Business Process Outsourcing (BPO)—it seems everyone is doing it and saving money in the process.  Of course, there are those horror stories about outsourcing disasters too.  What makes the difference between sustainable SG&A cost savings and headaches?  Here are three tips to sustainable outsourcing savings.

While the economy is finally showing signs of life, there is still strong pressure within financial organizations to cut SG&A costs.  Of course, when is there not pressure to cut SG&A costs?  Zero Overhead Growth (ZOG) and Negative Overhead Growth (NOG) are key strategies to increase the bottom line in good times, and layoffs have been par for the course in the current downturn.  The internal organization feels it has already “cut to the bone,” but outsourcing promises not only reduced costs but better processes—with the added benefit of implementation being somebody else’s problem. 

Then again, there are those disaster stories that one hears about in outsourcing—exploding costs, unsatisfactory implementations, and poor performance in the out years.  Fortunately, there are some key lessons that illustrate how to mitigate the risks associated with any sort of outsourcing.  Keeping these lessons in mind will significantly increase the likelihood of a successful partnership.

• 1. Give your partner the freedom to exploit its comparative advantages.  Remember, vendors need to make a margin on delivering the services you outsource.  So in order to deliver savings, they are expecting to cut costs significantly.  While this is achievable, vendors do not have a magic wand—service delivery is going to have to change if sustainable savings are to be achieved.  One of the reasons to outsource is to take advantage of capabilities that you don’t possess within your organization—access to global (offshore/nearshore) staff, economies of scale, best in class processes, etc.  The more limitations you place on your partner, the less effective these comparative advantages will be.  If there is a specific function that requires the same staff to continue to provide it in the same way, that function is not a good candidate for outsourcing.


• 2. Trust but verify.  Ronald Reagan’s strategy towards the Soviet Union also applies to outsourcing vendors.  Letting outsourcers play to their strengths requires a significant amount of trust and “letting go,” but without strong vendor management, metrics and service level agreements, the partnership is likely to be contentious.  Strong vendor management is worth every penny—ensure that you have the capacity within the organization to know the contract inside and out and monitor performance.  Take the time up front to ensure that the SLAs offered align with industry standards, your current performance, and your expectations going forward.  Vendors generally like to reduce the risk they are taking on, but good SLAs are key to a good ongoing relationship.  There are few greater sources of dissatisfaction in an outsourcing relationship than poor metrics and SLAs—if you’re not measuring the right things you’ll be arguing about performance rather than working together to reduce costs and optimize service.


• 3. Avoid lock-in.  When first making the decision to outsource, you are in the “romance” phase.  There is a tendency to underestimate how closely you will become entwined with your vendor.  Once transition and implementation is accomplished is not the time to think about how one would change vendors in the future.  Make sure that the contract allows you flexibility, within reason.  For example, if new software is being implemented how will licensing be handled?  If for some reason you are dissatisfied in the future and go your separate ways, you don’t want to have to pay again to run your system.  Also pay attention to intellectual property clauses—you don’t want to find out later that switching vendors is difficult due to IP hold ups.  Remember, your contract will be renegotiated at some point, even if you don’t switch vendors, and you want to retain as much leverage as possible.

 
At PRGX, we are committed to helping organizations increase profits—sustainably.  We bring experienced staff to bear to help you solve your current issues while mitigating risks of future pitfalls.

Questions about a managing successful BPO engagement?  Contact us at .(JavaScript must be enabled to view this email address).