What does an outsourcing provider do with the wealth of data and information it accumulates as it runs business process or IT services for a client over the course of a multiyear contract? What does it do with the in-depth knowledge about the client’s business and industry that it develops over time?
Until recently, the answers to those questions focused mostly on greater efficiency: standardizing and streamlining operations, running a business function better and faster, and driving out cost wherever possible.
Make no mistake—that’s been great. When your outsourcing provider can run a business process like finance, human resources or procurement not only more effectively but also at a cost that can be anywhere from 20 percent to 50 percent cheaper than you were able to achieve internally, it’s a big deal. Still, companies can pull the same levers of labor savings and process improvements for only so long before the benefits begin to sound less impressive. Now the legitimate question organizations are asking of their outsourcing providers is, “Is there something else you give me?”
That “something else” turns out to be the ability to use the business and operational knowledge gleaned from a long-term outsourcing relationship—and experience with business functions across multiple industries and clients—to go deeper into a company’s value chain.
Earlier generations of outsourcing solutions were concerned primarily with efficiency, standardization and industrialization. Those emphases will continue, but now they will be placed in a greater context of value based on deeper relationships, more extensive analytics-based insights, and the scale and experience a provider gains within and across multiple industries.
Outsourcing providers are uniquely positioned with sight lines across entire industries as well as across their clients’ operations, including customers, global supply chains, business units and decision-making structures. That means they can use their scale, analytics capabilities and insights to help create innovations that can drive better decision making, continuous operational improvements, enhanced product development processes and more profitable customer relationships.
To a degree, the ability of outsourcing providers to extend their reach and influence into their clients’ operations is a simple matter of acclimatization. What was once extraordinary has become less so—and companies’ comfort levels about what functions can be outsourced have increased based on initial successes.
Now that organizations have seen external providers perform an increasing number of business functions better than they can themselves, the entire issue of core competencies that once dominated discussions about the outsourcing industry—what’s core, what’s non-core, what should be retained and what should be outsourced—has been turned almost on its head. The key question being asked today is less “How much should we keep?” and more “How much can we assign to a provider that can perform processes for us better now, and even improve them in the future?”
|Examples of how outsourcing providers are moving deeper into their clients’ value chains and customer relationships may be surprising to those who think of outsourcing merely as a way to streamline operations or make transactions more efficient. The focus now is much more on the new capabilities that an organization can acquire through an outsourcing provider.
Click to Enlarge
For example, in support of a health insurance company, one outsourcing provider employs a team of nurses in Manila that monitors the medical progress of patients who may be half a world away. The nurses maintain contact with the patients, monitor their ongoing health status, remind them to take their medications and remind them of upcoming doctor’s appointments. These “outsourced” nurses help patients avoid the complications of poor self-treatment while lowering the overall costs to the insurer.
Or consider the marketing function for a consumer products firm—something once considered to be at the very heart of that company’s competitive advantage. Procter & Gamble, one of the world’s largest consumer products companies and a savvy marketer in its own right, has determined that the complexities of marketing in a digital age are most effectively handled through an outsourcing relationship. Today, an outsourcing provider manages P&G’s worldwide digital marketing campaigns for 65 programs. The work includes overseeing mobile promotions (pushing relevant and timely marketing to customers’ mobile devices), making sure website content is innovative and timely, and working with more than 200 agencies and other vendors to manage on-time, on-budget digital marketing campaigns.
Insight to innovation
Beyond the willingness of organizations to entrust more significant parts of their value chain to outsourcing providers, however, is the ability to increase business advantage based on the insights and innovations generated by external partners. That is, the next generation of business process outsourcing isn’t only about applying old tactics to new parts of the business; it’s about new ways of capturing value.
Outsourcing providers can gain a broader knowledge of their clients’ business—using analytics capabilities to look across operational data, customer behaviors and business results—to see trends and capture insights that can fuel additional innovations and higher-level business improvements.
Consider an example from the finance function. Until fairly recently, what a company most desired from an outsourcing provider was simply that it process transactions quickly and more efficiently, at lower cost and with fewer errors. Today, providers can do much more than that, based on their ability to use leading-edge tools to analyze invoices and other financial data, even down to individual line items. Those insights enable a company to see where it can close gaps in processing, generating significant savings and additional revenues, and improving compliance.
For example, Canon Europe entered into a long-term finance outsourcing contract as part of a strategy to become both more effective and more competitive. From a delivery center in Prague, the outsourcing provider now runs, on Canon Europe’s behalf, a range of finance processes, including accounts payable, cash posting and fixed assets administration, as well as travel expense processing.
The outsourcing provider’s ability to offer Canon Europe value beyond efficient transaction processing is based on both high-tech and high-touch capabilities.
In terms of the latter, the provider makes efforts to broaden its understanding of the business through experience and more extensive interactions. Individual teams (one for each process, such as accounts payable and cash posting) interact on a daily basis with the Canon Europe subject matter experts, who oversee particular finance processes, and with local finance teams. Every other week, an operations committee comprised of professionals from both provider and client meet with finance process owners to share ideas and insights, and to discuss future directions and enhancements.
An accounts payable analytics tool enables detailed transaction monitoring, automatically flagging exceptions during processing to prevent such occurrences as duplicate or improperly documented invoices. This capability generates savings by, for example, preventing duplicate payments leakage.
Additionally, data from Canon’s ERP system is processed through a procure-to-pay analytics tool, enabling deeper understanding of working capital efficiency and process effectiveness within the end-to-end process. This analytics capability is enabling Canon Europe to identify areas where additional business value can be delivered.
Similar examples of generating new insights about a business and its operations can be found across many other kinds of business process outsourcing. For the health insurer referred to earlier, for example, the outsourced nursing staff uses the information gleaned from patient interactions to improve the care of other patients with similar conditions or in similar situations, as experience leads to greater insights.
For Procter & Gamble, the outsourced digital marketing capabilities include monitoring and measuring the success of campaigns, information that is then cycled back to the company’s marketing strategists to help them improve results of future campaigns.
In the case of one communications company, what appears to be a rather ordinary managed services or outsourcing arrangement—a provider sets up phone service and high-speed data lines for customers—has become an opportunity for the external partner to help the company gain important knowledge of customer preferences and behaviors.
Last year, the managed services provider helped establish phone service for more than a million homes, and has been instrumental in finding innovative ways to enable the company’s customers to port their existing phone numbers to new devices in a near-instantaneous way. But with the customer data generated through these transactions—and the more personal relationships created through customer interactions—the provider now also has a way to spot usage trends that can help the company understand different customer segments more clearly and, as a result, offer innovative service bundles to retain those customers and attract new ones.
As outsourcing providers move deeper into the value chains of specific clients, so are they moving deeper into the fabric of entire industries, using their scale and experience with many companies in an industry to generate additional insights that can help those clients to solidify or advance their industry position.
In part, basic economics is at work here. Outsourcing providers maximize their performance when they can standardize and industrialize processes and operate them as efficiently as possible. By working with many companies across a single industry, a provider eventually achieves a kind of scale that gives it an edge in the execution of most of the standard processes within that industry.
For example, a learning outsourcing provider can embed specific industry needs, focus areas and experiences into its learning management system—the software platform that automates training administration and the delivery of courses—so that all its clients benefit. A sudden spike in calls to an outsourced call center for a communications company, insurer or manufacturer can alert related customer service representatives of a possible trend to watch across the industry.
Outsourcing providers are also in a better position to make the ongoing investments needed to improve operations within that industry. Most in-house teams struggle to acquire funds to invest in new skills and technology, and often must compete with their own R&D function. A world-class service firm, on the other hand, will make these investments more readily, since it sees those costs as investments that produce a direct and measurable revenue stream across multiple clients.
Just as FedEx and UPS could amortize their technology investments over many clients as they increasingly took over their customers’ logistics processes some years ago, so can outsourcing providers in any function and industry spread the full cost of leading-edge technologies across multiple engagements.
Beyond economics and efficiency, however, the ability to acquire deeper knowledge and experience is also at work. Third-party services providers gain valuable industry knowledge because of their lengthy exposure to multiple companies within an industry. Outsourcing providers often organize their teams by industry to create specialized skills that are hard for clients to duplicate—making themselves, in effect, industry subject-matter experts. As a result, such providers have a mix of industry knowledge that internal company talent can rarely match, since the latter’s experience is mainly limited to the realities and practices of their one employer.
Risk mitigation is another factor. When charged with establishing new industry-specific capabilities, companies frequently face implementation risks, cost overruns, extended timelines and requests for functionality that is not currently needed but might be in the future. By contrast, third-party services providers have the advantage of lessons learned from multiple implementations, and—while never entirely immune to the vagaries of economic and business cycles—they may be able to shorten time-to-value and eliminate a great deal of the implementation risk.
The pharmaceuticals industry offers an important example of leveraging the knowledge and insights gained across multiple outsourcing clients. Currently, eight of the top 10 pharmaceutical companies in the world work with a common outsourcing provider to help get new drugs tested and approved.
Why would a company outsource something that is, at least at first glance, so central to the success of its business? Because a great deal of the lengthy period required to gain approval—on average, about 18 months—is spent simply dealing with terabytes of data about drug interactions, adverse effects and so forth. Companies have to analyze potentially thousands of drug interactions and possible effects, do label assessment, conduct medical assessments, oversee quality assurance, and then perform aggregate reporting and medical communications.
When these activities are industrialized—in this case, performed from a delivery center in Chennai, India—data can be analyzed and reports generated far more quickly than the clients can do themselves.
In addition—while maintaining firewalls to protect each company’s distinctive intellectual property—this so-called “pharmacovigilance center” can also analyze data from other drug studies, dramatically multiplying the value any single company can receive by leveraging data from all companies.
The results are twofold. First, this outsourced approach has successfully reduced the approval period for many new drugs from two years down to about six months. Second, the approach can reduce risks to pharmaceutical companies by broadening the data sets, enabling fuller and more complete studies of adverse effects.
These kinds of shared platforms managed by outsourcing providers are altering the very basis of competition within entire industries. If competitors are willing to let an outsourcing provider run not just back-office transactions but also an expanding list of customer-facing functions, and to do so not only for their company but for their fiercest competitors, it’s a sign that the nature of competition itself has changed.
An outsourcing provider with the scale and experience to transform its broad industry experience into increasingly efficient operations must then move up the scale and focus on the unique knowledge and value it can bring to an individual customer. That value will now be increasingly based on knowledge that is a product of relationships: cooperative and collaborative behaviors, shared goals, the exchange of intellectual capital and the applied use of analytics technologies to drive new levels of insight and innovation.
For further reading
“The analytics advantage,” Outlook, October 2010
“Industrialize and innovate,” Outlook, February 2010
“A new value proposition,” Outlook, October 2009
Sidebar | An expanding list of outsourced functions and processes
The “externalization decision logic” going on across most industries today—the chain of thinking and decision making over what functions and processes can be outsourced—can be seen in the approach of one North American retailer specializing in women’s fashion and household products, with more than 1,000 retail outlets.
With the help of a third-party services provider, the company implemented a state-of-the-art statistical forecasting software package. However, it was unable to train or recruit enough people to use the new software in an effective way.
The company then decided to outsource forecasting to the same services provider. The logic of the decision went something like this.
||Is forecasting something we can do better internally than anyone else can do?|
||No. Others can perform it better than we currently can. |
||Will our costs to perform the function be equal to or lower than what we are currently paying? |
||Yes. The business case builds cost reductions into the lifetime of the contract.|
||Does the function depend on proprietary knowledge that puts us at risk if it’s leveraged across other clients?|
||No. It depends primarily on functional knowledge of mathematics and statistics.|
||Can the outsourcing provider integrate effectively with our internal professionals to form a unified team?|
||Yes. The forecasting services provider implemented the system, has worked with our people and knows best how to make the software function most effectively over the long term.|
Over time, this decision logic will expand to cover several additional questions:
- Does the provider have the analytics capabilities to drive ongoing improvements in the performance of the function?
- Does the provider have the scale to generate additional industry insights that can help my company grow?
- Will the provider make a contractual commitment to bring innovations to my business?
About the authors
Michael J. Salvino is group chief executive of the Accenture Business Process Outsourcing growth platform. A recognized expert in the outsourcing industry, Mr. Salvino was awarded FAO Today magazine’s FAO Superstar status in 2007 and 2008. He is also a previous winner of the prestigious Outsourcing Journal’s Editor’s Choice Award. Mr. Salvino is based in Charlotte, North Carolina.
After working in product marketing in the high-tech sector, Accenture senior executive
Charles Sutherland turned his focus to outsourcing in 2003. Today, he is the growth and strategy lead of the company’s Business Process Outsourcing growth platform. Mr. Sutherland, who is based in Boston, has been a strategy consultant for Accenture across multiple industry groups around the world.