Living By Numbers
Many executives following a SATSTRAT approach to their back office administrations are missing a number of crucial, cost-saving short-cuts along the way. This is in part because the correct data have not been entered into the system: the true running costs of the back office have yet to be adequately vectored.
One of the hallmarks of modern life is frustration with satellite navigation. You punch-in your destination, set off merrily on your way with complete confidence in your technology, only to be told by locals on arrival that you could have reduced your journey time by at least an hour with a well-known alternative route. In this context there are simply no substitutes for knowledge and experience. And so it is with executive strategy making. For all the prescriptive and propositional knowledge contained in business textbooks, it is the tacit, non-propositional knowledge gleaned from precious experience that ensures some organizations consistently remain ahead of the performance curve.
Although satellite strategy decision-making by the numbers alone may ensure you eventually reach your strategic destination, you may do so only to learn that others have not only been there long before you and made a better job of it, but have already set off in alternative directions, and are accelerating into the horizon. Such are the insecurities of executive life.
Many of today’s major companies have already attempted to control the costs of their back offices by outsourcing large segments of their HR and/or F&A. However, the factors shaping the decision over whether to outsource these functions or move them into a shared services delivery model is shrouded in mist. In fact, many executives following a SATSTRAT approach to their back office administrations are missing a number of crucial, cost-saving short-cuts along the way. This is in part because the correct data have not been entered into the system: the true running costs of the back office have yet to be adequately vectored. Moreover, new routes and short-cuts in sourcing strategies are constantly emerging with only a very select few executives and consultants privileged enough to be in possession of up-to-date information and the requisite non-propositional knowledge borne from experience. This has to change for organizations to better serve their stakeholders.
There is a major flaw to the conventional SATSTRAT approach which advocates slow incremental change process, first through internally managed transformation, then scaling to a shared services model and finally contracting with a service provider to further leverage cost reduction and service quality. This failure to decouple the execution of internal organizational processes and services from strategy has significant cost repercussions compared to the cost reductions and service improvements enjoyed by organizations that have chosen the "long jump" service strategy of outsourcing, as opposed to the "triple jump" strategy of owning their processes and services.
A crucial factor is this: The true cost of back office ownership to those advocating a triple jump strategy is comprised of the associated costs of investment involved in attempting in-house change programs, followed by shared services and all of its associated technology and implementation costs, on top of which you must factor in the additional running costs incurred in running a back office function over and above that offered by a third party service provider.
This article will enable executives to make more informed decisions about whether they should even engage in the exploration of outsourcing and pull the advisors, analysts and third party providers of the industry out into the open to debate the merits or otherwise of different service delivery strategies. The outsourcing industry is plagued by the twin pestilence of slick marketing, some might even say propaganda, and limited financial evidence. We will, no doubt, be returning to these issues in future debates.
Market (Counter) Intelligence
The F&A outsourcing (FAO) market place has doubled in size in the last two years and is forecast to grow at 30 percent beyond 2007, according to the latest available research from Everest. Such ebullience loses its sheen a little on the realization that the authors of the report fail to provide us with the denominator.
In fact, the most comprehensive and recent investigation into HR outsourcing, which has yet to even hit the streets, concludes there are 191 major contracts signed to date. You can take your pick as to whether this represents 38 percent of the Global 500 or 1 percent of the 18,200 global firms identified by Hoovers with revenues of more than $500 millions. Herein lies one of the major sources of executive frustration with the outsourcing industry. Senior decision makers in organizations are bombarded with white papers, case studies, prospectuses and research summaries, all reporting the explosion of the outsourcing industry without quantifying in meaningful terms what such an explosion comprises. A vacuum of intelligence anchors future growth of the global service delivery market place not because of a lack of conviction on the choices ahead, but because of the paucity of the information available to inform key decision makers.
The inevitable outcome is SATSTRAT. Executives are left making turns and u-turns in their strategic choices purely because they are not in possession of an accurate map of the, in this instance, outsourcing terrain before them. Something has to give.
There is no magic formula for outsourcing. Much depends on what you are seeking to achieve and why. And you, and only you and your executive colleagues, are aware of this. Which brings us to strategic enablement. I’ll be writing about this in next month’s issue.
© 2008 Anthony Hesketh. All rights reserved.