Outsourcing comes of age: The rise of collaborative ...

[Pages:24]Global Outsourcing

Outsourcing comes of age: The rise of collaborative partnering*

PricewaterhouseCoopers 1

Contents

Introduction

2

Executive summary

4

Outsourcing is a maturing success story

6

The challenges

10

The collaboration payoff

14

Rising to the challenge of

collaborative partnering

19

The PwC network of resources

20

Our Global Sourcing network

21

2 Outsourcing comes of age: The rise of collaborative partnering

Introduction

Recent research indicates many outsourcing deals collapse before the contract ends, citing rising costs and mistrust between service providers and customers, and implying saving money is not a sound reason to outsource. Some industry analysts and media pundits further translate the findings into painful trade-offs: cost savings vs. growth, speed vs. quality, and organisational cohesion vs. knowledge and innovation. Others suggest outsourcing is in a death spiral... a decline fueled by structural risks, questionable cost savings, and multiple complexities. Their bottom line? Organisations will soon become disillusioned with outsourcing1.

Such predictions and assertions seem to fly in the face of an equally prominent group of influencers and media commentators continually heralding lucrative outsourcing deals, impressive benefits and uncapped growth projections. Offshore service providers are delivering 30-40% year-over-year revenue growth every quarter. Meanwhile their Westernbased competitors hurriedly expand their operations in emerging economies. Beyond rapid growth and geographic expansion, some service providers are helping outsourcing customers compete in new ways. They provide a level of strategic and operational flexibility unattainable through any other means.

In the 10th Annual PricewaterhouseCoopers2 CEO Survey, released in January 2007, we found that many top global executives believe they gain major competitive advantages from outsourcing. They identified functions like logistics, manufacturing, customer support and service, research & development, and human resource management. The CEOs also described the growing importance of collaboration with suppliers and service providers as a way to mitigate complexity, reduce transaction costs, and gain competitive advantages.

1 We define outsourcing as the transfer of a business activity or function to a third party, usually along with people and/or know how. 2 PricewaterhouseCoopers refers to the network of member firms at PricewaterhouseCoopers

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So what's really happening here? Global research recently completed by PricewaterhouseCoopers (PwC) leads us to conclude that both perspectives have merit. Our findings indicate outsourcing is deeply established... an entrenched business strategy maturing and evolving to deliver value beyond just cost savings.

On the other hand, respondents say that not all is perfect. Full benefits often remain unrealised and the outsourcing process itself ? in its relentless move toward specialisation, innovation and new models ? is not easy.

To bring clarity to these issues, PwC interviewed nearly 300 executives, seeking insight into their oursourcing experience and views. The research, conducted worldwide in March and April 2007, leads us to conclude that outsourcing is alive

and well; in fact it is growing, maturing and evolving to deliver value well beyond cost savings.

This report presents results of our survey of 226 customers and 66 outsourcing service providers. We set out to explore some of the current trends: the growth of multisourcing, changes in customer supplier relationships, the emergence of new stakeholders and new governance models. At its core, our research confirms the growing complexity of outsourcing. However, it also indicates sophisticated leaders don't necessarily fear that complexity. For them, it is the normal path of a maturing business strategy and a manifestation of an increasingly global environment. As the examples of Apple and Airtel illustrate (below) the complexities of innovative partnering yield the benefits of growth and

performance. Outsourcing is now as diverse as business itself, differing by country, sector, and company strategy. It is characterised by smarter suppliers, improved automation and better informed buyers driving toward long-term, sustainable outsourcing arrangements.

Firms that effectively master the new complexities of outsourcing ? and the diverse business model innovations they make possible ? stand to reap the benefits and lead the way to the rise of collaborative partnering.

Cost savings can be the main driver of an outsourcing project. But as this survey illustrates, every company ? indeed, each outsourcing initiative within any one company ? has a mix of other drivers, prioritised differently in each case.

Beyond cost savings, a second major theme is access to capabilities ? whether human talent, process excellence, or sheer physical resources. Apple designs the iPod in its Cupertino, California offices, but it outsources the manufacturing to select Chinese firms ? not just because they can build it cheaply, but also because of their unique intellectual property in materials science and packaging technology. It also outsources, in a manner of speaking, content creation services: to an open community of providers from multibillion dollar music publishers to amateur podcasters.

A third major theme is strategic benefit ? freeing up one's own resources, improving flexibility, gaining access to capital, access to new markets, or changing the rules of competition

in an industry. In 2003, Bharti Airtel, an Indian mobile phone company, lacked the capital to respond to a massive growth opportunity in its domestic market. It cut an end to end IT outsourcing deal with IBM. Much of IBM's compensation in this deal depended on Airtel's market growth. Airtel made other shared risk/reward deals with equipment suppliers Ericsson, Nokia and Siemens. Today Airtel has some 40 million customers and is its country's market leader.

Apple and Airtel must manage complexity every day. Their business webs ? of which we've only described small corners ? are varied and demanding. Each company must achieve an optimal balance of top-down management and collaborative partnering in dealings with suppliers, channel marketers, companies selling complementary services and customers. Each deftly illustrates that a uniquely right kind of collaborative partnering business model makes possible the squaring of many circles: cost savings with growth, speed as well as quality, and organisational cohesion plus knowledge and innovation.

4 Outsourcing comes of age: The rise of collaborative partnering

Executive summary

The responses to this survey confirm that outsourcing is high on almost every company's agenda

Just about everybody uses outsourcing today, and for a variety of strategic reasons that extend well beyond cost savings. Factors that support business growth, like access to talent and capabilities ? and maximising business model flexibility ? are key drivers. For example, 70% of respondents say access to talent is an important or very important reason why they outsource. Customers of outsourcing are gaining maturity and have big expansion plans.

But success and growth are not without their challenges. Customers continue to be held back by cost benefit justification (i.e., the challenge of creating a business case where benefits are measured and delivered) and their own lack of experience ? among others. Nearly all feel challenged by one or more aspects of the outsourcing lifecycle; and their first inclination is to

blame service providers when projects fail. Service providers think the main cause of failure is poor collaboration with customers.

Nonetheless, this survey provides evidence that leading outsourcing customers and service providers are shifting from traditional to collaborative business models.

? Customers need to rely increasingly on multisourcing, joint ventures, and open business models. Unlike traditional single-source transactional outsourcing, these approaches ? and the complexities they entail ? intrinsically require collaboration. When General Motors moved from single-sourced information technology outsourcing (with EDS) to multisourcing, it prepared the ground by bringing service providers together to define standards and processes that would enable them to work together while improving the company's ability to operate globally.

? Successful customers of outsourcing show good collaboration with service providers, and good collaborators tend to be effective outsourcers. Collaboration yields best practices in the capabilities and processes of outsourcing itself. Toyota's supportive and candid collaboration with myriad suppliers, from design through just-intime logistics, has yielded efficiency, quality, innovation ? and now global industry leadership.

This report describes two of the many possible approaches to multisourcing. In a lead supplier model, one service provider functions as a general contractor who orchestrates other suppliers. In a collaborative partnering model, a collection of master partners governs relationships and deliverables for the benefit of end-customers or consumers.

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Important details about this survey

This report provides key findings of the PricewaterhouseCoopers 2007 Global Outsourcing Survey. It directly compares the experiences and opinions of customers and service providers of outsourcing, on a global scale ? 292 respondents in total. This survey was further informed by in-depth interviews with 23 senior executives at major outsourcing customers and service provider firms in Belgium, China, India, Netherlands, Philippines, Poland, Singapore, UK and US.

Customer survey PricewaterhouseCoopers conducted telephone interviews with 226 senior operating executives of private sector corporations that are `customers' of outsourcing services in 19 countries during March and April 2007.

51% of respondents are in customer firms with revenues greater than $1 billion US, including 16% with revenues greater than $10 billion.

We have classified the customer responses into three groups, based on our analysis of the maturity of the outsourcing market in various countries and similarities of responses to the survey:

? Large mature market: United Kingdom and United States (78 respondents, of which 63% have revenues greater than $1 billion).

? Medium mature market: Australia, Canada, New Zealand (31 respondents, of which 84% have revenues greater than $1 billion).

? Rising market: Bahrain, Belgium, Brazil, China, Germany, India, Italy, Japan, Kuwait, Mexico, Russia, South Africa, Sweden and the United Arab Emirates (117 respondents, of which 35% have revenues greater than $1 billion). Each of the listed rising market countries provided at least 5, and as many as 21 responses. Three other countries provided a total of four responses.

Service provider survey Of the 66 service providers we surveyed, 43 are in four countries: US (20), China (9), India (9), and UK (5). The remaining 23 service provider respondents are in 15 different countries on every continent.

6 Outsourcing comes of age: The rise of collaborative partnering

Outsourcing is a maturing success story

Outsourcing is becoming new again. There was a time when businesses even delivered their own mail. Then they `outsourced' it ? first to the post office, then commercial couriers, and now the Internet. What's new is the explosive outsourcing of services, increasingly defined down to precise functions that can each be performed in the most optimal location anywhere in the world.

Outsourcing is delivering results. A large majority of customers (87%) say that today's outsourcing delivers the benefits projected in the original business case, whether partly or completely. 31% say they got the benefits `completely' ? which is remarkable, considering the complexities and unknowns that are involved. In financial services, 46% completely met their goals.

And 91% of respondents, whether happy or not, say they will outsource again.

Saving money is important, but so is access to talent, capabilities ? and business flexibility

Top reasons firms outsource are to:

? Lower costs (important or very important for 76% of respondents).

? Gain access to talent (70%).

? Farm out activities that others can do better (63%).

? Increase business model flexibility (56%).

Other reasons are also important:

? Improving customer relationships (42%).

? Developing new products or services/ market segment expansion (37% each).

? Geographic expansion (33%).

A move towards core activities

Many respondents (53%) indicated they outsource activities that they consider to be `core'. The definition of `core' activities was left to the respondents' interpretation, and could mean different things to different respondents (depending on what they define as `core' to their business). It is clear that companies are moving from the outer `ring' of non-core non-essential

activities towards the second ring of non-essential business activities. For example, in the finance function, this could be a move from outsourcing payroll and accounts payable towards seeking assistance with budgeting, forecasting and management reporting.

Information technology services remain the most widely outsourced activity, reported by 57% of respondents. But overall, 70% outsource one or more inherently strategic activities:

? 53% outsource production or delivery of core products or services.

? 33% outsource sales & marketing (including third party distribution channels).

? 32% outsource innovation/R&D.

Key markets are embracing core outsourcing. Financial services firms, at 40%, are especially likely to outsource sales and marketing (e.g., to insurance brokers and financial planners). Because many are in infrastructure businesses, media/ telecommunications/IT companies are less inclined to outsource core work. But even

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