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Financial Accounting Outsourcing (FAO) Annual Report - January 2007

IT Outsourcing in the Small and Medium Businesses

Corbett & Associates' primary focus is on training and educating managers to be successful in modern outsourcing arrangements. Michael Corbett is president, and his experience includes strategic development work for IBM, which led them into the business, as well as being the founder of the Outsourcing Institute in 1993. From his perspective, the current environment will see continued acceleration of outsourcing in the industries served and the number of services offered.

As an example, Corbett cited the pharmaceutical industry where more than half of all research is conducted on a contract basis, and about 15 percent of manufacturing already is performed under outsourcing agreements.

"And that's just one small sliver of one industry," he said. "The proliferation of outsourcing is just phenomenal across types of activities, across industries and at every level of the organization. Each year brings more activity than the year before. It truly is a fundamental re-thinking of organization structure and of how companies create value. Outsourcing continues to be the most dynamic trend within business today."

Against that backdrop, Corbett identified the three elements on which he believes the industry should focus this year:

1. The Next Level for Value Creation
   Within the context of this explosion in outsourcing agreements, the first major obstacle is how to take outsourcing to the next plateau in the value proposition clients seek from outsourcing relationships. Clients are increasingly aware of the dangers of viewing outsourcing as a short-term cost reduction tactic, and increasingly seek outsourcing arrangements which can improve their asset utilization, service levels, customer satisfaction, and increase revenues. As companies try to move toward this new plateau, they are changing the way they think about creating and managing these new relationships, according to Corbett. They also are recognizing that they will have to do a better job of communicating these values at all levels within their organizations.
   
   "The providers have been trying to communicate a broader value proposition for some time," said Corbett. "The issue is more slowness on the part of customers to truly recognize that they need to focus on value. Traditionally, the view is so deeply rooted in our thinking that when you look to an outside organization, what you are looking for is a low-cost provider. It is very difficult for organizations to move themselves away from that perspective."

2. New Management Skills Required
   The perspective from top management on the value-added partnership that can create value in outsourcing isn't always shared by the people who are assigned the responsibility for managing the outsourced function and who deal with the supplier-partner on a daily basis. Corbett noted that the leadership skills associated with successful management of these new outsourcing relationships are so different from traditional management skills that retraining these managers is mandatory.
   
   "Whereas traditionally, the management skills the company focused on were operational and administrative type capabilities," he said, "the two most important skills in an outsourcing environment are the areas of communication and negotiating skills."
   
   Partnerships require a fundamentally different approach than hands-on management.  Without the new skills development, the outsourcing partnerships that truly add value are threatened once the new wears off the arrangement.

3. A True Focus on Customer Satisfaction
   What is it that truly sustains the relationship between two organizations on an on-going basis?, asks Corbett. The answer isn't in technical service parameters, but in the character of the relationship and its ability to be flexible, innovative, and consistent with expectations. That requires a new awareness of the importance of having a common language and common yardsticks for understanding, measuring, and communicating customer value. Corbett noted two critical elements within customer satisfaction, the first being the individual or group that has set up the relationship, and the second the actual end user of the services.

Outsourcing Wins, Good Times or Bad

Corbett expects outsourcing to be fueled by up or down economies. When companies are doing well, capacity and expertise will present constraints to growth, so outsourcing can satisfy those needs. When companies face challenging economies, they will seek outsourcing as a cost-control solution. These factors will continue to spur more outsourcing arrangements. Companies looking for cost reduction, for example, will create relationships that are short-term in nature with lots of gain-sharing. When improved utilization of assets is the primary goal, companies will seek longer-term relationships. Those seeking revenue enhancements will land in the medium-term relationships.

Change Drives Outsourcing Growth

Historically, outsourcing follows industries which are experiencing significant change. The hallmarks of outsourcing opportunity are the need for a company to acquire lots of expertise quickly, a need for investment in new technology, and an environment that is changing rapidly. In looking forward, Corbett sees industries under great pressure to re-invent themselves, including health care, insurance, financial services like banking and brokerage services, telecommunications and related technologies, and particularly the software industry.

Winning the Battle

Corbett's basic view is that outsourcing has won the battle in the minds of management. The challenge going forward, he said, is to train and educate managers on how to be successful in this new environment. The most fundamental problem he sees is the difficulty in making the mind shift, from viewing outside relationships as win-lose propositions to being win-win propositions."Once you can get that perspective to shift, it opens up the whole underlying set of issues that have to be dealt with," said Corbett. Those issues include understanding what is to be accomplished, developing new ways of identifying and selecting partners who can participate in the outcomes you seek, and learning how to structure and manage deals.

Publish Date: February 1998

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Copyright © 1998 - Everest Partners, L.P.

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