Next-Generation Shared Services & Outsourcing: Part II

The following is the second part of a panel session which took place at the Shared Services & Outsourcing Summit that ran in London in February 2009. Many topics regarding the future of Shared Servcies & Outsourcing were addressed including recent trends in sourcing.

* Click here to read Part I

Chairperson: Do you want to have a go at that first Sanjiv? I think you are in the right space. Then we will move on from there.

Sanjiv: Given the current environment and the short term pressures, particularly referring to the financial services where most of the providers have capital constraints, there is an impact in terms of looking at outsourcing and offshoring, because investment and capital is limited, and budgets are constrained. However, in the medium to long term, I think to get back to a sustainable level of cost-base and profitability one would have to continue look at shared services or offshoring or outsourcing. Once we are out of this current environment, I would see an uptake. One other point that I would say is that in respect to Shared Services: one of the major reasons, either in a larger group or across corporate or across companies, Shared Services doesn’t succeed, is the appetite for change or organizational resistance. Now clearly with the extraordinary times that we live in currently, the resistance will fall, and some of the points such as closer alignment to the business, closer alignment to the end users, which you lose with centralization, may become nice-to-haves. So there could actually be a pressure as well on getting more done.

Chairperson: Thank you Sanjiv, Vince, do you have any thoughts on this one?

Vince: Yes, I guess there is no black and white answer, from looking at our organization, having acquired forty or plus organizations over three or so years, we couldn’t have achieved the efficiency that we have without our functions being effectively outsourced, without the ability to adopt processes for core back- office functions. And to get to a point where it takes us approximately between six and twelve weeks to get an acquired business into that Shared Service center, and then adopting the standard reports and analytics that our business is going to operate within. So for me I don’t see the business case for bringing it back in house, I just believe that it will be unique for every organization, outsourcing will formulate a part of that core strategy, whether it’s outsourcing, or full offshore BPO, or something of a blended model. For me it has got to be outsourced.

Zulfigar: From our experience we see three brackets of companies when it comes to shared services, whilst looking at companies that are looking to Malaysia. The first bracket would be companies that have made their plans 18 months ago. When we speak with them on what is going on today, they are very comfortable and robust, we have made the plans, so the plans have been locked in, corporate understands it, the mandate has been given, so they are going on full steam ahead on the operations.

We see that the second group of companies made their decision to do something over the last six months. So we are seeing a second bracket of people who made decisions over the last six months, today are re-evaluating what are their priorities in what they are doing. But more importantly the third bracket that we are actually experiencing is that there is suddenly a big uptake in companies who have not considered Shared Services or outsourcing in the past. And today we are meeting ten to twenty companies a week trying to understand, we didn’t do it before, we are now trying to look at it, we are looking for new operations, we are looking at alternative operations, to that question there is a serious uptake in people who have not done Shared Services before, and today are seriously considering doing shared services.

Chairman: And Niek you had a comment?

Niek: I would like to add on to the comments from the last speaker, I fully agree there, what we are seeing at the moment is that there are still a lot of companies who have grown extremely fast over the past two or three years and despite the economic downturn they see this as an opportunity to consolidate their operations. I was speaking to a supplier of medical equipment, a pretty large one globally, and they were saying that they have a regional lack of processes, even though they are supplying the same customer. So the customer experience, the different service level, getting the service from different countries - they have a lack of total overview, so what is happening in the country? What is the transactional volume? What is the profit, what is the cost per unit that they add as well? There is still a lot of companies, at this time that say ok, there’s a bit of a downturn at the moment, let’s use this time to consolidate our back offices to make it better, to make it more sustainable for the future. And at the same time the resources that we free up, let’s use those resources to add value to the company, to reinvest and to grow. And to reinvest in the bottom line, and where possible in the top line.

Chairperson: Ok, further questions?...Then I am going to ask one if I may, which I am going to put to Niek first. In the supply chain area, and I know that you have done a lot of work in that area Niek - would probably see procurement as the leading candidate for a Shared Services or outsource approach. How do you see the future of the other aspects of the supply chain from the Shared Services or outsourced view?

Niek: Well, procurement I think is clear, we don’t have to have lots of comments there; there are a lot of large corporations, European and global corporations that are adding their procurement services together. The second step, and it has been going on for a while already is linked to the supply chain, consolidating distribution centers, whether you call that or you don’t call that shared services, as it is kind of consolidating your services. That trend is going on, it is going pretty fast eastbound, but you see it moving back, so rather than full centralization you see there are one or two central hubs with decentral services. A big portion of the large companies that are not fully online but do a lot of the manual transactions is the audit entry customer service part. And there you see a lot of consolidation going on whether it is centrally for Europe or whether it is regionally for a group of countries, so we are still all going there.

Chairperson: Anybody else have any views of that particular question?

Zulfigar: Just a short one, one of the things that we realized in shared services in outsourcing operations is that, today more and more companies are looking for centers of excellence of where you can find domain expertise, so for example, today out of Penang in Malaysia out of the last thirty or forty years the large semi conductor companies like Intel, JBel, Soltera and so on, had operations, today they are shifting into a services based operations. Because they have actually realized that they want to go to location where people have domain expertise about their business. So because they have had large plants, large manufacturing plants over in Malaysia for the past thirty or forty years, today they say we have got people who understand warehouse management, logistics management, supply chain management who can actually move into the services based operations to serve my other operations rather than to just focus on lower end activities, so that is something that we are seeing as a trend right now.

Chairperson: We have time for one more question before we break.

Attendee: Just in terms of outsourcing we have all very clearly heard and witnessed a lot of people moving further east, what is the panel’s view? Anecdotally we are kind of hearing that a lot of companies have gone in and outsourced then kind of had a second thoughts realizing that they are not getting the level of expertise that they would like, and that they are starting to pull some of these activities back in house into the business. And really I would just like the panel’s view on that evolution, and how they see it accelerating, or do they see it stopping?

Niek: Let me talk about one anecdote, and it is just a picture, so I am not talking about a country. A large Dutch television company moved a television manufacturing plant to Romania, and the business case was extremely positive, there was lots of staff available, with appropriate knowledge, the ground was cheap, and they could have it running within a year or so. A friend of mine ran the operation, so they had the operation there, somewhere in eastern Romania. There were limited roads down there, the supply of components was difficult, and one of the most difficult components was the power consumption of the plant. So if you set up a manufacturing plant, a multimillion dollar investment, you want consistency of power, electricity; otherwise you cannot manufacture it. So this plant was set up there, and because of the huge investment it needed to get the power up constantly, for a few years they didn’t reach the full extent of output, so that is one of the anecdotes. It is getting much better now, but as a result you see that they are not moving too far east anymore, it is slightly coming back to the West.

Vince: I think the important thing with any relationship is that it is cyclical, it the continuous movement and readjustment of processes, people, functions, technology; so we shouldn’t think of out sourcing as a we’ve done it now, tick the box and move on. It’s wherever you are in the process there is more work to be done, and there is no such thing as get it right for the first time for any organization, so we have seen people move offshore to the Far East then bring some back onshore, some back near shore. I think the previous speaker spoke about the carrot - the next set of processes, and that is what we would be looking for as part of the overall relationship. So how they are going to be included in the overall service being delivered back to the organization, how will the technology be managed going forwards, as we all know technology needs to be upgraded, there are new things coming along the line, how will they be integrated and brought into this service delivery model? And how will the gains then be shared between the outsourcer and the end organization? Of course we shouldn’t forget culture or language, they are massively important across Europe, and the anecdote that I was going to mention was that a colleague of mine who had made the decision to outsource their finance and accounting function, and were going to have a near shore and off shore service centre. They went into France, and I have no particular angst with the French, but the head of the shared services presented to the French organization, and said here are our plans here is what we are going to do, and his French colleagues asked, what about language? The French sourcing partners said, leave it to me, we had many courses in India, and we believe that people can learn French in six to eight weeks. End of conversation.

Jairo: I think that what the past has taught us is that even if you think that you have 100% of the information, to take a decision of this level, I think I agree with the previous speakers when I say that we need to be flexible, we need to have contingency plans. One thing that I haven’t heard much throughout the day is we also have to consider the price of CO2 - it is almost zero, and the price of utilizing it is not very much. And it won’t be long until the governments and the market forces are going to put so much pressure on us, taxing CO2 where taxing airplane trips and so many other things you know, that is going to add to a massive difference on the decision to outsource. If the goods are going to be moving back and forth; for example, if I produce a blackberry, the blackberry travels through seven or more countries. So back into the time where the dollar is worth nothing, and the pound is worth nothing, we also have to put into our agenda the cost of CO2, environment and the sustainability.

Sanjiv: I won’t go into anecdotes, but it is pretty clear as a user for any outsourcing or offshoring of shared services, the biggest risk is to unwind. Those who have been through that know that it is not easy to bring processes back or to get them back from another provider, particularly when you have lost all the knowledge and expertise, in the country from where you moved. So as a user the best solution is to try and to avoid getting into that situation. So how do you avoid? You have to take what the providers say with a pinch of salt, you will always hear about how they do for five different clients, how they have done the most top end of the pyramid, etc. But as you do your due-diligence, take a look at the processes really being performed, and also take references from some of the clients, sometimes you discover that the truth is somewhat different. Another point would be to do it is slowly but surely. Start slowly then gradually get the confidence of the organization, get the confidence of the provider, and then move up the value chain, test out the country, within a large country you have various locations. Depending on the type of work some you may be able to hire depending on the location and then move up, that is the best way as a user to gradually start and take the journey. It takes longer, it is probably less risky, but a better way of doing it. In any organization you have your share of skeptics, and all they are looking for is a case of failure to kill everything else that might actually be sensible to do. So what you don’t want to do is to give them that ammunition to kill all other initiatives, so I would say start surely but slowly, then grow gradually, as you gain confidence.

Zulfigar: I think that from our perspective there are two ways of understanding of what has been going on, either you go to the Far East or you move back to the West and so on. The first being it may be somewhat of a clichê, but we recognize today that companies that do outsourcing or shared services have become more mature in their sourcing strategies. We often see that three or five years ago, you close your eyes, you ask your IT or finance manager, where are we going? We are going to India boss, and no one gets fired because that was primarily a very reactive mode of sourcing, primarily looking at cost arbitrage and labor arbitrage and so on. But today the sourcing strategies are becoming more and more complex and mature. It is very important that we understand what we try to get out of the outsourcing activity, or the offshoring activity that you want. So for example in our case, we always stress that companies have a very strong either local presence in the team that they are going to establish in Malaysia, or they have a very strong partner that can inform them of the expectations, of what are you going to get out of this deal? If you don’t have that then you are going to find that you don’t manage the outsourcing provider properly, or your expectations are often not met.

The second point is echoing what Sanjiv just mentioned; there is probably no one model that fits, and this is the model let’s go out and do it and it is successful. One of the examples that I have shared with other people is that today HSBC Bank has about four thousand people in Malaysia probably servicing the UK, parts of Western Europe and Asia Pacific as well. But they didn’t start off with four thousand people immediately. They started off nine years ago in Malaysia, and for the first five years they probably grew from fifty to four hundred people, they started small they started with fifty people with two processes covering just the UK. And they grew from fifty to five hundred in five years, but from that stage, once they have reached that level of maturity, they have established the processes and so on. They have grown from five hundred people to four thousand people in the past four years, so when we talk to them and ask what the key factors in influencing this were, they were very comfortable in starting small, in understanding what would be the core process or core areas that Malaysia could deliver for their operations. So today one of the things that they have mentioned to us is that they have identified the niche areas that Malaysia can serve to complement the other operations that they have around the world. Today Malaysia becomes a good centre of excellence to serve their Canadian operations, when we ask why they say because there is a huge market for Chinese speaking population in Canada, and that can be served because of the multilingual capabilities of the Malaysians being able to speak Chinese and English to serve that particular area. So they find niche areas, they start small and grow from then on.