Resources

Introduction

Op2i has a significant library of resources that we use in providing services to our clients.

We produce a quarterly perspective, which looks at the industry and challenges old assumptions, in line with our moto of creating best practice, rather than following.

We also provide a variety of training programmes, workshops and events, bookings and details of which can be accessed from our events diary.

What is outsourcing?

Outsourcing is nothing new. From the 1600’s and earlier, the British have had work done for them abroad, even if it was simply the processing of sugar in Antigua.

Outsourcing is essentially an elaborate description for an arrangement whereby a company carves out certain services that it has been providing internally and retains a third party to provide these services. Offshoring is sometimes described as outsourcing to service providers in other countries.

What are the benefits from outsourcing?

Many authors and suppliers have listed the purported benefits from outsourcing - clearly these will depend on the company size, what is being outsourced and the outsourcing model that is used. However, the typical purported benefits include:

Allows further focus of management’s effort to the “core” function of the company .

Cost-savings from reduced overheads (labour arbitrage) and consequent reduction in training needs.

Sharing of cost-savings achieved through economies of scale gained by the outsourcing service provider .

Higher levels of service and performance due to specialization of the service provider.

Allows a reduction of capital expenditure, particularly in the sphere of information technology services, management and general support systems.

Sharing of new and improvements in older technology methods from the service provider to the customer, gained from a combination of specialization and economies of scale and scope.

Enables shorter times to market for a customer’s services, due to a more flexible and responsive process for the outsourced services.

Provides an opportunity for the customer to standardize its IT infrastructure and to simplify its processes – possibly in a shorter time than it would be feasible without outsourcing.

Improvement in processes and their documentation – something that tends to get ignored internally, but which takes on an importance on its own right when outsourcing.

What are the costs and risks associated with outsourcing?

For the benefits offered by outsourcing, companies outsourcing must however recognize that there are real risks involved. The typical costs and risks that a customer must access include:

Loss of day-to to-day management control of outsourced services and excessive dependence on the service provider for performance.

Dependence on the service provider for strategic information on internal technology, operational and business options.

By transferring employees and assets to the outsourcing service provider, the customer risks losing valuable knowledge and experience from displaced workers.

Additional costs associated with managing the outsourcing service provider.

Reassuming responsibility for the outsourced services on termination of outsourced services can be inherently difficult and risky.

Potential risk of IPR theft .

Data protection.

Regulatory obligations still responsibility of company.

Bad PR and press.

As is the case with respect to any material agreement, the structure of an outsourcing agreement is a key issue because it embodies the rights, remedies, duties and obligations of the parties and provides a blueprint for the parties’ relationship. When contracts transcend national boundaries, the national legal regime of any single country becomes inadequate and the rules of International Law come into play.

Specific legal factors around Data Processing, Intellectual Property and staffing implications (TUPE) must also be given careful consideration.

What can you outsource?

Traditionally the word outsourcing seemed very much associated with outsourcing of software development or call centres. However the industry has moved beyond these and now offers a range of outsourcing services.

Information Technology Outsourcing (ITO) was the original and still leads in terms of outsourcing – however the scope and depth of service offerings is much wider. e.g.:

Remote management and monitoring o Security management and monitoring, fraud detection o Database administration, mining, support

Business Process Outsourcing (BPO) has emerged as an effective sourcing strategy for organisations seeking to reduce their operating cost base while also improving service delivery and support for their customers, suppliers and employees. e.g.:

Data processing o Claims, forms, payment processing o Data translation o Office administration o Business transcription services (legal etc)

Knowledge Process Outsourcing (KPO) is the new wave. It is different from business processes in terms of the value proposition to the client, which leads to a clear demarcation in process complexity, the amount of intellectual intervention in the process, the skills required and the ability to scale. While business processes are essentially process driven and rule based, knowledge processes involve judgment. e.g.:

Finance services (accounting, financial analysis, financial model validations, equity research and M&A analytics support) o Staff augmentation o Market research and analysis (sales generation primary and secondary research, analysis, management and marketing consultancy) o Creative design and advertising (animation, modelling) o Interactive multimedia (graphics, publication and creative writing) o Education services (e-learning)

Why outsource?

Mounting margin pressure, global competition, and an increased focus on core business are driving companies like never before to look for new ways to get things done at a lower cost.

While cost saving is a primary driver of outsourcing, companies benefit in other ways, including freeing up internal resources and accessing world-class skills and capabilities.

The typical objectives stated by many that have outsourced include:

Improving strategic positioning through increased focus on core functions.

Improving competitiveness through operational performance improvements and access to cheaper and more specialist skills.

Increasing control through process improvement.

Reduction in costs through new technology or innovative practices.

Where to outsource?

There are essentially three options for companies to consider, 1) using locally based outsourcing service providers, 2) using companies based in countries near your own country (nearshoring) and 3) offshoring to a lower cost country.

There are clearly advantages and disadvantages to each. The following illustrates some of these:

Offshoring represents potentially the highest reward, however, as with most things in life, it does come at a cost – the higher risk, in some cases this is perceived risk and in other cases it is real. There is however ways in which you can get the benefits of offshoring without all the risks that this potentially involves.

How to outsource?

There are a number of ways in which a company could outsource; the options will depend upon the size of the company, its ability to invest upfront and its appetite for risk.

The four common models that companies have used include:

1. Captive Direct (many of the UK banks….)

Organisations create an organisation within another country, often known as captive centres. Because captive centres require a sizeable upfront investment, only larger companies have the necessary resources to use this model.

Less risks to an organisation than any of the other models, because dedicated management from the parent company directly oversees the foreign operations.

2. Joint Venture (e.g. BT and TechMahindra…)

A domestic firm partners with a foreign entity for shared control of the foreign operations.

In general, because control is shared with the foreign enterprise, this method of offshoring has a higher risk potential than the wholly owned foreign captive direct model, but less risk associated with it than the direct and indirect third-party contracting forms described below.

3. Direct Third Party (many of the call centres…)

Firms outsource operations to a third party service provider located in an offshore location.

Because the outsourcer has no ownership authority in this form, their control over this working arrangement is limited to the contract terms agreed with the third party service provider, thereby making this model potentially more risky than either the captive or joint venture forms.

In some cases the outsourcing customer may elect a build, operate and transfer model, i.e. contracting for services with a third party with an option to acquire the services operation, at some point in time in the future.

4. Indirect Third Party (using Op2i Managed Outsourcing Services for instance….)

A company enters into a contract with a domestic outsource service provider, who then subcontracts out all, or a part of the work, to an offshore company.

It is quite possible to have a relatively lower risk if the contract is between two domestic companies, as the usual issues of foreign law are not relevant for the outsourcer – essentially the indirect third party bears these risks.

Why things go wrong in outsourcing?

There are a number of reasons why things go wrong, and not all of them are the fault of the supplier. Outsourcing is a complex process with the relationship lasting for many years unlike many other business transactions. The outsourcing process can have business wide affects, yet usually only a select few (e.g. procurement) get involved in the initial outsourcing decision making process.

Outsourcing must have the buy-in from all stakeholders involved in the company, with a senior champion to provide clear direction, decision making and project management.

Any anti-outsourcing sentiments that exist within the company must be identified and adequately managed. Conflicting work styles, holidays, attitudes towards sickness etc must also be clearly understood at the beginning of the relationship and mechanisms put in place to manage these.

Both parties must put adequate resource in place upfront to ensure that both parties are fully clear about the others aims and requirements. Both parties must be realistic about the financial rewards and the effort required in managing the outsourcing agreement – squeezing the margins of the service provider to the bare minimum may look good at the beginning of the relationship, but may not bring about the right incentives from the supplier over time.

The customer must be realistic and clear about its own skill proficiency and experience and where necessary use expert help in the form of advisors and intermediaries.

When offshoring, both parties must realise that the potential for conflicting communications styles is high and both must work together to solves issues that may arise, including investment in training.

A frequently sighted area for things to go wrong, include poorly drafted and understood contracts and Service Level Agreements (SLAs) – however with a shortage of adequately experienced outsourcing lawyers and those that are available, charging a ransom, it is not surprising that many smaller customers rely upon the service providers’s legal input and/or use their own limited knowledge when negotiating the contract. This is a risky strategy from the customer’s perspective and indeed from a supplier perspective. It is well worth getting advice from an outsourcing advisory – the longer term benefits easily outweigh the short term investment.

Outsourcing contracts – key issues

Outsourcing contracts commonly consist of services agreements, supplemented by schedules that describe the services, service level commitments, charges, transitional arrangements and other particulars.

Typically within the agreements, there are two separate contracts, one for the transfer of existing business and one for the actual services outsourced.

Outsourcing arrangements are usually long term, and it is often difficult to fully anticipate, describe and manage contingencies and change conditions in the agreement. Therefore these agreements often include within the contract, broad procedures that describe the process the parties will follow when changes occur in the relationship, without having to re-write the contract. It is important for companies to appreciate from the outset that outsourcing agreements are more successful where companies view the relationship as long-term and based on mutual respect.

Trans-border issues

When contracts transcend national boundaries, the national legal regime of any single country becomes inadequate. When the parties to the contract are located in different countries, at least two systems of law impinge upon the transaction and the rules of International Law come into play.

Under Indian Law for example, parties are free to stipulate their terms of contract and lay down the law by which the contract is to be governed. It is also possible to split a contract, to allow different parts to be governed by different laws where there is an absence of choice, Indian courts determine proper law of contract.

Arbitration or litigation?

Arbitration is an alternative to full scale courtroom litigation. However, the process of arbitration is not governed by a well established set of case law and rules like litigation, so waiting for a final award can often be lengthier and decisions can be unexpected, since the decisions are frequently based on compromise. Therefore if arbitration is provided in the contract, it should state that the arbitration is to be governed by the terms of the contract, and insert such other provisions as may be necessary to restrict the arbitrator from going off on a detour of his own.

Transition planning

Before signing the agreement a preliminary transition plan should be initiated. Payments for transition related services should be contingent upon achievement of key milestones. Good outsourcing contracts include specific commitments to support transition to another service provider, or repatriation of operations to the customer, when the contract expires or terminates.

Critically, outsourcing contracts need to contain a comprehensive mechanism by which the parties can agree the scope and charging impact of any particular change.

Service Level Agreements (SLAs)

The typical outsourcing engagement will last for a number of years and be governed by a contract setting the terms and conditions between the customer and service provider for the duration of their relationship. It is important to regularly measure whether that relationship is working, and how well. In this context, Service Level Agreements (SLAs) are established to describe the performance levels required of the service provider of each service or product provided.

Contract Termination

Many companies suffer because they do not plan for what happens when the end date of the contract approaches or indeed if the agreement is terminated early. The outsourcing contract must include clearly what happens at the point of termination. The effects of termination should depend on the cause of termination. The rights and duties of each of the parties upon termination or expiration of the agreement should depend upon the circumstances of the termination.

Data Protection and IP

Increasingly, when considering any type of data processing by a service provider and where data is transferred offshore for processing, the company must also consider how the laws (or lack of laws) may affect the processing and its rights with respect to the information. It must consider the EU law in respect of duties placed upon it as data controllers.

Intellectual Property is usually an area where there is much debate.

Staffing implications

Outsourcing agreements inevitably have staffing implications. The EC Aquired Rights Directive and The Transfer of Undertakings (Protection of Employment) Regulations 1981 (TUPE) have the effect that the contract of employment can continue between the employee and the service provider. Customers must be fully aware of the implications of such regulations.

Offshoring – why India is still ahead of the rest

India offers skilled manpower - the historic British ties mean English speaking manpower is abundant. India also offers a highly qualified and capable workforce.

India offers lower HR costs - salary levels in India are around a fifth of the salary levels of developed countries and are typically lower than other outsource destinations. The average salary level for an IT professional is US$ 10,000

India offers a well established education and training capability - India has several world renowned universities offering comprehensive technical and business skills. India also has well established industry associations such as NASSCOM, the Federation of Indian Chamber of Commerce and Industry (FICCI), which are actively representing the interests of the Indian service providers.

Indian Government support - India has stated its long term objective of being a prime destination of outsourcing services and as such various tax incentives have been made available by Central Government. Furthermore State Governments are actively supporting the outsourcing industry and are implementing favourable policies, such as amending labour laws that are favourable to outsourcing. Central Government has also relaxed foreign direct investment limits, which is bringing about access to increased capital as well as know-how from the developed world.

Improving infrastructure - although historically a distinct disadvantage for India, recent liberalisation measures, especially within the telecommunications field, have seen improved roll-out and quality of infrastructure together with falling prices.