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Dollars & Sense:
Out Has Clout

  Column published in DM Review Magazine
May 2003 Issue
  By Susan Osterfelt

Companies large and small in many different industry verticals are discovering the benefits of outsourcing. While it began with outsourcing software application development and maintenance, momentum has now shifted to outsourcing complete technology and network infrastructure, and even selected business processes. Business process outsourcing involves letting someone else own and manage the resources needed to fulfill a particular business process, such as a customer call center or back-office functions of human resources or accounting. There are many reasons for an organization to outsource its non-core functions. Here, in David Letterman reverse-order format, are my top ten reasons to do so.

10. To improve flexibility, ability to change. An external service provider (ESP) dedicated to delivering a cost-efficient business process is going to be more flexible and nimble than a company for whom the business process is just "something else that needs to get done" among a myriad of other processes. When business conditions change, it's important to be able to gear up or reduce the cost structure, which - for the ESP - is shared among multiple clients.

9. To improve ability to scale. Related to #10, outsourcing can specifically provide the infrastructure necessary to scale as overall volumes increase. For growing companies, leaving the infrastructure to somebody else is a key critical success factor for outsourcing and leaves the worry of constant hardware/software/process upgrades to others.

8. To improve the speed of implementation. Focused resources can get things done more quickly than non-focused resources. Reducing time to market is an important reason to outsource. Getting highly skilled people previously not available to the company to work on a project can reduce the amount of time necessary to achieve project goals.

7. To enable innovation and the discovery of new sources of value. An ESP can see many new opportunities for innovation and potential value propositions when concentrating on a specific business process. Important to enabling this kind of thinking, however, is communication and a good relationship with the ESP.

6. To enable process improvements. Who better to pursue process improvements than the people who are responsible for the process and see how it works, day in and day out? Outsourcing can accelerate the benefits of quality programs and process reengineering.

5. To transfer personnel issues (downsizing, staff quality/training, etc.) to someone else. It's difficult to deal with the need for downsizing within an organization. It can be demoralizing for the staff to potentially face reductions in force and can reflect badly on the organization as a whole, even if the reductions are absolutely necessary to keep expenses in line with revenues. Outsourcing a non-core function transfers that responsibility to the external service provider, which can prevent untold political tensions within the organization itself, as well as deliver additional benefits such as providing the ability for employees to support different ESP clients.

4. To upgrade technology, replace aging systems and move to standard, shared services. Given the fact that the ESP can leverage volumes for a single business process, technology upgrades are easier than for an enterprise that has to prioritize technology upgrades for one process along with many others.

3. To improve service levels. One of the most important reasons companies cite for outsourcing specific business processes is to improve service levels. At their center, arrangements with ESPs have heavily negotiated service level agreements. This can bring shared risks and rewards to the partnership.

2. To reduce costs. Particularly when taking advantage of offshore capabilities, cutting costs is critical to an outsourcing decision. Providers - whose existence depends on performing processes efficiently - squeeze the costs out of what can be sloppy processes. Additionally, offshore labor costs can be a fraction of onshore costs.

1. To focus on your company's core competencies to achieve competitive advantage. Improving company focus on core competencies is the premier reason to outsource non-core functions. Large and small companies alike are interested in improving their companies' focus. They see outsourcing non-core functions as a way to share responsibility for processes that are ancillary to their main business, enabling them to concentrate on processes that make them unique in their market or industry. Building on this uniqueness can help forge further market gains.

Yes, an organization can get clout with outsourcing. The 14 outsourcing megadeals (deals greater than $1 billion) that occurred in 2002 received significant press and focused media attention on the benefits to large organizations. However, more small and medium-sized businesses are getting into the outsourcing game and realizing the financial and market clout they can chase by sharing the responsibility for non-core processes with others.


For more information on related topics visit the following related portals...
Business Intelligence.

Susan Osterfelt is senior vice president at Bank of America, in Charlotte, North Carolina. She can be reached at susan.osterfelt@bankofamerica.com.

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