Guest blogger Kenneth Hoffman of TPI's Financial Analysis team "blogging about the bottom line"
Understanding the dynamics that will influence the financial impact of entering into an outsourcing arrangement can sometimes be a mystery. Expectations vary widely and there are many factors that will influence the outcome.
Service Providers have multiple operational levers they can pull in order to deliver savings. However a client's appetite for change will ultimately influence the magnitude of savings a Service Provider is able to deliver.
When considering outsourcing as part of a long-term strategy, companies should clearly evaluate the cost-saving levers that can affect the operational aspects of their business, including:
- Location - How willing are you to move work to an offshore or near-shore location in order to take advantage of labor cost differentials? The amount of work a Service Provider can move offshore and the pace they can move it will directly affect the savings.
- Scope - What is the scope of services you are willing to include as part of your sourcing strategy? Service Providers may offer more favorable pricing for a broader scope of services
- Level of Service - What level of service is expected from a Service Provider? Are performance levels expected above current performance levels?
- Shared Service Centers - What is your ability to move work to shared service centers by consolidating processes that have common characteristics across multiple business units?
- Standardization - Are you willing to standardize desktop hardware and software across the company?
- Rationalization - Are you willing to rationalize your application portfolio - does the portfolio consist of redundant applications or legacy applications that can be retired?
- Network Consolidation - Are you willing to consolidate network operations - How many different carriers to you use? How do they compare against one another?
- Transformation - How efficient is your current organization. Have you already grabbed the low hanging fruit? The amount of transformation you have already achieved will impact the Service Providers ability to deliver savings.
- Financing - Do you want your Service Provider to provide assets or underwrite some of the upfront investments (see previous blog on Service Provider acting as your bank).
- Payment Terms - Service Providers will factor in the cost of money into their pricing based upon the client's requirements for payment terms.
- Inflation and Foreign Exchange Risk - Determining which party will bear the foreign exchange risk and inflation risk in an off-shoring arrangement will affect pricing. Service Providers will often build a premium into their price in exchange for absorbing and managing these types of risk.
Determining the answers to these questions generally requires detailed interaction with the prospective Service Provider as well as coordination with internal Business Units and other internal support organizations such as Tax and Treasury.
What has been your experience with the various levers that can affect savings in outsourcing agreements?