Organizations are emerging from outsourcing paralysis. Be ready.
 
By Rachel Stormonth
 
In 2008 many organizations’ sourcing strategies were frozen by the economic downturn while they undertook major reviews to determine their response to what was initially a “credit crunch”; some also experienced a change in senior leadership. Outsourcing mostly paused as organizations sought to address the shape of their businesses and focused on the actions needed to survive the recession.
 
Most outsourcing contracts signed in 2008 and early 2009 had been negotiated before the credit crunch. Some of the few exceptions were companies reversing their 'build-operate-transfer’ policy, when faced with dramatic shifts in transaction volumes, to outsource some of these operations. As organizations start coming out of their sourcing paralysis, both F&A BPO and procurement BPO have enjoyed a surge of interest.
 
For FAO, the deal flow is resuming, with EMEA leading the U.S. The scope of outsourced F&A services in first-time contracts tends to be more limited, with primarily transaction-based services such as accounts payable, accounts receivable, or general accounting being outsourced. As economic conditions improve, organizations will increasingly consider an expanded service scope, also comprising analytical and decision-support services. F&A BPO is also likely to benefit from organizations looking to relocate their F&A shared service centers from onshore (or relatively high-cost nearshore) to lower cost locations.
 
For procurement BPO, clients continue to be cautious, and contracts tend still to be small in size. Organizations are often still interested in relatively small scope outsourcing deals initially and might indicate to vendors during negotiations that there is the potential opportunity to expand the processes or spend categories in scope. Unsurprisingly, vendors need to demonstrate a strong business case for very fast payback (within 12 months). So far this year, IBM and ICG Commerce are leading in new contract awards, while Accenture, another major player, remains quiet.
 
One area where the recession has helped shift attitudes is in the likelihood of a client to outsource both F&A and procurement to a single services provider. Several clients have been working with FAO providers to expand the scope of services into the procurement area, not just into transactional P2P support, but also ultimately to sourcing support; these instances tend to be part of a long-term outsourcing strategy. More dramatic than this will be the simultaneous award by a client of F&A and procurement business processes to one service provider.
 
Back Office Sourcing
Priorities that have increased in importance include initiatives to reduce expenditure and those that center on operational consolidation. Offshoring is still a quick way to take cost out, which can be done through outsourcing, increasing the use of shared service centers across operating units, and/or relocating them to lower cost locations.
 
Although many firms are shedding employees, the looming lack of talent in the developed world (because of ongoing demographic shifts) will come back again to bite when this recession is over. As organizations shed staff, they must identify the key employees to help the organization survive and thrive. In fact, the more unsettled an organization is, the greater is this issue, as key employees are more likely to leave; this is also a potential issue in any outsourced arrangement involving personnel transfer. A major challenge therefore is not just to identify the key employees but also to make sure they will stay onboard, and some organizations are looking to external help in doing this.
 
Meanwhile, many firms have been looking to take advantage of new opportunities coming from emerging markets. The implication for support functions, of course, is how best to provide F&A, HR, and procurement support for the parent company as it sets up operations in those regions. In some cases, the region might also become a hub for support services in other regions, but this will not always be the case. As the geographical profile of a firm changes, so does the likelihood of relocation of shared service centers into locations that also support new domestic markets. Some organizations that several years back adopted the shared services center route, rather than outsource, are more interested in outsourcing this time round: reasons for the shift in attitude include the greater confidence in vendor capabilities as the outsourcing market matures, as well as the “need for speed”.
 
Faced with the reality of declining revenues, organizations are compelled to find ways to maintain their closeness to existing clients while still endeavoring to protect their margins. The general priority is to find ways to take services cost out—and here finance and indirect procurement are under particularly heavy pressure to produce measurable results.
 
Another common situation, even where service delivery is through internal shared service centers, is lack of coordination across delivery locations. As organizations’ delivery capabilities mature, putting the right activity in the right location becomes more vital; this may well involve a mixture of onshore, nearshore, and offshore service delivery for the heavy duty transactional stuff, even for HR. Again, some organizations consider using external services providers who can provide truly blended global delivery.
 
Another common experience, of greater uncertainty about transaction volumes, is leading some organizations to look to hand over transaction processing to an external provider.
 
Procurement Sourcing
Greater demands are being made of procurement departments to realize cost savings in the short term in indirect spend. Savings targets have increased significantly, and many are being asked to trim their headcount. Many are re-negotiating existing contracts. Some CFOs are pushing the procurement outsourcing agenda.
 
Cash conservation continues to be extremely important, although no longer the overwhelming concern. There are no big investments, in enabling technology, and there have been several instances where a client has switched from a technology-led initiative to using an external provider for sourcing.
 
Vetting the financial stability of key suppliers is an increasingly important proposition. Managing risk in the supply chain is critical for direct spend, which can mean shortening payment terms and offering help in identifying opportunities for savings. With indirect spend, procurement departments simply do not have the resources to conduct such checks.
 
Overall, more organizations are likely to look for assistance from external services providers in both short term engagements and longer term outsourcing deals.
With sourcing projects, there has been a shift in the selection of initial spend categories. Today’s imperative to secure savings as soon as possible means that initial strategic sourcing projects are now likely to be in big ticket, but more risky, categories such as telecoms and IT.
 
There have been a few instances where the outsourcing of sourcing and category management of low level items several years ago was blighted by the decision being tactical rather than strategic. The recession has, at least, increased support from the top,.
One major area of spend, of course, is marketing. But that is a function that has tended to be averse to receiving support from procurement in the past. Today, many CPOs are finding that marketing is beating a path to their door.
 
Vendor Developments
Two major inhibitions about outsourcing procurement have been lack of confidence in providers’ capabilities and the lack of choice of BPO providers overall. But recent months have seen several positive developments.
 
Most outsourcing services providers are emphasizing their ability to accelerate the return on sourcing cost savings for clients while also enhancing control of procurement. Some major vendors have increased emphasis on work with end-users across the client organization. This increased focus on change management and on end-user support is indicative of a maturing in the vendor landscape.
 
IBM recently announced an expansion of procurement services to include unbundled strategic sourcing services and procure-to-pay services. IBM is making it clear that it is interested in smaller opportunities, even to sourcing a single major category of spend.
 
Capgemini is working with IBX Group AB to develop a new procurement offering based on Capgemini’s BPOpen platform. The joint offering combines IBX’s source-to-pay software on a SaaS basis, pre-populated content for defined categories, and Capgemini’s global P2P transaction processing capabilities. Capgemini claims the new offering will enable clients to incur as little as one-tenth the implementation cost of a traditional implementation approach. While Capgemini still lacks extensive category management capabilities across all the areas of indirect spend, this partnership signifies Capgemini is at last making a serious play in the procurement BPO arena.
 
Some of the larger Indian headquartered vendors, notably Infosys and Wipro, are moving up the value chain from providing sub-process support, and Genpact is working on expanding from F&A into procurement.
 
Bottom line: 2010 will see a significant number of interesting procurement BPO contracts signed, with a real mixture of types of deal in terms of the processes in scope. In addition, some of the single category deals signed in the last year will expand in scope. The vendor landscape will continue to mature. Expect to see more partnerships and niche acquisitions as vendors look to beef up their capabilities around strategic sourcing and catalog management.
 
Rachael Stormonth is senior vice president at NelsonHall. She can be reached at rachael.stormonth@nelson-hall.com