships between customers andservice providers.

Growing complexities

Customers and service providers holddiering views on some important issues.They tend to dier on how contracts shouldbe structured, where work ought to beperormed, margins, and some key ethical

issues. Taken together, these dierencesunderline the growing complexities thatoutsourcing decision makers ace, andthe need or better alignment betweencustomers and service providers.

20 30 40 50 60 70 8020

30

40

50

60

70

80Strategy development

Business case development

Structuring the deal

Managing the transition

Ongoing managing and monitoring

Mid-contract change management

Introducing innovative changes mid-contract

RegenerationDifficult

Important

a

b

c

d

e

f

g

h

ac

b

d

e

f

g

h

Figure 5: Pressure points in the outsourcing lifecycle

Q: How important is this phase o the outsourcing liecycle? How dicult is it? (Customer responses only)


Id like to think that we are looking toward deeper partnershipswith our clients. Do I see it happening? Denitely. When we

were just starting, customers were not very open.Marianne Fullon, Partner, Payroll Service Providers Inc.


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What works best?

We asked both customers and serviceproviders to select what works best orthem in real lie outsourcing. Dierencesbetween the two groups refect that eachside wants to tilt the outsourcing balancein its avour. Consensus on industry bestpractices remains to be built.

Customers tend to preer detailedhighly specic contracts (4%)whereas service providers (notsurprisingly) like fexible businessterms (6%).

A quarter o customers think many

suppliers/providers work better thanew suppliers/providers, vs. only 0%o service providers.

While 2% o service providersrecommend oshore outsourcing, only20% o customers believe this worksbest in real-lie outsourcing.

This nding refects PwCs conversationswith clients on the issue o nearshoring

versus oshoring. Oshoring raises moreissues or customers than the benets ocost savings. They increasingly considercultural mismatches in oshore-domesticcommunications, oshore labour andemployment standards, brand impacts ojob mobility, and environmental sustainabilityissues. This raises the need to understandand manage a complex web o stakeholdersin a context o growing transparency.

How much money shouldservice providers make?

More than hal o customers believe thatservice providers should reasonably expectto achieve an ater tax margin in the rangeo 2%, whilst the target sought byover hal the service providers surveyedwas in a range o % - 2%. Surprisingly,nearly hal (46%) o the buyers ooutsourcing services have had sight o

service provider margins during contractnegotiations. Service providers and

customers agree that both sides benetedequally rom this visibility. This may be anindication o more transparency to come.

Oshoring and responsiblebusiness practices

66% o customers say that social andenvironmental issues will have a signicantimpact on their oshoring decisions.As suggested earlier, service providersare somewhat sceptical: 2% believethese issues will not be signicant ortheir clients. Service providers need

to listen more to meet their customersneeds on such issues.

Turning to specic topics o ethicalsourcing, the top issue is labour andemployment standards: 6% o customerssay that they pay attention to labour andemployment standards when making

Outsourcing nearby

Offshore outsourcing

Dont know/Refused/Missing

Customers

Service Providers

66%

24%

20%

52%

14%

24%

Figure 6: There is still a preference amongst users for near-shoring versus offshoring

Q: Which one o the ollowing pairs works best in real lie oursourcing?



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oshoring locations decisions. Serviceproviders agree that this is a key issue or

customers. The second most importantconcern or both customers (6%) andservice providers (2%) is the ethicalissues perceived in the customers homemarket related to moving jobs oshore.

This is consistent with other PwC research,including our annual CEO Survey, whichshows growing executive ocus onresponsible business practices.

Figure 7: Mapping priorities for responsible offshoring

Customers Service Providers

Labour and employment standards in oshorelocations

61% 65%

Domestic ethical issues around moving jobsoshore

47% 52%

Bribery and related business ethics in oshorelocations

45% 32%

Environmental impact o oshore acilities 35% 18%

Negative impact on oshore local communities 25% 39%

Q: Talking briefy about outsourcing to oshore locations, which o the ollowing do you expect to have thebiggest impact on your clients uture outsourcing decisions?



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Leading customers andservice providers are shiting

rom more traditional buyer/sellerrelationships to collaborativebusiness models.

The collaboration payo

Traditional long-term exclusiveoutsourcing arrangements work very

well or a near commoditised service(such as IT inrastructure services).They do not work as well with second-wave outsourcing arrangements thatare generally less commoditised.

Both customers and providers areemploying more multisourcing, jointventures, and open business models.Unlike traditional single-sourcetransactional outsourcing, these morecomplex approaches intrinsicallyrequire collaboration. At a minimum,multisourcing requires that customers

and their service providers get togetheror the sake o coordination. At best,multisourcing incents suppliers to takethe initiative, proactively work together,and devise new initiatives in the interestso the outsourcing customer.

Emerging open business models allowrms to engage networks o partnersand customers to generate high valueat low costs.

Successul customers o outsourcingshow good collaboration with service

providers, and good collaborators tendto be eective outsourcers. Collaborationyields best practices in the capabilitiesand processes o outsourcing itsel

Respondents believe the traditionalapproach to outsourcing using a singleservice provider is not about to disappear(in act 39% plan to increase use o thisapproach). But other models have moremomentum. 0% expect to increasemultisourcing and 4% plan to increasetheir use o joint ventures. The even newerapproach open, public and collaborative

business models is on the rise or asurprising 3% o respondents. Meanwhile,the traditional retail business to businessmodel requently changing supplynetworks is in retreat, with only 4%planning to grow this approach.

Customer respondents seem to believe thatemerging business models deliver tangiblebenets. Given a set o potential reasons to


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use open, collaborative sourcingapproaches, respondents top choices

are reduced costs (68%) and betterquality results (66%). This is a strongendorsement o the view that transparent as opposed to secretive styles obusiness engagement make it easierto innovate and improve perormance.

Multisourcing, joint ventures, and openbusiness models depend on brokeringseveral relationships at once; complexoperational and perormance managementchallenges; innovative approaches toallocating incentives; and a growing ocuson intangibles like intellectual property.

The response is a prolieration o newapproaches to governing and managingsuch relationships: they all require moretransparency, better communication,greater trust, and genuine reciprocity.In a word, collaboration.

Expert outsourcers relyincreasingly on collaboration

To measure collaboration, we askedrespondents to rate their companysexperience o dealing with outsourcingservice providers on each o several items,using a scale o to , where means

never true and means always true.Listed here are the percentages o

respondents who selected a 4 or oreach item:

Business dealings being honest andtransparent 6%

Matters o mutual interest beingdecided jointly 6%

Joint governance structures workingeectively 40%

Competing suppliers working togetherwell to meet your needs 3%

Risks and rewards being shared 3%

Suppliers being proactively innovative 27%

That the rst two items achieved majorityratings surprised us. On the other hand,these not to mention the other numbers really ought to be much higher.

That, or example, nearly 40% o customerseel their service providers are less thanhonest and transparent is quite problematic.The outsourcing community needs to

explicitly undertake a best practicesapproach to collaboration and candour.

The perormance challenge is clear.

To understand the collaboration issuea bit better, we compared the experienceo two groups o respondents:

Expert outsourcers who indicated,in response to a question in the survey,that their outsourcing has completelymet its business plan goals (3% othe sample)

Learners or whom outsourcing haspartly met the business goals (6%)

On our o the six measures listed above,expert outsourcers measure their vendorsas better collaborators than do learners.The sharpest dierence is on a oundationalmeasure o collaboration honest andtransparent business dealings. Smalldierences also arise on the ability ocompeting suppliers to work well togetherand the sharing o risks and rewards.

There is increasing experience with structuring relationships where there is sharingo risks, benets and inormation. Business is becoming more global while at the same

time becoming more collaborative.Brian Hayward, CEO, Agricore United


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Other insights about expert outsourcers:

66% preer trust-based supplier

management to aggressive suppliermanagement, vs. 9% o learners.

% o experts believe that fexiblebusiness terms work better thandetailed, highly specic contracts,vs. 38% o learners.

Regarding their overall experience, 34%o experts say most o their supplierrelationships are truly collaborative;only 2% o learners agree.

The reverse is also true:

collaborators do better atoutsourcing

Weve just seen that expert outsourcers getlots o collaboration rom service providers.But expert outsourcer or not, how doescollaboration help an outsourcing customerto succeed?

To answer this question we examine 6 highcollaborators, whether expert outsourcersor not. (In act 4% o high collaboratorsare experts and 9% are not).

High collaborators are dened by the actthat they rate their service providers the

highest overall on the key indicators ocollaboration such as business dealingsbeing honest and transparent (See Figure8 below). Representing 27% o the totalsample, they experience the most mutualengagement with their outsourcing serviceproviders. High collaborators:

Are least likely to select any givenbarrier to outsourcing, and 0% seeno barriers to outsourcing.

Support the use o multisourcing(many suppliers/providers) over limitedsourcing (ew suppliers/providers)

ar more than other respondents.

Support shared risk and reward overtraditional commercial terms.

Are disproportionately rom risingmarkets (66% vs 2% or the totalsample). This may refect the powero social ties in the business cultureso Asia and continental Europe, ascompared with the UK, North Americaand Australia/New Zealand.

High collaborators pay a lot o attention tothe challenges o the outsourcing liecycle.

Yet they are less likely to believe thechallenges are dicult. Their perspectiveon the liecycle illustrates the benets ocollaboration. Some examples:

High collaborators are much morelikely to view strategy developmentas important, but less likely to ndit hard to do, perhaps because theyget trustworthy support rom serviceproviders.

They tend to have less dicultystructuring the deal and managingthe transition.

Nearly all high collaborators considerongoing managing and monitoringto be important; nevertheless, theyare less inclined than others to seeit as dicult.

Dealings honest & transparent

Competing suppliers work well together

Risks & rewards shared

Experts

Learners

81%

50%

43%

37%

40%

32%

Figure 8: Open suppliers have happy customers

Q: Please rate your companys experience o dealing with outsourcing services suppliers in each o theollowing areas. Use a scale o 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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Figure 9: High Collaborators and the outsourcing lifecycle: focus and expertise

Total sample High collaborators

Important Dicult Important Dicult

Strategy development 62 47 77 34

Business case development 49 31 57 28

Structuring the deal 62 45 69 36

Managing the transition 66 37 71 34

Ongoing managing and monitoring 74 38 82 35

Mid-contract change management 40 28 39 25

Introducing innovative changes mid-contract 34 34 48 28

Renegotiation 47 39 51 38

Average score 54 37 62 32

High collaborators embraceinnovative outsourcing business

models.% o high collaborators will increasetheir joint ventures (vs. 44% o otherrespondents).

46% expect their use o open,collaborative business models to grow,vs. 32% o other respondents.

High collaborators are more inclined tocut back on single provider deals andrequently changing supply networks.

High collaborators have signifcantly

greater outsourcing growth plansin the most strategic areas: Core

products and services, innovation/

R&D, customer call centres, IT and

HR services. For example, 56% o high

collaborators plan to increase their

outsourcing o innovation/R&D, vs. 37%

o remaining respondents.

Q: How important to your business is each o the ollowing aspects o outsourcing?

Q2: What is the usual level o diculty o achieving success with each o these?

Source: PricewaterhouseCoopers Global Survey 2006

The one thing thats starting to happen now is that collaboration is increasingly meaningthat we help our clients grow and not just help our clients become more protable.Ashish Gupta, India Country Head & COO, Evalueserve


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Reasons to consider using an advisor

Planning, more detailed research and better advice beore hand are considered by customers to be the top 3 reasons or makingoutsourcing a success. Getting things right in the planning stages is critical. We asked what role an advisor can play to help companiesachieve their outsourcing objectives. Over a quarter identied their lack o sucient resources or time to properly assess, plan or

implement transactions as the main reason they would consider using an advisor. Having insucient knowledge o outsourcingwas second most important; service providers ranked it their most important reason to call on advisors. The third actor wasaccess to real resources on the ground in key supply markets.

Management o multiple relationships with thirdparty vendors and customer

Coordination and collaboration wth othersuppliers

Clear overarching responsibility or delivery withlead supplier

Ensuring robust requirements denition

Managing and supporting end to end integration

Use o eective methodologies and tools

Clear roles, responsibilities and territories

Competitive tension

Co-operation between partners

Sharing knowledge

Communication

Coordination and collaboration o all vendors

Any central lead supplier role is subject tocompetition

Collaboration and Partnering

Honest intentions and best interests o customer

Master

Partners

Telco

Fujitsu

Xansa

LM

NicheSuppliers

Collaborative Partnering Model

CSC

Two possible multisourcing models areillustrated in Figure 0.

In the lead supplier model, one serviceprovider unctions as a general contractorwho orchestrates other suppliers.The outsourcing customer may ormay not be involved in the economicsand governance o the subcontractorrelationships. However at the end othe day, the general contractor retainsaccountability or the results.

In a collaborative partnering model,

a collection o master partners governsrelationships and deliverables or thebenet o end-customers or consumers.Master providers provide the strategicand signicant deliverables, and theyare supplemented by a collection ospecialist providers. In a best practiceapproach, transparent mechanismsprovide explicit rules o governance,engagement, alignment o incentivesand penalties, and collaborative/competitive processes.

The lead supplier model is typically an

extension o traditional transactionaloutsourcing, and is most appropriate whendesired outcomes are highly predictable.Where deliverables are hard to speciy andrequire the creative engagement o multiplecontributors, collaborative partnering ismore eective.

Lead supplier model

Lead Supplier

Figure 10: Innovative business models

Source: PricewaterhouseCoopers

Outsourcing is a tectonic, structural change in the marketplace that will signicantlychange the competitive outlines o companies. It is the mainstream o 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)


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Outsourcing is growing ast anddelivering results. More people thanever are outsourcing with no indicationthat growth will slow. Our ndingsconrm that outsourcing has maturedbeyond cost reduction to become a wayor organisations to better access talentand capabilities, gain more fexibility,reinvent their business model and driveinnovation.

Arrangements are increasingly complex,with all parties increasingly motivated to

acknowledge the needs o a wide networko stakeholders outside their own our walls,beyond themselves. Successul outsourcingno longer simply entails a buyer and asupplier it needs partners. Many buyerseel their outsourcing eorts ail becausethey lack experience and skills to achievethe benets envisaged in the original

business case. The 3% who aresucceeding are most likely to havehonest and transparent businessdealings with service providers (includingtransparency on margins); decide matterso mutual interest jointly; have eectivejoint governance structures; and sharerisks and rewards.

A ew companies have developed internalcentres o excellence to manage outsourcingarrangements in this increasingly complexenvironment. Most have not. Success

or many requires increasingly objectiveand non-partisan advice on what andhow to outsource.

At PwC we are not interested in drivingdown costs in an inappropriate manner.We are committed to helping clients andservice provider partners achieve

productive, sustainable outsourcingarrangements such that each achievetheir specic business objectives.

As buyers increasingly seek to outsourcecore products and services, and suppliersrise to the challenge to deliver the skillsand capabilities required, a new modelo outsourcing is required: collaboration.Having an experienced, independentpartner to help orchestrate new partnershipscan give you the condence to succeed.

Rising to the challenge ocollaborative partnering


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Increasingly, value is created across anextended business network comprised o

partners, suppliers, customers, regulatorsand stakeholders and success dependson collaboration between them. Thismeans most business issues can nolonger be resolved only within your ownour walls. The best solutions must bothcapture opportunities and navigate riskacross an extended business network.

Coordinating change across an extendedbusiness network requires a unique set oskills and experience.

PricewaterhouseCoopers Advisory team

works to solve complex business issues locally and globally. Our teams draw upon

skills in nance, regulation, risk, tax,people, operations and technology

to devise, deliver and embed lastingchange. We advise and we implement.

In particular we can help you to:

Capture and sustain value rom deals

Grow revenue

Manage business perormance

Protect your business rom risk

Navigate regulatory requirements

Deal with unplanned events

Get the right sourcing strategy

We take the time to listen to yoursituation and oer a range o smart

choices to consider choices basedon independent and challenginginsights, supported by acts andindustry benchmarks. We give youthe condence to succeed.

For more information please visit www.

pwc.com/performance.

The PwC network o resources


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Our Global Sourcing network

Pat McArdle

Global Sourcing

Lead PartnerPricewaterhouseCoopers (UK)[email protected]+44 (0) 20 780 42024

Paul Horowitz

PricewaterhouseCoopers(United States)[email protected]+ (646) 47 240

Paul Zanker

PricewaterhouseCoopers(Singapore/Asia Pacic)

[email protected]+6 (0) 6236 333

Eric Wesselman

PricewaterhouseCoopers(Netherlands/Europe)[email protected]+3 (0) 2068742

Romek Lubaczewski

PricewaterhouseCoopers(Poland)[email protected]+48 02 84 39

John Y. Chang

PricewaterhouseCoopers(Canada)[email protected]+ (46) 869-2606

Ricardo Neves


(Brazil/South & Central America)[email protected]+ () 3674 320

Jeff Herrmann

PricewaterhouseCoopers(China)[email protected]+86 0 633 23

Mike Roy

PricewaterhouseCoopers(South Arica)[email protected]

+27 () 797 4437

Rose S. Javier

PricewaterhouseCoopers(Philippines)[email protected]+63 (2) 49 306

Carmen Tang

PricewaterhouseCoopers(Malaysia)[email protected]+60 (3) 2382 0884

Ambarish DasguptaPricewaterhouseCoopers(India)[email protected]+9 33 237 347

Paul Savage


(Australia)[email protected]+6 2 8266 0482

Alfredo MorantePricewaterhouseCoopers(Mexico)[email protected]+2 (0) 263 6088

Acknowledgements

Research and Editorial team:David Ticoll CEO, Convergent StrategiesChuck Degagne

PwC International Survey Unit:Colin McIIheneyJill HassanJonti CampbellCarmel OKaneAnne-Marie BrennanKaren Hutchinson

This report is available at

www.pwc.com/perormance

The member rms o the PricewaterhouseCoopers network (www.pwc.com) provide industry-ocused assurance, tax and advisory services to build public trust and enhance

value or its clients and their stakeholders. More than 40,000 people in 49 countries share their thinking, experience and solutions to develop resh perspectives and

practical advice.

2007 PricewaterhouseCoopers. All rights reserved. PricewaterhouseCoopers reers to the network o member rms o PricewaterhouseCoopers International Limited,

each o which is a separate and independent legal entity. Designed by studioec4 8796 (0/07)


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