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Matthew Banks on January 11th, 2010 at 4:05 pm :
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by Matthew Banks
Boston based consulting firm Vantage Partners has published a White Paper, aimed at law firms, entitled Easy Mistakes to Make When Making Decisions About LPO. The Paper contains several pertinent market observations and useful recommendations for law firms, both at a practical and strategic level. I have selected a handful for comment (text copied from the Paper is in italics):
In-house law departments are leading the way in the exploration and experimentation with LPO. And even where law firms are getting involved… Most law firm experience is centered around serving a particular client who has insisted in the use of a lower cost resource for some of the work. This is indeed true for most, but not all law firms. We are seeing more law firms folding LPO into their offerings and into their model. Recent examples include the Allen & Overy offshore document review option and the move by Simmons & Simmons to set up a core team in India. Most of this activity is from U.K. based firms. In addition, a number of US AmLaw 200 firms have set up either formal or informal LPO “investigatory committees”, as they conduct a due diligence process aimed at selecting one or more preferred LPO providers.
The LPO industry is still relatively immature, populated by many small providers who may not have significant staying power and who do not, in fact, offer the usual outsourcing benefits in terms of scale, technology investments, or process expertise. An industry that in its formative years was characterized by the emergence of numerous, boutique providers, is now beginning to scale up and consolidate in order to meet the increasing sophistication of AmLaw 200, U.K. Top 50 and Global 2000 procurement. Although the market is still comparatively nascent, a handful of leading providers has pulled away from the rest of the pack in terms of their experience, scalability and infrastructure. Maturing providers combined with increased market activity and acceptability make now a great time for many law firms, used to following not leading, to examine LPO.
Lawyers will generally be unable to shed responsibility for the quality of the work carried out by the LPO provider, even when the client has selected the provider and foisted it on the law firm. The structure for contractual relations and liability can vary. In some cases, the client will contract directly with the LPO even where a law firm is involved. In other cases, the law firm will be the aggregator who subcontracts to (partners with) with the LPO. In the latter scenario, the laws firm will have contractual recoverability from the LPO subject to any agreed limits on liability. We find that “risk” (reputational and financial) is a major part of any dialogue with law firms and should not be shied away from, but rather addressed and resolved head on. Quantifying risk (or lack of it) is very important, from the selection of suitable tasks for outsourcing through to transparency into the workflow process and quality regime. A robust documented and defensible process provides visibility into exactly what is being done, how and by whom, which means that the risk can be mitigated and managed. Risk management is something that Vantage has highlighted in their Paper.
The Paper goes on to list typical mistakes that law firms might make when they consider LPO:
Failing to understand what your clients are really asking for. Be prepared to address a client desire for strategic transformational change. Procurement departments of major corporations and banks are getting involved in purchasing legal services. We see this in more and more RFPs. It’s not just the delivery of services that is changing but the way they are procured.
Grudgingly accepting LPO when a client forces it upon you.It is easier to obtain quality outputs from an LPO provider if you enter into the relationship in a collaborative fashion rather than as the result of being coerced by your mutual client. It is even easier to do a quality job and get some credit for being responsive and innovative if, when asked by a client about LPO, you can identify some providers with whom you have already established a relationship and perhaps even have run some successful pilots. One hopes that all providers prioritize the best commercial and legal interests of the clients! Fortunately we experience highly collaborative working relationships with law firms. We also ensure that our documented process (which is approved by the client and law firm prior to project start) includes a pre-agreed communication and collaboration regime with outside counsel so this joint effort is not left to chance.
Thinking you have to “own it”.There are “best friends” relationships or networks that can serve as good alternatives and don’t require a large capital investment. There are providers who can leverage economies of scale and process expertise to deliver a reliable and more flexible managed service and do so under fairly stringent service level agreements. At any scale, there are challenges with the captive model. Ownership and control are not the same thing. The unwinding of captives in the financial services sector is a warning indicator. See blogs at http://www.integreon.com/blog/cat/captive-v-3rd-party.
Integreon’s LPO experts, Matthew Banks, Ron Friedmann and Mark Ross take a look at what to expect in the LPO world in 2010.
Someone once said that less happens in a year than you might think but more happens in a decade than you might think. That’s the way we feel about the legal profession and LPO. So rather than offer a list of dramatic and sweeping 2010 predictions; we tender below some likely developments consistent with broader trends that will continue to play out over 2010 and beyond, bringing significant growth to the LPO industry. We also break with traditional year-end predictions because our list exceeds the customary ten items.
LPO is part of the bigger picture of evolution of legal services. Legal organizations are now, more than ever, actively trying many new and related approaches: technology, back office restructuring, process improvement, LPO, alternative fee arrangements, and better knowledge management, among others. So, in that context, here is what we think 2010 will see:
1. More organizations will outsource more work to more LPO providers.
2. The third party provider model will dominate. We don’t expect to see many captives in the legal market; it’s too difficult and they fail.
3. In the U.S., expect the ABA to provide more detailed guidance on how to outsource legal services ethically. While in the U.K., the Law Society, to date silent on the subject, will publically comment for the first time.
4. There will be lots of talk about alternative offshore locations to India but none will yet emerge of such scale. Onshore and near shore will be the main alternative and could grow as quickly as offshore.
5. LPOs, which are already good at what they do, will get even better. More experience brings better service.
6. LPOs will expand what they do — more capabilities and services inching a little higher up the value chain but still based around the core services available today: discovery, contracts, compliance, research, and IP. In addition to moving higher up the value chain, LPOs will also expand into consumer related and high volume legal services such as conveyancing, personal injury, wills and probate.
7. Document review however, will retain its #1 spot as the service most often outsourced, at greatest volume, and by far the greatest revenue generator for the LPO industry.
8. Organizations will start to develop multi-functional teams on an FTE basis, rather than single function transactional work. For example, corporations will engage core teams to handle a variety of legal dept work such as contract management, compliance, etc. The underlying economics of a dedicated team is better both for customers and providers.
9. LPO pricing will be stable.
10. Revenue growth for the LPO market will be rapid and some providers could double in size over the next year or two.
11. The biggest LPOs will reach 500+ lawyers working on document review, contract management, and due diligence projects. While concurrently, some smaller providers will exit the market altogether.
12. We will see more Rio Tinto type publicity, but less than you might expect because law departments have no vested interest in making public their private outsourcing arrangements with third party providers. Law firms, in contrast, are more likely to publicize outsourcing because, as service providers in a competitive market, they may see it as a competitive advantage.
13. Generally, law firm activity will be reactively driven by clients. Although a number of major firms will cement “preferred LPO provider” relationships. However, many or most top law firms will have had exposure to LPO one way or the other by end of 2010. That said, the first few firms to do something new are always long in coming; once a handful have acted, the market can tip quite suddenly.
14. U.K. law firms will continue to be more active in offshore outsourcing than US law firms. US law firm activity will more likely be a mix of offshore, near shore or onshore.
15. Recent blog posts have debated whether process is the future of law. In part, yes, but there will be a polarization between what clients are prepared to pay premium rates for and what the market will force into new models. Not all law will be process driven but LPO will help to increase the scope of what can be process driven.
16. Procurement will drive more law department purchase decisions. Their drive to efficiency will push more work to LPO; their drive to systematize purchasing may slow down sales cycles.
17. The biggest LPO single client contract value will exceed $10M annually.
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Ron Friedmann on December 15th, 2009 at 8:08 am :
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We recently came across a fabulous video (a Flash animation) by Beaton Consulting, which is “Australia’s leading B2B services research and consulting firm, providing insights to drive business performance.”
In just under three minutes, “The Big (Legal) Picture” provides a great perspective on the current and future global legal market, including legal process outsourcing (LPO). We think this illustrates graphically that the LPO trend is just beginning.
This is a ’must see’ for anyone in the legal profession. Beyond the content, we have seldom seen such high ‘production values’ in the legal market. (Click on the arrow in the video box below to watch.)
As a quick side note, we have observed that in the last couple of years, video and animation have evolved into a major phenomenon for the consumer and business markets. In keeping with this trend, we have recently set up our own LPO channel on YouTube: http://www.youtube.com/user/IntegreonLPO.
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Mark Ross on November 30th, 2009 at 1:20 pm :
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Last week saw the release of the latest ValueNotes report, Legal Process Outsourcing:Crisis Creates New Opportunities for LPOs (November 2009), regarding the state of the LPO industry and representing the analyst firm’s third detailed research publication on this now fast maturing market. Following the predictions and postulations recorded in their prior reports, Offshoring Legal Services to India (2005) and Offshoring Legal Services to India, an Update (2007), what can we glean of Value (pardon the pun), from their most recent biennial LPO coverage? Here is my assessment of the report’s findings.
Impact of the Financial Crisis
The 2009 report’s release, and no doubt the time period during which the research was undertaken, coincides with a period of financial turmoil in both the wider global economic community, and of course the legal profession. When the 2007 report was released, Bear Stearns and Lehman Brothers were apparently in robust financial health, and the term “subprime” was hardly commonplace in day to day business speak. Profits per equity partner were at an all time high, new associate starting salaries at the AmLaw 50 were knocking on the $200,000 door and the concept of deferred start dates was simply unthinkable. How times change.
Without proffering novel information, the initial section of the report succinctly condenses the major changes affecting the global legal marketplace as a direct result of the great recession. Major corporations across a wide variety of industries have seen profit margins decline dramatically which in turn has impacted negatively on the world’s leading law firms. Certain practice areas have been harder hit than others:
“The number of global M&A deals in the first quarter of 2009 witnessed 5,914 transactions valued at $978.9bn, a decline of 41% and 48% respectively for the same period in 2008.” (ValueNotes Legal Process Outsourcing, November 2009).
I recall reading an op-ed piece over a year ago now in TheLawyer.com. In Law firms need to take advantage of tough conditions, Tony Williams, a former Clifford Chance managing partner, highlighted the example of a firm with a 25 percent profit margin with a fee income that fell just 20 percent, entirely plausible in the recent financial climate. This firm would witness its profit fall by 80 percent in the short term as costs simply could not be adjusted quickly enough to offset the revenue reduction. Add into the mix horrendous rises in indemnity insurance premiums and the tightening of credit witnessed over the last 18 months and one didn’t need to be Nostradamus to predict bleak times ahead. ValueNotes comprehensively details along a time continuum, the layoffs of partners, associates and support staff at the largest U.S. and U.K. law firms. In order to survive now, and hopefully thrive in the future, the report comments that law firms are,
“actively re-looking at their business models and developing strategies to remain profitable. Firms are offering alternative billing models, making technological improvements and entering partnerships with local and offshore service providers.”
Slowdown in LPO Revenue and Manpower Growth
In 2007 ValueNotes predicted revenue generated from the LPO industry in India alone to reach $640m by 2010. These estimates have been revised downwards substantially. Revenue is estimated at $320m for 2008, $370m for 2009, and expected to reach $440m by the end of 2010. The report rightly reminds us that these figures and others quoted in the report pertain solely to the Indian LPO industry. Clearly, although India is the dominant offshore destination, others such as The Philippines and South Africa cannot be discounted, and perhaps more importantly, these figures do not reflect the substantial legal outsourcing engagements to onshore destinations both in the U.S. and U.K.
In addition to slower than originally expected revenue growth, the overall manpower employed by the LPO industry (again, only in reference to India) has also witnessed sluggish growth. With the wonderful benefit of hindsight, forecasts a few years ago of 32,000 employees working within the LPO industry by the end of 2010 now appear wildly optimistic. The revised prediction for 2010 stands at 15,400. The LPO and KPO industries have not been immune to the global economic downturn. However, as the global economy continues along the path to recovery, while concurrently LPO becomes both an increasingly desirable strategic option for major corporations and law firms, the report anticipates that the there will be an upswing from the currently plateaued manpower levels towards a more consistent period of stable growth.
The report then proceeds to list each and every vendor (many of whose names my colleagues and I do not recognize) alongside estimates of their current manpower levels. Clearly these figures have been supplied by the vendors themselves and prospective customers would be wise to seek independent corroboration. However, immediately apparent on perusing the list is the wide variance in manpower levels, ranging from several LPOs with ten or fewer employees, to the larger, scale players with headcounts in the several hundred.
Changing vendor landscape
The report comments that for the first time in the lifecycle of the industry a number of service providers have withdrawn from the market and closed shop. The formative years of the industry, from 2005-2007, witnessed aggressive expansion, with numerous start-ups appearing on the scene. ValueNotes comments that in excess of 20% of the total number of service providers have now ceased operating altogether or at a minimum closed down their LPO operations. I was interviewed for this report and, as I state in it:
“The coming 12-24 months could prove to be tough for many of the smaller LPO providers, several of whom may simply give up the chase and withdraw from the market altogether. Others will look for an opportunity to achieve the scale increasingly viewed as a prerequisite by potential clients, by either merging with a competitor, or selling to a larger, more stable provider. This activity, together with consistent growth by the leading, large-scale providers of legal and knowledge process outsourcing services will continue to push the industry as a whole further down the path towards consolidation.”
The report correctly identifies scalability and multiple service capability as a prerequisite for attracting business from major corporations and the U.S. and U.K.’s leading law firms. A rapidly globalizing legal profession has reached a tipping point where legal outsourcing is now recognized as a viable and efficient option for the delivery of certain types of legal services. As major law firm and corporate procurement of legal outsourcing services becomes increasingly the norm, LPOs without the scalability to match both the increased demand and sophistication of the buying community will suffer. Purchasers will be inclined to opt for providers who can offer scalability through a global, multi-shore delivery platform. While there may remain certain niche areas of demand that the boutique, one geographical delivery center providers can satisfy, for larger scale projects or enterprise wide engagements, multiple locations, backed by access to a scalable workforce will become a prerequisite.
In order to achieve both the requisite scale and end to end capability identified as desirable by those procuring LPO services, the report identifies an upswing in M&A and strategic partnership activity within the LPO industry. Integreon’s recent acquisitions of ONSITE3 and Datum Legal are highlighted as activity enabling the provision of an end to end enterprise solution all under one roof.
ValueNotes comments that over the course of the last 3 years several of the largest U.K. law firms have announced outsourcing initiatives. On review of the dates of these public pronouncements, it is readily apparent that the pace of these declarations is picking up. 2009 will be viewed as the tipping point year, when major law firms were let loose from the shackles of reticence and began to acknowledge that their public embracing of outsourcing was clearly viewed by clients as indicative of being forward thinking, innovative law firms of the future. The report references Integreon’s recent deals with Simmons & Simmons and Osborne Clarke, as well as Pinsent Masons’ South African initiative with Exigent and CPA Global’s Rio Tinto engagement.
Key Takeaways
In an economic climate where numerous industries have taken a backward step, the slower than originally expected growth within the LPO industry should not be viewed as disheartening. In the early days of the industry, backed by a vigorous entrepreneurial spirit, the vendor landscape mushroomed dramatically. The last 12 months have witnessed the first signs of contraction. It has taken Integreon over a decade to achieve the scale, infrastructure, and end to end operational capabilities which affords us the position of now being the largest provider of Legal KPO services to major corporations and global law firms. As ValueNotes correctly comments, it will be those LPO companies that are able to acquire scale and provide operations from a multi-shore global base, as well as satisfy the desire of clients by providing a full suite of legal support services, which survive and subsequently thrive. Over the coming 12-24 months many of the smaller players will struggle to remain in the game, as client requirements become ever more sophisticated, and the move from piecemeal, short term projects, towards longer term, multiple FTE contracts, picks up pace.
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Admin on November 18th, 2009 at 12:50 am :
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by John Croft, President, Global Sales and Marketing, Integreon
On Tuesday I attended Centaur’s legal process outsourcing (LPO) conference, hosted by The Lawyer. Panelists from both law firms and in-house counsel made for a well-balanced discussion. Most noticeable was an underlying change in tone from debates at prior LPO conferences. Whether a result of the economic climate, the unbundling of legal services, or clear directives such as the one by Rio Tinto’s Managing Attorney Leah Cooper – it is now clear that no longer was anyone talking about ‘if’ but ‘when’.
Ms. Cooper led the charge against law firms, challenging their reasons for using the same old model – junior associates at £300 an hour – for repetitive aspects of legal work, for which she now refuses to pay. What does she propose instead? Unbundling and re-distributing legal work among her in-house team, her outside counsel and an LPO provider. “The trick to doing this well”, she said, was “we all have to do our bit and work together.”
Whilst this idea might have shocked the market just six months ago, the conference saw well-considered and pro-active responses by some big UK law firms who are heeding her call.
Lovells partner Neil Mirchandani explained that his firm had been working in a three-way relationship with their corporate client and Integreon for nearly three years. Lovells previously created what we can now view as an early-stage LPO: their ‘Mexican Wave’ outsourced legal work to lower cost domestic law firms starting in 1999.
Allen & Overy shared that Integreon is now their preferred LPO partner and they use this LPO offering as part of a “suite of options” that they offer clients. Unlike Simmons & Simmons, which has a dedicated team at Integreon for LPO work (see our press release), A&O has chosen to deal with Integreon on a project-by-project basis. This approach provides the benefits of scalability when needed and no overhead when not.
Add these firms’ names to the likes of Slaughter & May and Pinsent, which have both publicly stated that they are working with LPO providers, and it is clear that the message is not only being heard – but acted upon.
At the same time that firms are moving from talk to action, the LPO competitive landscape is shifting. According to conference speaker Arun Jethmalani, CEO of analyst firm ValueNotes, 140 companies claim to provide LPO services. He says, however, that the reality over the last year is that only a couple have emerged as the dominant players. Many smaller players have pulled out of the market or simply disappeared. ValueNotes reports that the important attributes of the dominant players include scalability; global footprint; referenceable clients (i.e. they actually do LPO on some scale!); and the ability to forward invest in technology, strong Western domain management, and onshore offices near the client.
Jethmalani compared LPO today with business process outsourcing (BPO) 20 years ago. Back then, there were hundreds of companies that claimed to operate in that space but today there is only a handful of dominant, global players. Now that law firms are joining the in-house counsel in discussing not ‘if’, but ‘when’, expect to see similar growth for a couple of LPO providers and a significant change in the way legal services are unbundled and delivered.
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Matthew Banks on October 28th, 2009 at 11:45 am :
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The news of Rio Tinto’s Legal Process Outsourcing (LPO) initiative has been widely reported. For a detailed report, I recommend Richard Susskind’s interview with Leah Cooper, the Rio Tinto General Counsel behind the initiative.
The number of major outsourcing arrangements between leading LPOs and blue chip global law firms, banks and corporations has increased but the topic is rarely discussed publicly. The Rio Tinto arrangement is one of the very few widely publicized.
Cooper’s approach to her challenges (as well as her messages to the industry) will resonate with GCs around the globe, who face similar pressures of increased workload but constrained budgets. LPO enables law departments to meet rising workloads whilst reducing costs. It opens up a “new way of working” where quality can be achieved at reasonable cost by reallocating legal tasks to partner providers.
Indeed, as I listened to this interview I kept coming back to Cooper’s notion of “a new way of working”. Whilst I do largely agree with her comments, I have a slightly different take on how GC should think about legal outsourcing.
The “P” in LPO: Process is Not a Dirty Word
Cooper doesn’t like the “P”. She sees her LPO team as a genuine extension of her in house team, contributing to the overall workload and undertaking tasks that a junior lawyer within the in house team might otherwise undertake. She rightly points out that the “P” downplays or downgrades the importance and nature of the work.
I agree that LPO is not about administrative form filling. Nor is it restricted to organizations with massive volumes of standardized documentation. Process, however, is integral to LPO: it is core to the how LPO lawyers perform tasks, even complex ones. Moreover, process should be core to lawyers everywhere but typically is not. The legal market finally seems to be waking up to the importance of this. Law Firms Look at Process Management in The Legal Intelligencer (20 Oct 2009) discusses project management and process, including law firms that are now adopting Six Sigma, a tool some LPOs, Integreon included, have used for some time.
The benefits of process include consistency, predictability, quality, productivity and defensibility – these benefits apply across many legal tasks of varying complexity, not just tasks which by their nature are substantively straightforward, standardized and routine. For example, one of our current projects involves a multi-national corporation with a suite of 20 “medium complexity contracts” used regularly in its business. The company has different attorneys around the world following different processes using different templates in different locations, accepting different edits with different results. The LPO process brings a method which is common, documented, repeatable and scalable. Beyond labor cost savings, working with an LPO helps the company reduce work volume plus improve consistency and therefore decrease risk.
Smart buyers of LPO services are not simply looking for Day 1 cost savings – they demand long term transformation and improvements. A key value add of LPO is creating these longer term productivity and efficiency improvements by combining process expertise with legal know-how. It’s the same core task but delivered in a more modeled and structured fashion. Richard Susskind discusses this in detail in his recent book, The End of Lawyers?
“Process” captures implementation and transition planning, workflow, performance metrics capture and tracking, communication, and reporting. All of these are not ends in themselves – they are genuine tools for improving performance.
So if you don’t like the word “process” then call it “method” or “systemization”. Whatever we call it though, it’s an essential ingredient to delivering and managing legal services – whether from an LPO, law firm, or law department.
The “O” in LPO: “O” Means Outsource, not Offshore
“O” is for Outsourcing, not Offshoring. Outsourcing is about an approach, not a location. The offshore element of the Rio Tinto deal is what grabbed the headlines, but Cooper explains that quite a few projects have actually been performed onshore in the US, and are still achieving cost savings when benchmarked against the cost of the law firm model.
LPO is not exclusive to India, nor those tasks which are suitable for offshoring. The “new way of working” is broader than that. We believe that outsourcing is a global phenomenon and LPO should be no exception. Outsourcing could be onsite at the customer’s office; it could be onshore, multi-shore or offshore.
Offshoring to India is highly successful and can be a great way to reduce cost and create efficiencies, but it’s not the only way. Organizations want the right fit for their requirements, not a one dimensional solution. Different locations offer different attributes and mature LPOs offer law departments and law firms an explanation of the differences and a choice. One size does not fit all; one shore does not fit all.
So What about the “L” You Ask?
The “L” of course is for Legal, which should not be confused with traditional business outsourcing, such as commonly associated with offshore technical support or call centers. Legal outsourcing requires domain expertise. So for example, Integreon’s legal outsourcing services are supported by our staff of full time, licensed lawyers, who can work on-site at client or law firm offices or at any of our secure facilities located onshore, including in such familiar places as midtown Manhattan and London, or in equally secure and lower cost offshore locations.
“Legal Process Outsourcing” therefore implies professional, experienced legal staff delivering quality, cost effective services from the client’s choice of locations.
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Mark Jewell on September 3rd, 2009 at 11:58 am :
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Earlier this year, FreePint and Integreon partnered to survey business research managers about outsourcing, barriers to its adoption, and the satisfaction level of those currently outsourcing. FreePint recently published the results in a report called VIP Report: Survey on Outsourcing.
Integreon is making available a free copy of the report; click here if you would like to request a copy. To receive the report, you must complete the registration form with the required contact information, including an e-mail address with a business/corporate domain name, and agree to subscribe to the Integreon blog. This offer is valid through Oct. 31, 2009.
Summary and Findings of FreePint Report on Business Research Outsourcing
The survey targeted managers of knowledge and information services but also included managers of document preparation (word processing, etc.), legal support, and pitch support (graphics, presentations, etc.). The majority of respondents were senior-level decision-makers spanning a range of industries, including legal, financial services, management consultancies, and pharmaceuticals. A total of 71 managers responded with nearly 40 percent from corporations with more than 1,000 employees. About one-third were in the US, one-third in the UK, and one-third elsewhere in the EU, Australia, Canada, or other countries.
The findings reveal disparate views about quality and the cost of outsourcing. On the one hand, the 40 percent of organizations that do outsource are satisfied with outsourcing quality and cost effectiveness. On the other hand, the 60 percent not outsourcing cited quality and cost concerns as the most important factors influencing their choice not to outsource.
We can’t explain this seeming contradiction though suspect it says more about outsourcing perception than reality. It may reflect negative perceptions of offshore outsourcing. Some recent surveys (e.g., see our blog post Cost Arbitrage is No Longer Enough (Black Book of Outsourcing Rankings and Findings) suggest that customers look for high cultural compatibility, which typically favors onshore outsourcing. The survey was not designed to tease out differences in onshore and offshore outsourcing. We welcome reader views on other explanations for the seeming inconsistency.
One other result particularly intrigued us: Among those who outsource, the majority of the work continues to be done in-house; respondents who outsource report that over 75 percent of the work remains in-house. This finding supports a key outsourcing benefit, namely, to free high-end professionals for their “highest and best use.” Outsourcing is ideal for handling important but routine tasks that can otherwise overwhelm more valuable strategic work.
Overall, the survey results suggest that organizations considering outsourcing may gain benefit from reviewing the upsides reported by those already engaging in outsourcing. With 2010 budget planning just around the corner, this may be the right time for those organizations to take a fresh look at how outsourcing can facilitate achieving their quality and cost efficiency goals in the new year.
Arpit Kaushik recently authored an insighful article, Making sense of Offshore Outsourcing 2.0 (published in CIO UK, 28 August 2009; and originally in CIO US, 13 January 2009), identifying five principles for outsourcers who want to move to “Outsourcing 2.0″, which represents next generation outsourcing.
Making a correlation with Web 2.0, Kaushik’s five principles for Outsourcing 2.0 include:
Offshore implemented as a platform rather than as the delivery channel,
Globally syndicated delivery networks,
Rich user experience: Success as the measure,
Rich user experience: Relationships, not complex contracts, and
Engagement as a conversation: Co-creation, not blame-game.
These principles paint a clear roadmap for Business Process Outsourcing (BPO) companies that want to move to the next stage of outsourcing evolution. Clear as Kaushik’s roadmap is, however, it’s a map for outsourcers, not for business managers.
Kaushik is absolutely correct that for outsourcing to be truly effective it needs to be pervasive and syndicated across the firm as a single, integrated approach rather than a series of disconnected initiatives. To achieve this outcome, the planning and analysis needs to be done at the C-Suite level. The problem is, the C-Suite does not focus on outsourcing; rather, it focuses on core business issues.
This distinction may seem subtle but it’s important. C-Suite executives generally receive staff recommendations tied to specific projects or functions. Whatever they need to move their business forward - building a new building, adopting a new technology, expanding the workforce, or even outsourcing - executives assume that staff have worked out the details reliably. But with the thinning of middle management, not just in this recession but over the last decades, the assumed attention to detail may only hold true with the help of a business partner who can augment these due diligence efforts and then translate them into strategic C-Suite business terms.
Rarely does the C-Suite see their organization as being confronted with an outsourcing problem. Instead they may see unrelated problems to solve or opportunities to pursue, for example, the rise in secretarial costs that needs to be controlled, an unprofitable product that has too many loaded costs, real estate constraints limiting the growth of their workforce, or the need to fix a recurring budget overrun. They do want a solution that works and is complete.
Kaushik ’s last three principles perfectly articulate these needs within the new wave of outsourcing. To be realized, BPOs must first establish a level of trust that quickly goes beyond metrics and penalties and rises to a holistic level that focuses on how the business should work. What this means is moving the conversation away from short term horizons (e.g., did we meet this month’s metrics), to more important business issues (e.g., are we fully supporting the client’s 2010 revenue goals). To achieve this, both outsourcers and customers must work at a higher level than in the past. They need to go beyond a traditional vendor type relationship, often characterized by “hand off” delivery processes, and instead mold a deeper business partnership using integrated, tandem processes.
To achieve such tight integration as well as the full benefit of outsourcing, customers and providers together should begin by considering how an existing or prospective outsourcer performs in three key areas beyond Kaushik ’s five principles:
Focus on just a few markets: There are subtle and not-so-subtle differences in how similar services are supported in different industries. A BPO needs expertise in specific industries, otherwise solutions will be crafted that take too long to get “just right” and may miss critical opportunities. So customers need to make sure their provider has the right industry experience and expertise.
Provide the services your markets need: No single BPO can perform every task for every client that every market asks for. Some big BPO’s focus on a single service such as Word Processing, or Accounting… which is perfectly fine. But providers who want to offer the synergies that the C-Suite demands need domain expertise across multiple service lines. So customers must make sure they assess the full range of provider capabilities.
Support offshore, onshore and onsite strategies: Kaushik is right to say that outsourcing is “not about ‘which’ shore you use”. But if a provider is going to fully provide for the outsourcing needs of a big client, it must have multi-shore capabilities. Clients don’t necessarily come into an engagement knowing that they need support from a variety of geographies. Yet, once the program is underway, details may emerge that the C-Suite did not anticipate, for example, national privacy laws, internal security regulations and the cultural history of a firm all come into play when designing specific programs. A BPO that lacks all of the right locations lacks all of the right tools to fully service the client. So customers must consider the range of geographies and locations, including onsite, over which their provider operates.
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Liam Brown on May 12th, 2009 at 3:09 am :
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Outsourcing is back in the news. Come to think of it, when has it not been in the news? Two US national mainstream media had important articles last week.
Outsourcing: Thriving at Home and Abroad (Business Week, 4 May 2009) reports that outsourcing is thriving in the current economy. “Companies looking to cut expenses in the face of soft demand are keener than ever to hand off parts of their operations to lower-cost providers.” That is old news; what’s new is the locations those companies are selecting. Political considerations, internal and external customer perception, availability of talent, currency exchange rates, disaster planning, shrinking cost differentials between domestic and offshore locations, relative inflation rates, now drive companies to consider smaller domestic US cities such as Indianapolis and Boise. The drivers have consistently been, as the article touches on, increasingly sophisticated customers taking “a more nuanced approach” to their operations and sourcing strategy. Core processes are kept captive and non-core processes are outsourced (the so called “hybrid captive/outsourced approach”); some non-core processes are outsourced to multiple providers to mitigate risk (the so called “multi-sourcing approach”); and some processes are sourced offshore while others are sourced onshore (the so called “right-shoring approach”).
Obama’s Plan on Corporate Taxes Unnerves the Indian Outsourcing Industry (New York Times, 6 May 2009) reports on how the Obama Administration’s proposal to tax offshore profits is causing consternation in India. The article suggests the impact of the proposals may not be that great, though they are not yet fully understood. As we read the tax proposal, to the extent it has an impact, it would impact the profits of companies operating offshore captives so it might actually drive demand for third party providers of offshore services such as Integreon. What really caught my attention, though, was the speed at which this tax proposal appeared and at which it has the potential to change the sourcing location landscape - much faster than company operations planners can respond.
The lesson we draw from both articles supports the strategy we have long followed; namely, be flexible about location and have a choice of countries and continents. Companies should select location based on factors such as culture, time zones, cost, business continuity, exchange rates, relative inflation rates, skill availability, turnover, and taxes. Because these factors change over time, sometimes quite rapidly, companies must retain flexibility. For example, the Indian Rupee has had dramatic swings in value versus the US Dollar. And, as the Business Week article points out, the economic downturn has suddenly shrunk the cost arbitrage advantage of India over the US (though it is still large).
For these reasons, we now operate delivery centers in India, the Philippines, US, and UK, with more locations likely in the future. We are not dogmatic about the “best” location.
For onshore locations, we have long been enthusiastic about the types of cities Business Week describes. In 2007, we acquired an existing outsourcing business in Fargo, ND. The location in Fargo was a big factor in our acquisition decision - we recognized that we could hire, and more importantly, retain long-term highly skilled workers there at costs significantly lower than in major US cities.
We have also just opened a delivery center in Bristol, UK. While Bristol is a major city, costs there are up to 30% lower than in London, so it reflects the same thinking - find the right onshore locations that offer a good mix of skill, cost, and cultural compatability.
To drive home the point that location decisions depend on many factors, consider electronic discovery services. For our EDD business, we employ specialized employees, operate server farms, and need to take quick delivery of digital media. For these reasons, we operate delivery centers in “high cost” domestic cities such as New York City and Washington DC.
Global supply chain economics are complex and change rapidly. We encourage those considering outsourcing to think carefully about the right destination(s) for their work and to select a service partner that offers a range of choices, with the location flexibility to accommodate your needs as the evolve. We believe that optimized value chains will operate the right processes, in the right places, with the right people, using the right technology. Each value chain will differ - one size definitely does not fit all.
The article reports that “[l]arge financial services groups are increasingly looking to the United Kingdom’s regional cities to house key support divisions.” Financial services companies were initially driven to onshore or near-shore cities such as Belfast and Birmingham to seek out talent. Now, the rationale has expanded. Whilst they still remain committed to Asian outsourcing centers, they see the benefit of moving some tasks closer to London front offices. “Language and time zone reasons make the UK an attractive place for call centres and other customer-facing functions, as well as relatively complicated work that may need oversight from London.”
Our clients share this view. They recognize the need to analyze each task to determine where best to perform it. Key considerations include complexity, continuity, and the amount of communication required. Business continuity and time zone coverage are also important. It is for the reasons outlined in the article that we opened in Bristol in the UK and in Fargo, ND in the US, locations which complement our delivery centres in India and The Philippines.