Outsourcing is More Than Throwing It Over the Wall

While outsourcing may be on the rise, it’s still not the holy grail of cost savings. The number of companies that bundled two more or more core F&A processes into an outsourcing deal may have doubled in 2010 (as compared to 2009), but it’s still no reason to rush into one. Even if it is, on the surface, getting cheaper (as the average contract value appears to have shrunk almost 40% since 2004), it will not necessarily save you money. First of all, there has to be money to save. If the organization has a global services unit that is best in class in a process, the organization is not going to save much by outsourcing. Maybe a few percentage points if the organization contracts to a best in class outsource provider that can leverage economies of scale, but that’s it. It is hardly worth the risk of losing the knowledge. Secondly, and this is the usual reality, if the process is broke, throwing it over the wall is not going to gain any efficiencies or savings, at least in the long term.

A recent article in CFO Magazine on how outsourcing matures, slowly did a great job of making this point with a quote from Mark Satchel of Skandia, a European investment firm that signed a 175 million dollar multi-year outsourcing deal with HCL Technologies. Skandia hired HCL to develop applications and manage the infrastructure of Skandia’s legacy systems, and absorb 250 of Skandia’s IT employees in the process. While it probably sounded great on paper, as it likely would have taken at least 25 Million in fixed recurring costs off the books, as well as the huge headache of managing legacy systems, which is something an investment firm wouldn’t be an expert in (or want to do), it was a poor decision.

Not only does such a deal “result in a great deal of inflexibility”, as Mark Satchel noted, but it doesn’t address the core issue. The reason that Skandia needed so many IT employees and a sophisticated data warehuse was because it was running on legacy systems. Skandia should have first modernized its systems and processes and then thrown it over the wall. Then, instead of having to go back and renegotate the outsourcing deal to contain the flexibility it needed to serve the “peaks and troughs” of its needs, including the need to update systems, it would have negotiated the right deal the first time. (And “the right deal” would have been considerably less as it’s a lot more cost effective to support new systems than legacy ones.) And Mark would have spent a lot less time wondering whether the gain on one side is lost on the other.

So before you throw that process over the wall, ask yourself:

  1. Is the process (and supporting technology) ready for outsourcing?
    If it’s not, fix the proces (and / or update the supporting technology) first.
  2. What can I reasonably expect to save by outsourcing?
    If only a few percentage points, it’s probably not worth it. If over 10%, then it’s definitely worth pursuing.
  3. What could happen and what flexibility do I need in the agreement to insure I don’t get caught holding the hot potato?
    Flexibile staffing? Variable throughput levels (because more invoices have to be processed over the holidays, for example)? The ability to include additional resources for system updates or replacements at pre-defined costs?

If you do, you’ll be better off.