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IT Outsourcing in the Small and Medium Businesses

In earlier issues we've discussed business processes outsourcing (BPO) in great detail. We've discussed how to assess core functions and differentiate from non-core. We've discussed the issues that BPO buyers face in developing a strategy, determining their goals, defining the specifications and ultimately selecting the service provider that they are going to 'marry' for the next five to 10 years. This segment looks at outsourcing from a service providers' viewpoint. The goal: to have both parties in an outsourcing relationship focus on creating a win-win situation.

Due to the complexity of BPO, it is in the best interest of buyers and service providers to focus on the true value that outsourcing can create, and the service providers' needs in order to deliver on the promise of value creation.

Value Creation

As the BPO marketplace becomes increasingly competitive, BPO is in danger of suffering a similar fate to that of ITO: commoditization. Service providers ought to look deeply into their organizations and discover new ways to create value for their clients and structure relationships accordingly. In addition, the necessity to continue to innovate and revolutionize the industry is critical to the success of outsourcing as we know it. However, buyers must also realize that in order to have a successful outsourcing arrangement, the service provider needs to make money on the deal.

Many view the term 'value creation' as "consultantese," but the ability to differentiate your services from that of the competition is what drives value creation. Furthermore, as BPO increases in popularity, it will be increasingly important to offer services and structure deals that will not fall into the bucket of commoditization. From a service provider's perspective, creating value means bringing a solution to the buyer that will meet or exceed his business needs at a price that will make his wallet smile. Given the current economic conditions, companies are trying to reduce costs as much as possible while meeting or increasing the quality of the service they receive from their current operations.

As service providers strive to increase the value of their relationships, it is critical for buyers to structure their specifications and Requests for Proposal (RFP) in a way that will challenge the service provider to search for business value.

Understanding the Service Providers' Needs

Although most buyers envision their service providers as the enemy, in truth, their intentions are generally good. At Everest we have had the opportunity to work with just about every service provider in the BPO marketplace on at least one transaction. Most service providers we've worked with have the desire to bring a meaningful solution to their buyers that will have true business impact on their organizations for years to come.

Recently, we've actually seen service providers begin to back away from deals that they know will not be viable or add value to the client in the future. Deals that are not structured around business value - deals that have a valid approach for achieving cost reduction and increased efficiency -- are destined to fail from Day One. The service providers know this. All the major service players are accountable to their shareholders; the only way to increase revenues and provide healthy profits is to sell and structure deals that work for both the buyer and the provider.

Just because the service provider has to make a profit doesn't mean the opportunity to significantly reduce costs through outsourcing doesn't exist, because it does. What is does mean is this: In their efforts to get the best deal, buyers must recognize the service provider has to make money for the relationship to work. Buyers must add this perspective to their negotiating strategy.

For example, I recently purchased a new car, and despite my negotiating skills (or lack thereof), the dealer wasn't willing to sell the car for less than invoice. He actually wanted (and needed) to make money.

The bottom line is that service providers must share the rewards in order to continue to fund the innovation, training, and improvements they will use to decrease the buyers' costs over time and add strategic value to the relationship. Shared learning and leverage are what give outsourcing its power in the marketplace.

Lessons from the Outsourcing Journal:

• Service providers need to be in a position to make money or the relationship will deteriorate.
• The service provider's ability to participate in rewards helps the buyer by funding the innovations, training and improvements it needs to gain value from outsourcing.
• Buyers must structure their RFPs and contracts to motivate service providers deliver and create additional value.
• Service providers today will not bid on an outsourcing deal if they can see it will not add value and be viable in the future.

Publish Date: October 2002

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Building a Case for BPO - Part 2: For Buyers' Eyes Only

Copyright © 2002 - Everest Partners, L.P.

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