Industry Perspective

Outsourcing Done Right: An Acai Solutions Perspective

Despite the well established trend in global capital markets for outsourcing IT and business processes to captive and third party offshore centers, planning and executing a successful outsourcing initiative is in reality no easy feat. Effective outsourcing requires a close and ongoing relationship that should be managed proactively and measured to ensure attainment of the business outcomes that are expected.

There are many pitfalls to avoid, not the least of which is an overemphasis on cost. Outsourcing decisions made solely on the basis of cost reduction are much less sustainable and successful than those driven by a more holistic, business driven plan and rationale aggregating multi-disciplinary objectives that include but are not limited to cost reduction.

One common mistake is to outsource processes that are ineffective or broken in the expectation that outsourcing will itself be a cure. Companies should first understand their own core capabilities, strengths, and weaknesses in deciding what, if anything, to outsource well in advance of considering alternative outsourcing solutions. In most cases, services more likely to be outsourced are non-differentiated, non-core activities so the client does not have to divulge too much intellectual property to the service provider. An effective outsourcing partnership frees up resources to focus on higher value core services driving growth and competitive differentiation. As such, both the customer and the outsourcing provider can focus on their respective core competencies to collectively achieve a higher level of service quality and efficiency.

Another common pitfall involves inattention or inexperience in contracting procedures and policies; “you get what you measure” is a good rule to apply to any outsourcing engagement. It is important that issues be thoroughly discussed and agreed upon in advance of signing a contract, and these should be captured- ideally with metrics- within the contract framework. Unclear contracts, disagreements on measurements of service levels, differing degrees of commitment by the parties, misalignment of the purpose of the outsourcing engagement, and inability to manage change are all common pitfalls. Terms and conditions should be simple and measurable to the greatest degree possible, and contract duration should allow for an initial transition period, extension provisions and timeframes, and adequate time and suitable methods to switch providers should the arrangement be deemed not to be successful. It should contain standard termination and incentive clauses as well as additional clauses for variable changes beyond the initial contract terms, allowing for flexibility to change scope of service as business needs change over time.

As with any outsourcing or consulting arrangement, the combination of performance measurement and clauses to allow replacement of personnel are important. These allow the customer to request changes in personnel should any resource or group of resources provided as part of the outsourcing not meet expectations or contractual measures. The key to this objective lies in a clear and effective Service Level Agreements (SLA), so both parties understand expectations, terms and conditions, and the manner in which they will be measured and reported. The SLA also provides the contractual grounding so that appropriate actions can be taken when an out-of-compliance issue occurs.

Migration is a very tricky aspect to any outsourcing initiative, whether to third party or to a client captive, and migration planning should be done well in advance of commencing the actual program. An effective migration plan will ensure minimal service interruption, a successful handover of tasks, knowledge, and personnel, and will include a detailed communication plan for onshore employees detailing the nature of and rationale for outsourcing and how their jobs and careers may be affected. Information leakage is a real pitfall, where rumors of an impending outsourcing initiative can circulate among employees and foster negative conclusions that can easily affect the quality and efficiency of ongoing work.

Even with clearly defined SLAs in place, financial services companies are perhaps still more concerned with the quality of service provided than in any other industry. Before selecting a third party outsourcing provider, we recommend a number of techniques that can help ascertain likely quality in advance of a selection or contract. Depending on the nature of work to be outsourced, these techniques can include ISO or CMM certification measures, detailed reference checks from like engagements, customer satisfaction surveys, third party audits, or the like.

Where appropriate, we believe the practice of including incentive gain share metrics in a contract- wherein a service provider can earn bonuses related to measured improvements and efficiencies correlated to their work- can help align the interests of both parties around tangible business objectives. At the same time, it is common that escalating penalties are incurred for repeat failures to meet the contractual obligations.

Over the past 5 years, financial services companies have outsourced a wide variety of IT, accounting, legal, research, security, and other processes offshore. This very breadth introduces the challenge that operational processes and data are spread across more systems and locations than ever before, resulting in a potential feedback gap that can inhibit the client’s ability to respond quickly to service level problems or unmet expectations. By taking steps to optimize this feedback loop and to create more real-time or near real-time measurements, one can greatly enhance the likelihood of a successful outsourcing initiative. Operational dashboards and reports can serve this purpose if well designed and integrated into the contractual obligations of the arrangement, breaking down silos for an aggregated, management-level view of the overall arrangement contextual to the business objective.

Acai Solutions has developed methods of helping clients assess and contract with outsourcing providers according to particular functions and grounded in real world results. This process begins by carefully mapping out the criteria that will be used for the evaluation and prioritizing accordingly based upon the relative importance to the task(s) to be outsourced. In considering references related to the defined criteria, we take particular care to consider those most aligned with the specific scenario under consideration and with an understanding that vendor references are carefully selected “success stories” with friendly client executives and thus may be somewhat biased.

Upon selection, we recommend an incremental transition approach to the degree feasible, starting small and expanding the relationship based upon demonstrated success. This allows time to resolve the typical process, communication, and relationship issues which can arise during transition before expanding or moving on to the next service or geography. The abilities of outsourcing providers to provide associated consulting and process improvement services can vary widely. We do not believe that broken processes should be outsourced but should first be fixed; on the other hand, we recognize that incremental process improvements can and should be gained over time in a successful and symbiotic outsourcing relationship.

Because Acai Solutions is not itself an outsourcing provider, we can be an agnostic, trusted advisor to our clients to help them plan and manage the journey. Along with our techniques and tools to help plan and manage the outsourcing initiatives, our experienced professionals can help separate vendor fact from reality, compare third party versus captive alternatives, and help our clients avoid the common pitfalls in outsourcing so as to maximize the realization of business benefits.