Today, more than ever, global companies are faced with significant competitive pressure and need to increasingly focus on their core competences and capabilities while outsourcing administrative and less critical business processes to lower cost, higher quality external providers. What are the advantages of outsourcing administrative processes and what risks need to be addressed and mitigated when considering to outsource?
- Cost Savings Companies can already save up to 20% of total process costs when outsourcing administrative and non-core processes to a specialist provider in their own country. This is due to the usage of lower cost resources (e.g., different collective labour agreements), lower infrastructure costs (e.g., better use of scale effects of a specialist service provider) and use of the latest state-of-the-art technology. In the case of offshoring work to a low cost country such as India, where wages can be up to 90% below US or European level, the benefit has been proven to be significantly higher.
- Technology – Specialist outsourcing providers in most cases use their own systems, methodologies and industry know-how and have access to a large expert pool. When outsourcing processes to a specialist provider, a company can ensure use of latest know how and best practices even for non-core processes and without having to invest significantly in order to build these capabilities in house. Therefore resulting in greater process efficiency and effectiveness, as well as quality of output that will increase over time.
- Flexibility – Especially companies that face significant seasonal peaks or that grow at a rapid pace can harvest additional benefits from outsourcing when working together with a specialist outsourcing provider: They have immediate access to a large expert pool and expertise that grows flexibly in line with their business requirements. At times where demand is low or stagnating, outsourced capacity can flexibly be adjusted downward at no cost saving the company expensive redundancy payments and keeping morale of existing staff high.
- Focus / Specialization – Outsourcing non core services to external providers frees up management and senior employee capacity which can be deployed against more value-adding activities. In particular, management can entirely focus on driving growth and taking strategic decisions, while not having to bother with the operational efficiency of administrative support processes that are carried out by an external provider.. As a result, new customer segments and markets can be grown more aggressively since management can entirely focus on their core strategic decisions.
- Transparency and new options – In an outsourced business model, management is given more resources, options and increases in transparency around performance of administrative and support services which then drive overall process efficiency. Outsourced services can more easily be benchmarked and compared in the external market place both in terms of quality of service and cost efficiency. Hence, management within the company easily ensure that consistently across the entire value chain of high quality is delivered at a reasonable and competitive cost.
A few words of advice: Not all is positive in outsourcing relationships and far too many outsourcing projects fail. Over the years, we have come across many cases where companies have significantly underestimated the risks of outsourcing or taken a far too hands-off approach to outsourcing. This resulted in the end output and delivery not meeting management expectations. The most relevant risks to consider in any outsourcing venture include:
- Overly Optimistic Business Cases – The total cost of outsourcing is all too often underestimated so that projects run over budget – in many cases only the cost of the external services provider are considered while not accounting for the required outsourcing interfaces at the client site.
- Too Large Scope of Outsourcing – Driven by top-down or strategic decision making outsourcing is favored over in-house options while not assessing adequately enough different in-between delivery models or determining the exact interfaces that are critical in keeping in-house parts of the business.
- Insufficient Due Diligence of New Service Provider – Over time, many companies realize that the highly thought of service provider is not capable to consistently deliver the expected quality of output – too little focus has been put on holistically assessing and comparing qualitative and quantitative service and company characteristics of potential service providers during the selection process.
- Limited Know-How To Manage Outsourcing Service Providers – For example: insufficient agreed-upon service levels and penalties in case of non-performance, ill-staffed Liaison“ function to manage each important outsourcing partnership.
- Underestimated Change Management Effort
In order for one to make a reliable decision in choosing to outsource their business, the advantages and disadvantages of the outsourcing process, along the value chain need to be carefully assessed and evaluated. Nonetheless, according to our experience, the advantages of a solid outsourcing strategy typically outbalance the potential risks and allow, in case of outsourcing to India, net cost savings of up to 50%. Moreover, potential risks, if identified upfront, can be managed and addressed in particular when working together with an experienced outsourcing service provider or consultant.If you are planning an outsourcing venture and would like to contact one of our experts for additional information please click on the link Contact us now!