Roundtable: Make or Buy?

At the recent Shared Services Week event in Orlando, SSN took the opportunity to gather some leading practitioners for a roundtable discussion on the outsourcing vs inhouse debate. Deborah Kops, Chief Marketing Officer for WNS Global Services, moderated the discussion.

Deborah Kops: I’d like to kick off this discussion by asking you about the "make vs. buy" debate. How did your organization originally make the decision to choose one business model over another? Was the decision mandated from above?

Andrea Schaffell (formerly Vice President International Services, Lockheed Martin): At Lockheed Martin, this pretty much boiled down to capability and investment in systems. Lockheed Martin has had a shared services for quite a number of years and selectively chooses what it wants to outsource, while carefully considering the cost structures around managing the various types of legacy systems it has in house, etc. The largest outsourcing activity we undertook over the past five years was to outsource the employee services center. This covered payroll, health and welfare for internal employees as well as retirees – nearly 300,000 people. Given the numbers, we felt it was more efficient to go to an outsourcing organization that had more expertise in this area than we had inhouse.

We were not really "mandated from above" to outsource – it was more function by function. For example, five years ago we considered outsourcing the financial services organization, but that option proved prohibitive, given that Lockheed Martin wanted the outsource provider to use our inhouse legacy systems to process work (because everything was so integrated with other legacy systems). But the costs were so extreme to harden out systems – we needed to protect other systems from being tunneled into, etc – that we decided to stay inhouse..

Bill Parker (Vice President, Sprint Shared Services): It’s not really an either/or but a complement in terms of shared services and outsourcing. From a shared services perspective, we first look at stringing together "like" business processes – and this actually enables and leverages outsourcing. Instead of outsourcing function by function, we’ll outsource a process. We’ve done it in procure-to-pay, for example, where we brought the process together in a shared services environment and then outsourced the transactional pieces. We found that a hybrid approach was most effective – shared services and outsourcing can complement each other. To be successful, as a shared services, you should be leveraging some outsourcing and offshoring opportunities; but it’s certainly not an either/or solution.

Linda Merritt (formerly Human Resources Director, ATT): We have to bear in mind that some of the shared services options we are discussing predate the modern era of outsourcing and multi-sourcing. At AT&T – and by the way, when I refer to AT&T I am speaking about the original company, before the merger with SBC – we had little choice, when we started out on our journey. Our move to an internal shared service center pre-dated the development of comprehensive multi-process HR outsourcing. We had already built an internal shared services organization and the benefit was that we were able to straighten out some of our legacy systems, do some transformation at the ERP level, and thus get rid of some of the legacy system "spaghetti" at the start. We built extensive employee and some management shared services and, while expensive, we used it long enough to gain value and cost recovery out of it. So 100% of the savings were already in our pocket and people were used to centralized remote services.

Also, all common support services in the business were geared up to look at "how can we do more with less?" based on a competitive market environment. When you’ve already gained a steep drop in cost via internal shared services, it was a natural progression to look at how to go a step farther via outsourcing. In the late ‘90s, this is how we all got started – via a blend of internal shared services and then adding in outsourcing opportunities.

Julie Hutchins (Head of BPO for North America, Nestle Business Services North America): At Nestlê, we have always had a focus on being cost competitive and have reduced many costs within our manufacturing processes. This focus then shifted to include the white collar processes.

The first BPO to take place was in the Nordics. At the same time, several centralized services emerged in certain parts of the world, e.g., treasury and AP in North America. North America then outsourced certain components of financial services. Nestlê Business Services North America has since evolved and is now based on four emerging services streams: procurement and retail sales with shared services; finance and employee services with a hybrid approach. We are now mandated for all operating companies within North America. Nestlê Business Services was formed globally in an attempt to harness the power of all these organizations across the globe and to develop one blueprint for how to move forward.

Linda Merritt: Just to add something to what you are saying: we did some research with Towers Perrin, which examined the reasons underlying sourcing decisions. ERP emerged as a top driver and major catalyst for change. The mindset tends to be: how can we get more value out of our investment? How can we do this at less than 100% of the cost? Sourcing providers can be helpful in these situations. Another trend that emerged is that organizations already considering large-scale change, such as M&A, consider: "What else can we include in this change?" Sourcing is a good candidate.

Deborah Kops: Let’s pass the questions to the consultants: how do you see companies come to the "make or buy" decision?

Bob Cecil (Executive Director, EquaTerra): Most of our clients end up in a blended sourcing model, as at the end of the day there is no replacement for a good opportunity business case. But I would observe three key trends.

First, the maturity dimension. The maturity of the outsource provider market place is changing constantly: three to four years ago, it was limited to what we could call a "lift and drop mode." And if the supplier dimension is not mature enough, as Linda pointed out, going inhouse can be the most viable route. Your own maturity dimension is also significant, based on the maturity of your own processes. We also look at it from the perspective of structural defects. So if you have, for example, a fundamental process control defect – SOX documentation, for example – you really want to get your house cleaned up internally before considering an external move.

Second, sustainability is now becoming a bigger factor as markets mature. Can they sustain captives for a longer period of time? This falls into the category of "Do I have the basic scale and scope to do this? Am I big enough?" HR and market reputation come into this: "Can I sustain the talent – and retain the talent – if I am going into a country where my reputation is limited? Can I offer a shared services career path?"

Third, the sourcing decision tends to be heavily influenced by culture. Some companies tend toward wanting to focus on the core and hence are more favorable toward outsourcing. Others will want to focus on building institutional knowledge and maintaining tighter control. These will tend to be more favorable toward retaining work internally. So you need to really assess your culture before making any decisions.

Julie Hutchins: There are also regulatory problems to consider, particularly country to country. For example, we are providing services for Brazil out of Costa Rica, but had to consider significant tax implications when implementing this.

Bob Cecil: Sure, and not to forget there are also huge security concerns in certain industries.

Andrea Schaffell: Yes, absolutely. At Lockheed Martin, as a defense contractor, it was not an option to have some of the tax accounting for our U.S. expatriates done via a U.S. tax firm outside the U.S. (offshore). Specifically, one of the big four accounting firms servicing us had suggested they send some of this work to a service center in India. We were not willing to move the work offshore, it had to stay in the U.S. Naturally, there is a cost to that.

Peter Allen (Partner and Managing Director Market Development, TPI): From what we have seen, I think it absolutely holds that successful outsourcing depends on the organization having already adopted the principles of shared services. Outsourcing is just one variant of the shared services business model. Those of us who have been in the industry a long time recognize the principles of standardization, cost transparency, charge back mechanisms, etc., as things that a good shared services should have in place. Outsourcing needs to fit hand in glove into this strategy.

Our counsel is that if an organization does not employ the basic tenets of shared services, outsourcing might not apply. In fact, to clarify: the "make vs. buy" debate really needs to be considered within the context of change. It is always easiest to stick with the status quo. The "make vs. buy" is really a change decision, and you need to see it in the context of a forward-looking business case. Too often, that decision is made based upon the moment "here and now." Outsourcing, however, can be part of a shared services strategy in a forward-looking context. We guide decision-makers by asking: Where are the points of leverage? By which we mean moving from a one-to-one relationship to a one-serving-more-than-one relationship.

This is often not thought through in the internal shared services setting, because you are constrained by legacy business models and expecting the same people to end up doing the work. Leverage is the key to increased productivity. There has to be leverage in order for shared services or contracted services to succeed. If you can’t achieve leverage internally, perhaps outsourcing is the right program for change. But, you need to be willing to let go in order to let leverage happen.

Bill Parker: I agree with Peter. A key success factor for our shared services was automation. As a first step, we tried to eliminate transactions via self-service which is cheaper than outsourcing. What you cannot eliminate, you then consider outsourcing to drive efficiencies with the remainder. Shared services operates most effectively when you eliminate the functional silos and operate as an end-to-end process. This process orientation also enables the implementation of self service tools across the entire process which helps you eliminate the manual transactions.

Peter Allen: Yes, in our experience, when you get to the point where you think outsourcing is the option, I think you are generally one of two things: You are either desperate, or you are ambitious. The desperates usually have taken things to the furthest point they can, inhouse, and are now facing a problem which they cannot fix themselves. They are desperate for the step function improvement.

The ambitious are trying to achieve an opportunity, not solve a problem. They are trying to penetrate new markets, deal with changing demographics in a workforce, or reinvest in the core business as opposed to the back office. That helps to frame the decision, "Is this service something that needs to be kept inhouse, or do we need a partner to achieve it?"

Linda Merritt: A key factor is internal resistance – or the readiness of the organizations to outsource. I hear many horror stories about outsourcing arrangements still in the mud two years after signing. In fact, the things we are discussing here are the real problem.

I like that now we are hearing more advice other than just on the financials. What is the culture? hat is the readiness? What are the business drivers? I recently sat on a panel with a representative from a large organization who described the apparent failure of their HR outsourcing arrangement. Although the organization had great external business drivers, what was apparent was that they did not successfully sell the concept inhouse. Internal resistance was a huge issue here. Coming from a totally decentralized place, they were coming up against the pain of basic shared services principles. They did not adequately manage the change. They looked at it as a project to transition to, and did not deal with the cultural change nor the reorientation of the organization successfully.

To some extent, even vendors have to get better at deciding which clients to match up with and what conditions these clients are really in. Such pain drives delays and costs money. And it takes away from the basic value proposition.

Sam Poston (Senior Vice President, ScottMadden Inc): Here’s something I’d like us to focus on for a minute, which leads on from Linda’s point: I can pretty much tell you 100% when a change program is going to fail! Certain conditions predetermine failure. First, ask yourself: have you managed change successfully in your organizations before? The ability to manage change on time, on budget is crucial. Second: how fast are you going to go? If you have an unrealistic time frame, you’ll set yourself up for failure. The bottom line is: management is key. You need to understand industry maturity models, as Bob said, and also understand your own maturity. I think few organizations really get this. My last point is on the vendor management aspect of this. The ability to deal with vendors and build a partnership is crucial. You need good management to make any model work.

Peter Allen: I’d second that and also add a caution. We put warning flags up when we hear THE BIG LIE. This is: it’s going to cost less but it’s all going to be the same. The same people, the same systems, the same processes, etc. But it will cost you less. This is completely ignoring the fact that the only way the economics work is via leverage, and the only way you can leverage is by fundamentally changing what is being done, maybe eliminate some work. So it is all about a change program – not just how services are delivered, but also how they are received.

Sam Poston: A trend that we’ve definitely witnessed over the past few years is that technologies now allow you to do lots of things yourself. In the past, if you did not have investment monies and the technology was too expensive you just handed it off to someone else to do. Now you can purchase the software and the knowledge ware yourself. The question is, of course, can you manage it? But this is driving trends today. We are seeing many companies bring services back inhouse, whether for reasons of control, cost, or whatever. The point is that you can buy the technology to do this yourself. And now you might have the confidence to take it on!

Linda Merritt: I think you can get to where you want from either a shared services or an outsourcing perspective. There is not an ultimate compelling reason for one or the other. In today’s environment, in some cases, the value proposition is not yet compelling enough to make a decision one way or another. Sometimes the vendors can provide the services as well as you can – but they might not be able to take you to a new place or provide new business capabilities. To some extent there is still an immaturity in vendor technologies and capabilities that makes me think that, in some cases, an internal solution may still be viable versus going out of house.

Bob Cecil: I’m glad you bring that up. I think the argument is moving away from a cost argument for outsourcing vs. insourcing. What we are starting to find is that, given shortages of talent in marketplace, increasingly it is not so much about process and scale and technology – but it is all about "where can I get the right talent?" People are struggling with this.

The real debate is in innovation. This is the big theme in the marketplace now, right? Some say innovation comes from being close to the business, having knowledge of the business. In an insourced model, these folk say, I can make better innovation decisions because I am close to the business. Others argue that service providers are better placed to bring innovation to the marketplace because they focus on this part of the business and this part alone. They are specialists in these processes. So the question is: Where do you find the right talent to do this?

Peter Allen: But Bob, isn’t innovation largely a function of a leveraged investment? So it comes about through someone making a decision to put money on the table to achieve leverage. Therefore, either the client bears the full burden, or innovation comes through some sort of a partnership in which a bet is made based on market opportunity.

Bob Cecil: I would say that is certainly one case of innovation – ie, innovation coming through leverage. I think there is a counter argument, though, which is, innovation based on knowing the business and understanding the context of the business. So you’re able to solve business problems because you know the business.

Peter Allen: That is where I think there has been a great contrast in shared services vs. outsourcing. Generally, SSOs have a fairly tight business alignment. When outsourcing is brought in, this alignment is often sliced horizontally, though. You’re taking apart that integrated technology and operations association, placing different parts with different providers so you end up basically disassembling the technology and operations business-aligned proposition, which is so fundamental. Right there is probably the make vs. buy decision: why would I possibly disassemble something I designed and engineered specifically to service the business needs?

Julie Hutchins: I agree. People are chasing arbitrage all across the globe. We need to view talent realistically, however. Some companies delegate control over business processes to the BPO. They may even ask the provider to not only be innovative, but also "tell me about my business." This is often done without having the governance systems in place to support it. It’s important to develop that relationship in the first place.

Deborah Kops: What strikes me about this industry is that businesses are really "left brain" oriented, whereas success in change, or shared services business models, depends on the "right brain." The ability to change the way of working is crucial. In this respect, how important was it to break down the way of working within your organizations in order to change the business model?

Bill Parker: To be successful, you really need to be flexible and able to adapt. Outsourcing in our current environment is difficult since our culture is one where employees and management want to be hand held when completing transactions. It is a challenge, but we are slowly making progress in this area.

Linda Merritt: We had the shared services principles in place already. So outsourcing was not really an issue for the business managers or for the employees using our services. But it was an issue for HR. Those who had the hardest time adapting were the strategy and policy owners, who felt we were taking their "arms and legs" away from them. They were not comfortable, at first, in dealing with a more distant and remote relationship. They knew how to do appraisals; they did not know how to use SLAs. We had to adapt to new styles of management important to the dynamics of the deal. Under outsourcing, we had to learn new behaviors.

Part of the governance challenge was to address those softer issues. Accordingly, we wanted to staff the governance team with good level, collaborative people. HR job evaluation, which managed the job structure, wanted to bring this down to a more tactical level. It took a lot of negotiation to get it all worked out. Where it worked well, we moved to a new way of managing while retaining close collaboration with the vendor. In one case, though, we brought back in a small part of the service because the drama it created was not worth the dollar savings.

Peter Allen: Too often we see functional executives not knowing what they are spending, how many people are really working on the process, etc. If you outsource in that situation, you’ll miss out on opportunities. Governance is not just about managing contracts, it is about managing services. You need to decide: what are these services? What are the customers’ requirements? What are the variations?

Julie Hutchins: Even in internal environments, you have the same considerations. It took some time to explain and convince executives that the same processes we’d quietly had in place for 25 years still applied! But for 25 years, few really understood what the underlying activities were – except the processors. The beauty of BPO is that it shines a bright light on these processes and creates awareness of the processes themselves, for costs and possible inefficiencies. There is a great benefit overall.

Bob Cecil: This is a dual-edged sword. In internal shared services, you tend to have softer controls in place. For example, let’s take consumption management. This is usually not actively managed but managed from the shared services budget. In an outsourced environment, a provider will be happy to offer the service – but then charge it right back to the client. So think hard about what you request. This also applies to tactical things like invoice verification. Internally, you’re really just passing money within the company. But when it is external, you need to pay attention to check the invoices are in the right amount for the right services. So, in wrapping up, if you do governance right in an outsourced relationship, you do, indeed, shine a bright light on some of these softener issues – which then become "harder." If not, you may end up leaking out huge amounts of money in an outsourced relationship.

Deborah Kops: I’d like to thank you all for taking part in this discussion. In summary, we’ve concluded that although organizations can get to the same point through different ways, individual organizations’ maturities, as well as market maturity, are key in deciding on a sourcing strategy. Sustainability and culture are emerging as significant factors, and organizational readiness, as well as change management skills, are significant in avoiding failure.