the “make or buy” question

Grant Farrell, Managing Director of the Global Public Sector Practice. Grant Farrell, Managing Director of the Global Public Sector Practice. Slide 1

The “Make or Buy” Question

Grant Farrell, Managing Director of the Global Public Sector Practice.

“Make or Buy” is often one of the critical questions asked when considering how to significantly improve “back office” support service performance.

The question is whether to move forward with setting up an INTERNAL Shared Services operation or to instead make the decision to outsource service provision to an EXTERNAL service provider.

In other words, to set up (“make”) an internal service provider through shared services or to “buy” the same services from a third party.


In theory any “back office” support service can be considered for outsourcing.

The question is really one of cost (short and longer term, fixed and variable) versus control.

The “attitude” to outsourcing also depends on other factors as well such as enterprise culture, risk sensitivity and the level of development and maturity of any existing shared service functions.

Outsourcing can also sometimes be used as a “lever for rapid change”.

However, be very careful of “outsourcing a mess” to achieve perceived very rapid short term cost savings. This may only achieve cost savings on paper in the short term and could result in control and compliance issues and also increased costs and clean up problems down the track.


It is generally true that transaction based services are relatively easier to outsource than services further up the value chain.

Having said this, in line with the experience of internal shared services, as BPO continues to develop and mature it is offering more services further up the value chain.

Outsourcing has been around in manufacturing for many years and IT outsourcing has been a practical sourcing option for quite a while now as well.

Back at Shared Services Week events in the early to mid 2000s outsourcing was not high profile at all, and was actually avoided as a discussion topic!

Today the subject of “offshoring” rather than necessarily “outsourcing” has political elements to it again as the world struggles to come out of global recession and unemployment remains very high in North America and Europe especially.


Business Process Outsourcing (or “BPO”) has boomed in the last decade.

BPO covers the provision of services such as Customer Support, Finance and Accounting, certain Human Resources functions and Procurement.

Offshore centers (for both internal and external service providers) have been established in many “lower cost” locations around the globe – many initially in Central and Eastern Europe and India but now also in many other regions and countries such as in Latin America, the Philippines, Indonesia, China and many more.

As the outsourcing model has developed many outsourcers have more recently themselves gone to a multi-shore model with their own operations having some locations back “closer to the customer” in Western Europe and the US for example.


Key Factors in Determining Whether to Outsource


There are a number of factors over and above the cost of labour that should be considered including:

Current state of existing processes in terms of standardization, complexity, cost, degree of centralisation, stability of control environment, level of automation, etc

Expertise of the BPO provider in the services being considered for outsourcing

Availability of skilled labour, in particular to manage potential multi-jurisdictional labour law requirements

Time zone and language requirements

Possible minimum commitment levels in contracts (often five years and above, and even then difficult to extricate from if you then decide to move back in-house or to another provider)

Service levels after go live if outsourcer considers you to be insignificant or not very profitable for them


How to achieve continued end-to-end process re-engineering to lower costs further and improve service levels when the outsourcer handles much of the process

Reputation and robustness of the potential outsource provider

Political and other risks associated with the country where the outsourcing will be provided from (including disaster recovery considerations).

Ability to flex up and down with volumes, required services and complexity (e.g. following an acquisition, annual pay /performance review)

Communication issues, including access, security, confidentiality and the associated costs

The requirement to have access to specialist HR knowledge that may not be cost effective to retain or always accessible ‘in-house’

The requirement (and ability) to provide meaningful people management metrics.


Does The Decision Point Change Over Time?


The “Make or Buy” question is a critical one in the early decision making stages and is very often part of an initial Feasibility Study and Business Case

Then over time, for any sourcing model, there come points when this question is asked again.

For example, after having operated an internal captive for a while, a business may then decide to look at outsourcing to take out further cost or perhaps allow the existing captive to move up the value chain of service delivery and leverage a third party to take on the already standardized, more transactional processes that were initially taken into Shared Services.

In this latter example, effectively service provision remains the responsibility of the captive Shared Services operation but the Shared Services operation itself decides to outsource certain elements of service provision to a third party.

This can potentially be a great model where the organization truly maintains controls and pulls different levers to achieve the optimum sourcing mix for its host business. A number of excellent initially captive Shared Service operations have gone down this route in recent years.


Is There A Mix Of Options?


The decision is not quite as simple as “make or buy” as there are sourcing mix options which can involve a combination of both.

Indeed “selective” outsourcing has actually been around for a long while. Just think about Payroll, Benefits Administration, local Accounting and Compliance services and local IT Helpdesk support as examples of this.

The large “multi-tower “ outsourcing deals that were promised in the early days of BPO have actually been limited in number

But selective outsourcing along and within specified service delivery lines has become more and more relevant and popular.


Where Next for BPO?


Over time, Business Process Outsourcing as a viable alternative to, or complement for, Shared Services has and will continue to mature and grow.

Shared Services and Business Process Outsourcing are becoming more closely entwined and provide a range of sourcing option alternatives.

The right course and speed ultimately depends on each individual enterprise’s current cost structure, its desire for change, its attitude to risk, and how effective any existing internal Shared Services organisation is today.


Why Do Some Organizations Not Outsource?


Cost outweighs the benefit

Loyalty to staff

Provider cannot improve the service

Unions, government regulations

Can impact a company’s image

Strategic importance to the company

Loss of staff contribution to other areas of the business i.e. general knowledge/expertise, hard to contract/price for

Market offerings and maturity

Giving away savings that could be kept in-house

Perceived loss of control

Fragmenting the service, splitting day-to-day operations from strategy and policy direction

Concern about the level of flexibility/adaptability

Need to get our house in order first

Building shared services is often a first step for learning about business transformation – growing capability


When Do You Bring Back Services In-house?


Service Levels not meeting expectations and no sign they will improve

Business unit now has a strategic importance to the company

Cost of hiring is cheaper than outsourcing

Concerns over service providers stability or commitment to this area

Hidden costs of outsourcing become apparent and original justification/assumptions for outsourcing now in doubt

Service provider’s staff turnover increasing and impacting service

Service provider now doing business with competitors

Your company maybe increasing/decreasing in size, again costs/benefits would have to be reviewed

Expected savings have not been delivered

Service provider’s contract is too inflexible, changes take too long to implement, damaging your business’s ability to respond to market forces or launch new products to market first

PR challenges, loss of business due to the outsourcing


What are the ‘Hidden Costs’ Associated with transition to BPO?


Staff who have been transferred may not be as productive or they may leave lowering the quality of service

Effort/cost involved in transition underestimated, in effect you could be temporarily running 2 organizations for the same work i.e. one being trained while one does the operational work, this can take up a lot of senior mgt time

The loss of the tacit knowledge held by employees when a role is transferred to someone else - knowledge may not transfer

Loss of internal expertise/knowledge - service provider will now charge

Loss of flexibility/adaptability of employees, now additional charges/contract negotiations

PR challenges, loss of business etc


Some Real Life Examples


Question 1: When you initially embarked on Shared Services at your company did you consider the option of outsourcing, either selectively or more broadly?

Answer 1: Global Drinks Company

No, the target was to consolidate core financial activities into Shared Services combined with moving towards Global Processes and single ERP system (SAP). Outsourcing came on the radar some 4 years after establishment of SSC. Key reason was (1) following the success of SSC, the desire to move more value-added services into the SSC and move out the framed, optimized operational tasks (2) conclusion that copying the SSC formula into APAC would not be feasible with the limited scale, volatile labour market conditions and problems of finding appropriate talent as experienced by companies having made that move.


Answer 2 : Global Oil and Gas Company

Yes, definitely. Indeed we chose BPO as a large part of our solution mix because we needed to “break the culture”. While we agree that “outsourcing a mess” is not in general a good idea, in our case we needed to do this to make a step change in the way services are delivered.

Answer 3: UK Based Major Retailer

No, cost arbitrage was not an issue as centralised finance cost base low. SSC was part of Finance so “re-badging” needed. More focus was on impact of moving Finance overseas. Some consideration made for using local BPO providers in Expenses area

Answer 4: Media Company

No, assumption was that 90% of SSO would be staffed by current Central Finance team. Past transactional processing in a terrible state – would need rectification prior to transfer to third party.


Answer 5: Global Logistics Company

No, the option of outsourcing core processes straight away was not considered in any of the four companies I have done shared services in. However, some ancillary processes such as imaging/scanning and invoice printing and postage and stationery procurement was. Also, eBilling - it would not occur to me to make – I would always buy. End of cycle collections I think is always better done externally (i.e. once the normal running cycle is completed and you are now going legal with the customer).

Answer 6: Global Consumer Goods and Global Media Company

At the time of Whirpool in the mid 90’s there was no decent FAO service provider. The best example was Reuters in 2003. We looked at the BPO markets and decided that we had to sort out our own house first before we considered any form of BPO – they simply were not able to offer a global standardized template solution. When we got going, we started using selective BPO for Billing, Statutory and Tax compliance, Payroll, etc



Answer 7: Global Telecoms and Networking Company

Yes. We looked at Outsourcing and made an assessment of its applicability and potential value actually at various stages. We chose to move forward with internal shared services across Finance and Accounting and much of HR globally but we did use “selective outsouring” as a way forward with quite significant outsourcing in IT and Facilities for example. We also selectively outsourced some local Finance and Accounting accounting and reporting in some of our smaller markets.

Answer 8: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company

Yes. We focused on selective outsourcing where it made sense. In most cases, we outsourced or considered outsourcing certain processes as opposed to complete services.



Answer 9: International Bank

Prior to the decision to create an ‘in-house’ shared service centre, various ideas around re-engineering the HR function were considered.

Outsourcing was considered to ensure the re-engineering effort reviewed all options and evaluated the merits for each, and also to look at what outsourcing providers could offer in terms of potential cost reductions. The Bank concluded that there was a strong business and technical case that its own people could ‘do it better themselves’.


Question 2: With the development, growth and maturing of the Business process Outsourcing market in recent years, are you perhaps looking at this as an opportunity in the future? Perhaps to outsource some of your existing processes that are currently insourced or to help expand scope or really not at all?


Yes, currently PTP processing, issue resolution, payments T&E card admin, query resolution, audit and reconciliation OTC billing, processing, payments, clearing to customer ledgers, ... several Asian countries (AUS, Japan, Korea, Vietnam,...) and African countries (Nigeria, Kenya,...) are full scope with Accenture Asia.




Yes – have reviewed BPO twice within past 15 months

Opportunity has passed for now but hasn’t gone away for ever Will be reviewed further in 2010

End 2 end processes are not available yet

Compliance levels still low

Business ability to deal with continuous change is LOW

Haven’t exhausted internal opportunities

Possible loss of income due to gain-share from BPO provider on savings




We do some tactical outsourcing either to reduce cost in a non-customer critical activity or to gain technological expertise. examples are cash application, import duty/vat queries and collection and some low value high volume credit control. I would consider it firstly for existing processes preferring to expand scope onshore initially to stabilize and build trust with the business partners before engaging with a BPO.



Yes and for the principle reason that BPO enables the SSC to move up the value chain. In Whirlpool, outsourcing AP enabled the SSC to start looking at controllership and Performance Management (business support). By outsourcing the stuff we have done well, we can focus on doing other things that are of higher value and much better for the company. Global payroll solutions offer great opportunities for example. Be careful though, most BPOs make there money on tidying up a process through good governance and service management, moving activity to lower wage cost locations and applying some good tools. The question you have to ask yourself is whether you have the capability to do the same (or indeed the aspiration to grow the capability), and make similar quality and savings benefits. Massive organizational learning comes from successfully learning how to manage change – in Reuters, shared services programme template became the standard for all subsequent change projects. Reuters has fundamentally changed its business model over the past 7 years.



Answer 5: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company

Yes, it will remain an option for the future. As we expand scope and plan for the future provisioning of services, we endeavor to consider the pros and cons of outsourcing for a variety of processes and services.


Question 3: How do you personally view Outsourcing? Do you view it as complementary to, an extension of, or a direct one-for-one alternative to internal Shared Services?


Complementary and as an extension. I see this as a valid business solution which can turn very attractive but needs thorough understanding, preparation and not be seen as a 1-off but as part of a bigger journey for improved business performance.




Outsourcing is suited to Transactional Processing and VOIP type processes

Once these processes have been migrated, stabilised and become effective, consider more Traditional “Value Add” activities e.g. business analysis, budgeting, reporting

Outsourcing depends on individual company risk profile, change capacity, marketing/ media profile, business/market operating within, FTE needs and budgetary concerns

No one answer fits all

See next slide for typical ITV review criteria for BPO elements

Complimentary? Could be but passed on secondary option

Extension? More so and can be the next stage aka logical evolution!

Direct one-for-one alternative? Not really!




My personal view is very mixed. From a personal perspective, I feel almost treacherous exporting jobs from onshore to offshore and the socio-political considerations I think are enormous. It might be possible but is it right? From a business perspective, I think there is a huge role to be played by outsourcing. I'm personally in favour of a hybrid model of service delivery based around the amount of customer intimacy that's required in any given process. Outsourcing gives you options.




Outsourcing is another important tool in the toolbox. It should never be seen as an end in itself – to do so is a classic misunderstanding of the value of outsourcing. BPO can be all three. In Reuters, we used a 3rd party to support the SSC provide global Statutory & Tax compliance to 140 plus countries. It became a complementary part of the service. We used a global company to provide local customer billing in each country so that we could manage the important part of collecting and allocating cash. We outsourced payroll to a global provider because they were better equipped to do it than we were.



Answer 5: Global Food, Beverage and Retail Services Company and US Scientific, Engineering, and Technology Applications Company. I view it as all three, depending on the scenario and the company situation.

the “make or buy” question

Business

global consumer

technology

global logistics

global drinks

retail services

global media

internal shared

personally