Thursday, May 13, 2004

Cost savings is just one of many good reasons to outsource business processes. But if you succumb to the mistakes companies commonly make when turning over the reins to an outsourcing provider, those good reasons will look like faulty logic.

Few suppliers are as bold in their claims as business process outsourcers (BPOs). They promise to take an in-house function and do it faster, better and more cheaply than it has ever been done before, knocking at least 20 percent off costs. As a result, they say, their clients have more time to spend on activities that are pivotal to their business. People will be freed from the mundane so they can concentrate on the profound, giving the company a stronger analytical focus and maybe even a better strategic direction.

Companies with the right outsourcer in their corner may realize those benefits. But they don't come automatically. Peter Bendor-Samuel, CEO of Outsourcing Center, an outsourcing consulting firm in Dallas, and author of "Turning Lead Into Gold: The Demystification of Outsourcing" (Executive Excellence Publishing, 2000), says, "Unlike a business relationship in which the buyer retains control of the process or tells the supplier how to do the work, when you turn things over to an outsourcer, you give up that ownership, and that's what often makes it such a challenging, painful process."

Avoiding Common Mistakes

Relinquishing control over an outsourced process is not always easy. The outsourcer may decide, for example, that some of the process steps the client once performed aren't necessary. Or it may devise an entirely new process. But clients that start to meddle risk nullifying the advantages the outsourcer can offer, such as greater economies of scale, superior process expertise, and access to more capital and cheaper resources. "For example, if you outsource an IT process to someone like Dell Computers or IBM or Xerox, you're getting a deeper level of expertise than your company possesses internally," says Bendor-Samuel. "If you outsource a financial process to someone like PricewaterhouseCoopers, a company that's built huge financial processing centers, you're gaining access to greater resources than you can muster on your own."

Another common mistake is failing to establish performance levels for an outsourcer. When a company completely turns over a process, client and outsourcer must agree on solid performance metrics and targets so the client can carefully monitor how well the outsourcer is performing. "A certain cause for failure is to let the supplier [outsourcer] dictate what the service and performance levels will be," Bendor-Samuel says.

Buyers of outsourcing services usually prefer to draw up their own contract, rather than sign the outsourcer's contract. "We felt we were more in control by having our outsourcer sign our contract, rather than the reverse," says Janis Emplit, CIO of Advantica Restaurant Group Inc., the Spartanburg, S.C., parent company of Denny's, Coco's and Carrows restaurants. After sending a request for proposal (RFP) to a number of prospective outsourcers, Advantica signed a three-year contract for a BPO to handle all of the company's IT support, including data center operations and network management support for more than 1,300 PCs, as well as the development and maintenance of its internal financial applications and in-restaurant point-of-sale transaction system. "There were some modifications to the original contract we drew up, but basically the final contract was our own," Emplit says. "In addition, we have one full-time in-house person who monitors the performance of the outsourcer."

A consultant helped create the monitoring system that Advantica uses to evaluate the outsourcer's performance and make sure it is delivering on its contractual promises. Emplit recommends that companies crafting an outsourcing agreement break it down by process, rather than outsourcing a group of processes under one blanket agreement. "That way, if you have a problem with one area, you can bring it in-house and still keep the outsourcing relationship going within your other areas," she says.

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