“How Do I Get Started?”
As you have seen, there are a lot of decisions that need to go into answering the outsourcing question. But once you have made the decision that outsourcing is right for your business, it is important to have a realistic and practical approach towards how to proceed. There are 4 fundamental steps that you should take to finalize your decision on what to outsource, where to do it and with whom.
Step 1: Analyze
This is typically a cost savings analysis, detailing the potential savings from moving the target positions offshore, and includes more than labor savings, incorporating other variable and fixed costs that a business incurs in providing services internally. As a general rule of thumb, the savings should be at least in the 30-50% range.
In the end, the deal needs to be something that both the customer and the provider are comfortable with. This is the cornerstone of an effective outsourcing relationship. Both parties need to get what they need from the engagement. The customer needs high performance at a lower cost. The service provider needs a reasonable margin to deliver the expected results. Doing this “on the cheap” does not benefit either party. In the end, you get what you pay for.
Step 2: Design
After you decide which function(s) you want to migrate, there should be a detailed process walk-through, documenting the current organization, processes, tools, controls and any special requirements, such as compliance related issues. The next step is to design and document the “to be” operating model. During this process, the final outsourcing service delivery model is defined. For many businesses, it is important that the service provider be flexible in its design and execution, allowing for a custom approach that accommodates the unique requirements of the customer’s function.
In addition to the process documentation, detailed operating documentation (“Standard Operating Procedures” or “SOP’s”) are developed, providing a step by step guide to the activities to be performed. These documents are used as the key material for training, as well as supporting the ongoing operations once they have “gone live.”
Many outsourcing service providers want to impose their processes on the customer, with transactions conducted in a “black box” and the customers only getting to see the output of the transaction. When speaking with a service provider, make sure that you have a good understanding of how the operating model will work, and where the “hand offs” will occur. For first time outsourcers, managing the change is often the most difficult part, and significantly altering a process to adapt to the vendor’s methods may not work for you.
Lastly, a risk management plan should be defined, with key risks identified and mitigation strategies worked through by both the client and its service provider. This will include transactional specific risks, prioritization and escalation protocols, as well as a broader strategy to support business continuity/disaster recovery concerns.
Step 3: Implement
The Implementation stage involves multiple steps, many happening at the same time. All these “moving parts” requires extensive coordination and communication between the client and the service provider.
Some of the key activities include:
Ideally, a combination of classroom training and “shadowing” is employed, wherein the outsource staff walk first through the functions and activities to be performed, in a controlled classroom like environment, using client systems and test data. During this step, the SOP’s developed earlier, should serve as an excellent training guide, providing staff with step-by-step instructions on how to perform the key activities involved in the job.
- Hyper Care
After completing the training period, typically the outsource staff works in a “hyper care” mode, meaning that they are performing live transaction processing, but with the client is providing more intensive oversight and support. Transactions volumes are typically lower than normal, as the outsourced staff ramps up to full production levels. This may require that the client retain its in-house staff in their current functions for an overlapping period, to ensure that there is no impact to production and performance. Hyper care typically lasts anywhere for 30-90 days, after which full production levels are expected from the provider.
- Service Level Agreement and Reporting
During the Hyper Care stage, the Service Level Agreement is finalized. The baseline transaction volumes, which were identified during the Process Design stage, will now have been validated and updated accordingly.A formal Service Level Agreement (“SLA”) should be developed, documented and agreed to by all parties. The SLA should describe the key activities to be performed by the service provider, as well as the key performance metrics to which the service provider will be measured against. This can include transaction volumes, error rates, utilization, response time, or any other applicable metric.
- Go Live
At the conclusion of the Hyper Care stage, full production should be provided by the outsourced staff. “Full production” should mean transaction volumes that are aligned with the Service Level Agreement, and that service level reporting is conducted on a regular basis. Typically, you will hold daily or weekly operational meetings, and monthly or quarterly service level performance reviews.
Step: 4 Optimize
This stage, occurring after go-live and when service delivery has been stabilized, focuses on a Continuous Improvement program. It starts by having strong performance metrics that accurately reflect the critical activities, volume and timing, which are being performed within a function.
In this model, both the client and the service provider work together to drive additional efficiencies and cost savings, and both should be able to benefit from this outcome. A Gain Share model, wherein both parties can receive financial benefit from reducing operating costs, is a highly effective method of incenting both parties to improve operations.
There are many well established methodologies to drive performance improvements, such as Six Sigma, Lean, and others, and you should work with the service provider to determine how this program will be implemented, and what outcomes can be expected. Many contracting models include additional efficiency targets by which the service provider is measured, and once a process is stabilized, this can be effectively implemented.
The Game Plan described here will help you to “take the leap,” painlessly and effectively. If you are interested in outsourcing, it is incumbent upon you to evaluate the opportunities and the risks, and not get overwhelmed by the process. Realizing that outsourcing has become a part of today’s business operating model, and that many businesses are successfully utilizing it to reduce their operating cost, and gain other key benefits, such as improved processing efficiencies, a greater focus on strategic activities, cost effective access to specialized skills, operational redundancy, and more, should give you some confidence.