Five Outsourcing Levers to Weather the Recession

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Tim Cummins

In a period of economic downturn you have to squeeze, we all know that. And it really doesn’t matter if you’re looking at an outsource service or a shared service, there is going to be pressure. There’s going to be pressure around reducing prices, but of course without sacrificing the quality or the levels of some of the key services.
I think the real point as we look at shared services and outsourcing, and compare and contrast them, is the question: "How much do those levers differ?" "What are the things that you can do in one that you maybe can’t do in the other?" "Which of them, if either, offers more flexibility than the other?" And how do you approach non-owned resources, contracted resources, as opposed to those which you already have under your own management?

What I would suggest we all have to do is remember that even in a time of recession, when sometimes there’s pressure for panic action, we really do need to be thinking about the impacts of what we’re doing on the future. I’m sure you, as internal owners of, for example, a shared services group, would always push back and fight against draconian actions that you know would destabilize you or disable you for the future, for when the upturn comes. Of course it’s already, according our research, on the way.

And the same applies if you’re into the outsourcing world, that we need to consider what we’re doing today and its impact upon the future. It’s also very important if you’re into outsourcing, to stop for a moment and remember why you’re there. And to pick up and learn some lessons from the recession—make sure that you don’t lose the benefit of the things that you are learning now and that you will learn over the next few months.

Of course, there is the question that asks, if you’re in a shared services group currently, or driving outsourcing strategy, are there some things you should be looking at doing now that you haven’t done in the past. Does this represent a time of opportunity? With that in mind as a background:

First: Outsourcing should offer you increased flexibility. With outsourced relationships, one of the key design points is obviously that of flexibility. Do all your relationships in fact offer you that flexibility? Which of them are most flexible? Think about the nature of the relationships you’ve established and obviously first of all tackle those that have good relationships where flexibility is possible. But take the opportunity here to think about those that haven’t perhaps had such great flexibility and what is it you need to do to get them there fast? Don’t go with a "one size fits all" approach in other words, to tackling the recession. It has to be based to some extent on the quality of the relationships that you have in place.

If you’re not already into outsourcing, what is it that you might do if you’ve got a well-defined business process, you’ve got a great shared service unit—maybe now’s the time that you should be pushing to some greater level of outsourcing. Maybe now is the time that you look for example at quasi-outsourcing through things like software as a service and managed services type areas.

Second: Don’t be deluded by your outsource partners, when they tell you that they can’t cut prices. Of course they can, and if they can’t you should really be concentrating on the quality of their operations. Because they, like you, are facing recessionary times and if they’re a good quality company, they are of course going back to their contractors and their various internal groups in efforts to cut costs. So, high quality outsourced providers are using this as an opportunity to drive up their margins. There is a possibility that they can share those margins with you.

The second point, if you are in a shared services world or you’re considering outsourcing, is that there are of course providers out there who have got spare capacity. Many of their customers are cutting back on the service levels required. That does mean that there are some opportunities out there at the more marginal cost levels for you to place business now at some very attractive rates and charges, so don’t miss the opportunity that the recession has provided.

I think you should always think about how you make yourself a client or a customer of choice. If we are going to be successful and effective in outsourcing, we certainly have to build good partner relationships, just like if you’ve got a disillusioned internal functional group that doesn’t work particularly well, that doesn’t feel well connected to the company. Obviously, in an area like BPO, you’re not going to have good performance if you have traditional arms-length adversarial relationships. So don’t indulge in traditional buyer behavior. I’m hearing far too many stories of clients going out there and trying to beat up the supplier; no discussion, no negotiations, no win-win—how do you cut your price? That’s the level of the discussion. And if there’s no intelligent discussion then you—particularly those of you in shared services—know what the results are going to be. If you can’t have intelligent discussion about well, how is this going to affect some of the service levels, what are some of the priorities, where are the things that can be cut relatively less painfully. In other words, if you set procurement free on some of your suppliers then you’re going to live to regret the consequences.

You need to help your supplier. Remember they are your partner; so communicate with your account team, your interfaces. They need to be able to sell your needs internally to their business. So you’re going to be far more successful in achieving a relatively pain-free transition and change if you are explaining to them and working with them in depth on how they are going to position your needs within their organization. And of course, this will often lead to some shifts in the delivery model. And it may be an opportunity to drive some improvements in that delivery model. I know that time is often of the essence; you are under pressure to cut now. And there may be some ways that you can get your supplier to agree, to provide some immediate benefit, but then committing to an ongoing discussion of how you rebuild the model. An understanding and recognition as part of that cutting now, that you are going to both address how you can mutually reduce some of the costs.

Don’t forget the lever you have of reducing your own costs of outsourcing. Where are all the inefficiencies that you’ve maybe got built in? What are some of the indicators you should be looking for? Well, for example if you have frequent claims or disputes, if service credits is a norm in your activity, then clearly you’ve got something wrong. What are some of the process times? Have you done any benchmarking? Do you actually know what your standards and norms are, relative to those of others? If you have opportunities now to drive out inefficiencies and ineffectiveness, it’s a great time to grab it. Don’t just push all the onus for change onto your supplier, because to be blunt, you are not blame free. There are opportunities on both sides, and of course the supplier is going to find it a lot easier to work with you if they see that it is a shared pain/shared gain, rather than just something where you’re going to impose your pain on them.

Think hard about ways in which you can engage with your supplier, with your provider, to look at mutual cost cutting in the way that service is delivered. Most contracts are incredibly inefficient. A lot of the core areas of contracting, there’s tremendous opportunity to take cost out of most contracted relationships. Typically in outsourcing, that’s at least between 5 percent to 7 percent of quick win activity.

Looking Ahead

And finally, let’s not have any illusions here. Yes, at the moment we are in recession. For many industries 18 months ago, it was all about the problem of how do we engage suppliers who are short of resources? How do we get them to commit more resources to us, rather than other clients? How quickly the world changes. How quickly the pressure on you, as owners of these activities has changed. And let’s not forget, it’s going to change again equally quickly.

In six months from now, the recession for many people is going to start being a memory. And we are going to be back into talking about well, how do we improve the service levels? How do we, once again, drive in innovation and other things? So, don’t forget that as you plan, and it’s critical that you do plan. Make your management of these levers into something that’s strategic, not purely tactical. You cannot afford to handle these embedded relationships in a purely tactical way. If you don’t believe me, when you go home, just think about the demands you would like to place upon your partner, how you would like to change their lives, their behavior, and make it a completely unilateral discussion and see how it goes. That’s the sort of reaction you’re going to get out of your suppliers. For suppliers, it’s the kind of reaction they are going to get out of their customers. We need to remember whether we’re providing shared services or whether we’re in an outsourcing world, that we are actually partners and we need to drive this as a partnership activity. So there are a range of very real levers you can use, in order to respond to the priorities of the business, but do it thoughtfully.

First Published on SSON.