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Outsourcing contracts: Under closer scrutiny from executives

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As the range of business functions that can be outsourced increases, the greater the participation required from “C” level executives in shaping and managing an organisation’s outsourcing contracts. The lack of executive support is a major cause behind the failure of many outsourcing projects.

Each department manager wants the responsibility for managing the outsourcing relationship that affects their area of the business. Michelle Cox, director, BPO South Pacific, Enterprise Services, HP South Pacific, comments, “In the past, the outsourcing decision making process tended to involve senior leaders and executives responsible for a specific function or department that was considering reducing headcount and costs”.

“Once the executive had all the information needed to finalise a business case and recommend a position, they would then involve other executives and then the Board to get the final decision”

But as more and more functions are being outsourced, affecting workflows and processes across the entire enterprise, matched with the increasing use of outsourcing to drive strategic improvements, there is an increasing need for outsourcing to be the responsibility, or at least under the watchful eye, of a “C” level executive.

Who does what?

The CEO determines the strategic direction and positioning of an organisation, but the COO  is responsible for the efficient day-today management of the company.

The role of the COO and the associated tasks differs from industry to industry and from company to company[1]. Many organisations operate without a COO, where the associated tasks are handled by the CEO and other “C” level positions such as CFO (Chief Financial Officer), CIO (Chief Information Officer) or CMO (Chief Marketing Officer). In a number of situations the COO may be viewed as a successor position to the CEO.

Common tasks and responsibilities of a COO usually include[2]:

  • The management of limited resources to the most productive uses, thereby creating maximum value for the company’s stakeholders
  • Implementing the organisation’s strategy/mission statement to the lower-ranking staff.
  • Establishing appropriate rewards/recognition and coaching/corrective practices to align personnel with company goals
  • Planning by prioritising customer, employee, and organisational requirements
  • Maintaining and monitoring staffing, levels, expectations and motivation to fulfil organisational requirements
  • Driving performance measures for the operation (including a consideration of efficiency versus effectiveness). This often takes the form of dashboards that regularly review high level KPIs (Key Performance Indicators).

In many organisations the ultimate responsibility for managing the organisation’s outsourcing and BPO arrangements, at the board level, is increasingly falling upon the COO.

More and more is being outsourced

The opportunities for outsourcing and BPO have expanded greatly over the years, as fewer and fewer functions are perceived as being core. Rather than being restricted to the IT department or managing a contact centre, outsourcing can impact every department and function within an enterprise.

Xerox COO for Financial Services Tom Blodgett, commented recently, “What’s happened over the last 25 years is companies’ perception of what functions as ‘core’ has changed greatly. Ten years ago, HR was core. Now, HR outsourcing is common.”[3]

No one organisation can have all the required skills needed inside its own ranks and sometimes they have to go outside the organisation to access certain skills. In the last few years the term KPO (Knowledge Process Outsourcing) has emerged, which includes the outsourcing of core activities that requires competitive knowledge and access to higher specialised skills[4].

Business process outsourcing has shifted from outsourcing back-end, non-core, transactional and repetitive processes such as accounts payables and accounts receivables to outsourcing core processes that require analytical thinking and judgement, processes like market research and data analysis.

Michelle Cox observes, “Over the years we have seen outsourcing providers increase the value they are providing organisations. This has been achieved through a progression from simply providing technology enablement and process improvement to providing business value-add as end-to-end process co-owner and now most recently by adding analytics, technology optimisation and automation and cloud delivery”.

“Right now”, says cox, “we are seeing organisations looking to outsourcing providers to help them by:

  • Developing a transformation road map that provides more agile, scalable, predictable and cost-effective processes
  • Assisting the organisation to have a greater focus on risk management
  • Provisioning timely business insights to improve the organisation’s competitive edge
  • Enhancing the total customer experience
  • Supporting its globalisation agenda and footprint growth plans
  • Achieving corporate responsibility agenda’s
  • Focusing on core business via outsourcing of non-core functions”

As more and more areas of the business are outsourced the more complex the range of relationships and interrelationships, between different internal departments and service providers, becomes. The greater impact outsourcing has on the operation of an enterprise, the greater involvement required from senior management and executives.

Redefining the role of senior executives

“Maybe five years ago, the outsourcing concept had limited mind space amongst Australian C-levels. In my view today, most large organisations are doing some level of BPO – maybe not so much of offshoring but more on onshore or nearshore delivery”, says Peter Monk, Partner & BPO Solution Leader, IBM Australia.

Senior management must define and communicate the objectives of the organisation’s outsourcing initiatives and explain how it will benefit the organisation to the various stakeholders, including staff, management, shareholders, partners, suppliers and even customers. Michelle Cox observes, “The roles of the C-suite are also becoming more involved in the decision-making process as the reasons for outsourcing are becoming more complex and strategic to the enterprise. Executives are now employing outsourcing to leap frog competitors rather than simply using it as a cost-saving or cost-cutting exercise”.

Ongoing management of an organisations outsourcing relationships is important. Senior executives need to be involved during the implementation of a contract. Not only should there be a clearly defined escalation procedure, but senior management should meet at appropriate intervals to discuss the outsourcing relationship.

Meetings should also be held at the operational level to address the working of the outsourcing contract in practice, to identify and resolve any problems that have been encountered, and to agree on changes to ensure continued satisfaction.

Michelle Cox, concludes, “we are seeing more involvement by executives outside the department earlier in the exploratory phase and throughout the decision making process. The reason being that outsourcing propositions are now focused on value-add and not limited to the older cost saving model. The result is that outsourcing is now more customer experience-focused and likely to affect multiple parts of an organisation or even the entire enterprise, rather than be limited to a specific function or department.”

   
June 23, 2013
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