(2012) Strategic Outsourcing

Dr.
Bharat Vagadia
Brampton Grove 53
HA3 8LE London
United Kingdom
Bharat.Vagadia@Op2i.com
ISBN 978-3-642-22208-5 e-ISBN 978-3-642-22209-2

DOI 10.1007/978-3-642-22209-2
Springer Heidelberg Dordrecht London New York
Library of Congress Control Number: 2011938156
# Springer-Verlag Berlin Heidelberg 2012

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Contents
1 Role of Strategic Sourcing in a Changing World . . . . . . . . . . . . . . . . . . . . . . . 1

1.1 Economic Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1.1 Challenging Times Leading to Changing Business
Models and Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.2 Contrary Forces at Work . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.3 All Eyes on Cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1.4 All Aboard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1.1.5 Mixed Fortunes for the Outsourcing Industry . . . . . . . . . . . . . . . . . . 4
1.1.6 Changing Commercial Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.1.7 Getting it Right . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
1.2 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
2 Globalisation and Convergence: Drivers

and Strategic Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
2.2 Convergent World . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.3 Raising Barriers to Globalisation and Convergence . . . . . . . . . . . . . . . . . . 10
2.4 Adapting Businesses to Compete on a Global Level . . . . . . . . . . . . . . . . . 11
2.5 A Case in Point: The Rise of India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2.6 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3 Social and Philosophical Considerations of Outsourcing . . . . . . . . . . . . . 21

3.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.2 Economic Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
3.3 Social Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
3.4 Separating the Spin from Reality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.5 Policy Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
3.6 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ix
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4 From Tactical to Strategic Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

4.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
4.2 The Role of Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
4.3 Information Technology Outsourcing and the Cloud . . . . . . . . . . . . . . . . . 31
4.3.1 Cloud Computing and IT Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . 31
4.3.2 Cloud Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
4.3.3 The Challenges of Cloud Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.3.4 Cloud Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.4 Business Process Outsourcing and Call Centres . . . . . . . . . . . . . . . . . . . . . . 38
4.4.1 Defining BPO Services by Organisational Impact . . . . . . . . . . . . . 39
4.4.2 Drivers for Customer Service Outsourcing . . . . . . . . . . . . . . . . . . . . 41
4.4.3 The Future of Call Centres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
4.5 Travel, Transport and Logistics Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . 44
4.5.1 Drivers for Logistics Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
4.6 Finance and Accounting Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
4.6.1 Drivers for F&A outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.7 Human Resource and Recruitment Processing Outsourcing . . . . . . . . . 47
4.7.1 Drivers for HRO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
4.8 Knowledge Process Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
4.8.1 Typical KPO Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
4.8.2 Challenges in Knowledge Process Outsourcing . . . . . . . . . . . . . . . 50
4.9 Legal Process Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
4.9.1 Drivers for LPO in Law Firms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.9.2 What Not to Outsource . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.9.3 LSO Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
4.9.4 Corporations Rather Than Legal Firms Driving LSO . . . . . . . . . 53
4.10 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
5 Outsourcing Within Industry Verticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5.1 Banking Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
5.1.1 Banking Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
5.1.2 Outsourcing Drivers for Banking Sector . . . . . . . . . . . . . . . . . . . . . . . 57
5.2 Insurance Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
5.2.1 Insurance Sector Value Chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
5.3 The Telecoms and Technology Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.3.1 Main Drivers for Outsourcing and Managed Services . . . . . . . . . 63
5.4 Public Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
5.4.1 A Means to Radically Transform Service Provision . . . . . . . . . . . 68
5.4.2 Evolving Generations of Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . 69
5.4.3 The Drivers for Outsourcing in the Public Sector . . . . . . . . . . . . . 72
5.4.4 Public-Private Partnerships (PPP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
5.4.5 Outsourcing Offshore Versus Onshore . . . . . . . . . . . . . . . . . . . . . . . . . 73
5.4.6 A Closed Market for New Suppliers . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
Contents xi
5.5 Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

5.5.1 Drivers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
5.5.2 Outsourcing Drivers not Just Focused on Cost . . . . . . . . . . . . . . . . 75
5.5.3 The Need for an Integrated Contact Management Strategy . . . 75
5.5.4 Transforming Customer Service Cost Centres
into Sales Centres . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
5.5.5 The Need for Greater Pro-activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
5.6 Charity Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
5.7 The SME Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
5.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
6 Strategic Outsourcing: Risks, Rewards and Relationships . . . . . . . . . . . 81

6.1 Rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
6.2 Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
6.2.1 Loss of Core Competence and Innovation Capability . . . . . . . . . 85
6.2.2 Cost Escalation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.2.3 Supply Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.2.4 Change Management Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
6.2.5 Selection, Contracting and Vendor Management . . . . . . . . . . . . . . 87
6.2.6 Communication Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
6.3 Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
6.3.1 Knowledge Retention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
6.3.2 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
6.4 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
7 Sourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
7.1 Evolution of Sourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
7.2 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
8 Strategic Outsourcing Decision Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 101

8.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 101
8.2 Decisions Driven by Consensus and Debate . . . . . . . . . . . . . . . . . . . . . . . 107
8.3 Suggested Decision Process for Outsourcing . . . . . . . . . . . . . . . . . . . . . . . 107
8.3.1 Defining the Objectives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.3.2 Outsource for the Right Reasons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
8.3.3 Using a Methodical Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
8.3.4 Engage with All Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 109
8.3.5 Choosing the Right Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
8.3.6 Negotiating a Robust Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.3.7 Use of Performance Incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.3.8 Establish a Relationship Governance Structure . . . . . . . . . . . . . . . 112
8.3.9 Establish a Relationship Management Function . . . . . . . . . . . . . . 113
8.3.10 Managing Human and Communication Issues . . . . . . . . . . . . . . 113
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8.3.11 Single Versus Multi-Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

8.3.12 Understand the Vendors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
8.4 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
9 Transition and Relationship Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

9.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
9.2 Managing the Soft Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
9.3 Governance and Relationship Management . . . . . . . . . . . . . . . . . . . . . . . . 123
9.4 Typical Governance Structures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
9.4.1 Joint Review Board (JRB) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
9.4.2 Service Management Team (SMT) . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
9.4.3 The Operating Group/Service Delivery Team (OGSDT) . . . . . 126
9.5 Governance in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
9.6 Role of the Legal Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
9.7 Service Level Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
9.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
10 Insights from Academic Research on Outsourcing . . . . . . . . . . . . . . . . . . . 133

10.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
10.1.1 Defining Outsourcing and Offshoring . . . . . . . . . . . . . . . . . . . . . 133
10.1.2 From Tactical to Strategic Outsourcing . . . . . . . . . . . . . . . . . . . 134
10.1.3 Empirical Studies Suggest Outsourcing can be a Risky
Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 135
10.2 Outsourcing Rewards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
10.2.1 Better Focus on the Core Business . . . . . . . . . . . . . . . . . . . . . . . . 136
10.2.2 Cost Reduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
10.2.3 Benefit from Supplier Investment and Innovation . . . . . . . . 137
10.2.4 Increased Flexibility and Technology . . . . . . . . . . . . . . . . . . . . . 137
10.2.5 Gain Access to External Competencies . . . . . . . . . . . . . . . . . . . 137
10.3 Outsourcing Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
10.3.1 Strategic Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
10.3.2 Operational Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
10.3.3 Commercial Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140
10.3.4 Human Resource (HR)/Communication Risks . . . . . . . . . . . . 140
10.4 Outsourcing Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 141
10.4.1 Agency Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 142
10.4.2 Transaction Cost Economics (TCE) . . . . . . . . . . . . . . . . . . . . . . . 142
10.4.3 Resource Based View (RBV) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143
10.4.4 Dynamic Resource (Capability) Model (DRM) . . . . . . . . . . . 144
10.4.5 Incomplete Contract Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144
10.4.6 Other Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
10.5 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
Contents xiii
11 Minimising Risk Through the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

11.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
11.2 Outcome Based Accounting Controls . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
11.3 Appropriate Contractual Clauses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
11.4 Contract as an Enabler of Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
11.5 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154
12 Minimising Risk Through Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

12.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
12.2 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155
12.2.1 Organisational Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
12.2.2 Group Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
12.2.3 Individual Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157
12.2.4 Creating Institutional Mechanisms for Building Trust . . . . 157
12.3 Control and Its Relationship to Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
12.4 Vendor Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
12.5 Service Level Agreements as a Means of Control . . . . . . . . . . . . . . . . 163
12.6 Collaboration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
12.7 Relationship Management and Internal Knowledge Retention . . . . 165
12.8 Necessity of Legal Contracts for Positive Trust Development . . . . 168
12.9 Adaptation to Cultural Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
12.10 Knowledge Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
12.11 Managing Distance and Communication Challenges . . . . . . . . . . . . 170
12.12 Continuous Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
12.13 Risk Minimisation in Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
12.14 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 173
13 Offshoring Leaders, Laggards and Hopefuls . . . . . . . . . . . . . . . . . . . . . . . . . 175

13.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
13.2 Location Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
13.2.1 From Countries to Cities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
13.3 Criteria to Assess the Location Decision . . . . . . . . . . . . . . . . . . . . . . . . . . 179
13.3.1 Factor Weightings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
13.3.2 Country Evaluation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
13.3.3 Relative Merits of each Location, Based on
a Rational Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
13.4 Effects of the Recent Political Unrest on Offshoring . . . . . . . . . . . . . . 181
13.5 The Outsourcing Industry in Asia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 182
13.6 The Outsourcing Industry in India . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
13.6.1 Infrastructure Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
13.7 The Outsourcing Industry in China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 192
13.8 The Outsourcing Industry in Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . 193
13.9 The Outsourcing Industry in Europe . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
13.10 The Outsourcing Industry in North America
and Latin America . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
xiv Contents
13.11 The Outsourcing Industry in Middle East and Africa . . . . . . . . . . . . 196

13.12 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198
14 Managing Cultural Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

14.1 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
14.2 Cultural Influences on Management Style . . . . . . . . . . . . . . . . . . . . . . . . . 200
14.3 Cultural Influences on Hierarchy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
14.4 Cultural Influences on Group Relationships and Motivations . . . . 202
14.5 Cultural Influences on Negotiation Styles . . . . . . . . . . . . . . . . . . . . . . . . . 202
14.6 Distinctions Blurring Between Cultural Dimensions . . . . . . . . . . . . . . 202
14.7 Cultural Differences in Evidence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
14.8 Take Aways . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
15 Implementing Successful Strategic Outsourcing Programmes . . . . . . . 207

15.1 The Eight Principles to Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
15.2 Principle 1: Strong Yet Flexible Contracts . . . . . . . . . . . . . . . . . . . . . . . . 209
15.3 Principle 2: Effective Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
15.4 Principle 3: Effective Control and Monitoring . . . . . . . . . . . . . . . . . . . . 211
15.5 Principle 4: Building Commitment and Mutual Dependence . . . . . 212
15.6 Principle 5: Ensuring Goal/Expectation Alignment . . . . . . . . . . . . . . . 213
15.7 Principle 6: Building Individual and Institutional Trust . . . . . . . . . . . 215
15.8 Principle 7: Managing Effective Collaboration
and Knowledge Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
15.9 Principle 8: Effective Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
15.10 A Summary of Strategic Outsourcing: Risks, Rewards
and Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
15.10.1 Don’t Start at the End . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 216
15.10.2 Establish What is Core . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
15.10.3 Establish What Success Means . . . . . . . . . . . . . . . . . . . . . . . . . . 218
15.10.4 Measuring Success . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
15.10.5 Making It Happen: Ever Had a Yearlong Migraine? . . . . 219
15.10.6 The True Picture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
15.10.7 It’s Not All Plain Sailing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
15.10.8 Impact on Strategy and Value Retention . . . . . . . . . . . . . . . . 221
15.10.9 Don’t Overlook the Challenges . . . . . . . . . . . . . . . . . . . . . . . . . 221
15.10.10 Organisational Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
15.10.11 Cultural Adaption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
15.10.12 Detailed Contractual Agreement . . . . . . . . . . . . . . . . . . . . . . . 222
15.10.13 Knowledgeable Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

List of Figures
Fig. 2.1 An interconnected world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Fig. 2.2 Pillars of competitive advantage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Fig. 2.3 From a vertically integrated organisation
to an allianced organisation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Fig. 4.1 The historical context of outsourcing from a client
and supplier perspective . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Fig. 4.2 The three generations of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fig. 4.3 Worldwide outsourcing market size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Fig. 4.4 Technology stack – the decoupled approach driving
innovation in service delivery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Fig. 4.5 BPO service impact on organisations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Fig. 4.6 Finance and accounting value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Fig. 4.7 Knowledge process outsourcing (KPO) services . . . . . . . . . . . . . . . . . 49
Fig. 4.8 Legal process and service outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Fig. 5.1 Banking value chain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Fig. 5.2 Banking value chain – the role of outsourcing
at each stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Fig. 5.3 Insurance value chain – the role of outsourcing
at each stage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Fig. 5.4 Telecommunications value chain squeeze . . . . . . . . . . . . . . . . . . . . . . . . 62
Fig. 5.5 Role of outsourcing in transforming telecom
operators . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Fig. 5.6 Outsourcing growing throughout the value chain
within the telecoms industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Fig. 5.7 The overriding drivers for outsourcing
the telecoms industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
Fig. 5.8 Changing cost structures in the mobile industry
through use of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Fig. 5.9 Government outsourcing trends by country . . . . . . . . . . . . . . . . . . . . . . 68
Fig. 5.10 UK government outsourcing by sector . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
Fig. 5.11 Evolution of public sector outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . 70
xv
xvi List of Figures
Fig. 5.12 Key issues for consideration within public sector

outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Fig. 6.1 Outsourcing drivers – academic insight . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Fig. 6.2 Outsourcing cost levers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Fig. 6.3 Key drivers of outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
Fig. 8.1 Strategic sourcing choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Fig. 8.2 Strategic intent to reality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
Fig. 8.3 The sourcing decision dilemma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
Fig. 8.4 The detailed outsourcing decision process . . . . . . . . . . . . . . . . . . . . . 110
Fig. 8.5 Stakeholder perceptions in outsourcing – example
of IT outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
Fig. 8.6 Multi-sourcing versus single sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . 114
Fig. 9.1 Transition phases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Fig. 9.2 The balance between the legal contract and relational
aspects of the deal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Fig. 9.3 Transition management activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Fig. 9.4 Levels of governance relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Fig. 9.5 Factors that lead to successful outsourcing governance . . . . . . . . 127
Fig. 12.1 Relationship matrix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
Fig. 12.2 From adversarial to collaborative relationships . . . . . . . . . . . . . . . . 163
Fig. 12.3 Rules for effective SLA metrics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Fig. 12.4 Communication management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
Fig. 12.5 Practitioner views of outsourcing risks . . . . . . . . . . . . . . . . . . . . . . . . . 172
Fig. 12.6 Practitioner views of most impacting risk
mitigation actions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172
Fig. 13.1 Offshore destinations by maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 176
Fig. 13.2 Offshore destinations – high level criteria
for assessment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177
Fig. 13.3 Offshore destination – detailed decision model . . . . . . . . . . . . . . . . 178
Fig. 13.4 Offshore destination criteria weighting . . . . . . . . . . . . . . . . . . . . . . . . . 179
Fig. 13.5 A rational country comparison using detailed
decision model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Fig. 13.6 Rational relative merits of each country – courtesy
of GovernanceDirector.com . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 181
Fig. 13.7 Relative attractiveness of Asia-Pac countries . . . . . . . . . . . . . . . . . . 184
Fig. 13.8 Relative attractiveness of European countries . . . . . . . . . . . . . . . . . . 195
Fig. 13.9 Relative attractiveness of North and South
American countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
Fig. 13.10 Relative attractiveness of Middle East
and African countries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 197
Fig. 15.1 Stakeholder conflicting requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Role of Strategic Sourcing in a Changing
World 1
The recent economic turmoil witnessed by the global economy has brought
outsourcing, managed services and shared services to the top of the board room
agenda. Organisations are now re-examining their business models and structures
and outsourcing is being seen as a tool for business transformation. The recent focus
by many organisations on cost reduction, however, may cause more problems than
they solve. This chapter outlines briefly the recent forces for change in the
outsourcing landscape and concludes that while the outsourcing decision must be
considered as a legitimate business strategy, it must be considered with a great deal
of care.
1.1 Economic Drivers
Early in 2009, organisations around the world, including many within the emerging
economies which had been somewhat protected from the recession, began to fear a
deep global recession brought on by the banking and credit crisis. For the
outsourcing market, this presented both heightened risks with more budget
constrained clients and new opportunities, arising from a real need within
organisations to cut costs and restructure balance sheets – outsourcing was featuring
high on the board room agenda.
Although emerging countries had not been as hard hit as the Western world, they
have nevertheless suffered from a drop in international demand for their products
and services. Just when organisations from these countries started moving up the
value curve, beyond cost savings into business transformation, customer demand
turned the clocks back by a decade and again expectations shifted back towards
lower costs rather than fancy value added services.
B. Vagadia, Strategic Outsourcing, Management for Professionals, 1

DOI 10.1007/978-3-642-22209-2_1, # Springer-Verlag Berlin Heidelberg 2012
2 1 Role of Strategic Sourcing in a Changing World
1.1.1 Challenging Times Leading to Changing Business Models

and Practice
The world went through what can only be described as an incredibly challenging
time. It is at such times that innovation normally thrives.
If most large organisations were to start anew, typically they wouldn’t build the
organisational model they have today. Outsourcing provides organisations with a
framework to help re-engineer themselves using a model that is in tune with today’s
technology enabled and converged environment.
What the 2009–2011 recession did, was to accelerate this transformation of
industries and business models. This transformation was not too different from
that envisaged by Darwin’s natural evolution theory – a change in the environment
leads to changes in demand, changes in the nature of competition, and the ways of
doing business. During this evolution, some business models and processes became
either more common or rare – to survive, standing still was not an option.
As the recession tightened its grip on business, outsourcing increased in popu-
larity as a cost saving business strategy and rose in importance. For a growing
number of businesses, of all sizes, struggling to pay rents, rates and staff salaries,
the idea of outsourcing, even for those that viewed it with suspicion in the past, saw
it now as the new saviour of their business. Even the public sector seriously started
examining the role that outsourcing and shared services can play in an era of
reduced funding and tough choices.
1.1.2 Contrary Forces at Work
Interest in outsourcing has grown over the last few years, by around over 20%
according to our most recent global survey.1 However, this has not necessarily
translated into more outsourcing. Many were reluctant to pursue this path; with the
uncertainty of the economic recovery hovering over executive’s heads, and many
simply avoided making a decision. Most couldn’t justify the up-front transition
costs involved in outsourcing. However, as a new wave of optimism spreads, many
executive heads are emerging above the sand of recession and seriously thinking
about what lessons they have learnt; taking the opportunity to transform their costs
and business structures.
1.1.3 All Eyes on Cost
The activity that distracts someone from their core business is the core business of an
outsourcing service provider – that means treating it as a profit centre, not a cost
1
Op2i Outsourcing Survey 2009–2010.
1.1 Economic Drivers 3
centre. This usually translates as “cheaper”. Following this logic, one would have
assumed that this increased focus on costs savings would lead to significantly more
offshoring, which contrary to popular belief, is currently just a small part of the
overall offshoring industry. However, what we are seeing is a very focused and
selective strategy for offshoring. As the industry matures, organisations understand
better which processes and functions are more appropriate for offshoring – in fact
what we have seen is that some processes and or functions that had been previously
offshored, are now being brought back in-house – having learnt an expensive lesson
in the process. This trend to bring back processes and functions in-house may
accelerate as upheaval in national markets and political pressures mount, and
organisations attempt to de-risk exposure to volatile regions – just look at the political
unrest in Egypt and Tunisia, and the effects this has had on business and trade.
If the right processes/functions are offshored, to the right destinations and the
right service providers, they have the potential to dramatically change business
economics through their significant impact on costs, quality and the availability of
huge talent pools. However, the “if” is a big if.
1.1.4 All Aboard
What we are also seeing is the diffusion of outsourcing to a wider business

audience.
When facing battle with a multinational corporation with significant resources at
its disposal – an SME with somewhat limited resources (human, technical, legal,
financial and global reach) may find the battle somewhat difficult and short lived.
However, it can be argued that the time has now come, when (operationally at least)
the many David’s of the world can compete with the few Goliaths that have
historically dominated the markets. With the increasing availability of outsourcing
and offshoring to the SME market, times are changing and SMEs can consider these
as new ways to compete, extending their business capability and reach. I myself,
running a small firm, have used outsourcing to great effect, outsourcing web
development, creative design and some aspects of marketing from India to Mexico
to Brazil and even the USA – albeit with a few hiccoughs along the way.
Outsourcing is nothing new – probably as old as the David and Goliath story.
Most large corporate organisations around the globe have embraced outsourcing in
one form or another over the last decade. Mid-market companies must now
embrace outsourcing and offshoring as both a means of survival and as a means
to level the playing field with their larger competitors.
Although the benefits and drivers for outsourcing are pretty clear, operational
execution and risk mitigation strategies are more difficult for the Mid-market to
comprehend (from experience the same can be said for large corporate
organisations. . .).
1.1.5 Mixed Fortunes for the Outsourcing Industry
Clearly the ingredients are there for the outsourcing industry to benefit from the
recession. However, the industry must improve its success rate if it is to convince
the wider population that outsourcing and offshoring are sufficiently mature to be
considered a viable business strategy, rather than just another tactical approach to
cutting costs.
The fear is that the recent economic climate, has brought focus firmly back to
simply cost cutting, without the necessary strategic focus being given to the wider
opportunities presented by an outsourcing programme This ultimately moves
outsourcing initiatives from being firm level strategic options to merely tactical
considerations, managed by the procurement department within the organisation.
A sharp focus on reducing costs has inevitably meant that the broader benefits
from outsourcing, such as flexibility, service/process reengineering and transfor-
mation, have dropped down the agenda – something that may well have longer term
consequences. With the success rate of outsourcing somewhere in the range
40–60%, it will be really unfortunate if this preoccupation with costs above other
benefits extends into cost preoccupied decision and programme governance.
Although the primary driver for outsourcing and certainly offshoring has always
been cost, what we have seen is a dramatic shift in focus towards cost, with transfor-
mation concentrating on core competencies, and time to market being down played.
Business transformation, the holy grail of outsourcing, although never quite
living up to expectations (not surprising, given it was the vendor community who
claimed the ability to deliver business transformation and enable their client’s to be
more flexible, innovative, and respond to market changes more quickly and effi-
ciently), must be the ultimate goal for the outsourcing industry.
Unfortunately, some vendors just jumped on the business transformation band-
wagon without the necessary domain expertise, or indeed the resources to be able to
commit to large scale transformations. Outsourcing relationships in the vast major-
ity of cases are still therefore very much transactional in nature and far from the
strategic approach that can deliver substantial value to the parties.
This is not to say that (some) vendors cannot deliver transformational change,
but that it requires a very different relationship and a very different approach to the
whole outsourcing decision process – an approach which both parties and their
respective stakeholders agree and commit to. Another dramatic change has been the
expectations of cost savings. Whereas organisations were happy to outsource and
offshore, investing upfront in transition activities with payback within 3–5 years,
customers now expect payback within 18 months, and ideally don’t want to invest/
spend any money upfront – not quite fitting the business model that vendors and
indeed advisors are familiar with. However, this change in client demand firmly
creates momentum for the cloud and Software as a Service (SaaS) models now
beginning to be rolled out.
This focus towards costs didn’t just affect new outsourcing service users; those
organisations that had outsourced, started demanding suppliers live up to the
partnership hype that they emphasised during the sales and negotiation phase, and
1.1 Economic Drivers 5
share the pain and pressures that customers faced – many sought to renegotiate their
contracts during 2009 – asking suppliers to deliver more-for-less, whilst also
seeking to deliver substantial cost reductions from the previously agreed rates
(figures between 15% and 20% had been claimed).
1.1.6 Changing Commercial Models
In a bear market, most suppliers felt they had no real choice but to respond (some
may well have lived up to the partnership model, others forced) to customer
demands. Most suppliers secured longer term contract extensions in exchange for
short term pain – where suppliers (e.g. offshore call centres) have profit margins
between 20% and 30%, they could afford to give a little. . ..
However, what this period showed is that the longer term contracts, typical
within the outsourcing industry, can themselves lead to less flexibility – contrary to
the common perception that outsourcing delivers greater flexibility. There will no
doubt be continued pressure on the industry for shorter term contracts – not quite
the model required for strategic outsourcing, where a long term partnership is
sought.
Given the principal mantra being prudence, organisations have also sought to cut
out expensive, and what they may deem as unnecessary, advisory support services.
Many have gone back to the antiquated belief that outsourcing is just another form
of procurement and therefore something that can be done quite adequately within
the organisation. This may well save costs in the short term and the organisation
may well find suppliers that can deliver some cost savings. The likely longer term
impact will be a dysfunctional organisation, with decisions being imposed by one
department or sponsor on others. The wider organisational benefits will be brushed
aside; all the possible options that may well deliver substantial benefits in the longer
term will be ignored with the blinkered lens focused only on immediate cost
savings. Within this environment, all the risks and possible risk mitigation
strategies will not be fully evaluated or clearly communicated with wider
stakeholders.
This communication challenge has also more than ever, influenced the decision
to outsource; “how will the market react to us outsourcing, how will our employees
react to outsourcing and possible job losses, the unions, the public. . ..”. Many
would-be outsourcers, seeing the benefits of outsourcing, have been restrained by
this force of public opinion. This however has not stopped public sector
organisations, especially local government looking hard at their sourcing options.
1.1.7 Getting it Right
Deciding what to outsource, where to outsource and identifying the right provider
are simply the opening challenges. Making outsourcing happen provides further
potential pitfalls – it calls for new forms of strong project, change and governance
management skills that in most organisations don’t exist internally.
The outsourcing decision making process, although only the opening challenge,
must, be done correctly, otherwise you end up fighting a lost cause, trying to stop a
runaway juggernaut. The decision making process must be all encompassing,
assessing all options; for outsourcing is not always the answer.
An appropriate rational decision making process is called for, more so than ever
before.
1.2 Take Aways
• Outsourcing becoming more popular – although still a lot of uncertainty.

• Outsourcing being used as a tool to re-structure business models and value
configurations.
• Outsourcing will be embraced by more sectors and by the SME market in the
near term.
• Increased outsourcing has not translated into increased offshoring.
• Vendors being forced to negotiate lower prices and create innovate commercial
structures to deliver greater value, quality and without the upfront investment by
client organisations.
Globalisation and Convergence: Drivers
and Strategic Outsourcing 2
The world has gone through incredible change over the last few decades which is
creating a globally interconnected world – a flat world. This pace of change is
increasing with convergence of products, services, industries, technology and
knowledge. The effects of globalisation and convergence will be dramatic and
impact every aspect of business in developed and developing economies.
Organisations in developed economies need to adapt to this new world and re-
examine the basis of competitive advantage, redefine their businesses; become
much more efficient through process and cost optimisation, seek best in class skills
and knowledge from a globally dispersed talent pool, utilise technology to deliver
superior value to their clients, provide products and services for this new converged
world and tap into the globally interconnected financial markets to access cheaper
capital. This chapter examines the drivers for globalisation and convergence, their
impact on business and details how organisations can compete in this environment.
2.1 Introduction
The two transformational forces of the twenty-first century; globalisation and

convergence are knocking down, long established structures, business models and
beliefs.
The effects of globalisation have been wonderfully illustrated in the book: The
World Is Flat: A Brief History of the Twenty-First Century by Thomas Friedman,
which analyses globalisation, primarily in the early twenty-first century. Friedman
defines ten “flatteners” that he sees as levelling the global playing field:
• Collapse of the Berlin Wall signifying the collapse of the Cold War and the
integration of countries from the falling physical barriers;
• The web broadened the audience for the Internet from its roots as a
communications medium used primarily by the academic community and
geeks to something that made the Internet accessible by everyone;
• Workflow software enabled equipment to talk to other equipment without the
need for human involvement;

8 2 Globalisation and Convergence: Drivers and Strategic Outsourcing
• Outsourcing allowed companies to split service into those deemed core and non-
core and allowed entities to subcontract activity and perform these in the most
efficient, cost-effective way;
• Offshoring, which Friedman described as the internal relocation of a company’s
manufacturing or other processes to a foreign land to take advantage of cost
advantages. The famous BRIC countries are at the foremost here;
• Open source software enabled communities to upload and collaborate on online
projects;
• The use of technology streamlining the supply chain, such as sales, distribution,
and shipping;
• In-sourcing, which is seen to be akin to what marketers call brand extension,
where organisations supply goods or perform services into adjacent markets
from their core markets, leveraging their existing assets, be it technology,
channels to market or customer trust – he uses the example of UPS, in which
the company’s employees perform services – beyond shipping – for another
company – e.g. UPS itself repairs Toshiba computers on behalf of Toshiba. The
work is done at the UPS hub, by UPS employees;
• The holy grail of efficient markets theory is about access to all information in
real time – this has now become closer to reality, thanks to Google and other
search engines, which gives the participants in a market the ability to find all the
information required in a timely and cost effective manner; and
• Finally the technology revolution, including Mobile, Voice over Internet, Broad-
band and other technologies which to some extent sit above the underlying
Broadband networks and makes the utility of the services much greater; helping
spur new innovative models, services and competition (e.g. Skype).
2.2 Convergent World
Friedman talks about convergence in a limited sense around horizontal collabora-

tion and converging economies from a communist perspective to a market led
perspective. However, the effects of convergence in its true form are much broader
and much more impacting on the world – more so than the ten individual flatteners
that were listed.
Convergence is happening in all its forms, which is changing the nature of
market structures, demand, competition, competitors and the ways of doing busi-
ness. Any organisation that is not cognisant of this, and does not transform their
businesses will be adversely affected.
Globalisation, increasing international trade and the lowering of barriers to entry
into markets will continue over time. The impact from emerging countries in terms
of competition, their effect on demand for raw materials and energy will only
continue to increase.
Organisations will need to not only transform their internal focus – improving
efficiency, accessing world class talent, better partnerships and focused on what is
2.2 Convergent World 9
core to their business, but they must also, examine opportunities to serve the
emerging markets.
Everyone talks about convergence in one form or another, some talk about
converging technologies, others converging markets and so forth. Convergence is
changing the ICT industry significantly today. It is not a theoretical argument, but
an everyday reality for companies within the ICT value chain.
ICT convergence is a state in which networks and intellect are globally
interconnected, integrating all forms of electronic communications into a single
universal transmission system which interconnect processing resources, and deliver
all forms of content that is delivered from one to the other, on whatever device and
wherever that individual desires such content.
I tend to view convergence more broadly and as my colleague, Ross Caldwell
elegantly put it, it is the interaction, overlap and absorption of different industries
converging together in a more competitive and deregulated market – a world where
skill sets are available everywhere, where everywhere is connected, where knowl-
edge is ubiquitous, where everything is now and where everywhere is here, and
where resources are globally distributed.
Viewing convergence in these broad terms paints a very different picture of what
the world will look like in the twenty-first century and what the implications are for
organisations.
The relatively simple diagram (Fig. 2.1) illustrates the interconnected nature of
convergence and globalisation:
Effects of convergence can be seen at the macro level

Advanced country local demand for goods and services
Emerging country
Local resources outstripping demand supply of goods
Emerging country
supply of labour
Labour rates rise
Migration of manufacturing to lower cost countries

Emerging country
Globalisation – reducing trade barriers growth driven by
FDI
Deregulation of telecom – facilitates globalisation
Emerging
Global connectivity country supply of
services
Relaxation of FDI limits Outflow of funds from developed to developing
Emerging country
Labour convergence Aging workforce – competition for skill sets growth driven by
exports
Technology convergence Immigration from developing to developed countries
Repatriation of
World Economy convergence savings and funds
- reduces barrier to entry into industries
Advances in technology
Knowledge convergence
- allowing different ways of doing business
Emerging
Deregulation Globalisation of knowledge country growth
in local demand
Free market mechanism
Positioning of developed countries as “knowledge” economies
Local stock Focus on Finance, Banking, Insurance industries

market
correlated to
Global stock Stock market driven society – economic growth linked to stock market
market
Deregulation of BFSI sectors Intense competition Cheaper products
Intense BFSI sector competition, breaks link with local and world economy
Global Credit Crunch Local Credit Crunch Unsustainable competition – costs rise
Energy prices
Increase in Default payments Disposable incomes fall rise
Fig. 2.1 An interconnected world

A World where globalisation and convergence are interconnected

Given this scenario, what are the options for world economies to compete on the
global stage? Well two, either raise barriers to entry into your local markets or adapt
businesses to compete in this spaghetti of economics, politics, regulation and
internationalisation.
2.3 Raising Barriers to Globalisation and Convergence
A country could attempt to counter the forces of globalisation and convergence by

raising barriers. Indeed countries have or are attempting to do just this – at the time
of writing this book, the UK is attempting to limit immigration, the USA is
considering raising trade barriers with China, the G20 is attempting to impose
more regulatory controls on the financial industry. However, these are seen as
relatively short term measures, an attempt to buy time. All participants in this
game know full well, that in an interconnected world, one country raising barriers is
likely to lead others to retaliate, and therefore over time the act of raising barriers
could over time lead to a dis-benefit. That aside, the options for countries to raise
barriers include:
• Raise trade barriers – where countries cannot compete with others, it may raise
trade barriers unilaterally or bilaterally – sometimes these may be rational
intentions sought to counter the effects from currency manipulation by a country,
but mostly is a reaction to competition from countries that have a lower cost
base.
• Regulate telecommunications strongly – globalisation, outsourcing and
offshoring have only been possible because of the ubiquitous and cheap avail-
ability of telecommunications infrastructure. During the early 1980s the price of
a call from the UK to India was more than £1.50 per minute – probably
equivalent to £5.00 per minute in today’s value; today the liberalisation of
telecommunications markets globally means it costs only £0.01 per minute.
• Limit FDI – many industries in developing economies flourished as a result of
foreign direct investment, but today many of these developing countries have
started investing in developed economies – usually to secure a channel to market
for their products and services. Although the largest investor in the UK remained
the USA, India was the second-largest investor in 2008–2009, ahead of Italy,
France, Canada and the Gulf countries.1
• Limit immigration – globalisation and outsourcing rely on the free flow of talent
across national boundaries. Making these national boundaries stronger can help
limit the effects of globalisation and outsourcing at a national level – it also
panders to public opinion around immigration.
1
UK Treasury.
2.4 Adapting Businesses to Compete on a Global Level 11
• Limit repatriation of funds – FDI and immigration are linked to the ability to
repatriate funds either to company head quarters or families, for business and
consumers respectively. Limiting the ability to repatriate funds makes immigra-
tion and FDI less attractive.
• Limit globalisation of knowledge – the fuel that has powered globalisation and
higher end knowledge based outsourcing has been the distribution and collabo-
ration of knowledge. Cutting this fuel can reduce the pace of globalisation and
outsourcing. This could mean limiting university collaboration, Joint Ventures
and reduced funding for joint research projects.
• Regulate financial markets strongly – the free flowing nature of financial markets
has led to the cross border flows of finance, liberating companies from their local
domestic markets to the international stage. Regulation of financial markets can
put the brakes on the pace to globalisation.
• Seek alternative energy sources or reduce demand for energy – one of the effects
the growing economies of the BRIC countries have had, is on the demand for
energy and raw materials. This has the inevitable impact on the price for raw
materials and energy prices. These being the primary inputs to production, have
fed through to final goods and services prices. It has also driven globalisation as
developing countries hungry to access steel, cement, coal and so forth have
ventured into overseas markets in an attempt to secure these – all eyes have
firmly been fixed on African countries for now.
• Enforce bank lending to affordability criteria – another periphery affect of
globalisation and the free flow of finance has been the relaxation of bank lending
to compete in an increasingly competitive market – apart from the effects
leveraged debt has on individuals when times get tough, it has meant individuals
have sought to invest in higher growth markets, fuelling globalisation.
2.4 Adapting Businesses to Compete on a Global Level
Taking the above definition of convergence, and given the first option of raising barriers
has to a large extent been relegated to the cold war era, means a business within a
converged world, to continue to compete needs to examine and concentrate on:
• Redefining what business they are in – what is unique, core and valuable –
concentrating limited resources to these and outsourcing the rest;
• Optimising and reducing costs through automation and outsourcing;
• Accessing skills and knowledge across the globe, by embracing international
partnerships, through a distributed workforce, and by accessing the necessary
tools and capability to manage staff and partners remotely;
• Embracing technology developments and working with the stakeholders to
create integrated networks, channels and knowledge sharing;
• Developing products and services for a converged customer and for delivery in
converged distribution systems – using international partners to help the expan-
sion of the business to the international stage; and
• Seek lowest cost finance.
These pillars of business transformation are illustrated in Fig. 2.2.

Achieving competitive advantage in a globalised converged world requires
adaption of the business to take advantage of the following macro factors (Fig. 2.2):
Achieving Competitive Advantage –5 basic pillars for adapting to the new

converged world
Focus Efficient Skills and Technology New products

Knowledge and markets
in and converge with partners
Redefine what business you are
optimisation
Seek cost and process
knowledge
Seek global skills and
loyalty
enhance and build customer
Seek to utilise technology to
and distribution channels

Seek new products, markets
Finance
Fig. 2.2 Pillars of competitive advantage
Achieving competitive advantage in a converged market therefore requires the

business to (Table 2.1):
Table 2.1 Surviving in a competitive global world

1. Redefine what business you are in 1.1 Determining the strategy to compete – what’s niche,
and partner what differentiates you, how do you compete with
emerging countries?
1.2 Using partners to implement organisational
functions/processes, which they can do better and
cheaper than a company can do internally
2. Seek cost and process optimisation 2.1 Seeking raw materials globally at lowest possible
cost
2.2 Improving allocative efficiency–resource allocation
to maximise returns
2.3 Improving productive efficiency (minimal per unit
cost)
2.4 Improving dynamic efficiency–investment in
innovation
2.5 Automating processes wherever possible to eliminate
errors and improve efficiency
2.6 Seeking to reduce consumption of inputs
(continued)
Table 2.1 (continued)

3. Seek global skills and knowledge 3.1 Recruiting talent globally and having the workforce
stationed globally working remotely, working in
different time zones – seeking to become a 24 h company
4. Seek to utilise technology to enhance 4.1 Implementing best available technology, systems and
and build customer loyalty management to interconnect employees, suppliers,
partners, customers and knowledge
4.2 Offering superior customer service, constantly
communicating and managing the relationship
5. Seek new products, markets and 5.1 Entering new product/service and geographic
distribution channels markets
5.2 Developing new products for the convergent age and
protection of such innovation
6. Seek lowest cost finance 6.1 Sourcing lowest cost finance, whether this is from
international markets, or new social clusters (e.g.
expatriate funds)
Looking at each of the above in turn:

1.1 Determining strategy to compete – what’s niche, what differentiates you,
how do you compete with emerging countries?
With increasing competition from domestic competitors, competition from new
players enabled by reduced barriers and international competition, basic products
and services will tend to get commoditised. Competing against international
competitors from emerging markets for commoditised products and services will
become increasingly difficult.
A company has to adopt three key strategic positions:
• Cost leadership, enabled through lowest production costs, efficiency and
optimised processes;
• Differentiation, enabled through superiority in either product or service delivery,
customer service or use of technology; and
• Focus, enabled through highly customised products and service to niche markets.
1.2 Using partners to implement organisational functions/processes, which they
can do better and cheaper than organisations can do internally
In a world where organisations need to become efficient and spend their valuable
resources in achieving excellence in allocative and dynamic efficiency, it is impor-
tant that any function/process which can be done better and cheaper externally
rather than internally, be considered for outsourcing. However contracting out
services in the “old fashion” will not enable the firm to seamlessly change its
business over time. To create a firm which transforms and transitions to changing
market conditions over time, the firm must partner with outsourcing service
providers on a relationship where both parties’ aims and goals are aligned. How-
ever, some functions/process must be kept internal to the business:
• Because they are core and essential, such that it would be too risky to outsource;
and
• In order to achieve dynamic efficiency – innovation will in most cases not be
invested in by the outsource service provider as it would be deemed as being too
risky.
2.1 Seeking raw materials globally at lowest possible cost

Whatever strategic position is adopted, it is imperative that production costs are
minimised through the procurement of goods and intermediate services at the
lowest possible costs – usually from international markets. Where intermediate
services are being procured, it is also important that lowest cost does not also
translate to poor service.
2.2 Improving allocative efficiency – resource allocation to achieve maximum
returns
An area where a firm must pay significant attention, especially in the context of
convergence, is in the appropriate allocation of resources to achieve the maximum
return on investment from a range of investment opportunities. This usually calls
for serious examination of the state of competition and the firm’s capability to
achieve ongoing margins given incremental production, distribution and customer
service costs. Appropriate resource allocation may need to change continuously
over time, changing in line with developments in the markets and customer
behaviour. However, to do so effectively, requires instantaneous access to relevant
data – at a detailed granular level. Without this information, it would be impossible
to make appropriate decisions. This requires investment in cost models, systems
and automation procedures.
2.3 Improving productive efficiency – lowest unit cost
It is no understatement to say it is important that achieving the lowest possible
unit cost per product or service is desirable, however this may not always be
achievable without significant economies of scale – i.e. only the largest can be
the cheapest. What is however important for all firms, large and small, is achieving
efficiency in all their operations, from operations, distribution, marketing, HR
management and within the area of SG&A. This usually calls for an examination
of all the business processes, ensuring maximum process optimisation, ensuring all
the processes are aligned and that there are no unnecessary delays, hand-offs or
blockages. In the some cases business process engineering, six-sigma and so forth
may be required.
2.4 Improving dynamic efficiency – investment in innovation
An area which only a handful of firms spend much attention to, is in improving
dynamic efficiency, which effectively means innovation – seeking new methods of
doing business, new products/services which effectively change the nature of
competition. However convergence provides a perfect opportunity to do just that.
Innovation can break the mould and allow firms to thrive in what may have been
competitive or difficult markets to enter – e.g. Skype, ebay, Napster – they change
the market and the way in which firms within the market must compete. Innovation
does not always derive from technology innovation, although most do. Innovation
in customer service, in bundling of products and services and procurement methods
can provide a key differentiator.
2.5 Automating processes wherever possible to eliminate errors and improve
efficiency
Most inefficiencies and errors that occur, especially in data intensive and process
driven sectors are as a result of human error. In a world where customers are more
demanding and switching costs from one provider to another are minimal, it is vital
that firms reduce all forms of errors and inefficiencies from their processes – this
usually calls for the automation of such processes. Automation also drives
efficiencies by utilising technology and systems. Automation also enables:
• The production and delivery of sub-process to be taken offshore and managed
locally;
• Enables processes to be brought back in house or migrated to an alternative
service provider easily and effectively.
2.6 Seeking to reduce consumption of inputs
It is important to reduce consumption of inputs wherever possible: raw
materials, HR, energy and so on. It is given that energy prices will remain relatively
high given the steady demand from emerging countries. Governments are keen to
utilise “green” sources and incentives are being offered which companies could
avail themselves of. In addition many consumers are becoming environmentally
conscious and will in the future reward those that they perceive to be more aligned
to their beliefs and views, by giving their loyalty to such businesses.
3.1 Recruiting talent globally and having the workforce stationed globally
working remotely, working in different time zones – becoming a 24 hr company
effectively
When competing in an ever more competitive environment, and especially when
firms seek to differentiate themselves and focus on niche markets, it is important to
recruit talent globally. No longer should companies be restricted in what they can
achieve, just because of the limitations in accessing talent locally. Consumers are
becoming more demanding, seeking immediate access to services and products
whenever they demand – a 24 hr society. This also requires firms to become 24 hr
businesses. Recruiting talent globally and working remotely enables a firm to provide
services and products 24 hr, without necessarily increasing costs significantly. How-
ever the firm must be able to manage the disparate workforce effectively.
4.1 Implementing best available technology, systems and management to inter-
connect employees, suppliers and partners, to offer superior customer service,
constantly communicating and managing the relationship
Where switching costs and loyalty are reducing over time, there appears to be
two choices that a firm has, the first is to lower prices to attract and retain customers,
and the other is to offer superior customer service, which customers are willing to
pay a small premium for. Competing on price alone, will not serve the firm or the
industry – a declining pricing spiral only benefits the end user. It is far more sensible
to compete on the basis of customer service – this effectively raises the barriers to
customers switching, and builds longer term loyalty. Offering superior customer
service, means making the customer feel valued, which usually calls for:
• Individualisation of some aspects of service;
• Constant communication; and
• Managing and being honest with customers if things go wrong.
Communication needs to move with the times and should also include web 2.0
based technologies. Technology must be used to differentiate your firm from the
rest – but keeping up with the latest technology comes at a cost.
4.2 Distributing knowledge throughout the organisation and its partners

Excellence is achieved by constantly sharing knowledge and communicating
with stakeholders – letting them know what is happening, where and why. Sharing
knowledge enables stakeholders to make better decisions and share responsibility
for the delivery of superior services and products. Knowledge encompasses both
explicit and tacit knowledge. It is important that firms capture through thorough
documentation management all forms of explicit knowledge, collect this centrally
and share such knowledge between its stakeholders. Tacit knowledge (know how),
in many cases distinguishes one firm from another, and it is important that the firm
facilitates, captures and disseminates such knowledge. Training must form an
integral part of organisational learning – not only in the form of formal external
training, but also facilitated workshops.
5.1 Entering new product/service and geographic markets
Globalisation and the emergence of developing countries on the world stage not
only creates competition, but also creates opportunities for firms in developed
countries. However, a firm must adjust its offerings for the needs of the local
markets, which may include significant cost reduction. Understanding the nature
of such local markets and the nuances that may not be visible can only be achieved
through partnerships with firms based locally. There is nothing to stop an offshore
firm which provides outsourcing services for some of your functions/processes, to
also become a distribution partner for your products or services.
5.2 Developing new products for the convergent age and protect such innovation
The nature of demand and the mechanisms for delivery is changing – firms must
develop or adapt products and services to cater for these changes in demand and
delivery modes. The changing nature of demand includes; more interactivity, more
demand for relevant content and more choice. In addition there are now new delivery
modes for content, through TV, IPTV, Web, Mobile, Games, etc. and new delivery
modes for products, such as the new retail channels created by the likes of Amazon,
Ebay, Tesco (who is now seeking to sell legal services from its stores).
6.1 Seeking lowest cost finance
Although it is quite obvious that a company must seek the lowest cost finance, it
is most often overlooked – many firms rely on bank loans or the local equity
markets. As financial systems across the world are becoming integrated, the
standards and governance frameworks of the most advanced financial markets are
now being applied within developing countries. It may therefore be possible to seek
finance from overseas markets, without the higher risks that would be associated
with such a move in the past.
2.5 A Case in Point: The Rise of India
We all know about how India is becoming a world power, growing at an amazing
rate, making headlines: from the smallest car in the world, sending satellites into
orbit, becoming the provider to the world’s poorest when it comes to generic
medicine, buying the UK’s beloved Tetley’s tea and so on. . ..
2.5 A Case in Point: The Rise of India 17
However, what I think is more remarkable is how less than 20 years ago, India
was on the verge of bankruptcy. In an age where the bureaucrats in Delhi controlled
the economy and to a large extent, enterprise, through their socialist lens, the
country was seen as a basket case.
During the 1990s the country opened up its markets not only to the private
sector, but to international competition. In a matter of two decades, India grew
exports of IT & Business Process Outsourcing services, exponentially to approxi-
mately $70bn today – contrast that with UK exports of ALL services at around
$250bn. The pharmaceutical sector is growing exponentially, including bio-tech,
which is growing by nearly 40% every year.
The telecommunications sector is growing faster than any in other country. India
is by some measures the second largest telecoms market with 10–20 million mobile
subscribers added every month.
The automobile industry is one of the fastest growing sectors globally, with
predictions that India will be among the top five vehicle producers in the next 5
years.
India is a country with a middle class larger than that of USA, or Europe, a
country where more than 125 million people speak English, which churns out more
than 2 m English speaking graduates and over 75,000 IT graduates every year (not
to mention the mathematicians, the engineers and the doctors).
It is a country where education is not only a pillar of the economy, but society as
well – where the average salary is a lot less than the UK, where over half the
population still live on two dollars a day.
There are a lot of aspiring, hungry, go-getting people, all looking to making
money in the global economy – if the private sector can churn out $70bn in exports
in two decades, think how far they can go in the next decade – India is the
equivalent to what China was, in the manufacturing world, for the service sector.
So what you may ask?
First, they will come knocking on your current and future customer’s doors, and
they will be a lot cheaper than you are today. Apart from creating huge barriers or
huge walls, like the old days, there is not much that you can do to stop them.
China did this to the manufacturing sector. China didn’t necessarily come
knocking on your customers doors, but your customers went knocking on China’s
doors. This is also likely when it comes to services – your customers will go
knocking on India’s door.
You will hear many in the developed world say we are different today – the UK
economy for instance is a knowledge based economy, it thrives on education and so
on – but India is building itself to be the world’s back office – to be a service
industry, to compete not in manufacturing, but on knowledge. So like it or not, it
will affect most service businesses in the developed world.
So what are the options for organisations in this new world order?
First the Indian market should be seen as an opportunity to market your
products and services. Unlike developed economies where growth is stagnant,
the economy is growing and is expected to do so for some considerable time. It
is still a very underdeveloped country. There is a massive need for improved
infrastructure – roads, rail, airports, the health system, the education system, secu-
rity, defence, energy production, green technology, more intensive farming, better
logistics, better distribution, and so on. India may have the large scale graduates, but
it lacks the innovative products, the R&D, the experience, the technology, the high
end engineering skills which developed countries have at their disposal.
The second plank of this strategy: instead of fighting this invasion, why not
collaborate – it is far easier to get onboard a running train, than trying to stop it. If
you go to India, you will see this is quite normal – I’m always surprised why India
doesn’t have more Olympic runners, given how most of the population are wonder-
ful sprinters, racing to board a running train. . .. If you know the markets are getting
more competitive, more demanding, more challenging – why not tap into the
resources that are available. There’s been a lot of resistance to offshoring by the
unions, and many people will increasingly view it with suspicion, as unemployment
starts to rise in developed countries – but is it not better for a firm to continue
trading, retraining staff to take new roles within the firm or beyond, than a firm
going under because it cannot compete on the world stage?
Globalisation and convergence require businesses to move from an integrated
monolith to an allianced enterprise as illustrated in Fig. 2.3.
Inbound Vertically integrated organisation

logistics
Operations
Outbound
Logistics
Marketing
& Sales
Service
Procurement
Technology Development
Finance & Accounting
Human Resource Management
Firm Infrastructure
Allianced organisation
1. Solution driven capabilities
2. Investment in knowledge networks
3. Solution & relationship excellence
4. Competition for relationships
5. Align structure & systems with required capabilities
6. Change management to transform values and behaviours
Outsourced
Retained
process and
functions /
Supplier
processes
management
Fig. 2.3 From a vertically integrated organisation to an allianced organisation

2.6 Take Aways 19
2.6 Take Aways
• Globalisation is impacting organisations today and will continue to do so into the

future.
• Convergence in all its forms is gathering pace and changing the markets,
environments and the basis of competitive advantage – organisations must
adapt or be left behind and meet the same fate as the dinosaurs.
• Organisations need to focus on core competences – things that will help them
differentiate in the global competitive canvas.
• Competition from cheaper players from the developing world means
organisations must seek cost and process optimisation to compete fairly.
• Knowledge and skills are globally distributed – organisations must leverage this,
rather than fight the inevitable trend.
• Technology can help reduce costs, improve quality or even re-define markets –
organisations must utilise technology, but do so within their cost constraints.
• Globalisation and convergence create opportunities for serving new markets and
offering new products – organisations must capitalise on this.
Social and Philosophical Considerations
of Outsourcing 3
Outsourcing and in particular offshoring has received a lot of media attention,

usually driven by the fear of local jobs going overseas or because outsourcing is
seen as a way of cutting costs which is perceived to impact quality or compliance
(such as the recent BP oil spill). Certainly the fear of job losses is one that needs an
urgent policy response, when unemployment in the developed economies rises and
the security of domestic economies is brought into question. However, when it
comes to job losses, the media hype may have been slightly more exaggerated than
experience has shown to date.
There is also a social perspective of outsourcing that has not received much
media attention which nevertheless is important for policy makers. This is the
impact outsourcing has on recipient countries; the positives have been reported,
but the negatives consequences on local populations, cultures and families have
failed to make the headlines.
This chapter highlights some of the social and philosophical consequences of
outsourcing and in particular offshoring, along with some possible policy
responses.
3.1 Introduction
Outsourcing has provoked a very emotional debate, especially in the United States.
There are two conflicting interests that appear to be driving the debate: workers vs.
employers and source countries vs. receiving countries.
Take the example of Frank LaGrotta, Pennsylvania House of Representatives
who in March 2004, stated: What’s going on with this offshoring of American jobs
to India and China is nothing but terrorism – economic terrorism.
He may have a point.
The various stated benefits from outsourcing at the organisational level, are
typically reiterated by developing country governments as a rationale for changing
national institutional frameworks, with the aim of increasing the deal flow of
outsourcing towards its country. However, there are wider consequences that

22 3 Social and Philosophical Considerations of Outsourcing
outsourcing more generally has upon economies. These consequences are not
widely discussed in the business literature, but are nevertheless important
considerations, especially with respect to national policy and politics.
3.2 Economic Consequences
Two decades ago, the loss of manufacturing jobs sparked fears of a hollowing out of
the USA and UK economies. Yet painful as the loss of those positions were, strong
economic growth and innovation created far more jobs to replace them.
Now, the same process, many economists argue, is going on in services. Yes,
some individuals are losing out, as well educated programmers or engineers are
doing the same job, for far less, halfway across the globe. But as developed
economies evolve, innovation should, the economists argue, create new high-
paying jobs.
Others though, argue that the outsourcing of highly skilled service jobs is
fundamentally different from what happened when manufacturing jobs were
outsourced – and poses greater risks for developed economies. They argue that
trade implies reciprocity – it is a two-way street, but that there is no reciprocity in
outsourcing, only the export of domestic jobs. In the old manufacturing based
economy, a firm’s assets were primarily tangible, e.g. plant and equipment,
machines, assembly lines, etc. In the new information based economy, however,
the bulk of a firm’s assets are often intangible – the creativity, knowledge, brain
power, motivation of its employees etc. In an information based economy, it is this
human capital and knowledge that creates worth for the firm. Exporting key
knowledge from within the organisation therefore poses serious risks. It is the
concepts, strategies, ideas, and information exchange that set their companies
apart from their competitors. It is the workers and their knowledge that
differentiates one firm from another, giving it an identity, value, and an advantage
in the market place. How can these knowledge assets be transferred, without a
significant adverse impact on the firm and the economy at the macro level? In a
knowledge based economy, knowledge is the value!
At the macro level it does raise concerns – what jobs will professional workers
re-train to, after the new wave of high-tech outsourcing? If an engineer, a chartered
accountant, or an architect at the top of his/her respective corporate ladder loses a
job, what does he/she do next?
At a firm level there are also concerns about the sustainability of a firm’s
competitive advantage – where cooperative relationships and exchange of ideas
between workers are needed for long-term success, who will provide these and
when these jobs are shipped out of the organisation? It is most destructive when
the organisation competes on the basis of creativity or sophisticated thinking
problem-solving.
Economic models may support this bleak outlook for developing economies. In
the case of two trading nations with factor differences in labour abundance (India)
and capital abundance (UK), economic theory predicts that this imbalance leads to
3.3 Social Consequences 23
a decline in the natural rate of unemployment in the labour abundant nation (India),
but a rise in the natural rate of unemployment in the capital abundant nation (UK).
The rise of the Indian IT outsourcing destination has been almost simultaneous with
the rise in unemployment of developed countries information systems workers. The
economic theory of labour/capital inequality between India and the UK predicts a
rise in the unemployment rate for information technology workers in developed
countries as the movement of labour is facilitated by enabling communication
technologies.
3.3 Social Consequences
If one considers outsourcing purely through a ‘free market’ capitalistic lens, it is

easy to ignore the social/philosophical issues associated with outsourcing.
Offshore outsourcing raises complicated social/philosophical questions with
multiple stakeholder costs and benefits. Some consequences are positive, but
many negatives are unseen. The positives include:
• The outsourcing firms’ stakeholders (shareholders, consumers, and core
employees) can reap benefits by having these firms become leaner and more
cost competitive in the global marketplace – they are better positioned to create
even more higher paying employment at home.
• Outsourcing affords assistance to workers in recipient countries in terms of job
creation, technology transfer, skills acquisition and more generally poverty
alleviation.
However, within developing countries which are the recipients of outsourcing
work, who are supposedly the winners within the outsourcing debate, there are
associated negative consequences which tend to be overlooked both in the literature
and in practice.
Within the recipient countries, negative consequences include: the impact that a
concentration of the outsourcing industry within a particular city has in terms of
infrastructure, culture, and the psychological affects such work may have upon the
health and wellbeing of workers and their families (Budhwar et al. 2006).
Bangalore, the heart of the Indian outsourcing industry, for example, has seen
infrastructure problems (Dittrich 2007), encroachment on rural land, rising real
estate price rises which have driven many of the poor out of the city (Dittrich 2005),
an increase in alcohol abuse, and workers suffering from psychological problems
(Noronha and D’Cruz 2007). There has also been a reported increase in divorce
rates which can be attributed to the growth of outsourcing service provision within
the city (Times 20071).
Within the developed country, as workers’ income levels, status, education, and
attitudes about business and the role of government change, clearly several
1
http://www.timesonline.co.uk (1st October 2007).
significant social effects may arise from these changes. As workers attempt to
maintain their standard of living on lower wage rates in lesser status jobs, they
may be forced to work longer hours to earn the same total wages. Offshore
outsourcing also raises concerns about extended retirement age, deleterious effects
on intellectual capital, and the security of information stored at offshore firms.
3.4 Separating the Spin from Reality
In general, corporations exist to yield profits for entrepreneurs and investors. As a

result, there is significant pressure on management to increase productivity and
profits. Usually, this is a good thing. Capitalism is successful because it strongly
rewards the best business models and the hardest workers.
Outsourcing is not necessarily unethical, nor is it unavoidable. After all, inter-
national business has opened huge markets for developed countries products and
has provided customers with new and cheaper goods. With advancements in
shipping and telecommunications, it is easier now than ever before to sell products
and services across the globe. If businesses and customers are willing to accept the
international market, then we must also accept its consequences – increased com-
petition. Developed country corporations now have to compete against businesses
in regions where operating and labour costs vary greatly. It would be foolish to
attempt to block the natural diffusion of labour into these areas.
Outsourcing will undoubtedly remain a natural part of business today.
What about the loyal employees who have been with the company for many
years and no longer have work? The ethical directive would be to maintain fairness
and attempt to pursue the best possible outcome for the employees within the
framework of outsourcing. Only then would outsourcing become ethical by today’s
standards. During a transition, the most important factor is open, honest communi-
cation and good planning. Decisions to cutback or outsource jobs should be made
long in advance so employees have time to find replacement work. The organisation
still has an ethical responsibility to its laid off employees. It is the organisation’s
obligation to minimise the impact of the outsourcing on its employees.
3.5 Policy Implications
Outsourcing can make globalisation fairer between countries; it creates jobs in

developing countries. Some developing countries have entered markets that were
long (and still are) dominated by industrialised countries. Outsourcing has benefits
for receiving countries, but can also bring welfare gains to sending countries. Many
jobs created in developed countries are new jobs, not jobs re-located from other
parts of the country and when the labour intensity of production is likely to be
higher: when labour is relatively abundant, it makes sense to re-engineer production
processes towards greater use of labour.
References 25
Outsourcing calls for active national policy responses: Developing countries

need to lay the foundations to participate in outsourcing as a host country. The
availability of low-wage labour is not sufficient to attract outsourcing. India’s
success in attracting services outsourcing shows that government policy was crucial
in driving investment in human capital formation. It also calls for the abstention
from over-regulation; tax exemptions and FDI promotion. Within industrialised
countries, the national policy response needs to cushion the effects on the local
labour market and find mechanisms to re-employ workers who may have lost their
jobs. There is no easy solution available, but a number of tools such as: skills
upgrading, a free mobile labour market and social protection schemes are necessary
to make outsourcing politically viable.
Outsourcing can make globalisation unfair within countries. In industrialised
countries: Low skilled workers in manufacturing and services (e.g. call centre
agents, most of them women) are disproportionately affected. Outsourcing needs
active governance to make globalisation fair. Isolated interventions are not likely to
succeed. What are needed are global standards that are implemented globally, such
as health and safety; freedom of association etc. There needs to be social protection,
giving workers that have lost their job adequate social benefits (as part of an overall
social security system) and importantly, governments and businesses must ensure
that workers made redundant can find new jobs.
3.6 Take Aways
• There is a mixed picture of the economic effects of offshoring. Traditionally it is

seen to have a relatively small effect on developed economies, but in a knowl-
edge based economy, the effects are likely to be greater.
• The positive benefits for recipient countries have been well documented, but the
negatives can be considerable and have received less attention than they deserve.
• Given outsourcing and offshoring are set to accelerate, it is imperative to
consider how the negative consequences on local employment can be minimised
through re-training and re-location.
• The policy implications from offshoring are significant. To date, the policy
response from developed economies has been lack lustre and rather confused.
What is needed are global standards for outsourcing – which set a level compet-
itive playing field between countries and a policy response which gives the
workers made redundant through outsourcing, the due respect they deserve.
References
Budhwar, P., Varma, A., Singh, V., & Dhar, R. (2006). HRM systems of Indian call centres: An
exploratory study. International Journal of Human Resource Management, 17(5), 881–897.
Dittrich, C. (2005). Bangalore: Divided city under the impact of globalization. Asian Journal of
Water, Environment and Pollution, 2(2), 23–30.
Dittrich, C. (2007). Bangalore: Globalisation and fragmentation in India’s Hightech-Capital.

ASIEN, 103(S), 45–58.
Noronha, E., & D’Cruz, P. (2007). Reconciling dichotomous demands: Telemarketing agents in
Bangalore and Mumbai, India. The Qualitative Report, 12(2), 255–280.
From Tactical to Strategic Outsourcing
4
Although the outsourcing industry is relatively young, only making an impact on

the world scene two decades ago, it has gone through a dramatic evolutionary
process (from applications development to ITO to BPO to KPO) and will continue
to do so. What we also see in this evolution is the move away from transactional to
strategic outsourcing to transformational outsourcing and in the future innovative
outsourcing. This chapter traces this evolutionary journey and examines the specific
characteristics within each segment, looking at cloud computing’s impact on the IT
outsourcing space, the impact demanding customers are having on call centre
outsourcing, the competitive advantages delivered by BPO, the growth of travel
and logistics outsourcing, Finance and Accounting outsourcing, Human Resource
outsourcing and the recent emergence of knowledge process and legal outsourcing.
4.1 Introduction
The outsourcing industry has been through an evolutionary process over the last
two decades. The initial phase of outsourcing represented engagements that focused
on ancillary activities and basic commodity offerings, which were focused purely
on cost savings. The relationships were transaction oriented with little emphasis on
relational investments.
The second phase of the evolution, having proved that the outsourcing model
works, was where organisations started to outsource various areas of supportive
activities that were slightly more central to business processes, the focus started to
move away, albeit slowly from just cost savings.
The third phase is where outsourcing started to be considered more strategically
and where an organisation adopted an over-arching outsourcing strategy that was
intended to coincide with its business level strategy. At this stage, outsourcing was
looked upon as a key strategic enabler that required significant management focus
to be leveraged for maximum advantage – so called Information Technology
Outsourcing (ITO) was born. The adoption of ITO can be attributed to two primary
factors: a focus on core competencies of the firm and reduction of IT costs.

28 4 From Tactical to Strategic Outsourcing
Transformation
ITO & BPO
Integrated global delivery model
2005-11 Global
KPO
Collaborative relationships
standardisation Scale or scope – no middle ground
Global Advisory Best Practice implementation
relations role
Provider implications
Focus on core Multi-tower
competency partnerships
1995-05 Standard Call Rule based Systems integrator role

ITO centres BPO Industry specific services
Access to Skills on
skills demand
Local
suppliers
Apps Tech Data Project based pricing

1980-95 support Support entry Being the cheapest
Cost Periphery
focus activities
Time
Fig. 4.1 The historical context of outsourcing from a client and supplier perspective
The fourth wave was what we now call Business Process Outsourcing (BPO),
where key process activities were outsourced and contractual responsibility was
granted to the service provider – this wasn’t a homogeneous phase; there were sub-
phases here, starting with call centre outsourcing, followed by back office outsourcing
and then into other areas of the business. BPO involved significant diversity in
outsourcing objectives, ranging from reduction in operating costs to innovation and
business transformation. The range of BPO objectives reflected significant heteroge-
neity in the nature and strategic context of outsourced business processes.
The fifth phase is what is being talked about at present, but not quite
implemented by organisations – transformational outsourcing – a form of
outsourcing, where the service provider effectively becomes an extended element
of the organisation, seen as a true partner, one that can be inherently trusted, relied
upon and one that can deliver significant operational and financial benefits to the
organisation – usually coincident with a global delivery network – the holy grail so
to speak. Transformational BPO relationships are especially pertinent to recent
moves by CxOs toward consolidating back office functions into shared services
units. This integration of services allows for their management by work process
rather than by function to leverage scale and synergies across departments.
Figure 4.1 illustrates this evolutionary journey.
4.2 The Role of Relationships
Relational investments in BPO are necessary and more important when the
outsourcing process is firmly interdependent on other processes that may remain
in-house, and where the information requirement is high for both parties. Relational
4.2 The Role of Relationships 29
investments help manage the process, bringing the parties together as one team for
seamless process delivery. The output of transformational BPO initiatives has a
more pervasive impact, often forming critical input to other processes. Such firm-
wide integration of process output in transformational BPO directly impacts com-
petitiveness through creation of enterprise-level competences.
Transformational BPO involves a cooperative, flexible, business process man-
agement relationship, with the service provider offering a broader scope of services
underpinned by the technical infrastructure. The client and its partner frequently
define these services jointly.
Transformational BPO is a high-payoff BPO initiative involving a deep com-
mitment between the company and its outsourcing partner to radically transform the
company’s enterprise-level outcomes. The two companies jointly define a broad
range of processes they will use and may also share in a joint venture that manages
the assets and employees that both contribute.
Other changes that we have seen within the industry include:
• Multi-country outsourcing, as clients seek arrangements that cover their global
operations;
• Outsourcing increasingly encompassing “strategic” activities – areas which may
have traditionally been deemed too near their core competence to outsource; and
• Outsourcing now more often involves a significant development component –
while most outsource providers offer “commoditised” services, many clients are
pressing for “customised” solutions that require significant “bespoke” develop-
ment effort.
Figure 4.2 illustrates the three generations of outsourcing transformation over
the last two decades.
Transformational outsourcing is anchored around a programme jointly devel-
oped between the outsourcer and the enterprise to integrate change, capability,
resources and business structures – around shared accountability. The contract is
driven by business outcomes, and accommodates re-alignment based on future
realities. It is designed to maximise incentives for both parties. The relationship
offers incentives to both parties to win together and rely on what the supplier and
the client can generate in strategic terms. Control and governance is based on trust,
transparency, integration of workflows and executive commitment to the success of
the partnership.
Conventional outsourcing on the other hand is inflexible, with either party
usually losing if the circumstances change – these deals do not reward the supplier
for investments in new technologies, tools or automation, and rely on cost reduction
as a major success measure. It often outlines specific operational outcomes to be
generated by the supplier in tactical terms, such as cost per transaction, cycle-time,
and number of calls per agent. Control and governance is through elaborate
penalties, and credits. The underlying premise is mistrust and the need to keep
the supplier “in check” at all times.
The outsourcing industry has evolved to a stage where a number of different

processes and verticals are now served. The newer processes (BPO rather than ITO)
Generation 1 Generation 2 Generation 3

Cost focus Efficiency focus Innovation focus
IT development & management

IT helpdesk IT application development
New technology development
Call centres Business Process Outsourcing
Knowledge Process Outsourcing
Application support Human Resource Outsourcing
Legal Process Outsourcing
Data entry Finance Accounting Outsourcing
Higher end BPO
Flexibility
Labour arbitrage Specialisation Lower cost and higher value
Scale Process improvement Greater emphasis on innovation
Aggressive multi-sourcing
Long term inflexible contracts Shorter term contracts Long term flexible contracts
Onshore Offshore captives and offshoring Global delivery
Fig. 4.2 The three generations of outsourcing
Worldwide Outsourcing Market

$362 billion
Customer care Logistics
Other 7% CAGR = 26%
4%
3%
Industry specific
processes
8%
IT Infrastructure General & admin

35% (HRO, FAO, Procurement)
CAGR = 10%
14%
IT Applications
Development &
Maintenance
29%
Source: IDC Research
Fig. 4.3 Worldwide outsourcing market size
are expected to grow more aggressively over the next few years as illustrated in
Fig. 4.3.
What we are also seeing is the gradual convergence of what have been seen as
two separate silos within organisations and within the outsourcing industry.
4.3 Information Technology Outsourcing and the Cloud 31
Traditionally ITO and BPO have been considered as separate activities, driven
by different requirements, served by different vendors and managed by different
teams. However, what we are now seeing is the convergence between ITO and
BPO. IT is integral to process execution and management in BPO. This is true of
transactional processes such as administration or processing services, where IT
performs simple automation or process updates, as well as more strategic pro-
cesses such as customer analytics or financial planning, where IT facilitates
linkages with other processes and delivers business information to process
workers in a timely fashion.
4.3 Information Technology Outsourcing and the Cloud
Ever since Kodak’s landmark decision to outsource the bulk of its Information
Technology (IT) functions in 1989, IT outsourcing has been a widely publicised
practice. Organisations that have outsourced significant portions of their IT
functions by transferring their IT assets, leases, licenses, and staff to outsourcing
vendors include British Aerospace, British Petroleum, Chase Manhattan Bank,
Continental Airlines, McDonnell Douglas, Xerox, English Heritage, MetLife,
National Policing Improvement Agency, Lloyds TSB, Reuters, and the list goes on.
However, despite predictions to the contrary, IT outsourcing has contracted
rather than expanded in the years since we entered the recent recession, according
to industry watchers, and analysts forecast, IT outsourcing growth will remain slow
for some time to come.
A lot of people renegotiated their contracts and a lot of people dropped their
services and brought those functions in house during the recession, with one
dominant feature of the outsourcing market over the last 12–15 months being the
emphasis on cost above all else. Cost was (and remains) the primary driver in most
outsourcing transactions. The difference is that during the boom years of
2002–2008, cost was often down-played by customers and, instead, emphasis was
placed on other business benefits such as transformation, concentrating on core
competencies, and speed to market. 2009 saw cost and, more particularly, immedi-
ate cost savings, take centre stage when customers engaged with existing suppliers
or contemplated new sourcing projects.
As the recovery gets under way, banks and insurance companies – which were
among the hardest hit verticals of the recession and which put more deals on hold in
2009 than other sectors, are likely to come back to the fold in 2011.
4.3.1 Cloud Computing and IT Outsourcing
Cloud computing and outsourcing are very different. Both will help revolutionise
the performance of businesses but I don’t believe one is a direct threat to the other.
They are not mutually exclusive.
Cloud computing describes the offering of hardware and software resources as

services across (distributed) IT resources. As a relatively new concept, cloud
computing and related technologies have rapidly gained momentum in the IT world.
Outsourcing, particularly micro-outsourcing for small businesses is in fact
booming and cloud computing is only making the process easier, just look at
Freelancer.com.
Up until recently, outsourced services were not necessarily fulfilled online. BPO
has become attractive to both large and small businesses with the advent of service
oriented computing and specifically Web services and Web 2.0 technologies.
4.3.2 Cloud Services
Cloud services require no software to purchase and install. Cloud service fees are
typically subscription based. The vendors usually charge on a month-to-month or
annual basis. Cloud services are flexible and easily scale up and down, effectively a
self-service on-demand provisioning model. It usually goes side by side with
automation, thus meaning decreased support cost for both client and vendor.
Although cloud computing is not without concerns around security, stability, and
data ownership, at its best it allows businesses to unshackle day-to-day operations
from the local data centre. With cloud services, small businesses reap the benefits of
not having to deploy physical infrastructure like file and e-mail servers, storage
systems or shrink-wrapped software. Plus, the “anywhere, anytime” availability of
these solutions, means hassle-free collaboration between business partners and
employees by simply using a browser.
Thus cloud services offer a number of benefits beyond cost, that include:
• The scale of available technology – The largest vendors now have enormous data
centres with the capability to store huge amounts of data and deliver vast
processing capability to businesses. Google is estimated to have over 2 million
servers in over 30 data centres and can now use that scale to offer a range of
corporate services at very competitive prices;
• A reduced price point – A low price point with no barrier to entry is another very
important driver for adoption, as cloud enables a reduction in both operational
and capital expenditure when compared to traditional methods of IT delivery,
which in the current economic climate is a very attractive option to any CIO
looking for competitive advantage;
• Improving green credentials – In parallel to reducing costs, cloud computing has
the potential to significantly reduce your carbon footprint through a reduced
reliance on in-house technology and through a flexible model that enables
a business to flex services to cope with peaks in demand, rather than resourcing
for peaks and running the day to day business with unnecessary excess capacity;
• Flexibility without the capex – service on tap and guaranteed service levels,
paying only for what you use;
• Ease of operations with better user interfaces and APIs that allow organisations
to integrate their own applications with purchased cloud services;
• Standardisation such as The Open Cloud Computing Interface (OCCI);

• Ease of configuration;
• Better performance, as the cloud provider can use the latest technology to tune
and improve processing speed, memory speed, storage access, read and write
speeds, latency, bandwidth, through access to better technology or superior
engineering and operations expertise;
• Reliability and security. Reliability is understandable, but many assume that
cloud service surely cannot be claimed to be more secure. Using the analogy of
offshoring paints a useful picture. When organisations started offshoring to
India, the media made a big deal with data security concerns; however over
time we find most offshore suppliers have security procedures to protect client
data which go far beyond what the clients themselves ever thought of
implementing. Given client concerns and the drive to satisfy client needs,
security was bolstered by the vendor community to a point where security is
now only a concern for those uneducated of the industry.
However, one must understand cloud computing is not a simple homogenous
concept or service, but a series of discrete interlinked technologies, each stacked
onto each other to enable further process or service value addition as you climb up
the stack, as illustrated in Fig. 4.4.
Hardware is the basic underlying physical technology – the nuts and bolts so to
speak. This level of the hierarchy is inherently difficult to align itself to outsourcing
or sharing of resources.
SaaS
Cloud Applications
PaaS
Cloud Software Environment
Cloud Software Infrastructure
IaaS
DaaS CaaS
Computational
Storage Communications
Resources
Software Operating Systems
Hardware / Firmware (Haas)
Fig. 4.4 Technology stack – the decoupled approach driving innovation in service delivery
Software operating systems links the underlying physical technology with the
functions using intelligence through the software operating system. Up until
recently the market has been dominated by proprietary operating systems from a
select few – think of MS Dos, Apple’s OSS, Unix etc. However, what we see today
is a host of open-source software platforms such as Linux, OpenSolaris, Symbian
which are slowly penetrating the market.
Infrastructure as a Service (IaaS): hardware resources (such as storage) and
computing power (CPU and memory) are offered as services to customers. This
enables businesses to rent these resources rather than spending money to buy
dedicated servers and networking equipment. Often companies are billed for their
usage following a utility computing model, where usage of resources is metered.
E.g. Amazon offers S3 for storage, EC2 for computing power, and SQS for network
communication for small businesses and individual consumers; typically using
virtualisation technologies to address the problem of underutilisation of physical
resources.
When people talk about virtualisation, they’re usually referring to server
virtualisation, which means partitioning one physical server into several virtual
servers, or machines. Each virtual machine can interact independently with other
devices, applications, data and users as though it were a separate physical resource.
Different virtual machines can run different operating systems and multiple
applications while sharing the resources of a single physical computer, and because
each virtual machine is isolated from other virtualised machines, if one crashes, it
doesn’t affect the others.
In addition to using virtualisation technology to partition one machine into
several virtual machines, you can also use virtualisation solutions to combine
multiple physical resources into a single virtual resource. A good example of this
is storage virtualisation, where multiple network storage resources are pooled into
what appears as a single storage device for easier and more efficient management of
these resources. Other types of virtualisation include:
• Network virtualisation splits available bandwidth in a network into independent
channels that can be assigned to specific servers or devices;
• Application virtualisation separates applications from the hardware and the
operating system, putting them in a container that can be relocated without
disrupting other systems;
• Desktop virtualisation enables a centralised server to deliver and manage
individualised desktops remotely. This gives users a full client experience, but
lets IT staff provision, manage, upgrade and patch them virtually, instead of
physically.
Virtualisation also allows IT systems and the business processes that they enable
to be disintegrated or deconstructed, and bought and sold separately rather than as
part of a long term outsourcing arrangement. Business operations can then be
operated with real flexibility in response to changing circumstances – and the
business processes and software systems that underlie them can be assembled as
individually sourced services from a competitive market place.
This begins to subtly shift the concept of outsourcing from the traditional
facilities management model (“Client outsources their operations to the Supplier”)
towards a direct sourcing of services model (“Client directly sources services from
the Supplier”).
Companies such as Amazon, e-Bay and Google have pioneered the exploitation
of virtualisation in the practical delivery of B2C (Business to Consumer) services,
using the Internet as the delivery channel. They have innovated business models
based on the high productivity manufacture and delivery of services, with reliabil-
ity, security and commodity economics.
Although clearly more complex this service manufacturing model is directly
applicable in B2B (Business to Business) markets, meaning that businesses can
now source services direct from a range of suppliers, rather than the supplier simply
taking over the customer’s existing or future technology requirements. The techni-
cal architectures enabled by virtualisation decouple the layers of the classic “big
company” technology stack. Each layer can then potentially be sourced as a distinct
service.
Database as a Service (DaaS): A more specialised type of storage is offering
database capability as a service. E.g. Amazon SimpleDB, Google BigTable,
Apache HBase and Apache Force.com database platform and Microsoft SSDS.
DaaS on the cloud often adopts a multi-tenant architecture, where the data of many
users is kept in the same physical table.
Communication as a Service (CaaS): Sometimes called hosted communications,
allows you to implement communications services like VoIP and Unified
Communications without the expense of buying, hosting and managing communi-
cation equipment. This emerging cloud service is gaining ground with enterprise
users who want the benefits of unified communications without making the signifi-
cant hardware and management investments to run them. Hosted, Internet-based
communications is not new. There have been Centrex services for a long time. We
also send video, voice, and data across the public Internet today. However, this type
of communication has not been the model for most business voice communication.
Businesses generally have purchased and run their own communications infrastruc-
ture. What we see within the CaaS space is the emergence of a new breed of vendor,
not the traditional telecommunications operators, but the likes of Skype and
Google.
Platform as a Service (PaaS): Refers to the provision of facilities to support the
entire application development lifecycle including design, implementation,
debugging, testing, deployment, operation and support of rich Web applications
and services on the Internet. Most often Internet browsers are used as the develop-
ment environment, e.g. Microsoft Azure Services platform, Google App Engine
and Salesforce.com Internet Application Development platform. PaaS enables
Software as a Service (SaaS) developers to develop add-ons, and also develop
standalone Web based applications, reuse other services and develop collabora-
tively in a team. However, vendor lock-in, limited platform interoperability and
limitations of programming platforms in supporting some language features or
capabilities are major concerns of using currently available platforms.
Software as a Service (SaaS): Software applications are offered as services over

the Internet rather than as software packages purchased by individual customers.
One of the pioneering providers in this category is Salesforce.com offering its CRM
application as a service. Other examples include Google web-based office
applications, Microsoft online CRM and SharePoint, or Adobe Photoshop and
Adobe Premiere on the Web, as well as new comers like GovernanceDirector.
com. Customer data is kept in the cloud, potentially based on DaaS.
4.3.3 The Challenges of Cloud Sourcing
Before we get too excited however, there are a few challenges to be aware of to
ensure a smooth transition to this brave new world:
• Security – Storing your confidential business data in a shared, cloud environment
requires complete trust in your potentially virtual supplier, which has up until
now been one of the major barriers to adoption of the cloud. However this is
gradually changing as the scale at which the cloud suppliers operate at, enables
them to make vast investments in security that individual companies and smaller
traditional operators cannot always match;
• Data protection – Many of the larger cloud computing providers use US based
data centres for the storage of their data, this is at best a risk and at worst a barrier
for many potential customers with sensitive or regulatory constraints that pre-
vent data from leaving the UK or the EU;
• Public vs. Private – At a high level, there are two ways to use the cloud, either
public or private and there are pros and cons to each. Public Clouds (such as
Amazon EC2 or Microsoft Azure) are low cost and offer easy access, whereas a
corporate Private Cloud where a business buys a cloud service from a dedicated
supplier just for their use is more expensive, but potentially more secure and
reliable (although this is a debatable point). Selecting the right option for your
business requires careful thought and consideration;
• Existing contract restrictions – Most large organisations already outsource some
aspects of their corporate IT. Unless their existing suppliers can offer them the
cloud based services themselves, the enterprise may need to look elsewhere for
cloud services and encounter in the process contractual restrictions and relation-
ship issues or even exit penalties within their existing IT Outsourcing
agreements;
• Who to trust – The vendor landscape in this new services world is a new one with
three main categories of vendors to consider:
• Traditional IT outsourcing suppliers – The major global IT organisations are
developing their existing outsourcing models to cope with demand for cloud
based services.
• Large scale cloud specialists – Such as Amazon, Apple, Google & Microsoft
who are all offering cloud in the form of infrastructure and applications
services and have the scale and credibility to become major competitors in
the previously closed world of corporate IT outsourcing.
• New entrants – There are multiple smaller specialist organisations, able to

offer a range of services designed around the cloud computing model, offer-
ing a low cost, high service model, often targeted at specific industries or
business functionality.
• Complexity – Deciding who to work with, how to work with them and
integrating the services into your existing service model can require system
and service integration skills;
• Bandwidth – A parallel consideration will be the quality and reliability of
accessed networks and bandwidth – Google Apps guarantee 99.9% service
reliability, but that is in practice “at the factory gate” not at the user’s machine;
• Migration – Moving data from one cloud-based storage system to another, for
example, is not always easy. Buyers of cloud services must take account of the
dangers of lock-in, and favour service providers who allow them to switch
between services without too much hassle; and
• Change – Cloud computing requires a fundamental change to the way of
thinking that most organisations have followed for recent years. One of the
biggest barriers to adoption is corporate inertia as change of this magnitude
requires a new way of thinking which can take time to fully understand.
Cloud computing is likely to take centre stage in IT outsourcing in 2011. This
will be the first year in which cloud computing will have a real role in procurement
decisions. The outsourcing industry is likely to begin seriously addressing these
issues in 2011. That means cloud solutions will become an acceptable risk for
customers. At the very least, the dramatically lowered cost of cloud providers will
become a lever for customers to use in negotiations with their traditional sourcing
providers.
In addition, cloud is likely to create new options for combining process, software
and hardware in business process outsourcing (BPO) solutions.
If you’re going to have your data and applications hosted externally in the cloud,
do you really need to manage them yourself anymore? Do you really gain a
competitive edge with the way you process your insurance claims, or isn’t it time
to find a services vendor that will host the application, the associated infrastructure
and even process the transactions for you?
Cloud services could well be the foundation for next-generation enterprise
sourcing solutions. It can make traditional delivery of IT services more efficient
and cost-effective.
4.3.4 Cloud Vendors
Many traditional IT service providers and offshore vendors are beginning to work
cloud service into their portfolio – or at least give the appearance of doing so.
IBM Global Services and HP are serving up more and more “x-as-a-service”
items on their menus, from infrastructure to storage. Infosys is offering end-to-end
IT and business processes – Source-to-Pay for procurement, Hire-to-Retire for HR
– on a pay-per-use basis built on a cloud backbone. Wipro Technologies is piloting
a central computing cloud to study the potential of the trend. Patni Computing
Systems is selling a “cloud acceleration service” to help developers migrate their
processes to a cloud-based model the way it did internally and is experimenting
with testing-as-a-service.
Given that most customers care about where their confidential information is
housed, it is likely they will prefer it to be within the confines of a trusted service
vendor, rather than that vendor’s alliance partner. This may well be the impetus for
greater mergers between strong infrastructure services and BPO vendors as the
move to cloud services picks up more steam. In the years ahead, cloud services will
separate the basic IT and business process body shops from the innovators. Vendors
pushing standard labour arbitrage services under a thin veneer of “cloud marketing”
will quickly get cast aside. The emergence of next-generation solutions requires a
high degree of provider flexibility and management will to embrace new ways of
working. It’s likely that this trend will further segment the provider topography.
The biggest cloud-based opportunities could exist for the newer members of the
outsourcing industry, like Salesforce.com, Rackspace, Amazon and Dropbox.
4.4 Business Process Outsourcing and Call Centres
BPO initiatives include very different processes and in many senses is an all
encompassing term. However, one could make a distinction between BPO activities
that involve content development from those that involve service provision:
• Content development involves the creation of fairly well defined outputs or
products by vendors. These relations involve clear handovers, schedules and
typically more precise contracts. Examples include outsourcing for application
development.
• Service provision involves ongoing relationships where a vendor provides a
service on a continual basis. Examples include applications maintenance, call
centres, help desk, and transaction processing. The impact of transition costs and
interaction costs are typically more severe in service provisioning than in content
development and therefore the risk greater.
The relative importance of these transaction costs are also likely to systemati-
cally differ depending on how the process is organised: i.e., on the ownership model
and proximity to origin. BPO service provision requires significant coordination to
take place between the vendor and the client on an ongoing basis, giving rise to
ongoing interaction costs. Such coordination requires the need not only for person-
nel with the requisite knowledge, but also facilitating exchange by means of
investment in appropriate communication channels.
In relationships with continually evolving processes, face-to-face interaction by
means of some on-site presence of vendors at client locations and clients at vendor
locations proves helpful and efficient coordination.
Given the range of BPO services, each with its own coordination costs, its
capability to deliver competitive advantage and its impact on the organisational
processes, what we see is that traditional standard BPO services (such as
4.4 Business Process Outsourcing and Call Centres 39
High
Contact
Customer
Services
Opportunity Employee
for total Services Non-
Standard
cost reduction Standard
Operational
Processing
(Automated)
Exceptions
Processing
Standard Analytics
Low Opportunity for competitive advantage High
Fig. 4.5 BPO service impact on organisations
employment related services and customer service) are utilised primarily for their
cost benefits. Increasingly, we are seeing organisations looking for BPO services to
deliver competitive advantage in an increasingly difficult market (see Fig. 4.5).
Services outsourcing is not a one-time transaction, but an exchange that evolves
over time. Process improvements, service level expectations and fit with other
contextual processes typically evolve with changing competitive conditions and
changing technologies. These improvements in both delivery and development
often evolve in unexpected ways.
4.4.1 Defining BPO Services by Organisational Impact
4.4.1.1 Customer Service Outsourcing

Call Centres
According to various surveys, only 4% of people in the UK have had a favourable
experience when dealing with a customer call centre,1 44% complain that their
biggest gripe is contacting a call centre based overseas. I believe it is not the
location or people per se that drives this perception, but the system and controls
that determine how the work is managed, delivered and quality controlled that
drives failure (or success). Offshored call centres simply reinforce any negative
perceptions and experience.
There is nevertheless a mixed picture for Offshore Call Centres:
• Even in the face of a media frenzied backlash, many executives continued to
favour the idea of “offshore”;
1
YouGov survey commissioned by Callmedia.
• The Chairman of HSBC famously said that his workers in Asian countries were
superior to their British equivalent;
• Then in recent years, we have seen a number of high profile businesses predom-
inantly in the finance sector actively promote their “UK only call centres”;
• In 2006, Channel 4 produced a documentary highlighting data protection failures
in India’s call centre industry;
• In early 2007, Lloyds Bank announced what appeared to be a scale-back in
offshore operations which seemed to many the beginning of the end for
offshoring;
• But just as many people thought offshoring was dead, Barclays announced that
they will be sending more jobs overseas.
The fact is that the triple digit growth in offshoring has ended but nevertheless
the British economy does not (that may change given the downturn) have the labour
capacity to cope with the complete home shoring of all the jobs offshored. There is
also clearly the cost factor to consider – despite the perceived public dislike for
offshoring, there is little evidence to suggest that consumers would pay more for
home-grown customer service.
It is estimated that £3bn worth of goods and services are sold every year in
the UK through outbound telemarketing. As well as the increased competition in
the telecoms and utilities sectors, much of this growth has come from “warm
calling” – calls to existing customers in order to gain further revenues. In large
part, this is an effect driven by CRM processes, such as relationship-building calls,
cross- and up-selling and customer satisfaction calls. As data protection becomes
more of an issue, businesses are increasing the effort they make to sell more to their
existing or past customers.
Cold calling is still present, but untargeted campaigns are increasingly being
seen as less economic than targeted outbound work. Increasingly consumers are
taking a negative view of unsolicited outbound calling, which along with the
increased uptake in TPS registrations, will reduce the number of unsolicited
outbound calls in future years.
Call Centre Opportunities by Vertical Sectors

Financial services organisations run the most contact centres of any business sector
in the UK. This vertical market consists mainly of banks, credit card companies,
insurance companies, building societies, collection agencies and credit reference
agencies. The first three sub-sectors are amongst the largest users of contact centres,
and many of the largest operations are within this vertical market (over 33% of 500+
agent position contact centres are finance operations). The retail and distribution
sector has the second-largest number of contact centre operations. This vertical
market includes catalogue/direct mail retailers (which tend to be the largest in this
sector), package couriers, high street retail support and niche retailers. This industry
is driven by customer service and thus contact centres form a central part of the
business.
The telecoms vertical market although accounting for only 5% of operations, has
a much bigger impact on the industry as a whole, as many telecoms contact centres
are a considerable size (13% of 500+ agent position contact centres are in the
telecoms sector). This vertical market includes both fixed line and mobile operators
and are beginning to use contact centres and social media aggressively to attract
subscribers as their markets get more competitive.
The transport and travel vertical market which includes travel agents (both High
Street and web-based), public transport companies, airlines, and car hire firms has
almost 11% of the UK’s contact centres market. However the opportunities for pure
call centres are likely to fall as the industry is shifting more towards self help and
online booking.
The IT sector is made up of both technology sales and external helpdesk
operations. There are large numbers of internal helpdesks which support employees
– this has been the home of offshore call centres and in particular India, because of
the availability of highly skilled technical engineers at a fraction of the costs in the
developed economies.
The telemarketing and research vertical market is centred on outbound calling. A
subsector of this is printing and publishing contact centres which include newspaper
and magazine subscription and advertisement operations, along with a few book
publishers, who use contact centres to sell advertisement and sponsorships. Due to
tighter data protection and TPS registration procedures, this sector is likely to see a
challenging time ahead.
Manufacturing companies account for 8% of UK contact centres, although they
are generally relatively small operations, dealing with customer support and sales to
other companies rather than the public. This sector offers good outsourcing poten-
tial but is driven by quality rather than scale, and may be more appropriate for
onshore outsourcing rather than offshore outsourcing.
Public services contact centres are leading contenders for outsourcing currently
(contactable government) – but offshoring is unlikely given that local job creation
is a mandate for most public sector agencies.
4.4.2 Drivers for Customer Service Outsourcing
4.4.2.1 Cost Focus

The primary reason businesses consider offshoring contact centres is to reduce the
60–70% of their operating expenses which are spent on agent salaries. For a 500-
seat contact centre, agent-driven expenses alone can approach £6–8 m per year.
Payback time for a 50-seat contact centre operation moved to India for instance
could be achieved in 3 months. This reduction in cost allows businesses to initiate
projects which would not otherwise be economically viable in the UK, e.g. large-
scale outbound operations aimed at selling lower cost items or to lower-margin
customers.
4.4.2.2 Better Customer Experience

Differentiation through provision of a better customer experience may be one of the
few opportunities retailers have to rise above price competition. Seventy-three
percent of European consumers2 said they would do business with a company based
on a great contact centre experience. Of these, 15% would do so even if prices were
higher than average.
When a customer walks into a shop they expect the sales assistant to understand
the products and be able to help them. The same is true if a potential customer picks
up the telephone, sends an email or clicks for instant chat. Replacing a skilled
operator with an automated service might save money in the short term; in the long
term however, you risk losing brand advocacy and sales. Inbound customer calls
can generate “sales through service”. By resolving customer issues and exceeding
their expectations, a contact centre agent sustains rather than loses a revenue
stream.
4.4.2.3 Multi-Channel Availability

Multi-channel shoppers generate 20–25% more profit than the average customer.
However, these customers have low store loyalty across channels. Multi-channel
availability if not managed, can therefore potentially be a threat to retailers,
nevertheless, customers have come to expect multi-channel availability. By failing
to provide customers with a means to transact with the organisation at their
convenience, an organisation runs the risk of losing custom to its competitors.
Multi-channel experience in most cases is lacking in a number of areas:
• Retailers often fail to answer e-mails from their customers in a timely manner.
• Retailers often fail to take advantage of opportunities to personalise their
interaction.
• Proactive contact can build brand, enhance customer service and increase
revenue, yet is only a small portion of all outbound contact centre activity.
A majority of new customers (~70%) will hang up if the phone is not answered
within 25 seconds or if they get through to an answering machine. According to
E-consultancy, providing a contact number during the online shopping process can
foster trust – reassuring consumers that they can discuss any issues they may have
with an adviser over the phone – this is especially true of reluctant e-shoppers. The
publication notes, such a strategy can be particularly useful in persuading users who
have misgivings about e-commerce to buy online.
4.4.2.4 Lower Costs Means Potentially a Greater Number of Staff

The case can certainly be made that lower salary costs mean that offshore contact
centres do not have to be staffed as carefully as in the UK, where over-generous
scheduling means much higher costs. In offshore countries, a more relaxed attitude
to staffing can benefit customers: the average speed to answer calls in India for
instance is less than 7 seconds – more than twice as fast as in the UK.
However, research suggests that offshore contact centres may not be offering
quite the same level of performance as the UK industry in some areas, (although
2
Genesys Consumer Survey 2007 – Europe.
outperforms it in others: e.g. salaries for an Indian call centre agent are ~£2K p.a.
Compared to ~£13K p.a. in UK) and although Indian agents answer calls more than
twice as quickly as UK workers, and work 6 hours a week longer than UK agents,
on average, UK agents answer 25% more calls each hour than Indian agents, and
resolve up to 20% more of these calls first-time. British call centre workers tend to
stay with their organisation for well over 3 years. On average, Indian call centre
workers move on after only 11 months in the job.3
A key metric for the contact centre of the future will be “first time resolution”.
Whether in a sales or service environment, first-time resolution is key to developing
a positive customer relationship and keeping costs down – something that
offshoring has not been successful in achieving, to date.
4.4.2.5 Twenty Hour Availability

Twenty-four hour businesses require 24 hour support. Having a 9 am to 5 pm
business no longer caters for the demanding customer. Customers expect service
here and now. From time to time things can go wrong and it is critical that the retailer
can address these problems efficiently to ensure that it is providing the highest level
of service to its customers. Customers will demand a 24 hour help desk.
The speed of response in resolving a customer’s query is as important as the
content of the response. Whereas customers were once happy to wait 2 or 3 days for
a reply to an email, organisations must now aim for a response time of no more than
4 hour. Email communication means that the speed of response has to be so much
faster, especially since people are making purchasing decisions based on what and
how quickly their emails are answered.
4.4.3 The Future of Call Centres
The industry needs to evolve from call centre businesses to business automation
centres. They need to be broader than just call centres. The advisors need to take a
more conversational approach to their call handling rather than following a rigid
script (this is not as easy as it seems). These same scripts were introduced to help
overcome some of the cultural and language barriers that naturally exist between
the offshore advisor and consumer; they help to prop up the confidence of the UK
based managers who are being held responsible for the offshore call centre perfor-
mance. Without those scripts, those managers fear the call centre quality will
reduce. The truth is with these scripts the quality of the customer experience is
significantly reduced.
An important factor for improving customer experience is “Empathy”. Contact
centres must find ways of establishing better empathy without compromising call
cost. Call centres can do this by creating an environment where empathy thrives
3
Source: Precision Marketing.
through: robust staff recruitment, training and retention, improved technology and
better call routing. Creating better empathy allows agents to reflect and align with
the callers’: Values, Beliefs, Experiences and Habits.
4.5 Travel, Transport and Logistics Outsourcing
Consumers of manufactured products and other goods, world-wide, are directly

dependent on logistics, and the various activities involved therein, to provide the
products and services they require when, where and how they want them.
Manufacturers of all sizes are also dependent on logistics to ensure that they receive
the necessary raw materials, components, and ingredients when, where and how
they need them in order to continue with their manufacturing operations.
Many large companies are outsourcing their transportation and logistics
functions, driven by pressure to cut costs combined with the challenges of increas-
ingly complex logistics technology. Although many companies are reluctant to
hand over critical supply chain functions to an outside company, many are discov-
ering that logistics service providers are better at integrating logistics functions into
their supply chain management environments, whilst offering cost advantages.
Companies are finding that outsourcing logistics can be a source of savings, and
over the long-term they need logistics as part of their overall supply chain strategy.
Most companies understand that it is not a core competency for them.
There are many ways outsourcing aspects of the supply chain can add value to an
efficient cost-effective logistics network, e.g.:
• The automotive industry often relies on outside providers to perform functions
associated with Just In Time (JIT) operations. This is often not classified as
outsourcing, but in many senses could well be classified as outsourcing;
• In the grocery industry, collaborative planning, forecasting and replenishment
links customer demand with replenishment scheduling to reduce inventory in the
system. This results in smaller, more frequent shipments. Contract logistics
companies are able to combine these smaller shipments into truckloads, reducing
freight and handling costs and enhancing the distribution process;
• Information technology management is perhaps the most important value-added
offering that third parties have provided in recent years. For many companies,
increasing demands (for new information systems resources, and real-time
visibility into production and order status) can often be met most efficiently
through outsourcing.
4.5.1 Drivers for Logistics Outsourcing
As manufacturers shift more and more of the production to the east, supply chains
become more complex and costly. For this reason, manufacturers and retailers are
increasingly outsourcing a variety of value-adding logistics functions, above and
beyond warehousing and distribution.
4.6 Finance and Accounting Outsourcing 45
Beyond the usual cost drivers this sector has specific drivers in terms of capture
and intelligent use of real-time information; information which increases the
flexibility of supply chains and which helps optimise movement of goods and
services – whether through optimising the business processes or by using the latest
technology. Technology can help turn data into intelligence by capturing and
collating data and turning it into information that can be used for regaining control
of the assets.
The second driver is securing the movement of people, products and data
security. This is an essential component of any business strategy, especially in
response to the demands of government legislation, e-borders, homeland security,
business continuity, data protection and may include: biometric access control;
baggage screening; security consulting; RFID tracking systems; managed security
services; and infrastructure management.
Basic services like transportation and warehousing are becoming commodities,
and Logistics Services Providers are expanding their services portfolio to address
more profitable segments and provide multiple services starting from basic trans-
portation to increasingly more complex areas such as fulfilment, global trade
services, light assembly, and so on.
4.6 Finance and Accounting Outsourcing
Outsourcing finance and accounting processes has recently become a strategic issue
for many organisations. Businesses are under increasing pressure to improve
performance and reduce costs. Although the emphasis has often been on reducing
cost, there is a trend towards outsourcing to enable strategic change. The real value
to be gained is that the retained finance function can focus on working more closely
with the business to provide business partnering and help improve decision making.
A key consideration for most organisations is an understanding of which specific
finance and accounting process should be outsourced (see Fig. 4.6). Transactional
processes (such as accounts payable, travel and entertainment, accounts receivable,
billing, cash management, etc.) tended to be the most popular to outsource. More
recently, with improvements in provider capabilities, there has been a move to
outsourcing higher end or higher value services such as statutory/regulatory
accounting, financial reporting and tax. In some cases, more strategic processes
such as management accounting, budgeting & forecasting and financial analysis are
being considered for outsourcing, what is sometimes labelled KPO services.
Finance and Accounting Outsourcing (FAO) has undergone major transforma-
tion over the last 10 years. The need to ensure their systems were Sarbanes Oxley
compliant encouraged many US corporations to outsource. BPO service providers
gained expertise and credibility in meeting this need.
With constant changes to the complex financial reporting framework and regu-
latory requirements – it is becoming important for organisations to meet these
obligations in a cost effective manner, whilst using the finance function
strategically to make better decisions for the organisation with respect to
St
ra
te
In creasing judgement intensive and strategic
gy
Finance
&
Accounting Strategy
intensive process
Internal audit
Judgement
Budgeting and Forecasting
Capital budgeting
Treasury and Risk Management
Management reporting & analysis
Regulatory reporting and compliance
inten
Fixed assets
Tran processe
Tax
sive
sacti
General accounting
Accounts receivable on
s
Accounts payable
Fig. 4.6 Finance and accounting value chain
transaction processing, general ledger, accounts payable and treasury. As recruiting

the best finance talent and ensuring its optimum utilisation becomes an increasingly
difficult challenge, the role of outsourcing of the F&A functions becomes more
important to balance these requirements. To date F&A outsourcing has been the
domain of larger organisations, where the economic benefits of improved transac-
tion processing, clearly makes sense. However, it is likely that over the near term
SMEs will embrace this also, as results indicates that there is high levels of
satisfaction among companies that have outsourced finance and accounting, espe-
cially in the context of meeting compliance obligations.
4.6.1 Drivers for F&A Outsourcing
• Leveraging FAO to undergo a major, company-wide, global change agenda;

• Helping consolidate internal finance operations after a merger and/or
acquisition;
4.7 Human Resource and Recruitment Processing Outsourcing 47
• Moving an under-performing shared services model to FAO;

• Access to specialist skills;
• Achieving stronger metrics and clear visibility into the activities of its financial
operations;
• Consolidate different finance and accounting functions distributed at several
locations;
• Standardising processes;
• Realising business continuity planning for the organisation by leveraging the
service provider’s experience and involvement with multiple clients and service
provider footprint; and
• Leveraging the benefits technology innovation can have to the finance and
accounting function – e.g. using Software-as-a-Service and cloud-based
solutions in finance and accounting.
4.7 Human Resource and Recruitment Processing

Outsourcing
Increasingly human resources are seen as being the most critical assets of any
organisation, as the organisation’s success and know how lies in their hands. But in
order to ensure that its employees remain satisfied, the company has to have a
specialised human resources department. Most of the time this proves to be a costly
option.
Organisations are considering outsourcing their human resources management
functions, or creating a shared service centre to access the specialised skills, provide
flexibility and effectively deliver more for less.
Deciding which functions to offload and which firm to outsource to is a major
decision. HR functions include Payroll administration (producing checks, handling
taxes, dealing with sick time and vacations), employee benefits (Health, Medical,
Life insurance, cafeteria, etc.), human resource management (hiring and firing,
background interviews, exit interviews and wage reviews), risk management
(workers’ compensation, dispute resolution, safety inspection, office policies and
handbooks) and others – the drivers and appropriateness of outsourcing can differ
by each HR process and functional role.
4.7.1 Drivers for HRO
Cost management
• Need to reduce/control administration costs
• Reduce and better control HR operating costs
• Access to technology which would otherwise be unaffordable
• Access to new services which would otherwise be uneconomic
Service quality/risk
• Need to raise quality of service provision – provide higher quality HR
services
• Increased accountability
• Improved legal compliance
• Gain access to skills and expertise not available in-house
• Gain access to technologies not available in-house
Flexibility
• Provide cost and organisational flexibility
• Offload activities that are non-core
• Free up HR time to focus on strategic activities
Strategic
• Share risks of new investment in technology with external specialists
• Transform the HR function’s internal reputation
• Improve organisational satisfaction with the HR function
• Overcome capital investment limitations preventing upgrade of new technol-
ogy solutions
Usually four main reasons are given by organisations who externally source HR:
1. Provide HR the chance to position itself as a strategic partner for the manage-
ment of the organisation. The reasoning behind this is that being responsible for
transactions and all kinds of basic HR processes distracts the attention from
thinking on an abstract level; it is not possible to be a strategist and an opera-
tional leader at the same time.
2. Reducing HR total cost of ownership – External sources better enable the
calculation of the total cost of ownership of HR; not only costs of salary related
costs like employer costs, pension, training, etc., but also derived costs, costs of
employment (laptops, phone, clothing, etc.) and of course management costs.
3. A decentralised HR function within organisations poses a risk, especially in the
context of associated systems for capturing and automating routine HR tasks.
Outsourcing allows the organisation to centralise HR and access best in class
technology and automation capabilities.
4. Most HR departments within organisations rely upon key staff for business
continuity, when such staff are not available due to leave, sickness or because of
a job transfer the whole department comes under pressure. Getting external
support through agency staff can only provide temporary comfort but leads to
loss of knowledge. Outsourcing this HR activity ensures the organisation no longer
needs to worry about staffing levels, nor business continuity problems resulting
from absent staff – in essence the organisation passes off this risk to the vendor.
4.8 Knowledge Process Outsourcing
Knowledge processes are different from business processes in terms of the value
proposition to the client. Differences lie in process complexity, the amount of
intellectual intervention in the process, the skills required and the ability to scale.
4.8 Knowledge Process Outsourcing 49
While business processes are essentially process driven and rule based, knowledge
processes involve judgment.
4.8.1 Typical KPO Services
As the outsourcing industry matures, more complex processes are being offered
by providers. Knowledge process outsourcing usually refers to “high end knowl-
edge or judgment” services.
According to Outsourcing.com, a professional information institute, the KPO
market was projected to reach USD 17 billion by 2010.
Knowledge work, by its very nature and definition, cannot necessarily be
accomplished successfully by following a set of predefined procedures. Moreover,
the outcome of a knowledge process (e.g. research and development) may be
interwoven with an organisation’s core competency and/or long term sustainability,
as opposed to commodity processes typically included in BPO contracts.
Inherent difficulties in outsourcing knowledge processes exist, since creation of
knowledge and its subsequent accumulation is associated with any activity. As
such, outsourcing decisions affect the knowledge base resident within an
organisation. This impact is more critical for those processes associated with the
generation and use of knowledge. As knowledge related function or process is
delegated to an external entity, loss of knowledge concerning these functions or
processes can occur and may have implications on the availability of learning
opportunities from which organisational knowledge can be increased.
Market research and

Financial services Other KPO services
analysis services
Financial research & analysis
Corporate financial statements

Primary and secondary research
Analysis of financial statements (telephone surveys)
Pharmaceuticals research
Analysis of portfolio structures Web based market research and
Biotechnology research
analysis
Analysis of prospectus, offer documents
Technology research
Data analytics
Ad-hoc reports, industry reports (fact
Computer-aided simulation
books, competitor analysis) Competitive business analysis
Engineering design
Creation and maintenance of databases and Trend analysis
libraries
Professional services such
Company profiling
as business research and
Product pricing and financial analysis legal services.
Management and Marketing
Financial model validations Consultancy
Equity research and M&A analytics support

(valuations and related financial modelling)
Fig. 4.7 Knowledge process outsourcing (KPO) services

These knowledge processes can be embedded in an organisations business

processes, in terms of: knowledge generation, knowledge codification (codifying
the knowledge into a form accessible to others) and knowledge transfer (facilitating
interaction between and among people as well as the interaction with repositories
and knowledge management systems).
4.8.2 Challenges in Knowledge Process Outsourcing
Dependence on core competency: Outsourcing implies the shifting of an

organisation’s risk to the supplier. This, however, does not eliminate all risk from
the client organisation. The customer can become dependent on the supplier. The
level of dependency or risk incurred by the customer can be assessed by how much
the outsourced process impacts other organisational outcomes/processes. This level
of dependency can be viewed as the distinction between knowledge partitioning
and task partitioning. This partitioning helps clarify the level of ownership retained
by the customer and/or the supplier.
Knowledge loss: The inherent risk is that outsourcing knowledge processes also
outsources the knowledge itself. The magnitude of the risk is a function of the
knowledge learning curve, knowledge holding cost, knowledge value deterioration
rate and future value of the knowledge in comparison to the cost to purchase such
knowledge at some future point in time.
Incentive to innovate: Innovation, specifically R&D activity, is viewed as a
significant source of knowledge for an organisation. Outsourcing, especially in
terms of proprietary knowledge assets, is not considered a means to innovate
because an outside supplier lacks the incentive to innovate for the buying firm.
This view is reinforced when an organisation considers that they will receive only
the codified results of R&D externalisation and not the accumulated person-embod-
ied skills.
IP, legal issues and security: Security and confidentiality of data, customer
information and proprietary intellectual property will pose considerable challenges
in managing KPO relationships. For example, who will own the outcome of an
R&D effort if the process itself is outsourced? When information related to the core
competency of an organisation is outsourced, security will be an issue.
Measurability of outcome: The outcome of a knowledge process may often be
fuzzy. The deliverables being knowledge items, means it is often difficult to come
up with precise measurable outcomes. Arguably, without definitive objectives,
relational aspects between the provider and customer play a significant role.
Integration of knowledge from disparate sources: For knowledge outsourcing,
an emphasis must be placed on knowledge integration to reduce the knowledge
loss. Since the degree of knowledge dispersion increases with outsourcing
arrangements, the uncertainty regarding where the knowledge resides increases.
Customers must create conditions to integrate knowledge dispersed across the
supply chain.
4.9 Legal Process Outsourcing 51
4.9 Legal Process Outsourcing
Traditionally, law firms started outsourcing their IT and business processes to

outside vendors, what has been called by many, as Legal Process Outsourcing
(LPO). This model was about adding low incremental value to high volume of
work. It also meant that only work which was highly process and technology driven
(and less knowledge driven) could be outsourced/offshored. The culture in this kind
of delivery setup closely followed that of cost minimising BPO operations. The
nature of work handled was commoditised.
Legal Service Outsourcing (LSO) by comparison is knowledge driven; the
incremental value is driven by people, enabled and supported by processes and
technology.
A necessary condition for the rise of LPO is the disintegration of the legal
services value chain. In particular, information and communication technology
(ICT) has enabled such disintegration, by (a) introducing a higher degree of
standardisation and codification of legal knowledge, (b) facilitating organisational
modularity between the back office and the front office; and (c) making geographi-
cally distanced delivery possible.
It is generally understood that business corporations, rather than law firms, are
driving the growth of the LSO phenomenon. The reason for this may be found in a
number of factors that distinguish the business corporation from the law firm,
including their ownership structure and its influence on strategic objectives. In
particular, law firms’ relative reluctance to offshore legal work may be due to (a)
lawyers’ conception of their work, and (b) the notion of partners’ autonomy to make
make-or-buy decisions.
From the perspective of a law firm, the value chain consists of three separable
steps: (a) knowledge and information management (b) consultative advice and
representation; and (c) client relationship management.
Lawyers may appear reluctant to use the outsourcing and offshoring option
because the billable hour does not give an incentive to necessarily lower costs
rather than raise revenue. Moreover, the partnership model with distributed author-
ity implies that decisions to outsource or offshore are typically taken at the
decentralised level, practice by practice, or even partner by partner. This makes it
less likely that law firms can easily adopt a centralised firm-wide decision to
outsource.
However, the challenges faced by law firms are significant and may lead to more
lawyers looking at outsourcing as the economic woes and client demand forces
change.
There is likely to be a degree of flux in the industry moving forward. Law firms
are well aware of what outsourcing can deliver – most provide advice to companies
on their outsourcing deals. Despite this, very few law firms have considered
outsourcing for themselves and even fewer have an outsourcing strategy. However,
the legal sector is showing signs that it is now adopting outsourcing as a business
strategy – partly driven by the economic turmoil. Clifford Chance led the field by
moving back office and secretarial support to its own office in India, in order to
carry out much of the company’s administrative work (LPO). The outsourcing
programme is expected to yield more than £9.5 m in annual savings. Similarly,
Pinsent Masons announced a deal to offshore its bulk typing and transcription
services as part of a move to change the role of its secretaries.
4.9.1 Drivers for LPO in Law Firms
• Core cost reduction – Most expensive costs to a law firm are legal and paralegal
staff – reduction of these costs mean it’s possible to provide competitively priced
legal advice without reducing profitability.
• Getting access to capability/resources – Legal instructions are often received ad
hoc and at short notice when In-house resources/specialists may already be
committed to other clients. Outsourcing means its possible to utilise external
resources at short notice to enable the new instructions to be delivered, extending
the ability of law firms to take on work.
• Better utilisation of in-house resources by outsourcing low-value services –
Many instructions are for low-value services which need to be undertaken to
retain a client’s goodwill. It may be deemed better to outsource such matters and
allow lawyers to concentrate on providing premium rate services.
The success of any law partnership is dependent on the successful delivery of
services to clients by all the lawyers in the firm. Legal service outsourcing is
undoubtedly an option that can help law firms address key challenges, but only if
done correctly. So how can a firm best go about using outsourcing to their
advantage?
4.9.2 What Not to Outsource
• Complex, uniquely fact-driven cases – the amount of time required to bring

outside lawyers up to speed require a greater amount of time than would be
supported by the reduction in costs.
• Fact-driven one-off cases – fairly complex, fact-driven subject matter can be
reasonably outsourced only if the case is ongoing or recurring.
• Complex work without local supervision – outsourcing efficiencies are
undermined without proper supervision.
• Unfamiliar subject matter – counsel limits their ability to provide proper super-
vision when, due to lack of familiarity with the area of law, they are unable to
judge the quality or accuracy of the work (Fig. 4.8).
4.9.3 LSO Challenges
LSO delivers high value to organisations by providing domain-based processes and

business expertise rather than just process expertise. These processes demand
4.9 Legal Process Outsourcing 53
• Intellectual property rights & Asset management

• Patent search & application drafting
• Trade-Mark and copyright registration
• Legal research
• Document review and analysis
<< High-end Work
• Intelligence services
• Contracting, administration and standardisation
• Audit and compliance
• Contract abstraction and summarisation
• Paralegal services & legal coding

• Corporate secretarial services
• Legal memo development
• Transcription
Low-end Work >> • Document management
• Data entry
• Litigation support (electronic or paper document
discovery, legal research, document review)
Fig. 4.8 Legal process and service outsourcing
advanced analytical and specialised skill of knowledge workers that have domain
experience to their credit. Therefore outsourcing of legal services face more
challenges than BPO. Some of the challenges involved in LSO will be maintaining
higher quality standards; investment requirements for appropriate LSO infrastruc-
ture; the lack of experienced talent pool; the requirement of higher level of control
and maintaining client confidentiality and enhanced risk management.
Unlike BPO where the focus is on executing standardised routine processes,
LSO involves processes that demand advanced information search, analytical
interpretation and technical skills as well as some judgment and decision making
skills.
4.9.4 Corporations Rather Than Legal Firms Driving LSO
Given the institutional context described above, profit-capturing opportunities for

LSO providers vary according to whether their clients are law firms or business
corporations.
In a law-firm driven value chain, the major part of LSO providers’ work lies in
knowledge and information management. Climbing up the value chain implies
taking all steps in knowledge and information management. But even as the LSO
provider accumulates internal legal process capabilities, it is unlikely to be able to
take on advisory work, unless the law firm, as client, wishes to disintermediate
itself. LSO providers’ growth is therefore likely to come more from new client
markets, by developing low-cost efficient solutions (in effect a new product) for
new segments in the legal marketplace which have not previously been able to
afford the service, for example small and medium-sized firms and low-income
households.
By contrast, in a business corporation driven value chain, an LSO provider deals
directly with a client corporation, specifically with its in-house counsel. Upgrading
opportunities, taking on advisory work, appear larger in this value chain, with
external attorneys hired directly by the corporation to deliver premium advice. In
corporate transactional work, LSO providers may have the opportunity to undertake
multi-disciplinary business advisory work, by combining legal and non-legal work.
4.10 Take Aways
• The industry has and continues to evolve to meet the needs of organisations.
• Cloud computing is likely to affect not only the IT outsourcing sector but also
the BPO sector – however there are still many questions surrounding cloud
services.
• The call centre industry needs to change to deliver better customer experience
and empathy. The drivers for call centres are nevertheless significant, including
delivering multi-channel communications availability, 24 hour availability and a
more responsive service to a more demanding customer.
• Growth is expected to be seen in the travel and logistic outsourcing sector driven
by the complexity introduced by new technology, in Finance & Accounting
through increased regulatory pressures and in Human Resource outsourcing
through the drive to become knowledge driven organisations.
• The recent emergence of KPO, LPO and LSO, although still relatively immature,
are likely to see significant growth.
Outsourcing Within Industry Verticals
5
The adoption of outsourcing and offshoring varies by different vertical sectors.

Some have been early adopters like the banking and telecoms sector. Others like the
insurance sector have been reluctant, but are now being forced to consider
outsourcing to drive efficiencies or even reconfigure their value chains.
The telecommunications sector being an early adopter is still a major driver for
innovation in the use of outsourcing and managed services. The public sector is now
beginning to embrace outsourcing as a means to reduce costs, restructure service
delivery and drive efficiencies, although the challenges to the use of outsourcing are
significant. The retail sector has also been a reluctant user of outsourcing, but will
increasingly use outsourcing to not only reduce costs but deliver multi-channel
experience to their customers.
Today, the charity and SME sectors are also looking to outsourcing to help
compete in the global market, although the lack of operational experience and
resources makes the task of successfully managing an outsourcing programme
more difficult.
This chapter examines outsourcing in each of these sectors in detail.
5.1 Banking Sector
Ever since offshoring and outsourcing in the services sector began to evolve, the
banking industry has been at the fore-front in taking advantage of this trend. While
it started with non-core activities seen as peripheral to the organisation’s main line
of business, as capabilities and confidence have grown, outsourcing has progressed
to business enablers such as IT, critical back-office processes and pre-sales/post-
sales support activities.
As banks are regulated entities, the offshoring of banking services has received
the attention of central banks. The Basel Committee on Banking Supervision
(which is a global central banks organisation) through a Joint Forum has identified
key risks in the outsourcing and offshoring of banking services and now provides
recommendations on how central banks and banks should address these risks.

56 5 Outsourcing Within Industry Verticals
The Joint Forum of the Basel Committee on Banking Supervision established a

working group to develop high-level principles about outsourcing. The key issues
and risks and the principles are contained in the Joint Forum Publication, February
2005, but in essence its recommendations and requirements are no different than
best practice applied in other sectors.
5.1.1 Banking Value Chain
The banking value chain is a complex series of activities involving: creation of

financial products; bundling of such products to be made available to the mass
market; branding of services; sales process which pushes the products out to the
market through multiple channels; application processes used by customers, which
include detailed collateral verification; back end financial operations processing;
making available the financial product to the customer; the actual transaction (see
Fig. 5.1).
Some of these activities are appropriate to outsourcing, however some of the
activities may be deemed to be core. As such the financial institution needs to be
careful in understanding exactly what activities are core and which may be deemed
to be too risky to be outsourced from a compliance perspective, or for the longer
term success of the business.
Marketing Sales Product Transaction
Branding of Sales Multi Channel Acquisition and Clearing

Credit Funding Payments
a Product Support Mgmt. Offering and Settlement
Introducing a General Management Determine Collateral Credit data to Payment of Booking of

brand e.g. offers to of sales via financial evaluation treasury interest payments
“easycredit“ in customers via Internet requirement
the credit market letters branches and Rating of Refinancing of Payment of Governance of
sales banks Identification borrower credit amortisement in-time
Advertising Forecast of potential payments
projections collaterals Final pricing
Bad Loan
Pricing Credit Management
approval realisation of
collaterals
Credit
account
opening
Payout of
credit
Risk Management: Management of Credit Portfolio and Credit Risk
Identify the resources allocated to the consumer credit process
Calculate costs and revenues for each process step
Evaluate cost efficiency respectively value added for each process step
Fig. 5.1 Banking value chain

5.1 Banking Sector 57
5.1.2 Outsourcing Drivers for Banking Sector
5.1.2.1 Economies of Scale

The market continues to see challenging times, with banks forced to adapt from a
high-growth industry to a low-growth, low-margin one.
The competition among firms has changed into fierce rivalry within and outside
certain parts of the value chain. The challenge therefore is to critically analyse the
processes within the value chain, identify those core competences which provide a
competitive advantage, and redesign established organisational layouts accordingly.
While quite distinct in actual practice, banks, insurance firms and other financial
services providers have several common features that predispose them toward using
a large degree of outsourcing. Specifically, they handle large volumes of informa-
tion, in both paper and electronic form, and they typically provide customers with a
wide variety of services.
According to an influential study by Deloitte,1 size is a critical factor in terms of
its impact on outsourcing. Larger financial firms seem to be driving change across
the financial services industry and benefiting from outsourcing to develop a com-
petitive advantage over their smaller rivals. Approximately 80% of the world’s
largest financial institutions – characterised as firms with market capitalisation
exceeding $10 billion – are already working outside their home market. In 2006,
15 major financial groups had more than half their assets abroad (Gentle 2007). As
for smaller companies, only about half of them procure services from an offshore
location.
5.1.2.2 Efficiency
Compelled to manage expansion whilst keeping a constant eye on the cost-income
ratio, banks are looking to achieve a step change in operational efficiency and
simultaneously improve time-to-market, and customer satisfaction. At the same
time, banks are being forced to deal with the burden of extensive industry
regulations (banks are required to monitor their own financial and operational
performance more closely than ever).
5.1.2.3 Compliance
The costs of enabling compliance, including identifying the risks of, and tackling,
non-compliance, have resulted in a more systematic approach to risk monitoring
and governance. Most institutions are focusing on operational risk as a separate risk
category, and have consequently established separate group-level operational risk
functions. The aim is to improve performance and accountability, and not just to
comply with regulations. Outsourcing can help banks achieve compliance more
effectively.
1
http://www.deloitte.com/dtt/cda/doc/content/Offshoring%20Final(1).pdf
5.1.2.4 Cost Reduction

Banks increasingly need to rely on cost cutting to maintain earnings growth and
capture market share from competitors – banks are struggling to make further
progress in terms of cost reduction, forcing them to look beyond conservative
cost cutting to long-term efficiency. The financial services institutions have increas-
ing confidence in outsourcing as a mechanism for delivering benefits, cutting
operational costs and hence allowing available spend to be focused on change
activities.
Within the outsourcing space, there are some processes within the banking value
chain that are more appropriate for outsourcing, whether ITO or BPO or Customer
Service functions. There are however some activities which are seen as the core
business of the bank and are less likely to be appropriate for outsourcing, as
illustrated in Fig. 5.2.
5.2 Insurance Sector
With globalisation and deregulation, the business environment of the insurance

industry has changed substantially. The tremendous progress achieved in IT and
communication technologies are another main driver of profound change in the
insurance business. Entirely new business models and a segmentation of the value
creation chain, or, in other words, new forms of co-operation and competition are
among the consequences of substantial IT progress. In addition, competition is
Customer Seen as Core Mainly IT Mainly IT Seen as Core

facing competence Platforms Platforms competence
Risk
Channel Management Insurance Advisor Core Investment
Payments Cards
Renewal and Value Chain Platforms Banking Management
Compliance
Branch Doc Manage Payments

Channel Sales Advisor Lending Credit and Investment
(Teller and and Records Services
and Service Desktop/Portal Systems Debit cards Analytics
Seller) Retention Factory
Treasury and Company/
Customer Audit and Claims Client Data Internet Trade
Cash Industry
Knowledge Controls Processing File commerce Compliance
Management Provided Serv.
Payments
Loan Advisory Deposit Merchant Investment
Risk Analytics Underwriting Delivery
Origination Management Systems services Services
Channels
Security and Corporate and

Core Policy Clearing and Payment Trade Floor
Mobile Privacy Wholesale
Systems Settlement networks in-a-box
Management Banking
Business
Product Statement of
Call Center Continuity
Development Production
Management
Credit
Internet Reinsurance Decisioning -
Loans
Credit
ATMs Decisioning -
Mortgages
Credit
Decisioning -
Leasing
Fig. 5.2 Banking value chain – the role of outsourcing at each stage
5.2 Insurance Sector 59
becoming more and more intense, not least due to the necessity to earn adequate
returns on capital.
As a result of all these factors, market structures are subject to fundamental
changes since insurers increasingly work on improving their efficiency and use the
new environment to their advantage.
Insurance companies have resorted to a whole variety of strategies to meet these
challenges. Innovative product design, novel approaches to distribution,
re-organisation and automation of business processes, internal restructuring and
mergers and acquisitions are different approaches aimed at coming to terms with
this new environment. In addition, for many insurers striving for efficiency gains, a
particularly important approach consists of focusing on core-competences by way
of outsourcing non-core activities to third party providers.
Whereas up to the mid-1990s, the insurance industry was characterised by an
extremely high degree of vertical integration, this has changed rapidly over the last
decade. Today, insurers increasingly rely on outsourcing as a strategy in order to
save costs, enhance their flexibility or reduce risks.
So far, only a very small number of jobs have been relocated to low-cost
countries. The new offshoring possibilities have given rise to expectations and
fears that a substantial part of the value chain in insurance provision will be
relocated to India or to Eastern European countries over the next few years.
Because of the difficulties and risks involved in offshoring in the insurance
industry, which very much relies on customer confidence and a highly qualified
workforce, the locational advantages of developed countries still persist. Although
offshoring will certainly gain some importance, the vast majority of jobs in the
insurance industries will very likely remain “onshore”. If it proves worthwhile at
all, offshoring will in most instances be restricted to relatively simple tasks which
are characterised by an easy and time-invariant structure, and the possibility to
separate them easily from the rest of the business, without complicated and varying
interfaces.
It is to be expected that multinational insurance groups will use offshoring to a
far greater extent than national or even regional insurers which rely on other
instruments to enhance their efficiency.
UK policy administration has so far been dominated by the use of onshore
outsourcing resources, however the TCS-Pearl deal, which saw Pearl transfer
administration of its existing closed Life and Pensions books over to a new
subsidiary of TCS, illustrates the growing use of global sourcing strategies in this
space. The deal saw the transformational phase offshored to India with insurance
operations remaining in the UK in order to create a go-to-market centre of excel-
lence around insurance BPO.
Insurers are also using technology to support new distribution models such as
work-site marketing in life insurance. Commission technologies to improve agent
and broker commission processes represent another area of investment: to provide
satisfactory and competitive levels of service to field agents. Automating
underwriting/rating/pricing processes is emerging, with tools and configurators to
support workflow and decision making.
Risk management has also become more crucial as insurers address increased
regulatory scrutiny. Dashboards represent a newer area of investment, often bun-
dled with larger IT services and solutions as well as advanced analytics. Insurers are
placing heavy emphasis on enterprise integration technologies to tie together legacy
and newer systems, and interest in Service Oriented Architecture to gain flexibility
is growing.
Insurance industry’s response to market challenges:
• Insurers are using technology to support new distribution models and automating
underwriting/rating/pricing processes to support workflow and decision making.
• Core policy administration and claims processing has emerged as an area of
focus for IT investment, with technologies such as BPM and rule engines being
applied to improve speed, cost and satisfaction levels associated with claims
processes.
• Delivering excellence in the lending processes needs lenders to create
automated, standardised means of managing content and eliminating paper
from the process where possible.
• Users are expecting BPO providers to provide the technology, systems and
applications that facilitate streamlining and automating of business processes –
ITO and BPO are converging.
Implications for outsourcing service providers – they are increasingly being
asked for:
• Automation – elimination of paper wherever possible, minimising human error
and lowering unit costs via seamless workflow.
• Workflow systems to capture contractual agreements accurately, while workflow
timers guarantee promptness in process completion and ensure that deadlines are
met.
• Standardised – a consistent enterprise-wide view of the process, with a unified
framework that sits across the organisation.
• Ability to actively monitor events and adapt rapidly to changing business events
and investor demands via business rules.
• Clear and documented procedures and responsibilities in the reporting and
compliance “supply chain” of information.
5.2.1 Insurance Sector Value Chain
The insurance sector is ripe for outsourcing – it has been reluctant to do so, but with
increasing market pressures, the sector may be forced to outsource now.
Outsourcing deals in the Insurance industry lag behind Banking and Capital
Market industries. Being naturally risk averse it is not surprising that Insurance
firms have not outsourced further. However, the increasing regulatory
requirements, strong competitive pressures and the rise in fraud cases indicate a
potential rise in outsourcing of high-end insurance processes.
The FSA has developed detailed sets of principles that insurance firms should
adopt in any outsourcing arrangements. They outline: the factors to be considered
before deciding whether to outsource any activities; the issues to be covered in the
5.2 Insurance Sector 61
contract with the service provider; and the ongoing management of the relationship
with the service provider.
Behind them is the general principle that a company does not abdicate responsi-
bility for a service by handing it over to someone else. The overriding obligation of
an insurance firm is to take reasonable care to organise and control its affairs
responsibly and effectively with adequate risk management systems.
Firms are advised by the FSA to have ‘appropriate safeguards’ for any
outsourcing or delegation of activities to a service provider, bearing in mind that
different safeguards will be appropriate for different activities, and will depend on
the scale, nature and complexity of the activities. Safeguards are required to be
comprehensive and proportionate and backed up by regular assessment of whether
the service provider is achieving the right standards.
Firms should:
• Identify, assess and manage the risks arising from an outsourcing arrangement;
• Ensure, both contractually and operationally, that there are appropriate access
rights to the service provider’s premises, people and information for themselves,
their auditors and the regulators;
• Consider contingencies to protect business continuity;
• Have an exit strategy.
What the FSA outlines is clearly what most outsourcing arrangements must
consider, but having a regulator force these on the insurance industry adds an extra
dimension to the outsourcing decision making process, and may influence which
Application Knowledge Process

Core competence Customer facing BPO
Development Outsourcing
Sales & Marketing Insurance Order Insurance

Product design Reports Generation
activities Processing Maintenance
• Product • Agency • Verification and • Tracking Policies • Data mining

development and segmentation Validation of status • Payment
analytics • Performance Application Nos and • Maintaining reconciliation
• Loss modelling measurement and Aspirants details individual Agent • Yield management
• Price optimisation incentive design • Date entry records • Hedging strategies
• Customer lifetime • Distribution • Calculating • Claims Management • Asset liability
value analysis management Premium amount and Policy Servicing matching
• Competitive market • Agent training • Underwriting and • Commission • Statutory reporting
assessment • Customer re-insurance Payment Processing
satisfaction • History and audit
management trail
• Keeps track of
outstanding
receivables
Fig. 5.3 Insurance value chain – the role of outsourcing at each stage
activities within the insurance value chain get outsourced, and which don’t, as
The Insurance sector has also shifted many activities towards self help – many
insurance products are bought online using automated systems – firms will continue
with this drive. Given the regulatory requirements placed on the insurance industry,
many have preferred automation to outsourcing.
5.3 The Telecoms and Technology Sector
Infrastructure isn’t the differentiator it was. Operators more than ever need to
demonstrate their commitment to reducing cost and increasing profitability for
their shareholders.
The real differentiator for most is no longer the network, but the ability to
manage partnerships with suppliers and intermediaries.
Given these evolving competitive dynamics, existing players and new entrants
have started examining different operating models and competitive strategies.
Operators today face a number of challenges as market saturation, slow uptake
of new services, and the economic downturn increases pressures to cut costs and
improve efficiency. Industry deregulation has led to intense competition and rising
customer expectations as shown in Fig. 5.4.
In addition 3G, convergence, broadband and the Internet have transformed customer
expectations, while dealing with the rise in volumes of data services and the opening of
the telco value chain as a result of convergence, has changed the competitive landscape
and the types of competitive levers the old guard can pull – put simply – the business has
changed.
What the customer desires

- New channels (IPTV) Content
- New services (interactivity etc)
Applications
New breed of competitors Web Multimedia
-IT industry into telecoms
Telephony etc
-VoIP etc
Cut costs
through
outsourcing
functions
Operatosrs with MKT power
- QoS Service and control
- Security, Authentication Value Squeeze
Lowest cost per bit IP

Become
outsourcing
service
provider
Multiple access platforms Mobile Nomadic Fixed
Customer
Devices
Fig. 5.4 Telecommunications value chain squeeze

5.3 The Telecoms and Technology Sector 63
Outsourcing enables
TECHNOLOGY
Product centric (single platform, secure) Better customer focus
Inflexible PROCESS Agile service delivery

(automated, consistent, easy to change)
High Cost Cost competitiveness
CULTURE
Channel restrictions (outward looking, performance based, multi-skilled) Increase customer reach
Legacy systems INVESTMENT Modernisation of operations

(freedom, leading edge, benchmarked)
Customer unfriendly Become customer centric
INFORMATION
(BI, CRM, data warehousing, mining)
Fig. 5.5 Role of outsourcing in transforming telecom operators
Whilst new technologies (3G, LTE, Wimax) and service opportunities offer
operators new revenue streams to offset the declining margins of traditional
services, they require significant investment in terms of licensing and infrastructure.
To succeed in this environment, telcos need to automate and streamline business
processes, increase efficiency, and enhance relationships with customers and
partners, see Fig. 5.5.
Operators are signing large network outsourcing deals with increasing fre-
quency. There are more than one hundred major network operators both mobile
and fixed, that have outsourced at least part of their networks to one of the major
telecommunications equipment suppliers. The outsourcing supplier scene is also
rapidly changing, with new players on the block emerging from the East, as well as
old telco competitors getting in on the act, see Fig. 5.6.
The industry now (and will increasingly) exist in a complex web of deep
alliances. In many cases, organisations that were once arch-rivals are sitting down
to collaborate. Old adversaries are forced to co-operate, given the significant
financial, operational and strategic pressures they face, and the format that such
collaboration takes is in the form of an outsourcing alliance or some shared service
solution.
5.3.1 Main Drivers for Outsourcing and Managed Services
There are many drivers for outsourcing, driven by the pressure to increase revenues
and lower costs, as illustrated in Fig. 5.7. The terminology used within the telecoms
world means those unfamiliar with the industry would be forgiven for thinking
outsourcing is not a major component of many operators business. However, if you
equate managed services (the terminology used) with outsourcing, then you realise
that the telecommunications sector is at the forefront in its use of outsourcing.
Integrators Equipment manufactures BSS / OSS Operators Value chain
Motorola BT GTM
WiMAXnet build and Net ops for Nuetel
$20m management Convergys Amwaj Island
for Mena Telecom billing services for Smart City
Disney Mobile
C & W deal with
Royal SunAliance
BT Wholesale network
Alcatel-Lucent outsourcing deal for
managed NGN for Virgin
Accenture Telecom New Zealand
payroll for Telecom TUI 5yr network infrastructure
Zain deal with Ericsson to
$100m Italia outsourcing contract to
outsource the management of
its network and field operations Patni IT services Deutsche Telekom
in Nigeria for a five year term for Carphone
Warehouse Unilever extended its
BM 4 year deal with Ericsson outsourcing contract with BT
$200m Royal SunAlliance Network build & management in a technology refresh deal
for Endesa Spain
NSN a five-year services Asiainfo CRM / BI and
IBM Bus processes & IT contract to manage Orange’s maintenance for
for Idea Cellular Spain’s fixed and mobile China Mobile - 7 China
multivendor networks Mobile subsidiaries
NSN 5year deal with

Tech Mahindra Russian carrier MTS for
Strategic sourcing O&M across Central Russia
services for BT
Ericsson
$1Bn
Network build and mngt or Bharti
Ericsson Network build

$5Bn
and management
for Sprint Nextel
Deal value
Fig. 5.6 Outsourcing growing throughout the value chain within the telecoms industry
Issues
• Maintaining profitability
• Increasing competition
• ARPU decline
• Technology refresh
• Resourcing
Outward Facing Inward Looking

Solutions
Increase Revenues Lower Costs
Outsourcing
Wireless Managed
Service Outsourcing
Broadband Services
provision
FMC &
Sharing
Mobile TV
Fig. 5.7 The overriding drivers for outsourcing the telecoms industry
5.3.1.1 Restructuring the Business

As competitive pressures increase, operators need to re-evaluate their business
structures and their relative position in the value chain. Outsourcing and managed
services simplifies the value chain and enables an operator to move closer to
customers (if that is what they want).
5.3 The Telecoms and Technology Sector 65
MNO MVNO
Usually lowers as they leverage
Retail distribution
their existing channels
Network O&M
Marketing
Customer care /
billing
Retail distribution
Marketing
Customer care /
billing
Net Interconnect /
wholesale
Net Interconnect /
wholesale
Customer Customer
acquisition acquisition Fixed
Retention Retention Variable
Fig. 5.8 Changing cost structures in the mobile industry through use of outsourcing
Look at the lessons from the Mobile Virtual Network Operator (MVNO) world –
the cost structure of a traditional fixed infrastructure operator (an MNO as they are
called) is biased heavily towards fixed costs (Network O&M constitute ~30% of all
fixed costs, Sales ~20%, Customer Care (inc. billing) ~15%, Marketing ~15%. The
main variable cost elements include: Interconnect costs and Customer retention
costs (see Fig. 5.8)
Now look at the cost structure of an MVNO – it is almost completely the
opposite of the traditional facilities based network operator. The main fixed costs
are relatively small and comprise: Customer care (inc. billing), Sales, and Market-
ing. The variable cost proportions are dominated by wholesale airtime costs as well
as customer acquisition. Wholesale costs can often represent 50–70% of a typical
MVNO’s operating costs.
5.3.1.2 Regain Focus

Operators need to differentiate their offering with service bundles, which may
include new forms of content (video, TV, music, etc.). This requires considerable
effort for developing, launching and marketing, especially with increasing time-to-
market pressures.
Being able to focus on what may be perceived to be the key differentiating
activities can bring about significant competitive advantage – whilst leaving the
network to the outsourcer (or managed service provider). If the network is no-
longer the competitive differentiator – what is?
A next generation operator typically seeks to leverage its assets, which may
include:
• Brand – stretching existing brand equity towards the telecom domain (e.g.
Virgin);
• Existing customers – up selling services to existing customers is a lot cheaper
and easier to sell, than winning new customers (e.g. Tesco in mobile, banking,
insurance, etc.);
• Distribution – leveraging an existing distribution channel to get new products
and services to the market, at a much lower cost than those without such
channels (e.g. Carphone Warehouse);
• Product bundling – bundling of multiple communication services is a form of
convergence which enables operators to increase the sum of the parts, build
barriers to consumer switching and increase consumer loyalty (e.g. BT); and
• Content – as the old saying goes content is king, but without a channel to the
customer, it’s a king without an empire. Thus content owners or aggregators,
view fixed and mobile as a channel to customers and simply another media for
the distribution of its content (e.g. Blyk).
5.3.1.3 Improve EBITDA

Operators have embarked on internal process optimisation activities for many years
now, investing further will just result in diminishing returns – what is called for is
access to economies of scale. By outsourcing to a managed service provider, it
becomes possible to benefit from economies of scale and improve EBITDA.
5.3.1.4 Improve Quality of Service

In competitive markets, the Quality of Service (QoS) offered to users matters. It
may no longer be a competitive differentiator; it may not help acquire new
customers, but it may stop current customers leaving or conversely encourage
them to leave. Operators need to manage the end to end QoS of their networks.
This calls for attention to network design, implementation and ongoing operations
and maintenance. Outsourcing and managed services allows the operator to deliver
services and innovation without having to worry about assuring the quality of
service delivered over the network.
5.3.1.5 Manage Technology and Operational Challenges

As the pace of technology increases, with new standards, protocols, interface
requirements, from 2G, 2.5G, 3G, 4G, LTE and so on continually being pushed
in the market, it is crucial that someone keeps a watchful eye on these developments
and implements innovative technology that delivers added value (in terms of cost
reduction or service potential).
However, an interesting question arises, “what is the benefit in the operator
keeping a watchful eye, consuming considerable resource, if they can offload that
responsibility to someone else whose core business is next generation technology”?
5.4 Public Sector 67
Outsourcing to a managed service provider, can help reduce the technology and
operational risk (although it might tie the operator into a technology that they may
not necessarily want). . ..
5.3.1.6 Improve CAPEX Utilisation

Given telco operations are highly CAPEX driven with significant upfront invest-
ment, improving CAPEX utilisation is a useful means for improving cash flow. By
outsourcing, an operator can benefit from experience gained by the supplier of
leveraging equipment (not something that vendors would openly deliver as a
standalone service to telcos, given the cannibalisation effect it has on equipment
sales).
Outsourcing offers the quickest and (potentially) the least risky route to market,
requiring lower levels of capital expenditure. Capital expenditure is substituted by
increased operational (wholesale) costs to the outsourcing service provider, costs
which scale up with growth in the customer base and usage. Outsourcing can thus
reduce cash outflows in the short term and shorten the time in reaching positive cash
flow.
5.4 Public Sector
Changes to public sector finance are accelerating the drivers for change within these
agencies. The debate between state and private sector ownerships is being
re-examined, as well as issues of vertical integration and the use of outsourcing
as a real strategic lever for the public sector.
When a government decides to maintain public ownership of essential assets, it
could transfer responsibility for managing the asset to the private sector, thereby
separating asset ownership from service provision. The transfer of service provision
from the public to an external organisation is defined here as public sector
outsourcing.
Outsourcing enables government to retain control over the specification of the
service, the management of the contract, and the evaluation of the service
provider’s performance.
Although privatisation and outsourcing have many common characteristics,
there are a couple of important differences between the two. First, the arrangements
for provision of outsourced goods and services are not forever: the contract will
specify a date at which the arrangement ceases, absent a contract renewal.
Privatisation, however, is generally a once-and-for-all sale of a state-owned asset.
The government retains no governance control and no operating risk, although it
usually retains regulatory control. Privatised assets can be re-sold (even back to the
government), but this is usually caused by financial (or other) problems rather than
by contractual obligations. Secondly, outsourcing does not necessarily involve the
transfer of any physical assets, whereas privatisation does. Outsourcing may, in
fact, simply involve the procurement of a specific service – such as cleaning or
consulting – which involves trivial physical assets.
One common feature of both outsourcing and privatisation is that their rationale
hinges on the differences in incentives between the public and private sectors. The
objective of the private firm is to maximise profit, which can be measured relatively
easily and can be tied to a manager’s performance. Public-sector organisations, on
the other hand, have a more complex set of objectives that involve the maximisation
of social welfare. These objectives are hard to measure, thereby weakening the
power of incentives in the public sector.
The primary objective of outsourcing is thus to increase efficiency by
introducing a competitive environment for the provision of the services – engaging
the private sector in the practice of governance and service delivery supports the
idea of people’s participation in the government.
Outsourcing directly involves the non government sector in government
operations and for many countries which subscribe to democratic ideals this
manifests a sincere commitment to strengthening public-private partnerships.
Favourable business relationships established by successful outsourcing contracts
cultivate the precedence for other types of partnerships between corporations and
governments. Thus, aside from the tangible improvements that outsourcing services
deliver to public agencies, governments are also able to enrich their overall
relationship with the public they serve.
5.4.1 A Means to Radically Transform Service Provision
The extent to which countries outsource government services differs quite signifi-
cantly and is largely governed by the historic mindsets within each country (see
Fig. 5.9). The UK and USA being pro-open markets and keen on opening up the
Outsourcing of Government Services

(purchase of goods and services v's inhouse provision)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: OECD
Fig. 5.9 Government outsourcing trends by country

Total outsourcing expenditure by sector (2007/08 - 2012/13)
Source: Kable
Fig. 5.10 UK government outsourcing by sector
markets and promoting competition are shown to have outsourced a significant

proportion of goods and services that it requires, whereas some of the European
countries which have been more closed and less open, such as France and Portugal
have only outsourced a limited amount of goods and services, and most of that has
been goods, rather than services.
Within the UK, public sector outsourcing started 20 years ago and although now
close to 80% of goods and services is outsourced, it still continues to grow. The
range of goods and services that are outsourced by the public sector within the UK
includes a full range of services, from defence to transport to activities within both
local and central government (see Fig. 5.10).
However, much work is still required to drive out inefficiencies. The 2004
Spending Review identified auditable and transparent efficiency gains of over £20
billion in 2007–2008 across the public sector. Over 60% of these were directly cash
releasing. In 2010, the UK government identified £6 billion in immediate savings.
5.4.2 Evolving Generations of Outsourcing
Public sector outsourcing tends to follow an evolutionary path, usually starting with
the outsourcing of what is called blue collar services, which tends to include
services that are classified as facilities management. Building cleaning, mainte-
nance, cleaning, the running of canteens and security are seen as periphery
activities that have little impact on the direct delivery of services. These services
not only consume valuable management time, but tend to be more expensive to
provide in-house than through external providers that gain from economies of scale
(see Fig. 5.11).
Professional
Blue collar services
Core services
services considered
non-core
e.g. Building e.g. Information e.g. Prisons, fire

cleaning, technology,Back and rescue,
canteens, office tasks enforcement
security guards activities,
employment
placement services
FACILITIES CUSTOMER
MANAGEMENT ITO & BPO FACING
Fig. 5.11 Evolution of public sector outsourcing
The second phase of public sector outsourcing includes the external sourcing of
IT and some back office processes, such as HR, payroll, environmental services and
to a limited extent contact centres. These activities are seen as being the underlying
pillars for successful service delivery, but are not customer facing. Outsourcing
these activities brings about flexibility, an injection of process improvement,
efficiency and access to technology, which may have been out of reach by the
public entity.
The third phase is the outsourcing of core services, services which directly
interface with the public. These include the running of prisons, law enforcement,
employment placement services and the wide breadth of services that are delivered
by the public authorities.
The evolutionary path is necessary because it not only provides an essential
learning path, but also allows the public to become accustomed to outsourcing
within the public sector, something that tends to be met with some hostility by the
public and certainly the unions.
The recent financial crisis and the massive bail-outs by national governments of
the banks and the significant quantitative easing measures that have been
implemented, has meant that bringing down the cost of public provision of services
is now seen as vital to survival of public sector services. The evolutionary phases
are thus getting shorter and countries are leaping from phase 1 to 3 in a matter of
months instead of the decades that previous governments took.
However there are many issues that governments need to be mindful of, as
a
Traditional Model Outsourcing Model Implications
Separation of
Increased transparency serves to
“purchaser” and
foster accountability, avoids
“provider”
conflicts of interests (in-house).
Accountability Hierarchical
and Explicit specification
However, multiple organisations
Responsibility of services
Focused on inputs can blur accountability.
and processes
Performance
Political considerations: public
measures to monitor
pressure; minister always
compliance
responsible
Retain the technical skills of the Acquire the commercial skills

function being outsourced necessary to manage outsourcing
Government
capacity to
manage
This may be lost as the government is no
longer directly involved in the provision of
Needs to become an established and on-gong
the service
function, not “one-off”
May lead to dependence on the incumbent
Implications for career tracking policies and
supplier when re-tendered or may preclude
managerial promotions
taking the activity back in-house
Government Private sector

contracts contracts
= prescriptive and = more output (or
process oriented outcome) oriented
Contract
specificity - Concern about accountability implications
how to get Issues Manifestation of resistance to outsourcing in agencies
more than just May be difficult to specify outputs (or outcomes) effectively
the same
Agencies formally issues a tender offer but specifies its needs only in general
Possible terms and contractors are invited to be creative in responding to those needs.
Solutions Agencies put out a more detailed tender offer based on the responses to the
first round.
Fig. 5.12 (continued)

d
Creation of such markets Maintaining such markets
Avoiding over-reliance on a single

How to create Commodity-like services vs. highly supplier
and sustain specialised services
competitive The length and size of individual
supplier contracts can impact the number of
Government can exert tremendous potential suppliers
markets influence through its volume buying
Policies against low-balling
The government needs to focus on the impact on the supplier marketplace of individual
outsourcing decisions
Information previously in the public domain is now in the hands of private contractors and the
public’s right to access that information may be impaired.
Contracts viewed as commercially sensitive. Aside from protection of intellectual property

rights, this is generally inappropriate in the public sector context.
Transparency,
Confidentiality,
Data protection
and Knowledge
transfer Appropriate information needs to be publicly available in order for outsiders to be in a position
to make an informed judgement about the contracting decision.
Contract provisions need to ensure that sufficient information is turned over from the private
provider to the purchaser organisation in order for the latter to maintain up-to-date knowledge of
the activity for future tendering.
Fig. 5.12 Key issues for consideration within public sector outsourcing
5.4.3 The Drivers for Outsourcing in the Public Sector
The public sector is under unprecedented pressure to do more for less. Service
transformation and outsourcing remain valid ways to respond to the continued drive
for benefits realisation, efficiency gains and the shared services agenda. They face
the challenge of achieving these goals whilst under constrained budgets.
Government organisations are not too different from large corporate firms in that
both have cost savings and operational efficiency as core objectives in carrying out
their functions and mandates. It is with these objectives in mind that government
executives have begun to reconsider the outsourcing model for public sector
functions.
As governments have strived to become more technologically efficient, more
attention has been given to public sector outsourcing.
Public sector outsourcing is now a well-established mechanism for government

service provision. Despite a great deal of practical experience by governments of all
levels, in many countries there is still relatively little agreement about whether
outsourcing is uniformly beneficial or what magnitude of reductions in government
expenditure might be achieved. This debate has intensified recently as outsourcing
has moved from straightforward tasks to more complex customer facing tasks.
5.4.4 Public-Private Partnerships (PPP)
The private sector financing, designing, building, maintaining, and operating of

infrastructure assets, traditionally provided by the public sector (or redeveloping
existing ones), represents a new form of outsourcing in the public sector, used
extensively within the UK. A public-private partnership brings a single private
sector entity to undertake the provision of public infrastructure assets for their
“whole-of-life”, generally 20–30 years. The private sector partner then charges an
annual fee for the use of the infrastructure assets. The essence of the argument is
that the whole-of-life perspective can potentially lead to efficiency gains, although
in practice, this has proved to be a debating point.
The PPP ideology is based on the premise that the private sector is more efficient
in its ability to embrace public finances and in providing services (both enhancing
quality and creating new services), in acknowledging clients needs and in making
demand-driven decisions. This it is claimed brings about better governance of
operations/resources, better effectiveness and efficiency.
However, problems have been encountered in the UK in terms of an inadequate
understanding of the deals, with consequences for the private and public sector, and
the quantification and management of risks (Project risks, Development Risk,
Technology Risk, Performance/Operational Risk and Revenue Risk).
5.4.5 Outsourcing Offshore Versus Onshore
In public sector outsourcing, an important question that governments have to

answer is whether to outsource onshore or offshore. There are two main
considerations that will have to be factored in when deciding where to outsource.
The first is the type of work that is being outsourced – is it handling sensitive data
which need more stringent security? Those functions which require stricter security
measures, if outsourced at all, are typically kept onshore.
The other is the impact such outsourcing has upon the local employment. Local
authorities have a dual role of providing local community services for the people, as
well as promoting business in their areas. Offshoring services, with the resultant
loss of local jobs will not only upset many local people, but will make their jobs
harder when it comes to promoting local business and employment.
Many industry analysts, from the outsourcing and government sector alike, are
of the opinion that contracting out does not have grave effects to local employment.
In fact, according to a report released by the US Bureau of Labour Statistics in 2005

only 2% had outsourcing as a contributing factor. In another report in 2006, the
Duke Centre for International Business Education and research stated that 90% of
all R&D offshore implementations had not created any job loss in the country.
These studies show how media reports may have overstated the negative effects
of offshoring on local employment.
Nevertheless, public managers find themselves trying to strike a balance
between maintaining a positive public opinion, whilst accomplishing processes in
the most efficient way possible, which is a very delicate balance.
5.4.6 A Closed Market for New Suppliers
Despite the growing demand for government outsourcing and the large deals that
they entail, government outsourcing has failed to overtake the market for business
activities by traditional verticals that have held the lead in industry, i.e. BFSI,
healthcare, etc.
One of the major issues that have been impeding government outsourcing is
rooted in the essential characteristics of the project contracts. Because of volume of
work that is involved in carrying out a government contract, prospective bidders are
somewhat limited. Only a few large players, many of them multinational in nature,
can guarantee stable facilities to deliver the service.
Furthermore, government protocols (and internal mandates) may require that
only companies with specific net worth can participate in the bidding process, as a
form of safety net and guarantee of the real capacity to deliver the projects.
For these filters alone, a vast majority of providers would have already been
disqualified. Because government agencies are under constant public scrutiny, they
would rather avoid contracts with companies which are relatively less renowned
than the major players in the industry to avoid controversies that may spark
negative public opinion.
Delivering on a public sector contract requires a specialised type of management
strategy and project planning. They also demand a deep understanding of govern-
ment needs that may not be accessible yet to companies which are used to servicing
smaller contracts from private sector clients. This is one of the reasons why despite
the forecasted US$100 billion opportunity in public sector outsourcing, only large
established companies such as IBM, HP-EDS, TCS, Wipro and Infosys have
explicitly expressed their intention to develop a business segment dedicated solely
to competing for government contracts.
5.5 Retail Sector
According to Bloomberg, in December 2007, retail sales in the euro area declined
2% from a year earlier, the biggest drop in at least 13 years. Business has gradually
picked up, but discretionary consumer spending is still under pressure in many
5.5 Retail Sector 75
countries for a variety of reasons, including higher energy and food costs, the
housing slump, and high levels of consumer debt accompanied by tighter credit.
The BRC-KPMG Retail Sales Monitor for February 2011 reveals that UK retail
sales values were down 0.4% on a like-for-like basis from February 2010.
5.5.1 Drivers
The retail industry typically has trouble coping with peak demand preceding
holidays, particularly during November to January, when most retailers earn
between 25% and 40% of their entire yearly revenue. Poor service during this
time will translate into permanent customer loss and lower revenues. Therefore
handling peak demand traffic should be a major priority. Outsourcing can provide
this flexibility.
5.5.2 Outsourcing Drivers not Just Focused on Cost
Differentiation by providing a better customer experience may be one of the few

opportunities retailers have to rise above price competition. Seventy-three percent
of European consumers2 said they would do business with a company based on a
great contact centre experience. Of these, 15% would do so even if prices were
higher than average. Multi-channel shoppers generate 20–25% more profit than the
average customer. However, these customers have low store loyalty across
channels.
Multi-channel availability if not managed, can therefore potentially be a threat to
retailers; nevertheless customers today have come to expect multi-channel avail-
ability. Outsourcing can provide the retailer access to both technical and process
expertise to implement multi-channel contact opportunities.
5.5.3 The Need for an Integrated Contact Management Strategy
By failing to provide customers with a means to transact at their convenience,

retailers run the risk of losing their custom to competitors. A majority of new
customers (~70%) will hang up if the phone is not answered within 25 seconds or if
they get through to an answering machine. According to E-consultancy, providing a
contact number during the online shopping process can foster trust in consumers –
reassuring them that they can discuss any issues they may have with an adviser over
the phone – this is especially true of reluctant e-shoppers. The publication notes that
such a strategy can be particularly useful in persuading users who have misgivings
2
Genesys Consumer Survey 2007 – Europe.
about e-commerce to buy online. Outsourcing provides access to resources and

capabilities that may not be available in-house.
5.5.4 Transforming Customer Service Cost Centres into Sales

Centres
When a customer walks into a shop they expect the sales assistant to understand the
products and be able to help them. The same is true if a potential customer picks up
the telephone, sends an email or clicks for instant chat. Replacing a skilled operator
with an automated service might save money in the short term; in the long term
however, the retailer runs the risk of losing brand advocacy and sales.
Inbound customer calls can generate “sales through service”. By resolving
customer issues and exceeding their expectations, a contact centre agent is sustain-
ing rather than losing a revenue stream. Outsourcing can help in transforming
service into sales through a combination of representative incentivisation and by
creating appropriate up-selling opportunities.
5.5.5 The Need for Greater Pro-activity
IMRG estimated that 4.4 million British shoppers spent a total of £84 million online
on Christmas Day in 2007, up 269% from Christmas 2006. However, retailers stand
to lose cross- and up-selling opportunities that have been facilitated in stores by
sales associates. There is a strong requirement for agent interaction, providing
assistance and information as customers shop online and access extended transac-
tional capabilities across channels.
Multi-channel experience, in most cases is lacking in a number of areas; retailers
often fail to answer e-mails from their customers in a timely manner; retailers often
fail to take advantage of opportunities to personalise the interaction. Given that
proactive contact can build brand, enhance customer service and increase revenue,
it is surprising that only such a small portion of all contact centre activity involves
outbound campaigns.
There are many ways in which retailers can engage with their customers to not
only enhance the relationship with the customer, but as a mechanism to drive up the
lifetime value of a customer.
Possible proactive customer contact triggers include:
• Customer complaints
• New customer welcome calls
• Lapsed payment
• Retention call triggered by specific customer behaviour
• Specific sales offering applicable to customer profiles
• Poor satisfaction rating
• Prior to maturity/completion of customer policy/agreement
• Customer attrition
5.6 Charity Sector 77
• Change in personal circumstances

• No contact from customer for specified period of time
However, these activities cost money, and retailers need to find ways in which to
engage with their customer base cost effectively. Outsourcing of contact centre
activities may well serve the retailers well. Although, given the negative sentiment
often encountered in relation to offshoring and offshore accents, it is likely that
most retailers will go for the safer option of outsourcing to onshore providers.
5.6 Charity Sector
Charities to date have been reluctant outsourcers. Fear of alienating their donors,
the risks inherent in outsourcing and the need for charity trustees to govern the
organisation, often whilst holding a day-job, has meant outsourcing was never high
on the charity’s agenda.
However, as charities start facing increasing competition for donations, as
government grants run dry, as donors themselves are starting to tighten their
purse strings, and as other charities start embracing new technology, many are
asking why they continue to struggle over work that is difficult and time-consuming
with pre-historic technology, when they can pay an expert, with the latest technol-
ogy to get the job done better than they ever could.
Outsourcing is slowly creeping into the charities agenda, as many are coming to
the realisation that turning to outsourcing provides them a solution that gives them
access to cutting edge technologies and specialist expertise that would be too
expensive to pay for in-house. If the charity can utilise and provide benefits to the
recipients of their charity at the same time, so much the better.
Outsourcing recruitment is well established in the voluntary sector, and using
specialist firms for IT support is also growing. But getting an outside company
involved in a charity’s public interface is obviously trickier.
While all charities outsource to some degree, they don’t tend to shout about it too
much. Charities are often worried about losing touch with their donors, and
sometimes the donor perception is that outsourcing costs money – and if not
managed well, is almost certainly the case over the long term.
The reality is that outsourcing should save money and free up the charity to
actually speak to donors, so there probably ends up being a better relationship.
Access to sophisticated technology is vital in helping small charities to fundraise.
Other benefits of outsourcing can include: freeing up staff to do their real jobs rather
than taking on unrelated work that doesn’t justify the employment costs of a part-
time post; and offsetting the risk of relying on a single individual to carry out
required functions such as payroll that are not core to the charity’s mission.
However, you can’t outsource the campaigning nature of a charity’s work – that
goes right to the core of what that charity is about – there is a line to be drawn, but
it’s a line that is edging further out. You can’t outsource the things that are strategic.
In a recession, charities need to ensure that as high a proportion as possible of
their donations is devoted to their mission. Outsourcing, or employing external
providers for routine functions, may offer significant opportunities to streamline the
operations and divert more funds to good causes.
The charity market place for outsourcing has an income of £3.4 billion, with
clients’ realising an average saving of 40% on their back office costs, these figures
could mean a total of £136 million extra for charitable activities.3 A recent survey
indicated that around 65% of charities were outsourcing Training, in whole or part;
that IT was outsourced by 61%, in whole or part; with Annual Accounts preparation
outsourced at 42%; whilst Finance functions only outsourced in 12% of cases –
demonstrating that the charity sector is a significant user of outsourcing, and this
trend is likely to continue.
5.7 The SME Sector
Clearly in a battle when facing a corporation with significant resources at its

disposal – an SME with somewhat limited resources (human, technical, legal,
financial and global reach) may find the battle somewhat difficult and short lived.
No one loves Goliath. What is surprising is the world’s failure to respond to the
market power of the multinational corporations as it did to the Goliaths of the past.
However, the time has now come, when the many David’s of the world can compete
with the few Goliaths that have dominated the markets till now. With the increasing
availability of outsourcing and offshoring to the SME market, times are changing.
With a slowing economy, which is expected to continue for the next few years,
the impact of the credit crunch and housing crisis impacting financial markets,
together with lower consumer and business confidence – the implications for
business community cannot be overstated. Under these circumstances, it is very
likely that larger companies will increasingly embrace outsourcing as a means of
global survival.
However the SME market tends to get hit the hardest when the economy slows.
Larger companies may derive their revenues from multiple geographies and may be
protected from the adverse economic conditions in a particular national market.
SMEs also tend to be singly focused – either vertically or from a service/product
perspective, and therefore less diversified in comparison to the larger organisation.
The SME market must embrace outsourcing and offshoring now as both a means
of survival and as a means to level the battlefield with their larger competitors –
who in most cases already benefit from outsourcing and offshoring.
Although most SMEs outsource something (how many SMEs do their own
accounts or clean the offices?), they have been reluctant to outsource beyond
these “traditional” functions. The SME market has been slow to take-up broader
outsourcing and in particular offshoring, primarily because there are not many
service providers who cater for this market with targeted propositions.
3
Charity Business (2008).
5.8 Take Aways 79
In addition, practical experience of outsourcing and offshoring is clearly missing

within the SME market. Although the benefits and drivers for outsourcing are pretty
clear, operational execution and risk mitigation strategies are more difficult for the
SME market to comprehend – they also lack the deep pockets of the large
corporations, who can afford to pay expensive lawyers to manage the commercial
process on their behalf.
Offshoring may now be the only means of survival for many SMEs. Mounting
margin pressure, global competition, and an increased focus on core business are
driving companies like never before to look for new ways to get things done at a
lower cost (typically between 25% and 50% when offshoring). While cost saving is
a primary driver of outsourcing, companies benefit in other ways, including freeing
up internal resources and accessing world-class skills and capabilities.
The typical drivers for SME outsourcing include: freeing-up executive time and
enabling on-demand access to specialist expertise not available internally; gaining
access to best practice processes and best-of-breed technology and tools; gaining
the ability to scale more efficiently; improving performance; and achieving the
obvious costs cutting benefits.
However companies must assess the risk – reward trade-off: for the benefits that
outsourcing and offshoring can provide there are some real risks that need to be
managed by SMEs.
Because SMEs often use outsourcing as means of enabling growth of the
business, it is likely that once growth has been achieved, some processes may
want to be brought back in-house – how easy will this be to achieve? The
innovation and efficiency that the outsourcing supplier may have achieved for the
customer may not necessarily transfer back in-house with the processes/functions,
and therefore there is a real risk that the quality of service will suffer. SMEs must
always seek to complement outsourcing with automation, which will make the job
of bringing the outsourced processes and functions back in-house easier.
5.8 Take Aways
• Competition in the banking sector is forcing banks to drive for efficiency, deliver
compliance and reduce costs – these are being achieved by the use of
outsourcing.
• Although the insurance sector has been reluctant, it is now starting to embrace
outsourcing to make the most of technology, standardise processes and automate
processes wherever possible.
• The telecommunications sector has seen a major shift in business due to the
effects of competition and convergence. The sector is using managed services to
re-configure the organisational structures, to transform fixed costs to variable
costs and regain focus on what can deliver sustainable competitive advantage.
• The public sector is embracing outsourcing to deliver cost savings and drive
efficiencies and transform the delivery of public services.
• The retail sector will embrace outsourcing of its contact centres to deliver
customer experience and transform the call centre into a profit centre.
• Both the charity sector and SME sector must utilise outsourcing to compete on
the global playing field, but the resource constrained organisations will find the
task of smooth transition a real challenge.
References
Gentle, C. (2007). Forecast for financial services in 2010: No room for laggards. Journal of
Business Strategy, 28(5), 20–28.
Strategic Outsourcing: Risks, Rewards
and Relationships 6
Outsourcing can deliver significant rewards to organisations, beyond the common

cost reduction benefits that are most obvious. These cost benefits are derived from
labour arbitrage, process optimisation, IT enablement and scale. Other benefits
include: focus, access to expertise, flexibility and faster time to market. However,
there are a number of risks in outsourcing that need to be recognised and managed,
from loss of core competence, cost escalation, supply market risks and change
management costs. Managing these risks needs a combination of a strong legal
contract and a good relationship, one that is built on mutual trust. This chapter
explores outsourcing risks, rewards and relationships.
6.1 Rewards
There are numerous drivers for firms outsourcing. Some may do so to achieve cost
benefits, others to access resources and some in an attempt to reduce risk (see
Fig. 6.1). All models however carry risks.
Although the particular objectives set for outsourcing will differ, it is possible to
list some of the more common strategic stated reasons for outsourcing, as
elaborated by Kakabadse and Kakabadse (2005):
• Achieving best practice, because a service provider whose core business is the
performance of a particular process will have better practices than a firm for
which that activity is only one of many and peripheral;
• Enforcing appropriate cost disciplines and controls, because the introduction of a
third party will require the need for better cost control and thorough documenta-
tion of internal procedures and costs;
• Better leveraging the core competences of the organisation, achieved through
increased focus on core functions and processes;
• Gaining access to new technology and skills not available in the organisation;
and
• Reducing headcount and achieving cost reductions. Service providers can
achieve savings from economies of scale and scope which can be passed onto

82 6 Strategic Outsourcing: Risks, Rewards and Relationships
Outsourcing Motives
Financial Strategic Other
Cost Core Get rid of

reduction competence problems
Follow the
Cost control Flexibility
competition
Belcourt, 2006 Fixed to Improve Belcourt, 2006

Kremic et al, 2006
Gilley & Rasheed, 2000 Variable service quality Lacity et al, 1994
Jennings, 2002 Kremic et al, 2006
Belcourt, 2006
Kakabadse & Lacity et al, 1994
Kakabadse, 2000, 2002
Gilley & Rasheed, 2000 Time to
Heikkilä & Cordon, 2002 market
Kremic et al, 2006
Jennings, 2002
Kumar & Eickhoff, 2005
Kakabadse & Kakabadse, 2000, 2002
Lacity et al, 1994
Kremic et al, 2006
Leavy, 2001, 2004 Access skills
Lonsdale & Cox, 1998
Lacity et al, 1994
Quelin & Duhamel, 2003
Leavy, 2001, 2004 Jennings, 2002
Zhu et al, 2001
Lonsdale & Cox, 1998 Spread risk
Prahalad & Hamel,1990
Quelin & Duhamel, 2003
Quinn & Hilmer, 1995
Quinn, 1999
Quinn & Hilmer, 1995 Kremic et al, 2006
Zhu et al, 2001 Quinn & Hilmer, 1995
Alexander & Young, 1996b
Belcourt, 2006
Belcourt, 2006 Gilley & Rasheed, 2000 Gilley & Rasheed, 2000
Quelin & Duhamel, 2003 Heikkilä & Cordon, 2002 Jennings, 2002
Lacity & Hirschheim, 1994 Jennings, 2002 Kakabadse & Kakabadse, 2000, 2002
Kremic et al, 2006 Kumar & Eickhoff, 2005
Quelin & Duhamel, 2003 Lacity et al, 1994
Quinn & Hilmer, 1995 Leavy, 2001, 2004
Alexander & Young, 1996a Belcourt, 2006 Quinn, 1999
Gilley & Rasheed, 2000 Gilley & Rasheed, 2000 Quinn & Hilmer, 1995
Kakabadse & Kakabadse, 2000, 2002 Jennings, 2002 Zhu et al, 2001
Kumar & Eickhoff, 2005 Lacity et al, 1994
Lonsdale & Cox, 1998 Quinn, 1999
Quinn & Hilmer, 1995
Fig. 6.1 Outsourcing drivers – academic insight
their clients. The client firm may no longer need to employ individuals for those
processes which it outsources, saving on recruitment, training and other over-
head costs. Offshoring also allows firms to benefit from labour arbitrage.
The most common and obvious driver is cost savings. However these cost
savings are realised through different means. The biggest gain comes from labour
arbitrage where anything from 20% to 35% can be shaved off the costs, the second
largest contributor is through IT enablement and digitisation which can deliver
anything from 15% to 20%. Third on the list is process optimisation that could
deliver around 10–15% savings and finally, economies of scale can bring about
3–5% savings (see Fig. 6.2). This means an outsourcing programme with an
offshore service provider, where the vendor provides a technology solution to
automate and enable the process to be digitised, where the vendor injects their
expertise in optimising the processes, and where they can pass on some economies
of scale benefits, can result in a cost saving of up to 75% to the client – not an
insignificant amount.
One further reason could simply be that the firm may want to ‘externalise’ the
issues and problems involved in doing those processes/functions, i.e. make them
someone else’s problem.
Outsourcing can thus deliver a number of rewards for an organisation (see
Fig. 6.3), from providing the ability for management to focus on its core
competences to cost management, or access to external expertise or technology,
giving the organisation increased flexibility or delivering time to market benefits
6.1 Rewards 83
Cost savings
(%)
20-35% 10-15% 15-20% 3-5% 48-75%
80
Aggressive
potential
60 estimates
Digitisation
40 IT
enablement
Reengineer
Offshore
Conservative
Optimiation potential
estimates
20
Nearshore
Labour Process IT enablement/ Scale Total

arbitrage optimisation Digitisation
Fig. 6.2 Outsourcing cost levers
Management Focus:
• Reduces effort required to manage peripheral activities
Cost management:
• Economies of scale / productivity (people / technology)
• Committed cost structure
• Capital investment avoidance – balance sheet restructuring
Access to external expertise / investment or innovation:

• Access to specialists, management expertise, products, efficient services
• Accelerate benefits
• Manage attrition and depth and breadth of resource requirements
Flexibility:
• Adopt best practices, manage complexity & stabilise environment
• Respond to changes in business environment, leverage technology advances
• Improve systems, strengthen control and enhance services
• Improve scalability
Time to market
Fig. 6.3 Key drivers of outsourcing
which can help organisations bring new products/services to the market quicker
than would otherwise be possible.
Many outsourcing projects run into difficulties because the managers in the
client organisations have unrealistic or conflicting expectation from outsourcing.
The fundamental motives for outsourcing can be characterised as seeking effi-
ciency, effectiveness, or flexibility. Each in itself is a perfectly valid motive. The
problem is that many clients expect (and indeed many vendors promise) all three –
efficiency, effectiveness and flexibility – in the same outsourcing project.
As product/service features increase, so do costs, even under the most efficient

production conditions. Organising for effectiveness is different from organising for
efficiency. The internal structures, systems, processes and culture that enable a
vendor organisation to provide “least cost solutions” are quite distinct from those
that support a “full-service offering”. Procedures used to identify target processes to
outsource, vendor selection, contract negotiations and relationship management
also differ by outsourcing objective.
While this need not necessarily imply that an organisation needs different
vendors for efficiency and effectiveness, it certainly implies that the manner in
which the outsourcing relationship is organised needs to differ based on the
motives. Similarly, flexibility, which is the capacity to increase and decrease
scale of production rapidly, is not easy to reconcile with a “lean” and low cost
operation unless vendors have multiple clients across whom they can balance
demand. But that, in turn makes it less likely that they can function as dedicated
captive units that are highly responsive to the unique requirements of the client.
Another reason why mixed motives are dangerous is that if key internal
stakeholders differ in their expectations from the outsourcing project, the project
is in political trouble before it begins.
Outsourcing without a clear motive and organisational buy-in from senior
executives (and the operational teams) will likely result in perceptions of
outsourcing failure, whatever the ground realities. To have one end of the reporting
chain thinking of BPO in terms of cost reduction, while the other thinks strategic
transformation, can lead to conflicts of actions, goals, and eventually disenchant-
ment with the BPO process.
Organisations need to prioritise outsourcing objectives – efficiency, flexibility or
effectiveness – and communicate them widely within the organisation – most
organisations cannot have them all.
6.2 Risks
The challenges to successful outsourcing are significant. Studies indicate that the
success rate of Information Technology (IT) outsourcing is 56% (Lacity and
Willcocks 1998). Other estimates show that outsourcing clients spend as much as
15% of their IT budget on litigation in the case of IT Outsourcing (Goles and Chin
2005).
Traditionally, research on managing outsourcing relationships has focussed
either on the legal contract, with tight contractual mechanisms recommended to
reduce opportunistic behaviour (Lacity and Hirschheim 1993), or on advocating
strategic partnerships (Willcocks and Kern 1998). Saunders et al. (1997) argue that
contractual mechanisms and strategic partnerships complement each other, with
the legal contract providing the context in which the relationship exists and defining
the interactions between parties.
6.2 Risks 85
No business process is foolproof. There always exists a risk that a process might
fail (that’s why most well documented business processes are also characterised by
an acceptable error rate).
However, it is important to distinguish between the risk of process failure and
the economic consequences of process failure. For instance, consider process
failure in the context of a call centre. It could mean poor customer satisfaction
with the manner in which calls are answered or their problems are resolved. The
economic consequences of this process failure are customer attrition and damage to
brands and reputation.
The risk of failure may increase or decrease to the extent that the vendor firm is
more or less competent than the client. Indeed a basic principle of outsourcing is to
prevent worsening the error rate and should guide vendor selection. However, in
most cases, the actual cost of a process failure when it occurs is the same regardless
of who is executing the process. Therefore unless outsourcing changes the costs of
process failure, it is unclear why clients should expect vendor companies to bear
part of the economic consequences of process failure ex-post. Whether the process
that produces an output is internal or procured, it remains the client’s responsibility
to ensure that the output from the process meets quality standards before passing on
the output to the next process, which could well be selling the final product to
customers. Whilst the client should take every step to ensure that the risk of poor
quality does not increase due to outsourcing (through well defined standards,
quality inspection, monitoring, etc.), it is not clear why outsourcing should make
the client less responsible for the ultimate quality of their product, e.g. when
pharmaceutical companies outsource clinical research, the responsibility for the
integrity of the research still rests with the pharmaceutical companies. In fact, the
only “vendors” to whom one can outsource business risk wholesale are insurance
companies. BPO vendors are not insurance companies.
Negotiating unrealistic penalty clauses or demanding unrealistic safeguards does
not help with successful business process outsourcing.
There are also many risks that have been documented – some of the major risks
are described below:
6.2.1 Loss of Core Competence and Innovation Capability
Loss of skills (by transferring employees and assets to the outsourcing service
provider, the customer risks losing valuable knowledge and experience from
displaced workers) poses a very serious risk. This can also be exaggerated by
outsourcing activities that should not be outsourced (which leads to the deletion
of core competences and affects the firm’s competitive advantage).
The evaporation of competence regarding the process in the client organisation
severely compromises the ability of the client to fuel future innovations. The client
firm acts as the hub of several interrelating processes and is uniquely capable of
pursuing systemic innovations by fine-tuning all the processes with respect to each
other. Some degree of individual component knowledge is necessary to pursue such

‘architectural innovations’.
For example, automakers still carry out R&D in components that they stopped
making many years ago, and frequently intensely collaborate with the component
suppliers in these efforts. Firms that retained the knowledge to integrate these sub-
systems into the over-all architecture of the firms’ products were better able
to identify changing market trends and technologies, and develop enough expertise
to perform systemic changes in all the processes that a new technology enables, e.g.
even though all major manufacturers had outsourced the production of engine
control systems, those manufacturers that had maintained R&D capabilities in
control systems were quicker to identify technological changes in the control
system, and were significantly more effective in performing systemic adaptation
in all aspects of engine manufacture that were affected by these changes. Similarly,
Intel still performs R&D on components whose manufacturing it has outsourced or
has never manufactured itself in the first place.
Another problem with the evaporation of competence is that the client is now in
a dependence relationship with the vendor. Since the client no longer has any
knowledge about the process or ability to execute it, there is significant scope for
opportunism on the part of the vendor – what we know as the hold-up problem.
Even with clear exit criteria with the current vendor, the client may no longer have
the competence to evaluate other vendors, negotiate suitable contracts and transfer
the requisite knowledge to set up a new outsourcing relationship for the process if it
does not retain personnel with the necessary knowledge. Outsourcing should not
mean that the process is not your headache anymore.
6.2.2 Cost Escalation
• Cost increases – the initial contract can be very competitive, however the
inevitable changes over time may increase cost significantly.
6.2.3 Supply Market Risk
• Supply market risk – loss of day-to-day management control of outsourced

services and the possibility of excessive dependence on the service provider
for performance and strategic information on internal technology, as well as
operational and business options.
• Losing control over the outsourced activity – because control through direct
ownership of assets and employment of staff is replaced by control through a
contract.
• Uncertainties associated with the stability of the service provider firms.
6.3 Relationships 87
6.2.4 Change Management Costs
• Overlooking the hidden costs of outsourcing – vendor search/contracting costs

and vendor management costs.
• Organisational change implications – setting up new systems, job roles, staff
transfers, redundancies, etc.
• Overlooking personnel issues – such as motivating retained employees and
gaining commitment from employees transferred to the vendor.
• Failing to plan an exit strategy – which leads to weak power bases for any
negotiation with the vendor and makes it very difficult to back out of an
outsourcing agreement.
6.2.5 Selection, Contracting and Vendor Management
• Selecting the wrong vendor – not looking at both soft and hard factors.
• Writing a poor contract.
• Issues to do with maintaining confidentiality and security.
6.2.6 Communication Challenges
• Poor organisational communication.

• Cross functional political problems.
• Unclear expectations.
6.3 Relationships
Much of the initial wave of outsourcing was focused on reducing cost through wage
arbitrage by using cheaper labour abroad. This approach made the relationship with
the BPO service provider adversarial from the outset and often led to disputes and
even litigation. In addition, the scale of the change programme and the level of
project management resources required were often underestimated.
Many risks can be minimised through a well constructed and managed agre-
ement, complemented by effective relationship management.
The structure of the outsourcing agreement is important, because it embodies the
rights, remedies, duties and obligations of the parties, and more importantly
provides a blueprint for the parties’ relationship. The functions to be performed
are typically business critical or strategically important and the relationship
between the service provider and the customer is typically of a longer duration
with greater intimacy than the relationship created in other commercial contexts.
A well defined agreement aids in developing a smoother relationship between
the parties. The process of creating the agreement is as important as the final
product. In many senses, a well functioning engagement is usually the very reason
that neither party later refers on a frequent basis to the written contract, or seeks to
manage the relationship using the formal word of the contract.
If a company decides to outsource strategic functions or processes, the contract
is the only mechanism to ensure that expectations are realised. However it is
unlikely that the contract can cover all possible future contingencies. There are
serious challenges in governance of contractual relations, given issues of conflict,
mutuality, and order. All complex contracts are unavoidably incomplete. Real
world contracts are almost always incomplete. The likelihood of including all
details in the contract is very limited. Reliance purely on the legal agreement is
therefore potentially difficult.
There is a need to move away from a pure agency relationship, to one which is
akin to a partnership. Although this is far from easy, commitment to striving for a
partnership relationship from both parties is essential if the outsourcing engagement
is to survive the many challenges that an outsourcing engagement presents.
The partnership approach requires surmounting cultural, managerial and com-
munication barriers. Managing anything across organisational boundaries is diffi-
cult. When this is transposed to different countries, difficulties are magnified
greatly. Another important aspect of this partnership relationship is the develop-
ment of trust – something that is difficult to establish when contracting parties are
based on distant shores, meet less frequently and where parties may have different
cultures and working practices.
In outsourcing relationships, especially those involving service provision, it is
impossible to write “iron-clad” contracts that take all possible contingencies into
account. The process and the relationships will both evolve, and the contract needs
to be flexible enough to allow for such evolution.
Managers must simultaneously develop conditions that facilitate the emergence
of trust, with contracts that are perceived as fair by parties, allowing the interacting
personnel to establish relationships.
Managers learn to contract better over the course of a relationship. Contracts in
such situations serve as repositories of knowledge acquired in the relationship
regarding both the partners and the technology. Flexible contracts guide the rela-
tionship and change as the circumstances change. They lead to greater trust and
cooperation between parties when they are used to canalise action by formalising
mutually agreed upon expectations and understandings, including learning from
prior interactions.
Contracts do matter; a well specified contract in the drawer provides both parties
with necessary assurance to draw on in the case of disasters, but the day-to-day
business may be conducted based on the relationship with minimal reference to the
details of the contract.
Very few firms report great success with their very first outsourcing project.
Depending on the complexity of the process to be outsourced, the contractual,
transition and interaction requirements could be very large. However, significant
learning both on part of the client and the vendor in such relationships takes place.
With time partners learn to communicate better leading to more efficient
6.3 Relationships 89
coordination. Clients and vendors learn about each other’s needs and are able to
negotiate better contracts focusing on value creation.
Learning between partners, especially of those skills that are difficult to articu-
late are enhanced by encouraging and facilitating contact between the members of
the two organisations. Such contact also improves trust and mutual respect that aid
in free information sharing and learning from each other’s skills and capabilities.
Research in both alliances and acquisitions show that having a formal process to
capture lessons-learned from previous agreements also helps the organisation to
perform better in the next alliance.
6.3.1 Knowledge Retention
Many firms active in offshoring are also taking active steps to escalate the pace of
learning, by pooling the knowledge about BPO from different parts of the
organisation. For example, in Deutsche Bank, Barclays Bank and the Virgin
group, offshoring business processes started as autonomous initiatives on the part
of some businesses, typically close behind the decision to offshore IT services. As
these initiatives gained momentum, senior management set up more formal
offshoring ‘expert centres’ that centralise and codify the knowledge from these
experiences to better execute future deals.
Such formalisation is facilitated by having a centralised function that is respon-
sible for alliance related activity that serves as the coordination hub for the
individual divisions, as well as having personnel with specialised expertise that
other parts of the organisation can leverage.
6.3.2 Trust
Trust as a phenomenon has many meanings, but no widely acknowledged defini-

tion. The notion of trust has been studied by a number of disciplines, each
emphasising different aspects. Economists tend to view trust as calculative,
psychologists emphasise the personal attributes, while sociologists consider the
institutional properties.
Organisational scholars have noted that coordination and control rest upon a
foundation of trust.
Trust is seen by many as an inherently individual level phenomenon, however,
individuals act within institutional and social contexts, and therefore institution
based trust is important. Interpersonal trust and inter-organisational trust are related
but empirically and theoretically distinct concepts. Inter-organisational trust
emerges as the overriding driver of exchange performance, negotiation, and con-
flict, whereas interpersonal trust exerts little direct influence on those outcomes.
Trust is often treated as a precondition for successful collaboration in the
literature. Trust can be seen as an enabling condition, which facilitates the
formation of ongoing networks. It is often argued that a certain minimum level of

inter-firm trust is indispensable for any strategic alliance to be formed and to
function.
The process of trust development is central to managing an outsourcing engage-
ment. It affects how agents negotiate, execute, and modify an outsourcing agree-
ment and strongly influence the degree to which parties judge it to be equitable and
efficient. The process influences motivations to continue in, or terminate, the
relationship over time. Successful outsourcing relationships it is argued, are
maintained not because they achieve stability, but because they maintain balance:
balance between formal and informal processes.
There are many factors which influence the development of trust. Issues such as
communication, exchange of information, and cultural convergence are critical in
managing the relationship. Differences in cultural background and working life
could create difficulties in offshore outsourcing relationships (see Table 6.1).
Outsourcing relationships in the future will be with preferred and trusted
suppliers, with greater attention likely to be given to performance based contracts,
strategic alliances and partnership arrangements.
The confidence both parties have in a business relationship is determined by the
level of trust and the perceptions of how good or poor are the controls that govern a
deal.
Trust and Control
Long-term outsourcing deals are usually constructed to rely on “control,” which
organisations understand, rather than on trust, which is often perceived to be a less
objective, and therefore more difficult, concept. In reality, a combination of both
trust and control is always in play. Optimal relationships rely on the right balance
Table 6.1 Trust indicators

Indicators Meanings
Capability The technical, management and financial skills and resources to do the job
Congruency Perception and reality are the same
Predictability The ability to set and meet expectations such as financial certainty, financial
stability and delivering to targets
Dependability Both parties can anticipate how each other will perform and behave,
particularly in changing and unpredictable circumstances. They are confident in
each other’s capabilities to get the job done
Mutuality As shared committed to a common goal
Communications Giving and receiving the correct information in a meaningful way and time
Consistency Standards, processes and protocols are understood and consistently applied
Responsiveness The ability and willingness to understand and react to new circumstances and to
harness skills and resources to meet those needs
Compatibility An understanding of the differences between the service provider’s and
customer’s delivery models
Reputation Built up by consistent, independent validation, usually from personal
experience, word of mouth, or from client references
References 91
between trust and control, and it is this combination that results in the perceived
level of “confidence” each party has in the relationship.
6.4 Take Aways
• The benefits from outsourcing are significant and go beyond cost savings.
However, the rewards that are sought must be aligned to the broader
organisational strategy, and must be clear between the stakeholders;
• Rewards can include cost management, focus, access to expertise or technology,
flexibility and faster time to market.
• Risks from outsourcing can also be significant and range from loss of core
competence, cost escalations, supply market risks and change management
costs.
• Managing risks from outsourcing requires a combination of strong legal
contracts and a relationship with the service provider that is based on trust.
References
Goles, T., & Chin, W. (2005). Information systems outsourcing relationship factors: Detailed
conceptualization and initial evidence. Database for Advances in Information Systems, 36(4),
47–67.
Kakabadse, A., & Kakabadse, N. (2005). Outsourcing: Current and future trends. Thunderbird
International Business Review, 47(12), 183–204.
Lacity, M., & Hirschheim, R. (1993). The information systems outsourcing bandwagon. Sloan
Management Review, 35, 73–86.
Lacity, M., & Willcocks, L. (1998). An empirical investigation of IT sourcing practices. MIS
Quarterly, 22(3), 263–408.
Saunders, C., Gebelt, M., & Hu, Q. (1997). Achieving success in information systems outsourcing.
California Management Review, 39(2), 63–79.
Willcocks, L., & Kern, T. (1998). IT outsourcing as strategic partnering: The case of the UK inland
revenue. European Journal of Information Systems, 7(1), 29–45.
Sourcing Models
7
There are various sourcing models available to organisations from the use of
captives, Joint Venture (JVs) to traditional outsourcing arrangements.
Within traditional outsourcing arrangements, there are also various engagement
models available, from the basic staff augmentation model to a more comprehen-
sive managed service model, and a number of models in between. Each model has
its own pros and cons, but fundamentally the right model for any given organisation
depends on the capability of the organisation to manage the relationship and what
specifically is desired from the outsourcing engagement. This chapter examines
these sourcing models.
7.1 Evolution of Sourcing Models
There are a number of sourcing models available to organisations with outsourcing

being just one. Most of the organisations, certainly the financial sector, originally
started by using captives in an attempt to manage the operations closely and manage
the risks from moving from their traditional organisational structures.
Some organisations used Joint Ventures to both manage the operations and get in
depth local knowledge, or to create additional value from the sourcing activity –
migrating from a cost centre to a profit centre. Some risk adverse organisations
sought the help of local outsourcers who bared the risk of offshore sourcing.
Increasingly what we see are many more organisations using the pure outsourcing
model, liaising and contracting directly with the outsource service provider, wher-
ever they are based.
These models are detailed in Table 7.1.
Of these models, the third and fourth are the more risky and require greater
attention to the written contract, as this remains the only real means of control. The
third model is the more typical, especially for small and medium sized firms that
wish to benefit from offshoring.

94 7 Sourcing Models
The first and second model are essentially followed by large multinational
corporations who may have the resources to utilise consultants and lawyers to
identify, evaluate and minimise some of risks that may be apparent.
Indirect Third Party models are still a relatively recent addition and generally
immature. Because the agreement is with a firm based locally, in the same jurisdic-
tion, the legal and managerial relationship may not be as challenging as the more
direct model.
Beyond these broad sourcing models, there are different operational models, in
terms of how the organisation engages with the service provider, from the basic
staff augmentation model to the more comprehensive managed service model and
the many other variations that sit in between the two, as detailed in Table 7.2.
Table 7.1 Sourcing models

Captives Direct Captive – a firm using its own resources to create, own, manage and
control an organisation within an offshore destination, often known as captive
centres – i.e. offshoring but not outsourcing
Joint Ventures Joint Venture – a local firm may partner with an offshore entity for shared control
of the offshore operation – again offshoring but not necessarily outsourcing
Pure Direct Third Party – firms outsource to a third party service provider located
outsourcing offshore. Control of the working arrangement is governed strictly by the contract
terms agreed with the third party service provider – i.e. offshore outsourcing
Local Indirect Third Party – an organisation may enter into a contract with a domestic
partnerships outsourcing service provider, who then subcontracts out all, or a part of the work,
to an offshore company – essentially the indirect third party may bear some of the
risks for a given payment consideration – i.e. an outsourcing arrangement, whose
objective is to offshore, but whose agreement may be based with an onshore
outsourcing intermediary
Table 7.2 Sourcing engagement models

Model Features Pros Cons
Staff ∙ Typically used when ∙ Client will have access to ∙ Even though quality can
augmentation certain skills are not quality resources without be closely monitored by
available in-house to having to budget for the client, if the
execute a project corporate overheads deliverable is not up to
standards, client cannot
hold the vendor
responsible. At best,
what can be done is to
get the staff replaced
immediately at no cost to
the client
∙ Widely used when the ∙ Tactical time to market ∙ Knowledge retention
client requires additional gains remains a challenge.
head-count to tide over a Clients may not always
short period of increased get the same personnel
work to work on projects
within the same area if
they re-engage the same
vendor after a time gap
(continued)
7.1 Evolution of Sourcing Models 95

∙ The client is fully ∙ Quality of deliverable ∙ This model is expensive
responsible to manage can be closely monitored in the long run
the staff as staff are directly
under the control of the
client
∙ The consultants are ∙ Budget variances in the
normally located project will be minimal
onshore at the client’s and costs can be
location accurately forecasted
∙ Cost flexibility
Managed ∙ Also known as the Fully ∙ Since delivery and ∙ Vendors are sometimes
services Outsourced Model, this management of reluctant to assume more
is where the vendor takes stakeholder expectations management
complete, end-to-end are the responsibility of responsibilities
responsibility of a set of the vendor, the client
deliverables in a project organisation can fully
– SLA driven focus on their core
strategic initiatives
∙ Vendor also has ∙ Vendors can be more ∙ Culture mismatch
complete decision independent and can between client and
making responsibilities have a relatively vendor organisations can
in providing the agreed interference-free often result in lack of
set of deliverables management of the understanding among
project both parties, which in
turn can affect
deliverables
∙ Budgets are set for a ∙ Enables vendors to make ∙ In some situations,
certain period of time long term strategic vendors won’t be in a
investments that should position to understand
indirectly benefit the all of the client
client organisation organisation’s pain
points
∙ Can resemble a fixed ∙ Vendors can also bring ∙ In a multi-vendor
price managed services their best practices into scenario, blame games
engagement the project, thereby are common, with both
making key process parties not willing to
improvements assume responsibility for
failures
∙ Adopted when the work ∙ The SLA driven ∙ Switching costs from one
can be clearly scoped out approach can, to a great vendor to another or
with clear deliverables extent, put to rest clients’ bringing back in-house
worries about can be difficult
management of
stakeholder expectations
∙ For this model to work, ∙ SLA driven approach ∙ Typically only justified
the vendor should have can also result in key for only complex
an excellent process improvements, outsourcing programmes
understanding of the delivering significant,
(continued)

client’s organisation and measurable benefits to
systems the client organisation
∙ The role of the client will ∙ Knowledge retention
be that of a reviewer with becomes more
additional responsibility streamlined and
of contract management sustainable
and budget tracking
∙ Adopting a managed
services model from day
one comes with risks
Co-managed ∙ Usually adopted by ∙ Outsourcing ∙ Vendors generally tend
organisations when the organisations can have to take a back-seat and
nature of the process/ tight controls over become more
systems involved is too mission critical comfortable doing
critical to allow the processes and functions mundane tasks as critical
vendor complete control within the outsourced decisions are taken by
of the delivery of system without the client, resulting in
services bothering about low client spending more
level, day-to-day details time in decision making
∙ Pursued when ∙ Quality of deliverables ∙ Client will spend a lot of
organisations do not can be managed at a high time in tackling vendor
have complete level by the client, and at issues and management
confidence about vendor the same time vendor bandwidth gets
capabilities teams can be less unnecessarily stretched
stressed about managing
stakeholder expectations
∙ There will be a ∙ This model gives the
designated Project or vendor teams an
Program Manager from opportunity to get closer
both sides to manage the to the stakeholders and
engagement get to know their
expectations better so
that it becomes easier to
move into a Managed
Services model
Time & ∙ There is an agreed rate ∙ This model is very ∙ Client needs to set aside
Material per hour between the effective if there are too management hours for
(T&M) based vendor and the client many unknowns in a controlling and tracking
organisation project vendor resources
including the approval
and clearance of time-
sheets
∙ The number of hours ∙ This model also enables ∙ It is often difficult to
clocked are tracked the client organisation to provide accurate budget
through a time sheet quickly ramp-up and estimates
system ramp-down project
teams as per
requirements and
budgets
(continued)
7.1 Evolution of Sourcing Models 97

∙ Sometime vendor ∙ It is the model of choice ∙ Vendor will not take
organisations define a for the initial phase of responsibility of
minimum hours of new development deliverables and
utilisation in order to projects management of
cover fixed costs stakeholder expectations
∙ Typically used when the
scope of work and the
deliverables cannot be
clearly defined. It is also
utilised when a certain
level of R&D needs to be
done
Managed ∙ This model has a ∙ This model facilitates ∙ It is often difficult for
capacity maximum limit on the better budget control and customer to track
amount that can be financial planning for the resource utilisation
charged to the customer customer
∙ It is very effective in ∙ This model also enables ∙ Customer cannot
situations where the the customer to buy a monitor resource
nature of work is likely portfolio of services and movements unless
to change or different skills from the vendor resources are named and
types of work are organisation that in turn tracked on a regular
required at various provides the customer a basis
phases during the tenure lot of flexibility in
of the outsourcing managing its own
contract. But the final department/functions
outcome of all these
pieces of work will be
pre-defined and definite
∙ Critical success factors ∙ Ramp-ups and ramp-
include accurate downs of project teams
definition of scope and a are easier to manage
definite estimate of the
work-load
∙ Vendor need not track
the work being
completed through
timesheets, but the
utilisation of project
resources is to be
conveyed to customer
Fixed price ∙ Fixed price model ∙ This is arguably the only ∙ The fixed price model
demands that the scope model that provides an increases the
of work, the milestones accurate forecast of responsibility on the part
and the final deliverables budgets of the client to select the
are clearly defined and best-fit vendor for the
agreed between client job, thereby adding to
and vendor the overall risk
(continued)

∙ Project requirements are ∙ As it is a fixed price ∙ Inaccurate requirements,
very clearly defined at project, it will enable the scope and estimates will
the start of the project client organisation to get result in disastrous
the required return on circumstances
investment if the
estimates have been
drawn accurately
∙ Standard operational ∙ Vendors will also be able ∙ The risk increases as the
procedures need to be to make strategic value of the project
followed by client and investments into their increases
vendor own technology
∙ Periodic reviews have to practices as well as into ∙ The model is not flexible
be carried out client relationship as changes mid-way will
throughout the course of management be subject to change
the project control procedures, and
∙ Billing is typically done more often a lot of
in phases management time is lost
in such exercises
Hybrid based ∙ In most organisations, a ∙ Provides flexibility, ∙ The management time
hybrid model of allowing the required in developing
outsourcing can be seen organisation to move to and managing multiple
in operation. The hybrid a different model as deals
model may comprise circumstances may
Staff Augmentation, demand
Managed Services, ∙ If the system is highly ∙ Loss of an end to end
Managed Capacity, mature and is understood solution, with the
Fixed Price, Time and clearly by the client inherent control
Material or T&M and organisation and the problems
Co-Managed models in vendor, then it is a
operation at any point in perfect candidate for
time Managed Services or
Capacity. If it is not
mature, then it could be
subjected to Staff
Augmentation or T&M
or even Co-Managed
7.2 Take Aways
• Outsourcing is but one of the sourcing models available and its use must be
driven by availability of resources by an organisation.
• Staff augmentation is the simplest engagement model and has been the model of
choice till now. It is fundamentally driven by the desire for cost reduction
through labour arbitrage, rather than the broader business benefits.
• Managed services can deliver broader business transformation but need serious
commitment from both organisations.
7.2 Take Aways 99
• A time and materials model is similar to the staff augmentation model, funda-
mentally driven by the desire for cost reduction.
• A managed capacity model can deliver better budget control and financial
planning for the client organisation and benefit from technology innovation
delivered by the vendor.
• A fixed price model provides security and financial control, but vendor selection
becomes important.
• A co-managed model is the half way house, giving the client control whilst
deriving benefits from a vendor in terms of cost and flexibility. This model
however, requires strong governance structures for it to work.
Strategic Outsourcing Decision Governance
8
The decision making process for outsourcing is not an easy one. The process must
not only consider what functions or processes should be outsourced, but also the
relationship that must be established to deliver those rewards, whilst containing the
risks. Traditionally, organisations sought to move straight to the vendor selection
process, rather than systematically considering the most appropriate sourcing and
engagement model. One of the fundamental flaws of decision making is that the
decision is guided by the heart rather than the head. This chapter examines the
decision making process and details the seven deadly sins of strategic decision
making.
8.1 Introduction
Like any organisational decision, outsourcing is not free of risk and requires
effective management from the outset and through the life of the contractual
relationship.
Few companies have taken a strategic view of outsourcing decisions and the
disappointing results are not due to there being any inherent mistake in the practice
of outsourcing, but rather, are rooted in poor management decision making. The
absence of such a framework has led to a situation where outsourcing decisions
have been made most frequently by default, without considering the long term
consequences for the competitiveness of the organisation.
There are a range of option available to organisations when it comes to business
improvement at a process or a function level, ranging from mere tactical out-
sourcing to more strategic outsourcing. The matrix (Fig. 8.1) characterises four
options that are available, being dependent on how critical the process or function is
to the organisation and its competitive advantage and how capable the organisation
is at performing that process or function.
The vertical axis considers how important the activity is to achieving long term
strategic competitive advantage. For a software firm, for example, competitive
advantage is largely driven by innovation, release management and support. Code

102 8 Strategic Outsourcing Decision Governance
Internal
• Unique historical conditions
• Social complexity
• Causal ambiguity
• Influence of knowledge
• Technology influences
Critical to Perform internally and External
Invest to perform • Macro level influences
competitive develop
internally • Industry level influences
advantage or
or • Market level influences
strategic outsource
strategic outsource
Not critical Outsource

to Outsource or
competitive Keep internal
advantage
Less capable More capable
Fig. 8.1 Strategic sourcing choices
developers who understand the business need and can consistently deliver error-
free code clearly are of strategic competitive importance. Outsourcing the code
development function in this environment would, in effect, be handing over control
of this potential source of competitive advantage to an external party. On the other
hand, code development to a hospital may be of less strategic importance, and
therefore could, potentially be a candidate for outsourcing.
The horizontal axis relates to how competitively the function being considered
for outsourcing is currently being performed compared to the external competitive
marketplace. This relates primarily to quality, speed and cost.
Putting the two elements together gives four possible outcomes:
• Functions that are of strategic importance and being performed well in compari-
son to the market must be kept in-house or outsourced to a strategic partner;
• Functions that are of strategic importance but may not currently be performed
competitively with respect to the external marketplace should be re-engineered
to ensure that they are performed effectively and at a competitive cost. It is
possible that, as an interim measure to speed the transition process, a tactical
decision is made to outsource the function in the short term again to a strategic
partner;
• Functions that are not of strategic importance to the company and which are not
currently being performed competitively with the external marketplace should
be outsourced. There is little value in investing in improving this function when
there are Outsourcers who have this as their core business.
• The final combination, those functions that are not of strategic importance, but
which are being performed competitively with respect to the external market-
place is more interesting. If the company can perform this function competi-
tively, then a recommended path might be to transfer it to the outsourcer for
ongoing management.
8.1 Introduction 103
Strategic outsourcing transfers most equipment, staff and responsibility for

delivery services to a vendor, while selective outsourcing is the outsourcing of
one or a few selected processes or functions. Total outsourcing isn’t easy because of
the scope of the endeavour and because of the consequences if it isn’t done well or if
it shouldn’t have been done at all. The stakes are high.
Strategic outsourcing is a major undertaking and no organisation should do it
without considerable thought. These deals are often structured to last for long
periods – usually more than 5 and often 10 years. Vendors plan to make their
margins on economies of scale and on replacing hardware in the future at costs that
are substantially below costs today, in the case of ITO. Strategic outsourcing
arrangements only yield acceptable margins over longer periods of time. Moreover,
clients who enter into strategic outsourcing arrangements must spend considerable
time and effort analysing the deal and contracting with a vendor.
Technology will certainly change over a 5 or 10 year period. The business
environment will change, yet it is hard to set contracts that allow for large changes
in scope. If the arrangement with the vendor does not succeed, it is necessary to
either contract with another vendor, which involves substantial costs and disrup-
tion, or it’s necessary to bring the function back inside the organisation with all the
attendant costs and problems. This is not to say that strategic outsourcing should
never be considered, but must be considered carefully looking at both the legal and
psychological contract between the organisation and the vendor.
It is also important as part of the outsourcing decision making process to
consider aspects beyond those traditionally associated with outsourcing contracts.
These need to include: trust, communication, cooperation, conflict management,
cultural awareness and commitment from both parties.
The outsourcing decision must consider, and be driven by:
• The nature of the sourcing contracts;
• The contractual and informal relationships between user and provider;
• The use of market opportunities for competitive advantage; and
• Successful management of outsourcing relationships and contracts.
Figure 8.2 illustrates the typical high level process for outsourcing decision
making.
Executives are entrusted to make difficult, complex outsourcing judgements
critical for their organisation’s success. A wrong decision can cost the company
dearly at best and can put the business in jeopardy at worst.
However, many businesses (and the public sector) simply jump onto the
outsourcing merry-go-round, and once they’re on, it’s more or less impossible for
them to come off, as the recent defence contracts in the UK showed, where the
outsourcing vendors have the client, “the UK tax payer”, in a very difficult
position.1
1
The HMS Ark Royal will be axed “with immediate effect” along with its fleet of Harrier jets, but
two new vessels will be built at a cost of £5.2bn, because it would cost the taxpayer more to scrap
the contract than to see it completed – UK Government Announcement on 19th October 2010.
Establish the strategic intent Which structure will best help meet
strategic and operational goals given core
Strategic Fit competencies, competitive landscape, and
• Management consensus regarding vision for the
growth objectives?
Outsourcing and why it needs to be implemented
• Essential to define prior to defining operating model and What are the required investments (time
organisation design and money) versus the anticipated benefits
Economic
Impact (savings and service level improvements) of
• ALL downstream decisions require a clear understanding of each option to stakeholders?
the ultimate goal
Define the model

What is the required timeframe to reach
Required
• Define comprehensive Front Office / Back Office steady state and achieve payback on
Timing
process model investment?
• Understand real business opportunities and

constraints
Which structure will best enable
Operating
• Take holistic approach to organisation design organisation to achieve best-in-class
Model
including ‘retained operations’ performance in our required timeframe?
• Leverage technology
Develop the business case Should you view an outsourcer as a partner

Cultural Fit and will an outsourcing partner offer best-
• Critical input for the investment decision in-class capabilities vs. In-sourcing?
• Necessary to convince management and

businesses to pursue Outsourcing What are the
Risk regulatory, operational, socioeconomic, and
• Forms baseline for measuring progress Management financial risks of each option and how can
and success they be mitigated?
• Identifies constraints / requirements for

later design
• All subsequent steps undertaken if the

business case is attractive
Fig. 8.2 Strategic intent to reality
Organisations would be wise to have a thorough decision making process which

starts by questioning why they need to change the status quo in the first place:
• Why are you thinking of outsourcing anyway?
• What is the most appropriate sourcing approach – is outsourcing the only
answer?
• What type of sourcing engagement model is appropriate at that moment in time?
• What type of relationship is being sought or should be sought with a vendor,
given the environment, internal capabilities, enabling infrastructure, resources
etc.
• What is the most appropriate project management approach?
• What is the most appropriate governance model?
• To what extent is security important and what does that mean in terms of
sourcing arrangements?
• What are the must have and nice to have contract clauses, clauses that help the
organisation realise business goals, rather than tick all the boxes that a lawyer
will have listed for the sake of completeness?
• Which vendor meets the organisation’s requirements, will fit into the business
culture, and have the relational attributes that make a partnership model
possible?
Many jump to the last of these stages, straight to thinking about “which vendors
do we know about” and “who can we get them to respond to an RFI/RFQ”, ignoring
the soft factors in vendor selection.
A proper starting point should be the identification of the various stakeholders
affected by, or who have an interest in the outsourcing programme. The next stage
calls for an appropriate decision framework, which allows the organisation to
rationally take input from these stakeholders to build a picture of what the
“organisation” needs, and would require, from an outsourcing programme. Unless
you get all these stakeholder requirements, and more importantly prioritise them,
they will never be contractualised, and there won’t be any control over success or
failure.
Vendor selection should be the least of your worries. If the organisation has built
a thorough decision framework and applied it to the stakeholders, and prioritised
the organisational requirements, this could quite easily become the template for
evaluating the most appropriate suppliers that can meet these needs – in this sense;
the process aligns internal stakeholders, aligns the customer and supplier, and helps
align cultures.
Executives on the whole assume managers make rational decisions and chose the
best option available to them, however when it comes to outsourcing, most
decisions are guided by the heart rather than the head.
Making the right decision is less important than focusing on how the decision is
made! In constructing an outsourcing decision process, executives should be
mindful of the seven deadly sins of strategic decision making:
1. Availability heuristics
People usually assess the probability of an event by the ease with which
occurrences of the event come to mind. However, availability is affected by
factors other than frequency and probability. We have a tendency to give
preference to recent information, vivid images that evoke emotions and specific
acts and behaviours that we personally observe and relate to. All these cause
biases in decision making – i.e. why the public sector is hell bent on going down
the outsourcing route, is because they assume (sometimes wrongly) that
outsourcing “always” delivers significant savings. . .
2. Representativeness
Unrecognised tendency of decision makers to judge the likelihood of an event’s
occurrence based on its similarity to previous events leads to representative bias,
i.e. outsourcing can save at least 20% from our current costs. If managers
challenged these assumptions and long held beliefs, they may come to a more
realistic conclusion – i.e. around a third of deals result in an overall loss. . .
3. Anchoring and adjustment
Anchoring is a widely prevalent trap in decision making. It is so common that
sometimes it is hard to think that the decision may be biased. The mind gets
anchored on initial assumptions so much that any decision made subsequently
revolves around what was presented initially – i.e. we need to save a bucket load,
therefore outsourcing has to be the answer. . .To ensure that the decision making
process is not guided by such anchors, executives must view the issue from
multiple perspectives, involving people with different thinking styles and creat-
ing an environment for dissent and debate.
4. Loss aversion
Loss aversion is a human tendency to prefer avoiding losses than acquiring
gains. Loss aversion leads to status quo bias in decision making where people
prefer maintaining the status quo to avoid losses – i.e. we’ve been doing this for
years, so it must be a core competence and surely it shouldn’t be outsourced. . .
5. Mental accounting
Mental accounting is a set of cognitive operations used by individuals to
organise, evaluate and keep track of financial affairs. Existing outsourcing
programmes may have less stringent controls compared to current outsourcing
deals, whereas, there may well be more to gain from scrutinising existing
programmes – i.e. managers should set a clear set of criteria for evaluating
performance on an ongoing basis, with continuous improvement being funda-
mental to long term outsourcing programmes. . .
6. Hindsight bias
Hindsight bias is a tendency to see things more predictable and obvious when
they have occurred, whereas in fact the event could not have been reasonably
predicted before the onset of the event. It is easier to reconstruct why something
worked or did not work after the event has happened. Managers can assume the
future as more predictable in developing strategies than maybe the case. As a
result, they may face challenges executing those strategies or may not achieve
projected results when the external environment changes. In this era of high
uncertainty in the external environment, there is even more need to be aware of
hindsight bias – i.e. Scenario modelling and organisational flexibility are
paramount. . .
7. Over confidence
Being confident is considered as a great asset, unfortunately however, we
systematically overestimate our decision making abilities compared with what
objective circumstances would warrant. If the skill required is great and the task
is complex, we tend to get even more confident of our abilities and judgment.
Related to overconfidence is a bias of over-optimism. We tend to be over
optimistic in predicting what we desire will happen. When we have more
information, we feel more confident (illusion of knowledge). Similarly, if we
spend more time on analysing the situation and have a long of prior successful
outcomes, we feel we have more control over the outcome (illusion of control).
The tendency to see the future through the lenses of over confidence and over-
optimism can create unrealistic forecasts which are not met – i.e. estimation of
synergies in an outsourcing partnership, that never materialise post deal.
8.3 Suggested Decision Process for Outsourcing 107
8.2 Decisions Driven by Consensus and Debate
Deeply held assumptions about customers, competition, business models can

become so ingrained that the organisation can go on blindly accepting conventional
wisdom. Pressures for conformity by individuals also arise because of the relatively
homogeneous groups of like-minded people that may make up the senior manage-
ment within the firm.
The absence of healthy debate and dissent frequently leads to unwise decisions.
Of course, conflict alone does not lead to better decisions. Executives also need to
build consensus in their organisations.
Consensus should not mean unanimity and complete approval by a majority of
the stakeholders.
Consensus must have two key components:
• A high level of commitment to the chosen course of action – helping prevent the
implementation process from being derailed by departments or individuals who
object to the selected course of action. Commitment can also encourage
managers to persevere in the face of obstacles.
• A strong, shared understanding of the rationale for the decision, allowing
individuals to coordinate their actions effectively, and enhance the likelihood
that everyone will act in a manner that is consistent with the spirit of the
decision.
When executives do engage in debate (which doesn’t happen that often) during
the outsourcing decision process, people can become dissatisfied with the outcome,
disgruntled with their peers or seniors and putting it politely, not fully dedicated to
the implementation programme.
Conflict may diminish consensus, and thereby hinder the execution of a chosen
course of action.
The real challenge is therefore to foster conflict and dissent that enhances the
quality of decisions while also building the consensus required for successful
implementation of an outsourcing programme.
8.3 Suggested Decision Process for Outsourcing
8.3.1 Defining the Objectives
Before starting engaging in the outsourcing process, it is vital to think through

thoroughly the outsourcing lifecycle and answer some of the high level issues,
including whether outsourcing is the right approach for the organisation; what the
optimum engagement model is, given the strategic importance of the process/
function and the capability of the supplier community; the relationship attributes
that are deemed appropriate in achieving the longer term goals; the type of quality
and project governance framework deemed necessary; the detailed security
arrangements required, especially with respect to constraints imposed by regulatory
obligations (see Fig. 8.3).
1. What is the optimum Sourcing Approach, given 4. What kind of Quality Management approach is being
Organisational Readiness? sought?
• In House Optimisation • Service Performance Focus
• Business Process Re-engineering • Business Level Impact Focus
• Outsource • Balanced Scorecard Focus
• Shared Service
• Captive 5. What kind of Project Governance Model is suitable?
• CMM methodology
2. What is the optimum Engagement Model for Organisation? • Six Sigma methodology
• Staff Augmentation • Relational management
• Out -Tasking
• Project Based Outsourcing 6. What type of Security Arrangement is required?
• Managed Outsourced Service • Business Continuity Focus
• Outsource offshore • Physical Security Focus
• Outsource nearshore • IT & Data Security Focus
• Shared services
• Offshore captive
7. What type of Contract and Causes are required?
3. Which Relational Attributes are most important? • Comprehensive Global Contract
• Coordination & Collaboration • Flexible Contract
• Contractual Control • Balanced Relational Contract
• Knowledge Management
• Communication 8. Who is the most suitable Vendor to deliver?
• Trust • Vendor 2
• Commitment • Vendor 1
• Culture • Vendor 3
• Conflict Management
Fig. 8.3 The sourcing decision dilemma
Outsourcing must be done carefully, systematically, and with explicit goals.

Organisations that rush into outsourcing without fully and explicitly understanding
what they hope to gain may find themselves mired in a contractual battle with a
chosen vendor.
Outsourcing is not an excuse to wash management’s hands of a poorly managed,
costly, or misunderstood function.
Organisations must fully understand the costs of a function and manage it
effectively before evaluating its potential for outsourcing, anything else and
organisations may simply be deciding to outsource for the wrong reason, maybe
outsourcing a sub-optimal performance which carries on being delivered by
vendors sub-optimally, and starting a relationship that is destined to fail.
Organisations should consider (or reconsider) the overall outsourcing decision
every 2–3 years (and the contract must enable this), especially in fast moving
industries and with the pace of market conditions, technology and international
competition becoming increasing volatile.
8.3.2 Outsource for the Right Reasons
Organisations must assess outsourcing’s potential tactical and strategic benefits and
disadvantages. Potential disadvantages (amongst others) include: outsourcing for
the wrong reasons, losing control of the resource, losing personnel who have been
trained in the organisation’s particular business practices and have become a part of
the organisational family, and the risk that the outsourcing vendor may not be able
to achieve the desired benefits or may fail in providing critical services.
The outsourcing initiative should be part of a larger one regarding how the
function or functions being evaluated for outsourcing fit into the organisation.
In deciding to proceed along the outsourcing path, the organisation must ask
itself and have convincing organisational wide answers. As part of the sourcing
evaluation, questions like the following should be answered:
• What are our core competencies today and tomorrow and what impact will
outsourcing have on maintaining our competitive advantage?
• Which services or corporate functions are integral to or close to our core
competencies?
• What are the barriers raised by the corporate culture at the decision stage, the
transition stage and at the implementation stage?
• What is the likely cross-functional impact from outsourcing on the remaining
processes and/or functions?
• Is the process or function being considered, deemed relatively optimal, can we
fix ourselves internally before we consider outsourcing?
• What might be better accomplished by an outside vendor – why couldn’t we, or
what is stopping us doing this ourselves?
• What are the bought-into goals we want to achieve from outsourcing?
• What kind of relationship with a vendor is most appropriate, and why?
• How do we deal with the people issues?
8.3.3 Using a Methodical Approach
The process of deciding whether to outsource should involve numerous steps in the
process. The Governance Director decision modelling framework is a useful refer-
ence here, it provides a methodology that describes the various steps to be
performed and lays out the decision criteria necessary for a thorough evaluation.
It consists of eight phases in the decision process, starting from an evaluation of
sourcing readiness and ending at phase 8 with vendor selection. Each phase’s
decision output feeds into the next phase to ensure that the decision has an end to
end rationale, such that vendor selection is undertaken in a rational manner which
considers the relative importance of the preceding phases (see Fig. 8.4).
8.3.4 Engage with All Stakeholders
Executives who have made the decision to outsource should be able to predict the
likely impact that outsourcing will have on the organisation’s stakeholders, which
includes shareholders, customers, suppliers, employees, unions etc. After
anticipating the impact of an outsourcing evaluation on stakeholders, executives
should include the revealed issues in the outsourcing plan.
As an example the desired goals from outsourcing for an IT outsourcing
programme would be very different for different stakeholders and their
expectations would also differ (see Fig. 8.5 – example of IT).
1. Sourcing Readiness 2. Sourcing Engagement Model 3. Relationship Management Model

Long Term Requirements Alternative Sourcing Solutions Appraisal Vendor Business History and Specialisation
Short Term Priorities Competences in Managing External Coordination & Collaboration
Organisation-wide Readiness Relationships Contractual Control
Performance Measurement Capabilities Asset and Knowledge Specificity Knowledge Management
External Suppliers Service Capabilities Organisational Constraints Communication
Risk Manageability Transition Management Capability Trust
Stakeholder Readiness Contract Management Capability Commitment
Positive Business Case Supplier Location Culture
Enabling IT & Security Infrastructure Conflict Management
Project Definition
In-House Service Capability 8. Vendor Selection
Vendor Business History and Specialisation
Vendor Corporate Performance
4. SLA & Quality Management Model
Vendor Governance, Measurement and SLAs
SLA Design Competences
Vendor Quality Assurance
Metrics Design
Vendor Management Philosophy and
SLA Measurement Competence
Capability
SLA Reporting Framework
Vendor Customer Support Capability
SLA Control
Vendor Telecoms and IT Infrastructure
7. Contract Development SLA Quality Management
Vendor Legal and Contracting Compliance
Contract Heads of Terms Vendor Organisation Management
Contract Responsibility Vendor Market Understanding
Warranties, Liabilities, Damages Vendor Personnel Management
Contract Commercials Vendor Innovation 5. Project & Governance Management
Transition Vendor Security & Compliance Model
Performance Reporting Requirements
Project Management Capability
Staffing Provisions
Financial Controls
Compliance Requirements
Business Outcome Management
Termination Rights 6. Security Arrangement
Dispute Management
Data Protection and IPR Protection Confidential Information Assets Control
Compliance
Provisions Vendor Physical Security Controls
Governance Structure
Technology and Infrastructure Provision Vendor Information Security Controls
Contract Management
Vendor Business Continuity Assurance
Fig. 8.4 The detailed outsourcing decision process
Stakeholder Perspective of outsourcing
Customer’s senior manager Business benefits. Added value
Customer’s senior IT managers Contractual commitments. Live within budget
Customer’s IT staff Performance of service provider and Impact on jobs
Service users More and better services
Supplier’s senior management Maximise profits and Keep customer happy
Supplier’s contract Service and profitability targets
Supplier’s IT staff Technical focus
Fig. 8.5 Stakeholder perceptions in outsourcing – example of IT outsourcing
Early in the evaluation, stakeholders must be identified who will take leadership
responsibility, perform the analysis, and make the decisions.
Once the decision is made to outsource, the project team must identify
stakeholders who will be given responsibility for oversight and management of
the outsourcing engagement and supplier relationship management after the con-
tract is signed; they should be part of the team that crafts the contract also.
When outsourcing threatens to upset the status quo in an organisation it may not
be possible to rely on internal sources for accurate estimates of internal costs or
internal effectiveness. Under these circumstances, bring in objective outsiders for
the assessment work.
Many executives in governance roles in larger organisations make the mistake of

considering their role as one of “making” strategic decisions and making business
strategy rather than “taking” strategic decisions and delivering strategic direction.
In so doing, by taking the responsibility for making the strategic decision and
business strategy they lose the right to sit in judgement or act as arbitrator when
things go wrong. The strategy and strategic decision becomes their ruler, rather than
them ruling the strategy. Inevitably it makes it more difficult to force a change in
strategic direction when needed. Business leaders need to look more closely at how
their organisation can make and propose decisions without moving the responsibil-
ity for the decision to the business leaders. The more important the decision,
perversely the more important it is for a business leader to take a decision ratifica-
tion role rather than decision maker/owner role.
But if you take the decision making role away from business leaders, they need
to be assured that the right decisions are being made. This puts the onus onto
business leaders to put in place methodologies, processes, systems and tools to
ensure decision making is carried out to the highest standards, that the right people
and stakeholders are consulted and that decisions are robust and fully transparent
and documented.
An executive sponsor or champion is recommended, and in cases that involve
organisational politics such support is absolutely critical. The team needs a mix of
managerial and technical talent. The team should also include representatives from
user areas that will be directly and heavily impacted by the outsourcing under
consideration. User views may be critical for setting scope and for assessing risks.
The size of the team depends on the scope and size of the project, but smaller
teams are generally more effective than larger teams. Teams with full-time
members are often more focused and effective than teams composed of people
who work part-time.
It helps to have people experienced in outsourcing on the team for the insight
they bring to the issues and the realism they bring to cost and benefit estimates.
8.3.5 Choosing the Right Relationship
Contracting relationships can be viewed as a range or continuum. At one extreme

are market-like relationships in which your organisation has a choice of many
vendors capable of performing the work, relatively short contract durations, and
the ability to switch to another vendor at the end of a contract for future work of the
same type with little or no cost or inconvenience. At the other extreme are long term
partnership arrangements in which your organisation contracts repeatedly with the
same vendor and develops a mutually beneficial relationship that lasts a long time.
Since it is a continuum, there are relationships that lie closer to market relationships
and relationships that lay closer to partnerships, as well as those that are midway
between the two extremes.
Market relationships cost the least to set up and administer and are relevant for
work that is fairly simple and straightforward. Intermediate relationships cost more
and are relevant for work that is more complex and has substantial benefits.
Partnerships cost the most and are most relevant when the benefits of a close
relationship with a vendor are both substantial and necessary for success. Choosing
the wrong relationship could result in excessive costs or failure.
8.3.6 Negotiating a Robust Contract
There are several critical components of a good outsourcing agreement. The

emphasis from the outset should not be on who wins the best deal, but rather on
negotiating a fair and reasonable contract for both parties. Because each aspect of
the outsourcing relationship is governed by the contract, both your organisation and
the outsourcing vendor need to agree on everything.
This also means parties must try to think of every possible contingency to cover
in the contract – it’s given that this is an impossible task, but the contract must be as
comprehensive as possible. This therefore calls for parties to agree on how to
resolve disputes or changes after the contract is signed. Such an agreement should
not take the form of an open-ended assurance of goodwill (although trust is critical
as I argue later for strategic outsourcing) but rather delineate the who, what, when,
and where of conflict resolution.
Obtaining the best value from an outsourcing contract requires a detailed
breakdown of the prices for each component of the service. The organisation
must build a detailed activity based costing model of its own cost structures to
understand what could reasonably be offered by vendors. Sensible negotiation with
vendors would otherwise be impossible.
8.3.7 Use of Performance Incentives
Successful outsourcing relationships focus on results. To be meaningful, these

results must be objective, measurable, quantifiable, and comparable against pre-
established criteria (the baseline).
The specific performance criteria differ depending upon the types of services
being provided, the customer requirements, and the level of service.
Properly defined performance criteria for an outsourcing engagement are objec-
tive, quantifiable, and collectable at a reasonable cost, and should be metrics which
can be benchmarked against performance of other organisations and providers, and
must incentivise the right behaviour, ensuring the incentives of the individual
managers on both the customer and vendor sides are also consistent with the overall
goals and with each others’ incentives.
8.3.8 Establish a Relationship Governance Structure
The contract must provide for a formal relationship governance structure linking
the customer and vendor. This structure typically takes the form of joint
management teams which have responsibility for day-to-day, tactical, and strategic
aspects of the relationship. Each team has a clearly defined responsibility, agenda,
frequency of meetings, and relationship to the other teams. Identification, resolution
and rapid escalation of issues should be a key responsibility of these teams.
8.3.9 Establish a Relationship Management Function
A team must be established whose responsibility is to manage the outsourcing

relationship for the organisation. They must be fully knowledgeable and have a
complete understanding of the business goals of the contract, the specific perfor-
mance criteria agreed to, and individual roles, responsibilities, authority, and
reporting structure. The same information needs to be communicated to the larger
end-user community. In this way, the entire organisation understands what is
intended, why, how problems will be identified and resolved, what is expected, etc.
8.3.10 Managing Human and Communication Issues
Although communication requires more effort than might be anticipated, it is

critical to success.
One of the first steps managers must take to ensure good communication is the
establishment of various forms of communications (e.g., newsletters and
organisation wide meetings) which help ensure that the right message is travelling
as fast and as widely as possible.
Keeping employees informed every step of the way and working out a deal
perceived as fair for them is important because an organisation trades more than its
physical assets to the vendor in an outsourcing arrangement – it often gives away its
staff as well. The organisation’s employees may become the vendor’s employees,
and individuals who feel they have been mistreated will have the power to bring
systems down.
8.3.11 Single Versus Multi-Sourcing
Single sourcing and multi-sourcing each has its pros and cons. Single sourcing can
lead to lock-in, whilst multi-sourcing can lead to increased complexity which can
be costly. Too many vendors can lead to too many different technologies or
processes and make the task of managing all those various relationships difficult,
ultimately leading to loss of management focus on what is actually core to the
client, not least because of the integration challenges in creating a seamless end to
end service. In multi-source deals, it is the performance of the client in terms of
service management, control and governance that determines the success of the
outsourcing programme (see Fig. 8.6). Arguably, clients seeking transformational
benefit beyond cost, may find this is more achievable using a single sourcing, where
Pros Multi-sourcing Cons
• Better pricing from pure play providers (negotiation) • Decreased integration between business processes
• Access to deep domain expertise (best of breed) • Increased complexity in vendor management
• Diversified risk • Lack of accountability
• Improved controls from separation of processes • Difficult to get end to end SLAs
by vendors
Pros Single-sourcing Cons
• Increased scalability and economies of scale • Insufficient deep domain expertise
• Clear accountability • No diversification of risk
• Better integration of processes • No negotiation leverage
• Reduced vendor management requirements • Less transparency and possibly control
Fig. 8.6 Multi-sourcing versus single sourcing
the organisation can bring their wealth of experience, their assets and scale without
fragmenting the end to end process.
8.3.12 Understand the Vendors
Vendors that offer various outsourcing services aggressively market and pursue
organisations to adopt outsourcing. Executives should take care not to be misled by
what other organisations are paying or what a vendor might casually offer as a
possible pricing scheme (the BskyB v EDS (2010)2 case serves as a useful
reminder).
Because the path toward outsourcing can be a difficult one, executives should
seek outside assistance to coach the internal team during the evaluation and
negotiation processes. However, the organisation must have its own robust decision
process in evaluating and assessing the outsourcing model, otherwise they risk
being influenced by possible biases (or vested interest) that may be present within
the advisory team.
In strategic outsourcing engagements, it is important to ensure trust and
communication is built in from the start; teams tasked with selecting the service
provider should possess a comprehensive set of appropriate skills and experience
that such a complex task demands. Some of these team members should continue
2
BSkyb Ltd & Anor v HP Enterprise Services UK Ltd & Anor (Rev 1) [2010] EWHC 86 (TCC)
(26 January 2010).
8.4 Take Aways 115
working with the chosen service provider beyond the selection and contracting
process, ensuring the continuation of the relationship and transfer of knowledge
between the parties.
The selection process must not only consider traditional factors (so called ‘hard’
factors) but include what may be called ‘soft’ factors in evaluating the service
providers. The first place to start in determining these factors, is during the Request
for Proposal (RFP) stage. Typically, many parties treat the RFP process as simply a
gating process, using standard templates and processes. Firms do not view or use
the process as a joint learning exercise, yet it can help form a useful basis upon
which an appropriate contract and relationship can be created.
Outsourcing negotiations are often protracted because confusion arises around
the types and levels of services that the customer expects the service provider to
provide. Drafting an RFP should include business, technical, operational and legal
personnel.
The approach the service provider brings to the table in negotiating the terms and
conditions, may indicate the approach that it may bring in dealing with problems
that will arise during the term of the deal. The process can help determine if the
service provider has the requisite relational qualities that may be deemed necessary
for a successful long-term relationship.
The selection and contract negotiation process can be useful in getting the
building blocks in place for developing trust and ensuring that the possible barriers
in terms of communication, culture and commitment are understood and action
initiated to surmount these, where possible.
8.4 Take Aways
• Outsourcing decisions must be guided by the head and not the heart.
• The decision process must engage with all the stakeholders to ensure both buy-in
and rigour in the decision process.
• The outsourcing decision must be driven by consensus and debate.
• Executives should be mindful of traditional flaws in strategic decision making:
availability heuristics, representativeness, anchoring, loss aversion, mental
accounting, hindsight bias and overconfidence.
• The decision making process must follow a methodological process being driven
by rationality, and stakeholder engagement.
Transition and Relationship Governance
9
Transition is the greatest challenge of successful outsourcing, requiring great care

and attention and needs to be guided by a transition governance framework to
oversee smooth transition. A robust change management methodology must be
employed to ensure transition risks are minimised and communication across the
organisation managed effectively. Beyond transition, an effective governance
structure must be established at different levels of the organisation. The role of
the governance function must go beyond just contractual oversight. This chapter
examines the role of transition management, governance and the role of the legal
contract and Service Level Agreements.
9.1 Introduction
Transition encompasses the activities necessary for the vendor to take over service
delivery responsibility from the organisation. Very few outsourcing projects
achieve transition without teething problems along the way. The change from
customer operated processes to service provider managed process can give rise to
issues around culture, the usual change management fatigue that organisations
suffer, as well as the resistance and misunderstanding of the changing nature of
roles within the organisation. Figure 1 illustrates the various phases that an
organisation must go through within transition.
During transition there is a significant learning curve for the service provider to
traverse. Knowledge hoarding by client employees can make knowledge transfer
more difficult and successful transition problematic.
Transition starts several weeks after the contractual agreement has been signed
and may take many months to complete. Systems may need to be changed or
upgraded, people trained and responsibilities handed over from one to another.
The organisation may need to consider the effect an outsourcing programme has
upon both transferred employees and those that remain within the organisation, and
how this may affect the relationship that is built between the parties to the
outsourcing programme.

118 9 Transition and Relationship Governance
Quality
Project
Planning Execution Parallel Run Steady State Management
Preparation
System
The execution phase For a period the

includes both the service maybe run in
Creation of a Knowledge transfer parallel.
detailed execution phase which is
where the operating During this phase,
plan is required with
procedures, training the teams prepare
the establishment of
documents and the ramp-up
Project preparation a governance
implicit knowledge schedule and
begins with the structure for the Within the steady
is transferred. manage the logistics Check points are
handover of the transition phase. state, key focus
of moving towards a maintained after
solution design to It includes the steady state. shifts to security and
The planning phase each phase of
the transition team. Technology transfer business continuity
must identify all of transition to enable
phase which This phase may also and the management
It involves defining deliverables across robust
identifies the slowly migrate of the SLA and
the roles and different implementation.
detailed service execution contract.
responsibilities of functionalities and
infrastructure from onsite to The Governance
key stakeholders to must monitor the SLA metrics
requirements and offshore delivery team undertakes
ensure a smooth implementation of tracking and
appropriate system centres, managed health checks after
transition. the plan across all reporting to monitor
architecture to carefully to maintain go-live to ensure
phases. continuous
deliver the service. continuity of satisfactory service
A dedicated performance is
The team must operations. delivery.
transition team must It includes the systematised.
assess and mitigate
be created. operating During the parallel
risk during the
preparedness phase running phase more
process, using
which includes realistic service
workflow tools to
recruitment, levels will be
manage the
induction of staff established which
migration smoothly.
and the possible will become
transfer of some contractually
assets. binding.
Fig. 9. 1 Transition phases
Smooth transition management is important as it sets the tone for the relation-
ship. Transition management needs to include the detailed, desk-level knowledge
transfer and documentation of all relevant tasks, technologies, workflows, and
functions (and in some cases employees).
Detailed planning is required, and needs to be carefully coordinated with the
service provider. Continuous project governance and risk management is essential.
Transparent communication at all stages is required to build trust during this
phase (see Fig. 2). Communication here refers to both formal communication in
Relationship
Transformation management
dominates
Enhancement The
contract
Business
value
Utility The
contract
The
contract Contractual
management
dominates
Relationship impact
Fig. 9. 2 The balance between the legal contract and relational aspects of the deal
terms of documentation, as well as informal communication. Different types of

outsourcing programmes have different communications needs during transition.
For example an outsourcing of an IT development activity requires more focus on
documentation and specification work (formal communications) than on informal
communications and relies on both parties having shared understanding of
standards and process requirements such as testing and release procedures. Informal
communication in this context really is focused on providing an understanding of
the scope of the activity being outsourced and providing such overview knowledge
that allows the outsource staff to understand the totality and context of the deal.
This could be quite different to certain types of call centre outsourcing for example
where the specifics of knowledge transfer is less defined and requires more informal
communication and training to explore situational responses.
Parties also need to be realistic about what can be achieved, in terms of quantity
and quality of service delivered by the vendor, in the early days of the outsourcing
programme. Certain types of transition are highly technical (e.g. it may require the
conversion of databases, configuration of systems and equipment, live testing of
systems or major parallel data fill activities that are essentially one off activities and
only happen during the transition period) and quality control becomes vital during
this process. Quality Management for some outsourcing programmes can be the
critical control activity of the Transition Phase.
Many outsourcing programmes provide for a steady state and a measured ramp-
up over time to help overcome some of the teething problems that are inevitable.
The transition period can be used to help develop and test robust performance
measurement regimes and long term achievable SLAs.
Challenges and risks within the transition phase include:
• Implementation of effective programme governance structures;
• Effective change management and communications plans;
• Allowing sufficient time for processes to become embedded within the service
provider;
• Adequately testing of revised processes;
• Retaining key process staff and overcoming any employee disengagement or
resentment;
• Transferring assets and providing familiarisation in their use;
• Assignment/novation of contracts needed to maintain continuous service
provision;
• Continuity planning;
• Learning to work effectively with the service provider; and
• Determination of baseline performance and cost metrics for the service.
Failure in any one of these areas can seriously inhibit the success of the
outsourcing programme.
There are four fundamental pillars to successfully managing transition:
• Project management process – the project team completes a definition and
planning phase to ensure the scope of the project and its accompanying risk
factors are understood and agreed.
• Project organisation and responsibilities – members of the project team define

and agree the key project team members and their roles and responsibilities,
including appropriate client sponsorship and involvement to ensure project
results are achieved.
• Project phases – work should be phased to provide the opportunity to reassess
and mitigate risks at key milestones throughout the project.
• Project management system – a management system should be established to
define and apply the appropriate governing processes for all project activities.
A key step for transition is a well-defined governance model that provides the
client with the appropriate level of decision making and decision implementation
control during the transition period. Figure 3 illustrates the detailed activities that
must be considered and implemented to ensure smooth transition.
The first tier of the governance structure is the Transition Steering Committee,
which is made up of executives and senior managers from both organisations. It has
the authority to establish the strategy, set the program objectives and determine the
business priorities. Its purpose is to oversee the transition at an executive level.
Establish Transition Project Office • Jointly set up the project management control structure and relevant processes
• Manage the transfer of staff to vendor

Manage HR & Workplace • Jointly define the resource plan necessary to deliver the services
• Establish a working environment for the transitioned staff
• Provide an environment where staff integrate well and feel valued within their new
roles
Culture Change
• Ensure that staff are provided workshops and training to have an opportunity to
understand each other’s organisational cultures
• Novate existing contracts from client to vendor as may be required

3
rd
Party Supplier Management • Establish working relationships with 3rd parties that now need to work with the
vendor
• Ensure the vendor fully understands the clients existing security policy, processes
Security Assessment
and procedures
• Establish the management systems that provide the controls necessary for effective
Management Systems
service management, resource management, contract management
• Undertake detailed review and measurements for key metrics in relation to the
processes or services that are within scope of the deal
Billing and Finance Management • Document and formally establish as baseline to determine service charges
• Establish the financial controls and billing process for financial management of
the relationship
• Establish an effective communications plan, mechanism, and ownership for

Communication Management internal and external information sharing
• Ensure the handover of assets (i.e. hardware, facilities, physical properties,

licenses) from client organisation to vendor is completed in an orderly, consistent
and timely manner. Set up a permanent, centralised asset management system
• Assess and align pre-existing processes, tools, documentation and staffing between
the organisations
Service Readiness • Service Readiness should be performed in the weeks prior to service
commencement
• Client should audit vendor’s service delivery readiness & processes
• Client should ensure the technical environment necessary for the Service Delivery
team to perform their responsibilities using either existing processes and tools or
“interim” processes and tools until the transformation projects are completed
Fig. 9. 3 Transition management activities

9.2 Managing the Soft Issues 121
The second tier is the Transition Management Team. It includes program

management representatives from both organisations. A Transition Program Office
should be established to take responsibility for the overall management of the
transition. This office works under the direction of the Transition Steering Com-
mittee and its role is to focus on reviewing transition plans, monitoring and
managing progress, maintaining and managing a risk register, issue resolution,
escalation management, status reporting and project change control.
The role of the project management team also needs to change during from the
transition phase to the steady state. The objective of the project management team
for both vendor and client is to replace themselves with process managers post
transition handover. For the client this transformational role of the project manage-
ment team is essential to a successful outsourcing programme; moving from a
process executor to a remote process controller.
If the project managers see the problem as a project management problem they
will not replace themselves, so management in transition is a critical thing to
discuss. Project managers have to manage four different sets of changing
relationships at the same time; the other transition project team; the other opera-
tional team; their own transition project team; and their own operational team.
Depending on how much of a partnership activity the programme becomes this can
be more or less complex. If it is a close partnership on client premises then team
building can help significantly in resolving issues that arise, but in distance
relationships this transition can be difficult purely because of the number and
political implications of different communication channels.
9.2 Managing the Soft Issues
Soft issues, primarily cultural and communication issues are one of the major
hurdles in efficient transition. They are also the most overlooked and hardest ones
to deal with while transitioning the services. These issues create communication
challenges, breed misunderstanding/mistrust and increase the overall risk of failure.
Organisations must give due attention to these issues and should consider:
• Cultural training – Arrange cross cultural training for both vendor and customer
teams. The purpose of this is to enhance understanding of the subtleties of
communications between the teams. For example, in some cultures a nod can
mean yes, while in others it can mean no and in others it can be simply a
submissive gesture. Cultural training should be done in the initial stages of the
transition to reduce the risk of miscommunication and reap the benefits of better
understanding between teams.
• Right team mix – Transition phase has a huge learning curve and is a heavy
pulling exercise in which team leadership and team membership skills of all
members of the teams are tested. The teams need to have more senior manage-
ment involvement to ensure smooth sailing in this phase.
• Team building – Conduct regular team building activities to foster better under-
standing, open communication and working relationship. Most transition
engagements naturally experience varying degrees of hostility between the

parties. Open communication of future plans and objectives as well as arranging
team building activities can help to reduce “they vs Us” barriers and help to build
an effective and unified “one team” culture.
• Focus on knowledge management – Encourage more/better documentation and
better knowledge management and transfer practices.
• Perform reviews diligently – Ensure reviews and inspections are carried out
regularly at each stage of the transition.
Table 1 illustrates the risk management activities that should be considered
within the transition phase.
Table 9. 1 Transition risk management activities

Risks Risk Management
Key staff start leaving before and during ∙ Identify core processes and focus on them first
transition ∙ Conduct parallel knowledge management
sessions to maximise staff coverage
∙ Involve HR to manage personnel issues
Business interruption with the big bang ∙ Careful transition planning
transition approach ∙ Mix of transition methods – including parallel
running
∙ Select team having prior knowledge of the area
to facilitate quicker transition
Loss of knowledge during transition ∙ Re-badge key experts
∙ Formal knowledge transfer processes
Low existing level of documentation ∙ Bring in standard templates and process flows
to reduce documentation
∙ Provide expert resources to document
processes and procedures
Hostile teams may not wilfully cooperate in ∙ Treat all employees with due respect
sharing the information thereby increasing the ∙ Incentivise the teams to share knowledge
risk of the transition ∙ Facilitate trust between the personnel from
both organisations
Low process maturity – if the process culture ∙ Ensure that the level of process maturity is
and maturity is at low level, it impacts transition fully understood
time and results ∙ Seek to improve process maturity before
attempting process transformation
∙ Ensure both organisations work at the same
process maturity level
∙ Get the vendor to bring in best practices to
improve process maturity quickly
Senior management commitment ∙ It is essential the senior management is kept
informed and their buy-in to the programme
obtained in advance
∙ Have an executive sponsor and/or programme
champion who can lead and represent the team
at the highest levels of executive management
9.3 Governance and Relationship Management 123
9.3 Governance and Relationship Management
In any long term relationship, there are bound to be issues – avoiding these is nearly
impossible. A properly structured and faithfully executed governance model is
essential to provide the means to deal with changes (and problems) efficiently,
amicably and fairly, thereby enhancing trust in the relationship.
In general terms, governance is the overall process by which the customer and
the service provider oversee and regulate their relationship. A governance schedule
outlines the framework within which they should meet to:
• Review and discuss reports on the progress of implementation projects and /or
the performance and future direction of the services, as appropriate; and
• Resolve any commercial, operational or technical issues that might arise as part
of the project
A successful governance model addresses all transition, transformation, service
delivery and exit issues. It should:
• Ensure both parties agree and understand how to engage with each other at what
level and when;
• Define how the service provider management team aligns and responds to its
customer counterpart. The concern from the service provider’s perspective is
that the service provider should not give the customer oversight which is so wide
ranging or at such deep level that the customer is tempted to micro-manage
inputs;
• Ensure there is customer executive sponsorship throughout the contract term;
• Build in flexibility for major changes in the parties’ respective rights and
obligations, such as those generated by the customer’s strategic priorities and
service demand;
• Establish a mechanism to handle, approve and account for minor variations in
day to day service delivery requirement;
• Review the service level reports and agree on the actions and required changes to
improve quality and effectiveness of services;
• Ensure both parties fulfil all commitments and provide agreed inputs and /or
properly manage the delivery of the contractual services; and
• Establish a meeting schedule to discuss innovation and changes in technology
and processes.
An appropriate governance structure will help ensure the outsourcing agreement
is proceeding to plan, but could and should also be used to monitor the softer
aspects of the relationship. The governance framework must work at all levels of
the organisation (See Fig. 4).
Governance in this respect may need to include proactive and collaborative
management, improving ongoing communication processes, appropriate perfor-
mance reviews that seek to create the right incentives, and the general development
of trust and a partnership/alliance relationship. Governance in this sense must go
beyond the basic monitoring of contractual obligations.
The governance structure should have the following specific guiding principles:
• Representing the interests of the Business Units

• Customer advocacy
Corporate • Setting strategic direction
‘The Governing Board’
• Change authority
• Arbitration on critical issues
• Functional process ownership

• Service delivery
Operational • Determining policy and procedures
‘Process Owners’
• Process controls
• Process improvement
• Service levels
• Application of the commercial terms

Service • Service management
‘Relationship Managers’
• Performance management
• Relationship management
• Change and extension to services
Fig. 9. 4 Levels of governance relationships
• Stable, equitable and flexible decision making structures to avoid delays in time
critical opportunities;
• Delegation of decision making within a predefined set of guidelines;
• Clear, high communicative processes that encourage information sharing and
enable efficient, effective business decisions;
• An organised, focussed communications mechanism to encourage collaborative
discussion of issues and ideas critical to ongoing success; and
• Specific and defined escalation points and participation of executives with
appropriate levels of strategic and operational responsibilities.
9.4 Typical Governance Structures
Table 2 illustrates a typical governance structure for an IT outsourcing programme.

It details its constitution, what the responsibilities are, who the key stakeholders are
and how often they must meet.
9.4.1 Joint Review Board (JRB)
The Joint Review Board (JRB) is comprised of key service and customer
executives. The purpose of the JRB is to scope the strategic direction, resolve
major issues, approve strategic change and promote leadership and commitment.
9.4 Typical Governance Structures 125
Table 9. 2 Outsourcing governance procedures

Meeting
Body Responsibility Participants Frequency
Client Supplier
Executive meeting ∙ Evaluate overall CEO Country Twice a
partnership CEO year
∙ Discuss CFO Customer
partnership Value
development Creation
∙ Share business CIO Head
visions and goals
Corporate – The Governing Board ∙ Review overall IT/BPO Country 6–8 times
– sometimes called “Joint Review performance Board CEO a year
Board” (JRB) ∙ Decide on major CIO Delivery
changes and Head
projects
∙ Discuss
development
initiatives
∙ Evaluate
recommendations
from value
creation
workshops
∙ Resolve disputes
Operational Process Owners – ∙ Review delivery IT/BPO Account Once a
sometimes called “Service ∙ Review contract Management Team month
Management Team” (SMT) financials group
∙ Review strategic
and operating
plans
∙ Advice on
forecasting and
demand
management
∙ Advice on
technology
direction
∙ Sponsor projects
Service Relationship Management ∙ Service delivery Head of Delivery Bi-
– sometimes called “Operating Business Executives Weekly
Group/ Service Delivery Team” Support
(OGSDT) ∙ Workload Head of
forecasting Operations
∙ Business control
status
∙ Agree and
implement
correcting actions
The JRB guides the overall activities and phasing of the outsourced services, so that
the mission and objectives satisfy customer’s leadership strategy.
9.4.2 Service Management Team (SMT)
The Service Management Team (SMT) is comprised of contract relationship

manager, service provider and customer functional managers and leads. The pur-
pose of the SMT is to address typical service delivery issues, discuss and approve
changes and agree on process improvements. The SMT acts as the primary liaison
between the customer and the service provider and is responsible for understanding
the customer’s overall business needs and communicating those needs to the
service provider delivery organisation.
9.4.3 The Operating Group/Service Delivery Team (OGSDT)
The Operating Group/Service Delivery Team (OGSDT) comprises of functional

leads from the service provider and the customer. The OGSDT oversees day to day
operations, monitors and reports volumes and quality and identifies and resolves
tactical operational issues. The team is the first point of contact for issue resolution
and escalates unresolved issues to the SMT using the issue management process.
9.5 Governance in Practice
To minimise risk, the parties should:

• Conduct formal briefing sessions between negotiators and those responsible for
implementing the deal to enable a smooth hand-off, and conduct joint relation-
ship planning activities to mitigate problems arising from goal misalignment;
• Develop and enable a structure to govern the relationship. They should: review
and discuss potential pitfalls, and plan for how to avoid or mitigate their impact
should they arise, they should develop decision-making protocols to speed
implementation, develop a conflict management mechanism that ensures resolu-
tion of conflict on the merits, rather than by coercion, and implement a scope
management process that helps them view scope as a joint challenge to be
managed together;
• The client governance team should lead, whilst the service provider delivery
team put in place mechanisms that enable a continuous dialogue and change, and
plan together how they will manage and embed change within their
organisations during joint launch;
• Ensure individuals on both sides acquire new skills, exhibit new behaviours, and
make significant changes in mindset and assumptions. The parties need to ensure
that their teams have the skills they need to negotiate collaboratively, manage
9.6 Role of the Legal Contract 127
• Strive to be in the first quartile by cost in the industry

Define the strategic intent
• Improved controllership
Develop a compelling • E.g. Reduce transaction processing cost by 20 – 30 % through global consolidation
business case • E.g. Further reduce cost by 20 –30% by automation
• Define accountabilities
Set expectations upfront
• Pricing
Senior management • CEO / CFO / COO responsible for Outsourcing

support • Position outsourcing PMO as a peer of business leaders
Develop tiered • Plan what needs to be achieved over the next 3-4 year
Governance structure • Monitor performance through SLAs
Manage organisation • Develop a communication plan targeted at various stakeholder groups

change • Anticipate and manage risks proactively
Invest in training & • Train internal resources for new responsibilities

recruitment • Invest in hiring resources with skills in outsourcing implementation
Manage transition risks • Give the organisation time to digest changes due to outsourcing and then transforming
Set up a data production • Standardise processes – challenge legacy and move towards best practices
line • Automate to reduce touch-points
• Focus on quality and build quality at all stages and in all work-streams of the
Embed operations programme
excellence • Focus on compliance and improvements
• Focus on building a sustainable operation
Fig. 9. 5 Factors that lead to successful outsourcing governance
scope effectively, solve problems jointly, and build alignment among critical
stakeholders;
• Pay attention to not only the resolution of common problems (e.g., disputed
charges, disagreements over scope), but also the way the problems are resolved
(e.g., acknowledgement of the impact of the problem, a focus on avoiding the
problem in the future); and
• Regularly monitoring the health of the working relationship, in addition to
delivery and financial performance, is critical to ensuring that the ongoing
management of the relationship is on track and meeting the expectations of
both parties.
Figure 5 summarises some of the actions that lead to successful outsourcing
programmes.
9.6 Role of the Legal Contract
The legal contract, is not only important from a commercial perspective, but also
defines the conditions, circumstances and the role softer factors can, and must play,
in ensuring the success of an outsourcing programme.
Typically within outsourcing contracts, there are two separate agreements; one
for the transfer of existing business/assets and one for the actual services
outsourced:
The “transfer of assets” agreement deals with the transfer, where relevant, of any
property, assets, employees and intellectual property (“the Transfer Agreement”).
The “services agreement” records the outsourcing service description, service
levels and the roles and responsibilities of the parties during the term of the
agreement (“the Service Agreement”).
An important area within outsourcing agreements from the outset, is a clear
understanding of what services are being outsourced – i.e. the scope of the
outsourcing relationship. An outsourcing agreement forms the core of a successful
outsourcing relationship and needs to be drafted meticulously. It must capture the
business strategies, concerns, operational processes, as well as the commercial
understanding of the parties. It must be explicit in detailing the services to be
outsourced and the resources to be dedicated in providing such services.
For an outsourcing relationship to work successfully, it is important for both
parties to fully understand all the business, technical, commercial and legal issues
of relevance within the relationship.
One of the fundamental differences between an outsourcing agreement and other
commercial contracts is the length of time a typical agreement may last (sometimes
up to 10 years). It is impossible for the parties to contemplate all possible
eventualities within this period, and therefore the contract must allow flexibility
in terms of changing scope and pricing. Without such flexibility, conflicts between
the parties could easily arise.
Academic research shows that lack of flexibility, as defined by the cost of
reacting to changes, is the prime source of contract failure in IT outsourcing (Lacity
et al. 1995).
The outsourcing agreement must clearly define the process, roles and responsi-
bilities at contract termination. The rights and duties of each of the parties upon
termination or expiration of the agreement will need to depend upon the
circumstances of the termination. The agreement should set out the processes the
parties will follow upon termination so that transition is orderly. Good outsourcing
contracts include specific commitments to support transition to another service
provider, or repatriation of operations to the customer.
It is foreseeable that a service provider may not perform all its obligations or
meet all performance standards during the term of the outsourcing agreement.
Imposing damages is a common remedy, but measuring damages for failures to
perform obligations and meet performance standards can be difficult. Companies
usually ensure that damage and indemnity clauses are defined as narrowly as
possible, otherwise they may find enforcement of such clauses difficult.
A common feature of many outsourcing agreements is the ‘transfer of staff’ from
the customer to the outsourcing service provider. In the European Union (EU),
labour regulations (such as the EU acquired Rights Directive 77/187/EEC) require
elaborated procedures to be completed before staff transfer can take place. The
regulations also ensure the transferred staff retain their existing employment terms
9.7 Service Level Agreements 129
in the transfer and with their new employer; the service provider. The regulations
can apply regardless of the size of the transferred undertaking.
When firms need to transfer data or have their offshore service provider under-
take data processing, the firm must consider how the laws (or the lack of) may affect
its own and ultimately the data subjects’ rights with respect to the information.
Intellectual Property (IP) is usually an area to which lawyers pay close attention.
Without transfer of IP from the firm to the service provider, many offshoring
projects would not be feasible. Even a simple service project such as a call centre,
derives its capabilities to a large extent from the IP that is being provided. In more
complex arrangements, the need to manage a company’s IP acquires greater
importance. The outsourcing agreement will need to specify ownership of any IP
that may be used, developed, or improved during the relationship.
There are various models by which IP may be managed within the outsourcing
agreement:
• The service provider owns all newly created IP and then licenses it to the
customer for its internal use;
• Joint ownership;
• Service provider grants copyright to customer, but retains ownership of patent
rights and then licenses customer to use patent rights for its internal business.
The service provider could re-use the idea for other customers, but cannot copy,
cut or paste from the specific custom components developed under the
agreement;
• Customer owns all newly created IP, grants the service provider broad use and
sublicense rights, possibly subject to reasonable restrictions to protect customer
competitive advantage;
• Customer owns all newly created IP, where the service provider has no rights;
and
• A menu approach, which lists the potential options for IP ownership on a case by
case basis.
The most appropriate model will depend on the nature of the organisation and
the degree to which innovation is fundamental to its success.
9.7 Service Level Agreements
The typical outsourcing engagement will last for a number of years and be governed
by a contract setting the terms and conditions between the client and outsource
provider for the duration of their relationship. To measure whether that relationship
is working, and how well, Service Level Agreements (SLAs) are established.
A service level agreement describes the performance levels required of the
vendor of each service or product provided by the vendor. Performance standards
can be extensive if a buyer wants to manage processes, or they can be limited to a
few key standards if the relationship is purely results based. SLAs are usually
incorporated as a schedule to the contract.
An SLA is an essential part of any outsourcing project. It defines the boundaries

of the project in terms of the functions and services that the service provider will
discharge to its client, the volume of work that will be accepted and delivered, the
acceptance criteria that will be used and the level of quality acceptable. Well
defined SLAs correctly set expectations for both parties to the relationship, and
provide targets for accurately measuring performance to those objectives. They act
not only as metrics of performance by which to measure the service provider’s
performance, but also as a means of providing ongoing incentives.
Outsourcing contracts traditionally, have not been designed with inherent
incentives which seek to build consensus and gain commitment to the partnership
model. However, new pricing models are being based on ‘gain sharing and risk-
reward’ principles, which attempt to ensure the interests of both parties are served
in trying to improve performance.
Ensuring that the customer has defined an effective SLA becomes important to
the performance of the relationship over the many years the agreement is likely to
run. SLAs need to be designed by the people who run the business at the operational
level. SLAs designed by both parties’ operational teams may create better
incentives than those which are designed by one party or which are designed by
executives or lawyers within the organisation. Ineffective SLAs can have a negative
effect, not only in terms of contract governance but more broadly the relationship
between the parties.
An effective SLA must satisfy the following criteria:
• Is it simple?
• Is the measure the whole parameter you need?
• Can the measured parameter be controlled – who controls it?
• Is the measured parameter a primary measure or a derivative – if it’s derived,
who controls that?
• Is the measurement of the parameter a part of a control loop?
• Does the measurement period provide adequate statistical data?
Selecting appropriate metrics to gauge project performance is a crucial step for
the success of any outsourcing engagement. The selection process is complicated
by the large number of potential metrics. It may be more appropriate to select a
limited number of measures, which can be studied in detail. The choice of metrics
must be contingent on a number of other factors, such as: organisational experience,
the type of behaviours to be motivated, the cost and effort of collection, and the
impact such metrics will have on the ongoing relationship and development of trust.
Subjective performance standards may include (but are not limited to):
• Use of reasonable efforts in providing the services;
• Use of best efforts in providing the services; and
• Performance of the services in a professional and workmanlike manner or in
accordance with industry standards.
Objective standards may include (but are not limited to):
• Conformance to specifications;
• Conformance to baseline operational performance metrics;
References 131
• Conformance to service levels previously attained by the customer or a third

party provider for the same services; and
• Conformance to benchmarked operational standards and service levels.
9.8 Take Aways
• Transition management presents the greatest risks in the outsourcing

programme.
• A transition governance committee must be established to oversee the process,
with transparent communication driving the programme.
• Addressing personnel concerns during transition is paramount.
• The transition phase must seek to build trust within the organisation and between
organisations.
• The legal contract must be robust and as detailed as possible, seeking to create a
joint understanding between the two organisations, underpinned by a service
level agreement which creates the right behaviours in the vendor to deliver
services beyond the contract.
References
Lacity, M., Willcocks, L., & Feeny, D. (1995). IT outsourcing: Maximizing flexibility and control.
Harvard Business Review, 73(3), 84–93.
Insights from Academic Research
on Outsourcing 10
There has been significant academic research within the outsourcing arena, a lot
focussed on the drivers and benefits of outsourcing. There has also been more
recently a focus on the risks emanating from outsourcing and the role of relational
exchanges. Nevertheless, traditional research has been polarised between strong
contracts and relational governance. There is now the emergence of research that
suggests formal contracts and relational exchanges are complementary and both
required for successful outsourcing. It is not enough to simply develop an under-
standing of how to build and foster relational governance, but to do so in the context
of a formal contract.
This chapter looks at the empirical research on the drivers for outsourcing, the
risks presented by outsourcing, the role of trust and partnerships in managing
strategic outsourcing programmes, as well as the various academic models used
to describe and understand outsourcing.
10.1 Introduction
Most literature tends to focus on legal contracts or relationships (Poppo and Zenger
2002; Goo et al. 2009 are exceptions). Poppo and Zenger (2002) published a paper
in Strategic Management Journal, where they developed and tested an alternative
perspective through 285 survey responses of IS managers, whilst Goo et al. (2009),
publishing in another high quality journal based their findings on 92 web based
surveys.
10.1.1 Defining Outsourcing and Offshoring
Kern and Willcocks (2000), publishing their analysis of 12 organisations involved

in outsourcing, define outsourcing as the decision taken by an organisation to
contract or sell the organisational assets, people, processes and/or activities to a
third party supplier, who in exchange provides and manages assets and services for

134 10 Insights from Academic Research on Outsourcing
monetary returns over an agreed period of time. Elmuti and Kathawala (2000) in
their extensive study which explores why and how organisations are using global
outsourcing through 544 surveys, suggest outsourcing is nothing less than the
wholesale restructuring of the corporation around core competencies and outside
relationships. Goles and Chin (2005), use relational exchange theory as a concep-
tual basis for identifying the individual constructs that comprise a relationship.
They develop and test a set of items to measure those constructs, using structural
equation modelling and survey data collected from U.S. outsourcing customers.
They define an outsourcing relationship as an ongoing linkage between an
outsourcing service provider and the customer, which has a long-term orientation
and a mutual recognition, where the benefits attained by each firm are at least in part
dependent on the other firm.
Outsourcing therefore consists of: a relationship, usually a long term one,
between a firm and the service provider; a relationship where both parties may be
dependent on each other and one which is typically governed by a formal contract.
It also implies the transfer of internal activities to outside organisations which will
change the means and ability to control the activity by the client organisation.
Offshore outsourcing is here used to describe outsourcing to an entity based in an
offshore location. Dibbern et al. (2008), who published their multiple case studies
of six offshore software projects in a large German financial services institution and
interviews with 27 client and vendors, suggest offshore outsourcing brings unique
challenges compared to domestic outsourcing.
According to Duggal and Simkonis (2007), initially the possible candidates for
offshore outsourcing were application development and maintenance, bug fixes,
call centres, data entry and system maintenance. According to Steen (1998) as
quoted in Duggal and Simkonis (2007), as project management methods and
infrastructure improves, more types of work can be done offshore. Elmuti et al.
(1998) state that popular areas of outsourcing include: information systems/tech-
nology (40%), real estate and physical plant (15%), logistics (15%) and adminis-
tration, human resources, customer service, finance, marketing, sales and
transportation (30%) – the latter typically referred to as Business Process
Outsourcing (BPO). Whereas Information Technology Outsourcing (ITO) dates
back to the early 1960s and gained momentum through the 1970s and 1980s
(according to the book by Hirschheim and Dibbern 2002), BPO is a relatively
new outsourcing arrangement. It is therefore not surprising that much of the
research to date on outsourcing tends to be in the context of IT/IS outsourcing.
10.1.2 From Tactical to Strategic Outsourcing
McIvor (2000) in his paper published in a refereed journal provides a framework for
understanding the outsourcing process. He asserts that over recent years,
outsourcing has become an important issue for many organisations. Initially it
was only activities that were regarded as of peripheral concern to the business,
such as cleaning, catering and security that were sourced externally. However
during the 1990s more companies started to outsource critical activities (Jennings
1997). This McIvor (2000) suggests has forced organisations to rethink their
outsourcing practices and approach the topic of external sourcing from a more
strategic perspective.
Kakabadse and Kakabadse (2000) in their extensive review of both academic
and managerial literature, assert that perhaps the greatest advantage of outsourcing
is the full utilisation of external providers’ investments, innovations, specialised
professional capabilities, that otherwise would have been prohibitively expensive
for one organisation to replicate. They assert that a fundamental paradigm shift is
underway from strictly provider-user relationships to an emerging array of partner
based relationships and new outsourcing arrangements and organisational forms.
They state that the emergence of partnership or alliance arrangements as
alternatives to the formerly more popular transaction-based contracts, usually
shorter and more tightly defined, indicates a shift to closer interactions between
client and provider.
10.1.3 Empirical Studies Suggest Outsourcing can be a Risky

Practice
Lacity and Willcocks (1998), in their paper published in a high quality journal,
builds on previous data collection of 61 IT sourcing decisions and five best practice
case studies. They report that only 56% of IT outsourcing deals were deemed to be
successful. Craig and Willmott (2005) in an online article, claim that about 50% of
outsourcing deals fail to deliver the expected value. This rate of success is also
confirmed by Aron and Singh (2005), who state that several studies indicate that
about half the organisations that shifted processes offshore failed to generate the
financial benefits they had expected.
Lonsdale (1999) in his article published in a good journal, presenting a model for
effective risk management, suggests that a majority of organisations are dissatisfied
with the outcome of their decisions, but find that the disappointing results are not
due to there being any inherent mistake in the practice of outsourcing, but rather are
rooted in poor management decision making. Lonsdale (1999) goes on to suggest
that firms are using outsourcing without any sort of guiding framework. McIvor
(2000) affirms this by reporting that the absence of such a framework has led to a
situation where outsourcing decisions have been made most frequently by default,
without considering the long term consequences for the competitiveness of the
organisation.
Bettis et al. (1992) in their paper based on the authors’ research within firms in
North America, Europe and Asia, advocates viewing sourcing in strategic and
offensive terms instead of merely as a defensive technique for trying to fix
problems.
Although there are risks to offshore outsourcing, the possible rewards provide a
compelling case for many firms to pursue it. Amiti and Wei (2006) in their working
paper found that offshoring has a positive effect on productivity: service offshoring
accounted for 11–13% of USA labour productivity growth over the period
1992–2000; and material offshoring for 3–6% of labour productivity.
Outsourcing thus is potentially a valuable strategy for firms, whether they view
its use as tactical or strategic. However it is also a risky practice – this is also
confirmed by practitioner publications.
10.2 Outsourcing Rewards
The literature about outsourcing provides many reasons why firms may want to
pursue an outsourcing programme. Some of the more prominent ones are detailed
below:
10.2.1 Better Focus on the Core Business
Outsourcing of non-core activities eliminates the effort required to manage periph-

eral activities, except for the need to manage the relationship with the supplier. This
it is claimed, gives management the opportunity to concentrate on the important
elements of the business (Jennings 1997; McIvor 2000; Kakabadse and Kakabadse
2000, who provide an overview of the thinking behind strategic sourcing based on
the authors’ research and practical case studies).
Kakabadse and Kakabadse (2005) in their extensive paper published in a quality
journal, based on 747 survey responses and interviews with 50 CEOs, claim this
creates a need for providing greater attention to identifying what is a core compe-
tency1. McIvor (2000) however suggests that in a fast changing industry, the
definition of core and non-core must be revisited on a continuous basis.
10.2.2 Cost Reduction
Cost reductions can be obtained either through the savings of labour costs or from
improved efficiency due to the application of more sophisticated technology or
processes. The reduction in labour costs are based on the assumption that a supplier
can provide a certain service more efficiently due to its expertise with fewer input
resources (McIvor 2000; Kakabadse and Kakabadse 2000).
1
Prahalad and Hamel (1990) in their well known paper on core competences, state that core
competences are the collective learning’s’ in the organisation, especially how to coordinate
diverse production skills and integrate multiple streams of technologies. They suggest three tests
that can be applied to indentify core competences in a company. It should provide potential access
to a wide variety of markets; it should make a significant contribution to the perceived customer
benefits of the end product; and it should be difficult for competitors to imitate. Prahalad, C., and
Hamel, G. (1990). “The Core Competence of the Corporation”, Harvard Business Review, pp
79–91.
10.2 Outsourcing Rewards 137
Due to considerable economies of scale available to large outsourcing vendors,

outsourcing can also provide a more cost effective solution for outsourcing
customers (Abraham and Taylor 1996, in their extensive survey of thousands of
firms published in a high quality journal; Sharpe 1997, examining the rise of
outsourcing and the benefits it offers; and McIvor 2006).
10.2.3 Benefit from Supplier Investment and Innovation
Henley (2006), through the review of emerging strategies for outsourcing the
provision of software and IT enabled services to India, suggests that technological
change is encouraging firms to outsource services based on the availability of
leading edge technologies from the service provider. Quinn and Hilmer (1995) in
their brief practitioner article, also suggest that collaboration with suppliers can
provide access to high quality products and highly efficient services without the
otherwise required investment in human capital, processes or information technol-
ogy to obtain the required level of proficiency. Sharpe (1997) suggests this is one of
the main motives for outsourcing.
10.2.4 Increased Flexibility and Technology
Deavers (1997), suggests that outsourcing can provide greater flexibility, allowing
organisations to incorporate the latest technology and respond to changes in the
business environment more quickly and at a lower cost than vertically integrated
organisations. Quinn (1999) in his paper reviewing outsourcing, core competences
and appropriate management techniques, also suggests that in-house functions may
increase organisational commitment to a specific type of technology and may
constrain flexibility in the long run. This is confirmed by Wang et al. (2008)
whose study examined 120 companies’ performance after outsourcing IT.
10.2.5 Gain Access to External Competencies
Quelin and Duhamel (2003), suggest that it is possible to achieve higher service
levels, because firms can gain access to superior capabilities from their vendors.
McIvor (2006) suggests in the case of offshore outsourcing, firms can benefit
through access to skilled IT labour forces not available or very expensive in their
own countries.
Academic and management literature therefore identifies four main benefit
categories:
• Greater focus;
• Cost reduction;
• Flexibility; and
• Access to external expertise/investment or innovation.
However, these are only potential benefits. Translating these potential benefits
into actual ones requires a good understanding of the potential risks and possible
approaches to managing them.
10.3 Outsourcing Risks
Jurison (1995), publishing in a high quality journal, develops a model to describe

the relationship between outsourcing benefits and risk, stating that risk refers to the
chance or probability that some unfavourable event or outcome will occur.
According to Lacity and Willcocks (1999) in their paper also published in a high
quality journal, risk is the likelihood of loss as a consequence of uncertainty.
Many researchers have written about specific risks associated with outsourcing.
These include:
10.3.1 Strategic Risks
10.3.1.1 Not Achieving the Originally Planned Benefits

Adeleye et al. (2004) who report the results of a questionnaire survey involving
seven banks and 21 individual responses, note that the less experienced both parties
are, the higher the risk compared to traditional outsourcing. Lacity and Willcocks
(1999) list unrealistic expectations about what can be achieved by outsourcing as a
risk also.
10.3.1.2 The Loss of Core Activities and Competencies

Kakabadse and Kakabadse (2000) and Quinn and Hilmer (1994) suggest that
excessive outsourcing can lead to considerable reduction of overhead so that the
host organisation becomes a fraction of its former self, something they term the
“hollow corporation”.
10.3.1.3 Loss of Skills and Corporate Memory

Kakabadse and Kakabadse (2000) note that by contracting out goods and services
traditionally produced in-house, the organisation loses skills, competences and
collective knowledge, as both a producer and client of those services.
10.3.1.4 Loss of Strategic Business Flexibility and Innovation Capacity

Earl (1996) based on an analysis of 11 specific risks of outsourcing through
discussions with both buyers and vendors in the IT outsourcing marketplace and
Khalfan (2004) who reports the results of a case study, involving public and private
sector information systems/information technology (IS/IT) outsourcing projects in
Kuwait, suggests as the functionality provided by the vendor is available to all
customers simultaneously, there remains no first mover advantages.
10.3 Outsourcing Risks 139
Quinn and Hilmer (1994) note that during the term of the contract, client firms’
business environment could change dramatically. So poorly designed outsourcing
contracts may well lead to future strategic inflexibility.
10.3.2 Operational Risks
10.3.2.1 Dependency on the Supplier

Quinn and Hilmer (1995) suggest in their article, that dependence on the supplier
often finds its roots in: poor contracting, outsourcing into limited supply markets
and high asset specificity.
10.3.2.2 Cost Increases

Lacity and Hirschheim (1993) in their article and Lacity and Willcocks (1995)
through analysis of 61 sourcing decisions and outcomes made in 40 U.S. and U.K.
organisations from 145 interviews with case participants, suggest hidden costs
emerge if managers incorrectly assume the depth and extent of activities included
within the outsourcing contract. Levina and Ross (2003) who conducted a close
examination of vendor strategy and practices in one long-term successful
applications management outsourcing engagement, published in a good journal,
state that the pursued cost efficiency of (offshore) outsourcing is certainly not
always achieved.
10.3.2.3 Transition and Switching Costs

Kakabadse and Kakabadse (2000) notes that outsourcing requires a redefinition of
organisational boundaries. This in turn induces possible further restructuring and
dislocation of resources which induces a variety of costs in the process. Earl (1996)
in his article highlights these transition costs as including unforeseeable set-up
costs, redeployment costs, relocation costs or parallel-running costs.
10.3.2.4 Diminished Quality of Service

Aubert et al. (1998) who in their paper propose a conceptual framework for risk
assessment through empirical literature, note that reduction of quality may result
from several factors: the interdependence between an outsourced activity and
processes which remained in house, the lack of experience and expertise of the
service provider with the outsourced activity and/or the situation where the service
provider does not have the necessary resources.
10.3.2.5 Loss of Management Control

Quinn and Hilmer (1994) note loss of control over suppliers can occur when firms
do not closely monitor suppliers and where suppliers assume leadership in their
relationship. McIvor (2006) lists this as a major risk.
10.3.3 Commercial Risks
10.3.3.1 Security Breaches

Khalfan (2004) notes that a special issue in BPO is the risk to data privacy as the
service provider needs access to the client’s sensitive data to be able to process it.
Earl (1996) also warns of knowledge diffusion risk – the possibility of confidenti-
ality leaks and loss of intellectual property rights by the vendor.
10.3.3.2 Customer Lock-in

Quelin and Duhamel (2003) in their research through 25 semi-structured interviews
in 20 large European manufacturing groups and a subsequent survey of 180 firms,
note that this is mainly driven by two factors: (1) the level of standardisation and
complexity of the process and (2) the level of market maturity. The more customer
specific a process, the greater the difficulties associated with switching to another
service provider.
10.3.4 Human Resource (HR)/Communication Risks
10.3.4.1 Loss of Internal Coherence

Quinn and Hilmer (1995) note the possibility that external sourcing of certain
activities will hamper the internal coherence of the company. McCarthy and
Anagnostou (2004) in their paper published in a quality journal, looking at how
the economic benefits of outsourcing alter the contribution that an organisation
makes to a sector’s gross domestic product using an input–output method, note that
employees’ morale, trust and productivity can be damaged due to job security
issues related to outsourcing.
10.3.4.2 Communication Mismatches

Earl (1996) and Willcocks et al. (1999) note that what initially seems to be clear and
unquestionable to one side might result in disputes and litigation due to contrary
interpretation by the other partner. This can be especially true for offshore
outsourcing.
In terms of practitioner literature, the surveys conducted by my firm, Op2i
between 2009 and 2010 finds:
• Selecting the right process and functions to outsource in the first place was seen
as the best means of getting maximum return from the outsourcing investment –
the core competence argument essentially;
• The greatest financial risk remains the possibility of not achieving the cost
benefits, followed by cost of reintegration of processes on termination of the
outsourcing agreement. For offshoring, costs associated with managing the
service provider also rank relatively high;
• The two largest sources of internal risks are identified as: (1) inadequate skills,
proficiency and experience in outsourcing and (2) poorly constructed contracts
and SLAs;
10.4 Outsourcing Models 141
• The best approach to reducing the risks from outsourcing was stated as being the
development of a partnership relationship between the customer and supplier.
Strong contracts came second;
• The most effective strategy to reduce risks when outsourcing were deemed to be
the secondment of staff from the client to the service provider; and
• The best means of achieving a low risk outsourcing project implementation, the
survey suggests, requires a combination of having a well defined governance
structure and sufficient SLA measurement and monitoring systems. The majority
of respondents stated arbitration/mediation was important as part of the overall
governance structure.
Strategic risks to some extent form the greatest challenge as they require a
combination of strong yet flexible formal contracts, better knowledge management
and the development of trust and commitment which aid in developing comple-
mentary competences and achievement of the benefits being sought from the
outsourcing initiative. Needless to say, the decision to outsource and a robust
business case, which indentifies all costs, is a prerequisite to many of the other
risk management techniques if successful outsourcing is to be achieved.
When organisations outsource to offshore destinations, additional risks are
introduced which includes culture (as suggested by Krishna et al. (2004)), Language
and time-zone differences (as suggested by Rao (2004)) and the specific institutional
features of offshore countries, such as infrastructure, security, political conditions,
and intellectual property regulations within the offshore country (Rao 2004).
10.4 Outsourcing Models
There are a number of theoretical approaches that have been explored within the
literature on outsourcing, including agency theory, Transaction Cost Economics
(TCE), the Resource Based View (RBV) (which includes core competencies and
follows on from Porter’s five forces model [Porter 1980]), Dynamic Resource
Models (DRM), incomplete contract theory and other more recent models.
To some extent, each theory addresses a particular problem encountered when
outsourcing, but individually do not in themselves provide a holistic model for
explaining and addressing the various forms of risk that may also present when
outsourcing.
Agency theory suggests that the contract forms the basis of managing an
outsourcing relationship, whilst TCE suggests that opportunism in the relationship
must be countered. It informs that this can be done through the contract. Where it
may be prohibitive to manage such opportunist behaviours in a market based
relationship, an organisation may prefer to retain the activity in-house. Incomplete
contract theory suggests that contracts, however elaborate, will always remain
incomplete, and therefore, there will remain the possibility of risk even when an
organisation tries to account for all uncertainties through a well constructed con-
tract. Both RBV and DRM suggest that an organisation must carefully assess what
activities should be outsourced. Where an activity which may be determined to be
core competence is outsourced, the organisation must ensure it has initiated pro-
cesses which enable it to configure intra-organisational resources to gain competi-
tive advantage, without losing internal knowledge and capabilities of the
outsourced process – suggesting that the retention of internal knowledgeable
teams is important (something discussed later).
More recent models, such as the one proposed by McIvor (2000), and findings
from other researchers, suggest that traditional theoretical models are not applicable
or practical for outsourcing decision making today. These relatively recent models
attempt to fill what appears to be a gap in the existing theoretical models using the
concept of relationship management and factors such as trust and commitment.
The various theories are briefly described below.
10.4.1 Agency Theory
Jensen and Meckling (1976) define an agency relationship as “a contract under

which one or more persons (the principal(s)) engage another person (the agent) to
perform some service on their behalf which involves delegating some decisions
making authority to the agent”. In their extensive paper published in a high quality
journal, they suggest because the unit of analysis is the contract governing the
relationship between the principal and agent, the focus of the theory is on deter-
mining the most efficient relationships given assumptions about people (e.g. self
interest, bounded rationality, risk aversion), organisations (e.g. goal conflict among
members) and information (asymmetry).
The main finding from agency theory is the suggestion that effective use of
monitoring and, or bonuses, can reduce the moral hazard in relation to the service
provider (Jensen and Meckling 1976). This it would seem is too simplistic a
concept. Certainly monitoring and incentive schema may be useful as additional
factors, but do not on their own, provide the framework in which to manage risks
within an outsourcing programme.
10.4.2 Transaction Cost Economics (TCE)
Transaction cost analysis2 is an approach that explicitly considers the implications

of an organisation’s choice to perform a transaction or activity internally (hierar-
chy) or in the market (Williamson 1991).
2
Transaction costs can be decomposed into four separate costs related to transacting (Williamson,
1985): (1) search costs (i.e., the costs of gathering information to identify and evaluate an
outsourcing supplier), (2) contracting costs (i.e., the costs of negotiating and writing the contract),
(3) monitoring costs (i.e., the costs of monitoring the agreement to ensure that the outsourcing
supplier fulfils its contractual obligations), and (4) enforcement costs (i.e., the costs associated
with ex post bargaining and sanctioning the outsourcing supplier when it does not perform
according to the contract). Search and contracting costs are usually termed ex ante transaction
costs.
Markets for commodities like fuel or grain comes closest to the economists’
ideals of a frictionless market. Most real world procurement is subject to significant
transaction costs.
Some of these costs arise from the need to defend oneself against possible “sharp
practice” (opportunistic dealings), and some arise from the fact that human beings
are not infinitely rational – mistakes and coordination failures beset even the most
well-meaning of human enterprises.
Transaction costs are influenced by asset specificity, uncertainty, rationality and
opportunism, whereas agency theory is based on findings of goal incongruence,
information asymmetries between parties, moral hazard and risk aversion. The
main finding from transaction costs economics is that contract completeness and
transaction costs are connected. Because of the four important factors of this theory,
contracts are almost always incomplete.
Both agency theory and TCE attempt to find the most appropriate contract
between both parties to limit the transaction and agency costs, but also to limit
the opportunistic behaviour of the service provider (Jensen and Meckling 1976).
Opportunistic behaviour introduces a heightened level of behavioural uncertainty to
a contractual relationship (Wang 2002 whose paper published in a quality journal,
adapts TCE to analyse the implications of transaction attributes on the
consequences of customised software practice using 232 questionnaires from
medium to large companies in Taiwan). Uncertainty arises because it is hard to
foresee all contingencies that might occur during a transaction. This creates a
problem in developing contractual relationships because contracts are incomplete.
Aubert et al. (2003) investigating the characteristics of outsourcing contracts;
find that optimal contract completeness is the result of a trade off between the costs
of writing a complete contract and the expected costs associated with the level of
opportunism.
The transaction costs in outsourcing could be roughly divided in three categories:
contracting costs, transition costs and interaction costs. Contracting costs are the
costs of selecting vendors, negotiating and reaching agreement on suitable contrac-
tual deliverables, designing and implementing monitoring, measurement and dis-
pute resolution mechanisms. Transition costs are the costs of knowledge capture,
documentation and transfer from one set of personnel to another. Interaction costs
are the cost of managing interactions between the outsourced processes and the
processes remaining within the firm; these costs arise from the need to manage
interactions between the process and context and involve costs of ongoing process
mapping, interface design and costs of coordination mistakes.
10.4.3 Resource Based View (RBV)
While TCE focuses on the costs associated with conducting exchanges between two
separate entities, RBV concentrates on those factors that enable firms to gain a
competitive advantage. RBV is a continuation of the core competences model
proposed by Prahalad and Hamel (1990). Since RBV offers insight into which
resources are of critical importance, it helps determine which resources should be

kept or acquired. RBV helps determine whether one should or not outsource certain
processes and capabilities. Its proponents include:
• Barney (1991) whose paper published in a good quality journal, examines the
link between firm resources and sustained competitive advantage;
• Mata et al. (1995) again published in a quality journal, discuss RBV as a means
of analysing sustainability, and observe that some companies appear to earn
sustained abnormal returns. Barney (1991) argues this outcome arises because
they have access to key resources.
Barney (1991) as well as Cheon et al. (1995) (whose paper published in a quality
journal, expands the theoretical development of IS outsourcing), identify the
following four resource attributes as relevant: valuable, rare, costly to imitate,
and efficiently organised.
10.4.4 Dynamic Resource (Capability) Model (DRM)
The dynamic capability framework is an extension of the RBV. The term dynamic
refers to the capacity to renew competences (Teece et al. 1997 whose paper is
published in a high quality journal, develop a dynamic capabilities framework
approach which analyses the sources of wealth creation and capture by firms).
Dynamic capabilities are defined as a firm’s ability to integrate, build and reconfig-
ure internal and external competences to address rapidly changing environments
(Teece et al. 1997).
10.4.5 Incomplete Contract Theory
The theory suggests that no contract can be complete. Commons (1931) highlighted
the challenges of governance of contractual relations, given the challenges of
conflict, mutuality, and order. Harrison (2004) noted that all complex contracts
are unavoidably incomplete. The problem of incomplete contracts is aggravated by
the market dynamics facing both recipients and providers. Contracts must therefore
be flexible and adaptable, which puts an even greater stress on the importance of
contract management.
Changes in the partnership’s context necessitate “relational contracting”. This
entails that apart from formal contacts, informal contracting is an important element
in controlling one’s partnership (Barthelemy and Quelin 2006, based on 82 surveys
of personnel in charge of outsourcing in client organisations, published in a quality
journal). They further suggest, because contracts are incomplete, self enforcement
mechanism must be developed to ensure performance. They suggest constructs
such as: control, incentives and flexibility are important.
10.4.6 Other Models
Although traditional literature on outsourcing emphasis that only non-core

activities should be outsourced, there is now literature which suggest that core
activities can also be outsourced, but require additional steps within the decision
making process.
According to McIvor (2000) it is crucial to address the outsourcing decision
from an activity perspective within a firm’s value chain. He argues that it becomes
much easier to identify the value adding activities when a firm is seen from a value
chain viewpoint. The role of the supply base becomes more important with the
outsourcing of more strategic activities which is accompanied by a higher depen-
dence on the supplier. He proposes a four stage model:
• Stage 1 consists of defining the core activities of the business;
• Stage 2 consists in evaluating the relevant value chain activities and understand-
ing the required competencies to fulfil those activities, with benchmarking in
relation to potential suppliers from outside;
• Stage 3 consists in total cost analysis of core activities. This stage attempts to
identify all costs of either carrying out the activity in-house or buying the activity
from potential suppliers identified from the previous stage; and
• Finally, stage 4 consists of relationship analysis, which looks at the “suitability”
of the supplier base to outsource a core activity. Depending on the type of
relationship the sourcing company seeks, different relational competencies are
required from the supplier. For example if the sourcing company wants to
outsource a core activity but also wishes to maintain the knowledge to carry
out the activity, it has to establish a partnership relationship or a strategic
alliance. Both types of relationship require intensive collaboration. Hence,
potential suppliers must possess these relational competencies for strategic
outsourcing to be an option. Otherwise, he suggests, investing in order to
perform the activity in-house.
Levina and Ross (2003), reporting a study of vendor practices in one long-term
successful applications management outsourcing engagement, point out that
relationships matter particularly when viewing core competencies and the eco-
nomic concept of “complementarity in organisational design”. They suggest that
the softer aspects of a relationship are critical from both the vendor and the client
perspective. Currie and Willcocks (1998) whose paper is also published in a quality
journal, distinguishes between four types of IT sourcing decisions, through
interviews with 20 organisations and 4 case studies. They suggest that ‘relational’
or ‘softer aspects’ of the relationship are as important as the hard factors.
Grossman and Helpman (2002) writing in the Quarterly Journal of Economics,
develop an equilibrium model of industrial structure in which the organisation of
firms is endogenous. They show that the viability of outsourcing is determined by
the distribution of bargaining power between the two parties involved, the degree of
competition in the market, and the number of potential partners in the market.
Taking this as a theoretical background, one may expect that the benefits from
outsourcing are not always the same, but in particular depend on the characteristics
of the firm and industry in question. Confirming that there is not a ‘one size fits all’
model for outsourcing.
These models thus suggest there are a number of steps that a firm must under-
stand to implement an appropriate outsourcing model, which minimise risks as far
as possible. These steps include:
• A clear understanding of what the firm’s core competences are;
• Continual monitoring of the firms core competences, as these may change over
time;
• Understanding and identification in order of priority, the drivers for outsourcing
within the firm;
• The organisation and individual departments and personnel within it, must
understand the potential risks that are apparent when a decision to outsource a
particular process/function to a particular vendor in a particular country has been
made. They must identify how these may affect the firm’s outsourcing drivers
and the achievability of these, and identify possible mechanisms to overcome
such risks;
• An acceptance that all contracts are incomplete and therefore something else is
required to fill the gaps that may exist in formal contracts; and
• The use of relationship approaches, commonly referred to as ‘soft factors’, as a
means of filling such gaps.
However, the academic literature does not address important areas:
• An understanding of the implications of conflicting outsourcing drivers which
may be driven by different stakeholders within an organisation. The literature
appears to assume that an organisation has one or many goals, with the accep-
tance that such goal(s) are representative of all the stakeholders within the client
organisation. This arbitrary acceptance may in itself lead to conflict and unsuc-
cessful outcomes;
• An understanding of what can and cannot be covered by formal contracts – the
literature suggests that the contract should be as complete as possible, but given
the trade-off between attempting to write complete contracts and the costs
associated with this, it is important for client firms to understand what can
practically be covered by the contract;
• An understanding of what mechanisms within the contracts can be used as
control factors which aid in minimising risks. The prime mechanism for control,
contract monitoring and enforcement within outsourcing relationships is the
SLA. However, there is a dearth of extant literature which provides an analysis
of how SLAs should be developed to ensure maximum control for the firm,
whilst the establishment of trust and commitment can be achieved; and
• An understanding of how the more recent, relational approach can be
implemented and managed. Much appears to have been written on the relational
approach, but little on what practically can be done to achieve such trust.
References 147
10.5 Take Aways
• Research now suggests the legal contract and relationships are complementary
and both required for successful strategic outsourcing.
• The research suggests outsourcing is moving from just a tactical initiative to a
more strategic approach, although it still remains a risky practice with a number
of different risks that can be categorised as: strategic risks, operational risks,
commercial risk and HR risks.
• The drivers for outsourcing vary but could be broadly categorised as providing
either: greater focus, cost reduction, flexibility or access to external expertise or
technology.
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Minimising Risk Through the Contract
11
The prime mechanism by which risks in outsourcing have been managed has been
through the contract, although theory and practice recognise that contracts can
never be complete. Nevertheless, it is important to try to develop comprehensive
contracts with appropriate clauses whilst being flexible to cope with changes in the
environment. This chapter examines the role of the legal contract in minimising
risks.
11.1 Introduction
Formal contracts represent promises or obligations to perform particular actions in

the future. The more complex is the contract, the greater is the specification of
promises, obligations, and processes for dispute resolution. When asset specificity
of the outsourcing relationship increases, contracts become increasingly complex
for different reasons.
A complete contract therefore must specify all the actions that each party would
take in response to every possible state of the world. This is an idealised concept of
a contract. All contracts are incomplete. In this sense, incomplete contracts are
contracts that focus on offering alternative ways to deal with aspects of the
relationship that are not easily addressable by simply specifying all possible
contingencies.
A corollary issue is the willingness of parties to enter long-term contracts, which
tends to be limited by the hazards inherent in contractual exchange. Because writing
and enforcing clauses is expensive, only a limited number of contingencies are
included in contractual agreements. Optimal contract length reflects a trade-off
between the costs of negotiating the terms of trade on a period-by-period basis and
the hazards of being bound to an inflexible agreement for an additional length of
time.

152 11 Minimising Risk Through the Contract
11.2 Outcome Based Accounting Controls
Accounting controls, which are a subset of formal control mechanisms, can be used
to measure outcome controls and/or behaviour controls. Behaviour controls in inter-
organisational relationships specify both how the partners should act, and monitors
whether actual behaviour is in accordance with what has been pre-specified. In
contrast, outcome control mechanisms specify outcomes to be realised by the
parties and monitor the achievement of performance targets.
A contract must be used in order to avoid risks when dealing with an outsourcing
partner. The principle is to place the risk via an outcome-based contract, because
the rewards for both partners depend on the same actions.
Accounting controls are incorporated into an outsourcing agreement through the
use of SLAs.
11.3 Appropriate Contractual Clauses
The written outsourcing contract is the most important tool for defining work,
liability, price and expectations from both parties which guides their behaviour of
how to manage the contract. A tight contract is essential to ensure that expectations
are met; a loose contract increases risks. Relationships with loose contracts are
more likely to fail.
There are a number of different contractual provisions that can be used to
minimise risks in good outsourcing contracts, these include:
• Precision – the extent of the room for interpretation of the terms of agreement
and its procedures should be established;
• The description of services to be outsourced should be comprehensive and clear;
• Performance measures and targets should be determined with as many numbers
of elements as possible taken into account in the contract, subject to reasonable-
ness , ease of measurement and the impact these have on behaviour;
• Audit interval and procedures should be agreed between client and provider;
• Service reports should be aligned with determined service level measures;
• Cash penalties should be imposed for provider non-performance;
• Incentives, including cash should be used to motivate the provider to exceed
performance requirements and/or provide superior performance;
• Disaster recovery and business continuation plans are meant to operate when
certain force majeure events occur. The force majeure provision should not
operate to relieve the vendor of the obligation to perform. While force majeure
events might reduce the obligations of the vendor, they should not eliminate
them;
• Ensuring effective provisions for the application of the EU Acquired Rights
Directive (77/187/EEC). The purpose of the Directive is to “safeguard
employees” rights in the event of transfer of undertakings, businesses or parts
of businesses. The rules also apply when a “service provision change” takes
place (i.e. outsourcing). Broadly speaking, the effect of the Regulations is to
11.4 Contract as an Enabler of Trust 153
preserve the continuity of employment and the terms and conditions of those
employees who are transferred to a new employer when a relevant transfer takes
place;
• Ensuring that money laundering legislation is incorporated within the contract.
The EC Prevention of the Use of the Financial System for the Purpose of Money
Laundering and Terrorist Financing Directive1 applies to outsourcing
relationships. The responsibility for complying with this Directive remains
with the institution or person covered and cannot be passed onto the vendor; and
• Ensuring data protection legislation has been incorporated into the contract.
There are three different legal relationships that arise regarding the treatment
of personal data in a contract for outsourcing services: Contractual (and/or in
tort, depending on the jurisdiction), between the data subject and the data
controller, Contractual, between the data controller and the data processor; and
in tort, between the data subject and the data processor. In any case, the data
controller remains liable for the non-compliance of the data processor with
applicable law, because the latter acts on behalf of the former.
There are additional factors that must be considered, including: impact of local
taxes, regulations, warranties, guarantees, and subcontracting provisions, which
would warrant another book. Readers may wish to look at Outsourcing to India –
a Legal Handbook, my earlier book for further details.
Risks can be accepted, excluded or laid off. Where risks are not accepted there is
a price to pay for transferring the risk to someone else. Residual risk in an
outsourcing scenario is likely to lie within the customer appointing the service
provider. It is paramount to pre-plan for risk management and one of the best ways
of achieving this is to use a matrix clearly setting out which party accepts which
risk, to what degree and where insurance is taken out and who pays for it.
Where risks are accepted by the service provider, there is likely to be a
corresponding risk premium built into the price calculation and businesses should
check carefully the financial model to ensure that this is no greater than is fair in all
the circumstances.
A jointly prepared and maintained risk register can prove very useful in ensuring
that both parties understand and manage all the risks involved in the project, rather
than just focussing on the risks they see as their responsibility.
11.4 Contract as an Enabler of Trust
In response to exchange hazards, managers may craft complex contracts that define
remedies for foreseeable contingencies or specify processes for resolving unfore-
seeable outcomes. Rather than hindering or substituting for relational governance,
1
Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005.
“Prevention of the Use of the Financial System for the Purpose of Money Laundering and Terrorist
Financing”, 25.11.2005 Official Journal of the European Union L 309/15.
154 11 Minimising Risk Through the Contract
well-specified contracts may promote more cooperative, long-term, trusting

exchange relationships. Well specified contracts narrow the domain and severity
of risk to which an exchange is exposed and thereby encourage cooperation and
trust. The continuity and cooperation encouraged by relational governance may
generate contractual refinements that further support greater cooperation. Rela-
tional governance in this sense may increase the probability that trust and coopera-
tion will safeguard against hazards poorly protected by the contract.
11.5 Take Aways
• A complete contract should attempt to specify all the actions that each party
would take in response to every possible state of environment and relationship,
but balanced against the costs of writing such contacts.
• The contract should try to focus on outcome based accounting controls through
the use of SLAs.
• A strongly negotiated contract can enable trust, rather than diminish it.
• Vendor selection is important in minimising risks; it can be done through a non
collaborative approach, which is appropriate for tactical outsourcing or through
collaborative approaches, which is more appropriate for strategic outsourcing.
Minimising Risk Through Relationships
12
The role of relationships to minimise risks is gaining importance, as organisations

have come to realise that the legal contract doesn’t necessarily reduce risk on its
own. Trust is central to a good relationship. But developing trust is not an easy task,
at an organisational or individual level.
This chapter discusses how trust can be fostered at organisational and individual
level and examines the circumstances under which investment in relational
exchanges are appropriate. The chapter also documents two case studies looking
at the role of relationships from both a client and vendor perspective.
12.1 Introduction
There is growing realisation that the relationship itself plays a critical role in the
success or failure of the outsourcing relationship. Consequently, outsourcing
relationships consist of contractual arrangements together with relational based
governance. Considerable research has been done within the field of inter-firm
collaboration, but most of this research neglected the contractual dimension, which
is an integral part in many inter-firm relations, including outsourcing. But even a
very comprehensive contract with incentives and penalties cannot exclude all
possible risks.
12.2 Trust
A company cannot develop a strategy for outsourcing and implement it discretely,

without an understanding of the embeddedness of individual relationships within
wider networks. Trust is a fundamental relationship building block.
Empirical studies have found mixed evidence on the relationship between
formal control (contracts) and trust (and other types of relational governance).
Das and Teng (1998) in their article in Organisation Studies, which examined the
notion of confidence in partner cooperation in alliances, suggest that it comes from

156 12 Minimising Risk Through Relationships
two distinct sources: trust and control. They suggest that trust reduces the need for
contracts and hence can be conceptualised as a substitute for formal control.
More recent studies have found evidence that suggest that trust and formal
controls are found to be complementary (Poppo and Zenger 2002).
Trust as a phenomenon is complex and has many meanings, and no widely
acknowledged definition of the term exists. Whereas some scholars tend to view
trust in broad terms as one’s belief and expectation about the likelihood of having a
desirable action performed by the trustee, others tend to define trust in terms of
one’s assessment of others’ goodwill and reliability in a risky exchange.
Other scholars distinguish between cognitive and affect-based dimensions of
trust. Cognitive based trust is based on predictability, past behaviour, dependability,
and fairness – i.e. a rational perspective. In contrast, affect-based trust is based on
non-calculative reliance on the moral integrity, or goodwill of others, based on
emotional bonds between individual and social interaction.
Trust primarily emerges on the basis that the other party will fulfill its
commitments. Repeated personal interaction discourages attempts to behave in an
opportunistic manner and thereby increases the level of trust. As relationships
evolve, competence trust becomes more important than the written formal agree-
ment. Competence trust revolves around faith that the other party has the compe-
tence to be able to deliver what is required. Ultimately, goodwill trust is the decisive
factor in highly evolved relationships; it is the trust that the other party will perform
tasks in excess of the agreed terms and conditions.
Goodwill trust is based on the expectations that parties have an open commit-
ment to each other. Shared values and norms are a necessary, but not a sufficient
condition, for developing goodwill trust. What is needed is open commitment and
reciprocity. Close personal relationships between the parties to a relationship have
been identified as enhancing their commitment to the future of the customer-
supplier relationship.
Trust is said to be inspired by rational actions. From this rational perspective,
trust is a calculation of the likelihood of future cooperation. The rational perspec-
tive recognises that people must engage in self-centred actions and be ‘continually
making provisions for the possibility of opportunistic behaviour’ by others.
One important consideration within alliances is that conflict between partners
can result in higher costs or a premature breakdown of relationships. Trust helps
defuse such conflict, because trusting partners are more likely to interpret each
other’s equivocal actions in a manner conducive to the stability of the relationship.
If a firm encounters unexpected actions by its partner that could be ascribed to both
good and bad intentions, the presence of trust reduces the likelihood of a negative
interpretation. This allowance facilitates openness in sharing knowledge and
reduces fear of opportunistic behaviour by partners. Hence, the benefits from trust
are magnified when behavioural uncertainty is high. However, the benefits from
trust may be reduced when environmental uncertainty is strong, because overconfi-
dence in the information provided by each partner restrains the vigilant environ-
mental scanning and cross-fertilization of views that is of vital importance under
12.2 Trust 157
these conditions – assuming these possible concerns are not recognised and
addressed at an early stage within the relationship.
Interpersonal trust and inter-organisational trust are related but empirically and
theoretically distinct concepts. Inter-organisational trust emerges as the overriding
driver of exchange performance, negotiation, and conflict, whereas interpersonal
trust exerts little direct influence on those outcomes.
12.2.1 Organisational Trust
Organisational trust is typically characterised by a high level of trust in a company

name or brand, coupled with a belief that good controls have been established in the
deal. The parties are much more likely to ‘forgive’ each other even for relatively
serious mistakes. A ‘can do’ attitude pervades the deal, and usually have formal
‘co-management’ practices established. The parties in the relationship proactively,
and formally, seek opportunities to improve efficiency or enhance business value.
12.2.2 Group Trust
Good group trust is characterised by the groups of people managing or affected by

the relationship, in both the service provider and service recipient, having a medium
to high level of trust in each other, and believing the controls are adequate or
effective. Group trust often starts with small groups of good people trying to do the
right thing, but in an ad hoc and random way. As the group extends, or members
change, it becomes necessary to formalise best practices to maintain the level of
confidence achieved. This is the first step toward formal co-management.
12.2.3 Individual Trust
Individual trust is characterised by the key individuals managing the relationship in

the service recipient and in the service provider having high level of trust in each
other, and believing the controls are adequate or effective. These individuals will
likely work well together, respect each other’s capabilities and understand how
others are positioned and motivated inside their own organisations.
12.2.4 Creating Institutional Mechanisms for Building Trust
Given that reliance on the legal contract alone is insufficient in rapidly changing
environments. I recommend managing the outsourcing programme as a strategic
partnership, with emphasis on trust and flexibility.
Most partnership arrangements, whether flexibly defined or more formal,
involve shared risk and benefit. Even looser outsourcing arrangements are alliances,
consortia and shared service agreements. Whatever the reasons for the alliance,
transparency between the partners is considered to be vital for trust building.
Trust is a multilevel phenomenon that exists at the personal, organisational,
inter-organisational, and even international levels. At the inter-firm level, as already
noted, trust is a key element in cooperative relationships. It is effective in lessening
concerns about opportunistic behaviour, better integrating the partners, and reduc-
ing the need for formal contracting.
12.3 Control and Its Relationship to Trust
The other determinant of risk in strategic alliances is control. Control is generally

viewed as a process of regulation and monitoring for the achievement of
organisational goals. A key factor that enables effective control is effective
governance.
A firm’s critical resources may span firm boundaries and may be embedded in
inter-firm resources and routines. There are two classes of governance used by
alliance partners: the first relies on third-party enforcement of agreements (e.g.
legal contracts), whereas the second relies on self-enforcing agreements. The TCE
perspective falls primarily within the first class, suggesting that dispute resolution
requires access to a third party enforcer, whether it be the state (i.e., through
contracts) or a legitimate authority. In contrast, self enforcing agreements involve
safeguards that allow for self enforcement. Within the self-enforcement class of
governance mechanisms, we distinguish between ‘formal’ safeguards, such as
financial/investment hostage and informal safeguards such as goodwill trust.
Excessive concern with control however can be counterproductive. Management
of alliances is critically concerned with attitudes and interpersonal relationships,
and that attention should be paid to issues of trust. Trust requires familiarity and
mutual understanding and hence depends on time and context, on habit formation,
and on the positive development of a relationship. Repeated interactions lead to the
forming of habits and the institutionalisation of behaviour. Thus, habitualisation
becomes part of the ‘invisible assets’ that make future cooperation easier to
implement. Trust induced by institutionalisation and habitualisation, has a negative
effect on risk in the form of the perceived probability of loss.
There is a portfolio of controls that can be used in combination. These include:
• Accounting controls provide objective representations of the performance levels
of counterparties to inter-organisational relationships;
• Behavioural control is the process or the means to ‘goal achievement’ (the
controller can use formal controls such as performance evaluation and reward)
or informal controls (utilising social or people strategies to reduce goal
differences);
• Outcome control influence the outcome of the process through performance
targets;
• Clan controls promulgate common values, beliefs and philosophy, using shared
experiences, rituals and ceremonies; and
12.4 Vendor Selection 159
• Self control is used where the controllee determines both the goals and the
actions through which they should be achieved.
Outcome measures also enable a level of flexibility and innovation to be
preserved in the relationship as they do not require adherence to pre-specified
procedures or behaviours. They only specify the end results required from the
alliance.
12.4 Vendor Selection
Vendor selection can be a very complicated and emotional undertaking. The main
challenge is to ensure a vendor is chosen that delivers quality services at a
reasonable price point, one that reduces risks and that you can trust.
There are two approaches to vendor selection (see Fig. 12.1): a non-collaborative
and collaborative approach which should form the basis of contract formation:
• The non-collaborative approach can be identified by the request of the
outsourcer to the vendor for a formal request for proposal (RFP). In this way,
there is no active interaction between the possible partners. The simplicity of this
approach becomes a limitation when the outsourced process becomes strategic
Characteristics: Long
term focus, reduced
supply side, joint
problem solving,
Characteristics: Critical to information exchange,
technology intensive in competitive sharing the benefits and
rapidly changing advantage risk, high mutual
environments. Manages dependency, Obtaining
the relationship for as Competitive Close benefits in the
long as the supplier Collaborative Collaboration relationship that are un-
maintains a strong obtainable by its
position in the competitors
technology
Characteristics: Characteristics: Long

sufficient supplier Adversarial Secure Supply term relationship in order
competition exists, little to maintain supply
or no customisation continuity, need internal
required and where capability for-just-in-
economies of scale can case circumstances, tries
be achieved. Flexible Not critical to to standardise, limits
agreements with little competitive risks of one supplier
relationship focus, and advantage
little flow of information,
but possible multiple
sources of supply
Low Supply market risk High
Fig. 12.1 Relationship matrix

Case Study of Indian BPO Service Provider: Courtesy of Client Partner Manager
Based in UK
The service provider is a BPO arm of a major IT outsourcing vendor based out
of India. The parent company primarily engages in IT Outsourcing, whilst its
subsidiary focuses on the BPO sector. Within the UK the firm offers Human
Resource Outsourcing, Finance and Accounting Outsourcing and Data Man-
agement Outsourcing to a select number of industries; including the
healthcare industry, the market research industry, the legal sector and to a
lesser degree the manufacturing and engineering sector.
The firm provides what may be considered traditional non-core
outsourcing services such as data entry, transcription services and rules
based processes, however, it is increasingly trying to position itself to provide
more core services to its clientele, adding longer term value to the client and
moving into what is called knowledge process outsourcing services.
This is largely driven by the need to move away from a pure cost focus
which the interviewee suggested tends to dominate the client’s priorities
when choosing to outsource peripheral activities. This is not say that cost
does not feature as a key requirement, but the aim, the interviewee; a client
partner tells me, is to bring to bear additional drivers that are more important
when activities which are less peripheral are outsourced – these drivers
include efficiency, quality of end to end service and flexibility.
Another interesting development, especially given its parentage, is the
development of converged services to the market, which combine and utilise
IT to automate, streamline and deliver the firms BPO services. This is seen to
be critical in a crowded vendor landscape where there are a few select vendors
that dominate the corporate space offering a multitude of outsourcing services
and a large range of niche vendors offering specialist service offerings to
certain verticals or concentrating on certain processes.
Being stuck in the middle is increasingly seen as a real challenge. Con-
verged IT and BPO services allows the firm to specialise and compete in an
increasingly competitive market; this is also evidenced by the recent trend
towards more single sourcing deals rather than multi-sourcing. Clients it
seems prefer sourcing a vendor that can deliver more than just a single
outsourcing process. The company’s response to this market trend, has been
the development of applications, one specifically for the travel and logistics
industry and another for the legal sector – these applications now enable the
firm to establish a leadership position in the delivery of specific BPO services,
driven by the applications that support these processes.
What is also in favour of the firm is the greater acceptance by its clients
and prospective clients towards offshoring. This aligns the vendor with the
recent focus that clients place on cost reduction as their major outsourcing
driver. This drive towards cost reduction also means that there is a greater
appetite for outsourcing processes and functions that may have been ‘off the
table’ a few years ago, e.g. Financial planning and accounting is now
12.4 Vendor Selection 161
becoming something that clients are looking to outsource, whereas a few

years back it was seen as central to the business and not something that should
have been outsourced. In other words, the traditional boundaries and limits
placed on offshoring are now changing.
From an offshoring perspective, the Asian countries, and in particular
India remain at the forefront. China is still very much a destination for service
providers looking to access cheaper resources, but not end user clients, who
still see it as a major challenge given language and cultural differences. In
terms of Near-shoring, the interviewee sees this as something that appears to
have been talked up by media than reality; it is still seen as an expensive
choice given labour rates and the euro currency. There are however many
other destinations coming up that pose a greater threat (or opportunity), such
as Egypt, Mauritius, Botswana, Kenya and Sri Lanka. These destinations not
only offer labour arbitrage opportunities, but offer things that are unique, such
as multi-lingual language skills, diversity of talent or just natural skills that
may not be available in the traditional locations, such as India or Philippines.
The firm, as it moves to higher value service delivery, would like the
decision making process within clients to also change. Today for peripheral
activities most firms include a range of stakeholders in the decision making
process, with the COO ultimately making the decision to outsource, procure-
ment setting the boundary conditions for vendors and the line of business
driving the specific requirements. Other stakeholders are involved but usually
only to contribute their opinions. What doesn’t appear to happen, is client’s
willingly providing the vendor end to end visibility of the operations.
The procurement function in some instances inhibit this process by
imposing strict interfaces – this is not to say that procurement doesn’t provide
a useful role within the process (at contract negotiation stage they provide
useful structures and procedures that allow both parties to make objective
decisions and check the health of the relationship), but that their role should
diminish post contract to allow interfaces to be built between vendor and
client at multiple points within the organisations.
The problem is attenuated, as clients tend to be reluctant to share deeper
insights into their processes and internal performance measures for a number
of possible reasons; from not having the data, to fear of losing control, to fear
of the impact this may have on internal departments or teams that would face
competitive scrutiny if performance data was shared with a vendor. From the
interviewee’s perspective, such dialogue is essential to create a partnership
model for outsourcing.
From the vendor’s perspective, the contract and SLAs are important, but
should be considered hygiene factors (albeit with flexibility – although this
appears to be only through scope changes). What is ultimately important is to
create a partnership between the client and the vendor. A partnership offers
both parties’ points of reflection where each can judge the strengths and
weaknesses as well as opportunities for the relationship over the course of
(continued)
the deal – such a relationship can help the client organisation meet their
overall corporate objectives.
However, the interviewee suggested these things take time; it would take a
minimum of 3 years before you could say you have a partnership, and 5 years
before you could judge the relative success of a partnership (this isn’t including
the pre-contract period, but post service delivery). This time is required to build
the trust that is required at all levels within the organisations, to build a good
understanding of the organisation’s business and its customers and their buying
behaviour and to have tested the quality of the partnership during times of need.
But for a good partnership, it needs more than just time, it needs transpar-
ency, so the vendor has a good understanding of the end to end value chain of
the client; and the involvement of the right people from the client and not
necessarily the CxOs. Most organisations just assume because there is a good
relationship at the CxO level, they have a good partnership. This is dangerous
as the CxOs may be oblivious to what happens on the coal face of service
delivery. The traditional approach with set interfaces and governance
meetings that happen only at a peer level may hinder a partnership approach
rather than help. What is required is interface and governance structures that
involve the team as a whole, from the operational delivery team to the senior
executives, one which paints a good and true picture of the relationship and
one that harmonises perceptions and realities throughout the organisations.
The interviewee was keen to point out that a good partnership doesn’t
necessarily need to include a risk or equity contribution, because that
positions the relationship more in terms of what value can be extracted
from the other party and what control can be exerted to the other. In fact a
risk or equity model assumes there is not the genuine level of trust in the
partnership such that formal controls and incentive structures are required.
for the outsourcer. In this case, the vendor selection phase becomes particularly
critical and is often a determinant for the whole outsourcing activity success.
• The collaborative approach can be identified by the absence of preliminary
formal documentation between the outsourcers and the vendors. This approach
can be pursued by the outsourcer that looks for a vendor, or by a vendor that
approaches a possible outsourcer. This model has significant implications in the
field of innovation, since the outsourcer can explore and evaluate vendor
capabilities and promote common innovation. However this solution requires
high relationship investments and participation in the vendor selection phase for
both the outsourcer and the vendor.
What the senior manager from this Indian service provider talks about is chang-
ing the relationship between the vendor and the client from one that has typically
been adversarial to one that is collaborative and which seeks to promote dialogue
and relationships at all levels within the organisation, as illustrated in Fig. 12.2.
12.5 Service Level Agreements as a Means of Control 163
Adversarial
Design Design
Finance Finance
Info systems Buying Sales Info systems
Operations Operations
Logistics Logistics
Collaborative
Design Design
Finance Finance
Info systems Info systems
Operations Operations
Logistics Logistics
Fig. 12.2 From adversarial to collaborative relationships
12.5 Service Level Agreements as a Means of Control
SLAs are a critical part of the contract and complement the relational aspect of the
outsourcing programme. Within relationship management, all outsourcing
agreements are governed by formal contracts; therefore these must be used as
part of the relationship management process. SLAs enable certainty and help
publicise common beliefs and expectations and align goals. Negotiation of
contracts and SLAs can in itself be used as a relationship and trust building process
– the process can aid in developing the balance between formal contracts and trust.
SLAs should include not only outcome based measures, but processes and dispute
resolution procedures, as well as the roles and responsibility of various people
involved in the outsourcing relationships. Metrics used within the SLA should
motivate the right behaviour within both organisations (see Fig. 12.3).
There are three critical attributes of relational governance: relational norms,
harmonious conflict resolution and mutual dependence, which can mediate the
impact of SLA characteristics on relational outcomes of trust1 and commitment.2
Formal contracts affect the self enforcing nature of relational governance, and
explicit clauses dealing with the three SLA characteristics may also serve to
1
Trust reflects one party’s belief that its requirements will be fulfilled through future actions
undertaken by the other party and viewed as a necessary condition for relational governance.
2
Commitment entails durability (a desire to continue a relationship because of positive affect
towards the partner), input (a willingness to be deeply involved in the relationship through
investment of capital and effort), and consistency (a confidence in the stability of the relationship).
1. Choose measurements that 2. Ensure metrics reflect factors within

motivate the right behaviour – the service provider’s control – The
Each side must understand the metric should be two sided. If the
other side, its expectations and service provider’s ability to meet
its goals, and the factors that objectives is dependent on an action
are within their respective from the customer, the customer
control performance must also be measured
Check &
Acknowledge
Parts Confirm
3. Choose List
measurements that
are easily collected Order Check &
Create Schedule Service
delivery Service
– If the metrics in Acknowledge
plan Provision design
the SLA cannot be
easily collected,
Service
then they will Order detail design
quickly lose
favour, and Confirm
Create technical
eventually be specification for
ignored order
Configuration
and external
works
Plan Jobs
5. Set a proper baseline – To 4. Less is more – Avoid

be useful, metrics must be choosing an excessive
set to reasonable, attainable number of metrics, if the
performance levels. This is metrics generate too much
where benchmarking may be data, the temptation will be to
a useful tool ignore the metrics
Fig. 12.3 Rules for effective SLA metrics
develop social elements in relational exchanges (including norms, mutual depen-

dence and trust). Partnership issues in outsourcing must be considered only in
conjunction with contractual arrangements.
12.6 Collaboration
Trustworthiness varies between agents. It is to some extent personal, in bonds of

kinship and friendship, but also to some extent impersonal, when a person observes
a given ethic or set of behavioural routines. When an agent is a firm, its trustwor-
thiness is associated with ethics and behavioural routine, which are part of the
organisation’s culture.
Effective outsourcing requires the parties to view the relationship as more than
just an agency relationship, but one which is seen as a partnership or alliance. This
requires parties to collaborate with each other (where each party may have different
practices, interests, and competences). However, because of complex internal and
external dynamics, effective collaboration cannot be measured by objective
outcomes alone.
12.7 Relationship Management and Internal Knowledge Retention 165
Effective collaboration is a process that (1) leverages the differences among

participants to produce innovative, synergistic solutions and (2) balances divergent
stakeholders’ concerns. This process is facilitated by the existence of shared
identity and practices, but is impeded by status differences among participants
which inhibit open dialogue.
There are intentional ways of creating social capital (a fourth kind of capital
beyond structural, human and customer capital) that facilitates the development of
trusted knowledge paths. A side benefit of this knowledge sharing governance
structure is the creation of trust and mutual obligation, which reinforces the
institutional relationship.
Effective collaboration is difficult to achieve in global offshoring projects as
there are often multiple boundaries that must be bridged simultaneously. For
example, social boundaries and physical distance separate participants and make
it difficult to establish shared identity and practices. Some other boundaries that
have been studied separately in the past include:
• Cultural boundaries;
• Organisational boundaries; and
• Functional boundaries.
It has been argued that differences in national culture are among the key
challenges to offshore collaboration. Different cultural norms that are usually
discussed in cross-cultural research such as attitudes towards authority (Hofstede
1993) are produced and reproduced through actions and reinforced through the
symbolic interpretations of these actions. In turn, they alter how agents work and
interact.
12.7 Relationship Management and Internal Knowledge

Retention
Although vendors’ valuable and hard-to-imitate resource endowments and

capabilities may confer outsourcing firms with valuable opportunities and compet-
itive potential, a firm’s existing core capabilities enable it to make the right sourcing
decision and to effectively mobilise, deploy, and leverage the competitive potential
offered by the vendors. Firms that incur the cost of outsourcing without developing
complementary capabilities may be at a relative disadvantage compared to firms
that do.
There is a need to retain a central repository of expertise within the organisation.
Outsourcing does not eliminate the need to manage the function now performed by
a vendor. Rather, it creates a situation requiring managers to utilise a different set of
skills. Effective contract monitoring requires the creation of a reporting system that
allows for tracking of performance and costs, and technically competent individuals
are required to manage across organisational boundaries.
Case Study of Cooperative Financial Services: Courtesy of Steve Briggs Head of

IT Strategic Partnerships CFS
The Cooperative Group is the largest consumer co-operative in the world,

employing over 120,000 employees in the UK with a family of member-
owned businesses spanning food retail, financial services (CFS), farming,
funeral care and pharmacies.
Cooperative Financial Services (CFS), employ 13,000 staff, working in a
highly regulated industry with strict data security regulations and regulatory
scrutiny.
The focus of this case study is on CFS and in particular their outsourcing
relationship with Steria for IT applications support and development
(although the group has also outsourced to SCC their desktop management
and Intel infrastructure management and their life and savings back office
administration to Capita).
The relationship with Steria being the largest of the three deals, goes back
18 years, and for all intent and purposes can be considered a mature relation-
ship. Over the years, some 320 people have been moved across from CFS to
Steria.
The initial drivers for outsourcing were in order of priority:
1. Flexibility to meet fluctuations in demand (where resources can be ramped
up and down at 3 months notice);
2. Innovation to ensure CFS benefit from technology and transform the use of
IT to deliver transformational benefits to the business;
3. Inject best practice in terms of next generation IT and software develop-
ment; and
4. Cost savings. Cost savings is integral to any outsourcing deal, but in this
case it was seen as something thing useful to have, not as the initial driver
for outsourcing.
In their other desktop support and Intel infrastructure management
outsourcing deal with SCC, the priorities for the deal were different, this
time priorities were driven by different requirements:
1. The initial drive was to refresh and standardise the environment, drive
efficiency savings and improve support capabilities. A second desktop
refresh was embedded into the 6 year term;
2. Second on the list of priorities was cost savings, higher up the priority list
than the broader application support and development area, which was
seen as being integral to the core business of CFS and something that could
deliver longer term competitive advantage.
Looking back at the decision to outsource, Steve Briggs says with hind-
sight it has been satisfactory; it has delivered on the original business case,
and still remains competitive, having tested the commercial model through
the use of benchmarking; the relationship with the vendor is seen to be
12.7 Relationship Management and Internal Knowledge Retention 167
positive, although as always with hindsight, there would be things that would
be done differently.
The relationship could capitalise on the partnership model and deliver
something that CFS could consider as being beyond just the ‘business as
usual’ benefits.
CFS, which is still highly unionised, and aligned to local communities and
one that places a lot of weight on corporate social responsibility, is not averse
to offshoring. Although most of the outsourcing activity is still onshore, some
100 people within the Steria relationship are located offshore at two locations.
CFS places a large value in consulting the key stakeholders, of whom the
unions are one.
The decision making process for large impactful decisions within CFS
follows what could be considered a typical process in many larger
corporations, with a three tier decision structure. At the bottom of the pyramid
are the project based teams, sponsored by a senior executive and owned by a
service management line, tasked with ensuring the decision has broad agree-
ment amongst the stakeholders, which includes: Procurement, Security,
Finance and Tax, Strategic supplier management teams, and Legal.
Having assessed the pros and cons of the decision and having identified the
risks, and considered risk mitigation actions, the signed off decision is formally
put to the executive (by the executive sponsor). Only if the executive commit-
tee approves the decision, does it go to the board for final approval. There is
also wider consultation within CFS to understand existing outsourcing
relationships and possible economies of scale that may be obtained.
The process is very much consensus driven, following the culture of the
organisation generally. This cultural heritage means it is not difficult to reach
consensus and there is more give and take by stakeholders than may be the
case within more traditional organisations (with their inherent power bases
and departmental silos).
CFS places significant value on relationship management; it is seen as an
activity which can add value to the bottom line, although quantification of this
is not easy.
The relationship however is not seen as a substitute to strong control
through the contract and the need for good governance.
Steve suggests a good relationship management capability can add any-
thing between 2% and 3% on the annual contract spend – when deal sizes can
run in the multi-millions, this is a considerable sum. Obviously there is an
investment required in developing and maintaining a relationship manage-
ment capability. This isn’t just a requirement for a very senior relationship
management team, (who though they may not have authority, require consid-
erable influence within their organisation and intra-parties), but also a
retained capability. A retained capability is crucial to understand the vendor’s
service delivery performance and to perform proper governance. As ever, the
(continued)
challenge is to better understand what additional changes to the service

configuration or design can have on the business, as well as the true cost of
these changes, rather than relying on the word of the vendor.
Given the trade-off between the benefits of a partnership model and the
inherent costs involved, CFS considers carefully which deals should be man-
aged on a transaction basis, which need to be managed as a true partnership,
which need close control to ensure continuity of supply in business critical
applications, and those that need to leverage economies of scale, given the
volume of the deal. Off the 299 suppliers that CFS engages with, 255 are
managed on a traditional transaction basis and only a handful as partnerships.
However, defining exactly what a partnership means is not easy. Steve
suggests it usually means the vendor going out of its way to help the client
when needed; working beyond the contract and worrying about the details of
the financials when the crisis has passed; where the vendor shares their latest
thinking on research that may be useful to the client and where the vendor
works with the client to actually deliver wider benefits to the organisation
through better use of technology or processes, which may actually ultimately
lower the value of the revenues from the client in the short term.
This ultimately needs a high degree of trust. Trust at potentially all levels
of the organisation, dependent on the nature of the deal. At a base level, Steve
suggests, trust provides a sense of reassurance to the client that the vendor
will not exploit and display opportunistic behaviour. However the extent of
trust doesn’t go as far as sharing IP with the vendor – this is seen to be
problematic and potentially damaging to the relationship, especially with the
insertion of lawyers, when the discussion may get adversarial.
A manifestation of a partnership could be in the form of a JV, however
Steve believes in most cases given the different cultures of the two
organisations, a JV has its own challenges, and usually requires strong middle
management for there to be any sense of success.
12.8 Necessity of Legal Contracts for Positive Trust

Development
Trust itself can be a risky engagement – trust can be disappointed and then appear to
be misplaced. The existence of legal norms is one of the most effective remedies for
confining the risk of trust and therefore for providing those good reasons which a
potential trustor seeks before actually deciding to invest trust in a relationship.
Thus, it is argued, legal norms and trust are more than compatible. With reference to
relationships between individual or organisational economic actors it can be
assumed then, that the legal agreement can play a vital role in situations in which
an actor needs to decide whether he should invest trust in the relationship with his
business partner, or whether he should refrain from doing so.
12.10 Knowledge Transfer 169
Personal trust is by no means sufficient to produce the quantity of trust that is

needed in highly differentiated socio-economic systems. In other words, trust based
on individual actors’ integrity can only fulfill a supplementary function, compared
with trust produced by institutional arrangements.
12.9 Adaptation to Cultural Differences
Culture has traditionally been defined as ‘the collective mindset that distinguishes
members of one nation from another’ (Hofstede 1991).
Management within a society is very much constrained by its cultural context,
because it is impossible to coordinate the actions of people without a deep under-
standing of their values (Hofstede 1984, in his seminal work, where 50 countries
were studied in a single organisation with 32 value statements).
The nature of management skills is such that they are culturally specific: a
management technique or philosophy that is appropriate in one national culture is
not necessarily appropriate in another. The core element in culture is values. Values
are broad tendencies to prefer certain states of affairs over others. Relationships
between people in a society are always affected by the values which form part of the
collective programming of people’s minds in that society. Management is therefore
subject to cultural values. Cultural influences within outsourcing are elaborated in
the next chapter.
12.10 Knowledge Transfer
Successful projects need synchronisation of tacit knowledge, informal information

and cultural (social) alignment. Outsourcing success is significantly related to how
the supplier manages its human capital and how effective it and the client are at
knowledge transfer from the supplier to the client. Customers often outsource to
gain access to technical skills and expertise. For this to take place, suppliers must
manage their human capital effectively by ensuring that they assign sufficient
employees with the required skills to work on the project and to minimize turnover
of staff. Knowledge transfer works both ways; at the beginning of the outsourcing
programme, knowledge transfer from the client to the vendor is important. Some of
this knowledge may be documented, whilst some will be tacit and therefore more
difficult to codify and transfer. In order to exchange tacit knowledge, someone
needs to communicate it to another person, and therefore communication manage-
ment may form an important part of the outsourcing strategy.
Partner specific knowledge absorptive capacity is a function of (1) the extent to
which partners have developed overlapping knowledge bases and (2) the extent to
which partners have developed interaction routines that maximize the frequency
and intensity of socio-technical interactions. In addition, partner-specific absorptive
capacity is enhanced as individuals within the alliance partners get to know each
other well enough to know who knows what and where critical expertise resides
within each firm. In many cases this knowledge develops informally over time
through inter-firm interactions. However, it may be possible to codify at least some
of it. The ability of alliance partners to generate rents through knowledge sharing is
dependent on an alignment of incentives that encourages the partners to be trans-
parent, to transfer knowledge, and not to free ride on the knowledge acquired from
the partner.
12.11 Managing Distance and Communication Challenges
Significant challenges may arise from geographic distance and languages barriers
between the client and the vendor.
Furthermore, time zone differences as well as specific institutional features of
offshore countries, such as infrastructure, security, political conditions, and intel-
lectual property regulations within the offshore country, have to be taken into
account when entering and managing an offshore outsourcing arrangement.
When people communicate using computer-mediated IT, such as videoconfer-
encing systems, the effectiveness and style of their communication is affected.
Verbal and non-verbal behaviour in interpersonal communication varies quite
widely depending upon a person’s cultural background.
Sharma et al. (2008) through responses from 71 IS outsourcing vendors and
clients, found 95% of respondents agreed that information risks can be controlled
by using appropriate communication modes, with 76% of respondents suggesting
that the inability to communicate regularly and casually with the vendor/client can
reduce trust. The preferred mode of communication to increase trust between
parties was regular face to face communication (83%), and where this is not
possible video conferencing was preferred over telephone conferencing. Video
conferencing helps display facial expressions, gestures and body language, which
help visually display clear communication intent, without which cultural nuances
would be lost. Figure 12.4 illustrates how communications management must be an
organisational-wide activity.
From a trust perspective, it is better to use telephone or video conferencing,
avoiding e-mail as much as possible to reduce misunderstanding (Joyner et al.
2005).
12.12 Continuous Improvement
The key principles and objectives underlying continuous improvement process

should be those of: improving quality and efficiency; reducing costs; and encour-
aging innovations. The process must reflect the need to achieve value for money
over the full term of the outsourcing contract. Service levels can provide for
gradually increasing level of performance or for additional service levels to be
added through the life of the project. A sophisticated continuous improvement
regime in more complex projects may use a combination of devices to provide:
12.13 Risk Minimisation in Practice 171
Assessment of Top-down proactive-
Strategic Direction
Client Vendor
overall health of Executive Executive set strategic direction
Engagement Leadership Leadership and planning
Resolve
Overall Vendor Performance, Strategic Planning
Escalate Strategy execution,

Vendor prioritisation and
performance, MSA Client Vendor
Sourcing Relationship overall portfolio
level issues balance
Management Resolve Management
Global Relationship, Contracting, SLA Trends, Escalated Issues
Escalate
Program level Establish specific
Ongoing Communication, Escalation
planning & targets and initiate

Client IT or Vendor
monitoring by BU material ideas
Business Program
Management Resolve Management
Operations Execution & Performance, Strategic Initiatives, SLA Misses

Project level Define
planning and processes, standards
monitoring Escalate and ensure
Client IT / successful execution
Business / Vendor
Project Project
Team Team
Resolve
Coordination of all Quality, Training, Customer Satisfaction, Sales Initiatives, Operational Performance Management
Fig. 12.4 Communication management
a more stringent and structured approach to the requirement to improve and an

obligation on the service provider to commit to achieving the aims described above
and in some cases guaranteeing it.
Devices often used for continuous improvement include: benchmarking, targets
for cost reductions and key dates for service revision/review based on predictable
changes to the customer business processes or requirements. It may be appropriate
to share savings with the service provider from continuous improvement
programmes where the improvement was suggested by the service provider or
where the implementation of the improvement requires the service provider to
incur costs.
12.13 Risk Minimisation in Practice
The Op2i survey conducted in 2010, Vagadia (2010), confirms the important role of
contracts, partnerships, trust, control, governance and knowledge sharing. Over 100
global respondents believed the best approaches to reducing risks from outsourcing
are:
• The development of a partnership relationship between customer and supplier;
• Strong contracts and limitations on subcontracting;
• Having a well defined governance structure and process;
• Secondment of staff to the service provider; and
• Appropriate SLA measurement and monitoring systems.
The largestrisk faced by business Yr 09-10

when outsourcing off-shore Yr 08-09
40%
30%
20%
10%
0%
Compromise of Loss of day to day Loss of knowledge Bad press Reduced quality
company's management from transferred
intellectual property control emp
The largestrisk faced by business Yr 09-10

when outsourcing on-shore Yr 08-09
40%
30%
20%
10%
0%
Compromise of IP Loss of day to day Loss of knowledge Bad press Reduced quality
mngt control from transferred
emp
Fig. 12.5 Practitioner views of outsourcing risks
Most impacting outsourcing risk mitigation actions Yr 09-10

Yr 08-09
80%
70%
60%
50%
40%
30%
20%
10%
0%
Negotiate strong Build Partnership Manage public Impose legal Place limitations on
contract relationship relations and press obligation on subcontracting by
supplier supplier
Fig. 12.6 Practitioner views of most impacting risk mitigation actions
Loss of day to day control continues to be the largest risk faced by business when
outsourcing, whether it is onshore or offshore, with little change from the previous
year (Fig. 12.5).
What is disappointing, is the fear about loss of control has been acknowledged
within both academic and practitioner literature for at least a decade, yet very little
appears to have been done to give customers greater management control. What has
been evident is greater visibility – the provision of daily or weekly reports or, real
time access to systems for clients, but what is still missing is a sense of control.
References 173
The best approach to reducing the risks from outsourcing remains the develop-
ment of a partnership relationship between customer and supplier. Strong contracts
follow, but significantly dwarfed by the partnership approach (Fig. 12.6).
12.14 Take Aways
• A strong contract is not enough in minimizing risks, it needs to be complemented

with relational exchanges.
• Trust lies at the heart of a good relationship, although defining it remains a
challenge.
• Trust can be built on the fulfilment of commitments by both parties and the
demonstration of reciprocity.
• Goodwill trust requires a shared understanding and shared values that can be
developed through two way open communication.
• Trust exists at organisational, group and individual levels, although
organisational trust emerges as the overriding factor.
• Outcome based controls aid in building organisational trust.
• Collaboration between organisations helps build trust through relational
exchanges, although effective collaboration requires a knowledgeable retained
team within the client organisation.
• Successful collaboration and development of trust requires effective knowledge
transfer and adaption to cultural differences. However, to aid this process,
mechanisms to minimize the challenges from distance, time zones and working
environments need to be implemented, with effective communication central to
the outsourcing programme.
References
Das, T., & Teng, B. (1998). Between trust and control: Developing confidence in partner coopera-
tion in alliances. Academy of Management Review, 23(3), 491–512.
Hofstede, G. (1984). Cultural dimensions in management and planning. Asia Pacific Journal of
Management, 1, 81–99.
Hofstede, G. (1991). Culture and organisations: Software of the mind. London: McGraw-Hill.
Hofstede, G. (1993). Cultural constraints in management theories. Academy of Management
Executive, 7(1), 81–94.
Joyner, B., Payne, D., & Raiborn, C. (2005). How to be a good global communicator. Journal of
Corporate Accounting and Finance, 16(6), 19–28.
Poppo, L., & Zenger, T. (2002). Do formal contracts and relational governance functions as
substitutes or complements. Strategic Management Journal, 23, 707–725.
Sharma, R., Apoorva, S., Madireddy, V., & Jain, V. (2008). Best practice for communication
between client and vendor in IT outsourcing projects. Journal of Information, Information
Technology and Organisation, 3, 64–93.
Vagadia, B. (2010). Op2i’s second annual outsourcing survey. An Op2i report, published March
2010.
Offshoring Leaders, Laggards and Hopefuls
13
Offshoring, although a small proportion of outsourcing today, is likely to grow over

time, as are the number of countries looking to become outsourcing hubs. However,
there are a number of factors that determine the appropriateness of a country as a
destination. This chapter examines the criteria that should be used to rationally
examine the appropriateness of a country and proposes a mechanism to weight
these criteria. The chapter also illustrates how a rational analysis can bring about
unexpected results. The chapter then examines the relative strengths and
weaknesses of various countries across Asia, Americas, Europe and the Middle
East and Africa region.
13.1 Introduction
Despite slow-paced and fragile recovery of the global economy, the global
outsourcing industry is estimated to post a decent revenue growth in 2010. The
industry is estimated to earn revenue of $425 billion in 2010, up 13.9% compared
with 2009, according to XMG Global, a research and advisory firm.
However, the estimated growth is lower compared to the 14.4% growth in the
previous year, reflecting sluggish investment expansions in offshoring countries
and moderate rise in outsourcing demand from the US and European regions.
One significant feature of the global outsourcing industry landscape in 2010 was
the narrowing revenue gap of China compared with the leader in offshore
destinations, India. China is estimated to close the year with a revenue growth of
30% compared with 14% of India. However, India is projected to lead the market
with expected revenues of $54 billion, occupying 44% share of the total revenue of
$124 billion of all offshore destinations.
On the other hand, the Philippines, the third leading outsourcing destination
globally, outpaced India in voice business process outsourcing (BPO) services.
According to Everest Research, the Philippines was projected to earn $5.7 billion
from voice BPO services against India’s revenue of $5.6 billion in 2010.

176 13 Offshoring Leaders, Laggards and Hopefuls
13.2 Location Selection
The approach to selecting locations for offshore service delivery has to date, been
hap-hazard, with focus mainly paid to workforce availability, costs and government
incentives. This is not surprising when offshoring started very much with cost
reduction in mind and specifically where access to a workforce with specific skill
sets was important within the IT domain.
Offshoring is a widely understood concept, at least within the sourcing community
– what is not so well understood is rational analysis of the destinations for offshoring.
Mention offshoring, and almost all will mention India, but should organisations
wishing to offshore, only think about India? There is no question, India was the
first destination, which viewed outsourcing as a sector in its own right and influenced
government policy. India still leads when it comes to sheer volume, however many
question whether the country is suffering from its own success: where there was an
abundant labour supply, today there is a shortage in some areas, where there was
immense scope of labour arbitrage, today that has narrowed, as inflation takes grip,
companies that benefited from the dollar exchange, no longer do so, where there was
pro-outsourcing government incentives, these are slowly been eroded as government
priorities shift, and where companies were eager to get business and went that extra
step, today these same companies have an overflow of opportunities showing little
loyalty to its old client base.
There are new destinations coming up, which may offer a better “deal” for
offshorers; these new destinations may also be superior in offering services where
India was weak (see Fig. 13.1).
Cities competing with

cities
Reaching
maturity
Emerging
rapid India
Market value creation
growth
Emerging Canada
hubs Philippines
Ireland
Czech Rep
China
Romania
Egypt E. Europe
(IT) Hungary
RSA
Ghana Malaysia Ukraine
Sri Lanka
Mauritius
Kenya
Maturity
Fig. 13.1 Offshore destinations by maturity

13.2 Location Selection 177
13.2.1 From Countries to Cities
Most location analysis compares entire countries, such as India, when the reality is
that India is more like a continent, with major differences between regions and cities.
The choice of outsourcing cities is based on a combination of both country
specific factors and regional/city factors – the latter are clearly more important in
larger countries and may not be relevant for smaller countries. Generic factors
which offshorers look for include labour arbitrage, availability of proper infrastruc-
ture and lower country risk. It is these generic factors that have made Indian cities
hot destinations for offshoring. Availability of a fairly large and qualified pool of
workers is imperative to the success of these Indian cities over the rest of the world.
Clearly infrastructure availability varies by city and combined with the availability
of skilled labour, and in particular the availability of middle and senior level
management is an important determinant of a good outsourcing city. Figure 13.2
details the criteria that should be used in evaluating a location.
A city’s success eventually leads to its down fall – this is the case with cities like
Bangalore. Its immense success has seen wage inflation and staff retention become
a major issue. Real estate prices have gone through the roof and the availability of
skilled resources is becoming a problem. The very things that made the city a
success is becoming its Achilles heel.
However times are changing and the ‘one size fits all’ approach has lost its
relevance. With offshoring emerging as a major business activity and companies
offshoring both core and value added processes, and cities competing for that piece
of the pie, cities will need to differentiate themselves and we will eventually see
cities positioning themselves as specialists outsourcers whether this is for call
(can you enforce the contract – (is English the predominant language? What
Legal system what is the data and IP rights Language about other languages that your customer may
protection regime like?) desire?)
Skilled (how educated is the labour

Labour costs (what is the scope for labour arbitrage?)
workforce market?)
Cultural (do they think and work the same Existing track (how good is the outsourcing vendor market –
alignment way?) record can they be trusted?)
(is there a risk of security (what if there is a problem tomorrow, can you
Political stability /sanctions/ change in policy Proximity resolve remotely – how long does it take to get
stances?) there?)
(how solid is the economy, is (outsourcing requires robust commslinks, good

Economic
there are risk to currency / taxes Infrastructure power supply and road and air links – how does
stability
etc?) the country compare?)
(Offshorer will need local support at some stage

Government (are there favourable government Access to – what is the availability of skilled business
incentives incentives to go there?) Resources services and professionals – e.g.
lawyers, consultants etc?)
Fig. 13.2 Offshore destinations – high level criteria for assessment

centres for the likes of Manila, IT development for Bangalore, creative and media
for Chennai, or market research and financial services for Delhi and Mumbai, etc.
Some cities in India like Bangalore today represents a relative expensive loca-
tion compared to tier two and tier three cities. However, the merits of these other
locations needs to be understood and trade-offs made to ensure the location meets
the requirements of the firm today and in the near term.
Over time, the requirements for offshore locations have matured, but the deci-
sion model is still primitive, where most decisions are based on irrational emotions,
rather than a rational analysis. The choice has also risen exponentially and firms
looking to offshore locations must evaluate the locations based on the full set of
criteria (see Fig. 13.3: Offshore destination – detailed decision model – courtesy of
Governance Director, which is based on a European client looking at possible
countries for locating back office banking and insurance processes, based on a
rational decision model).
The priorities must be rationally assessed with a methodological process, one
which trades-off one criteria with another. The firm must be clear about how much
Topic Factor Assertion Topic Factor Assertion

Risk profile Availability of skills
Security Skill Pool
Low Risk to personal security Good Labour pool with required IT skills
Low risk to property from fraud Good Labour pool with required business skills
Low levels of crime and terrorism Good Labour pool with required management skills
Good Labour pool with required language skills
Disruptive events
Labour pool with required communication skills
Risk of labour uprising low
Risk of political unrest low Staff attrition
Risks of natural disasters low Level of staff attrition low
Regulatory risks Level of additional training required minimal
Stability University standards considered high
Fairness Vendor landscape
Efficiency and enforceability of legal framework Good sized local sector providing IT services
Similar legal system Good sized local sector providing back office services
Macroeconomic risks Quality of infrastructure
Low cost inflation Telecoms and IT
Low currency fluctuations Low network downtime
Good capital freedom Speed of service restoration high
Intellectual property risk Bandwidth connectivity good
Strong data protection regime Network redundancy adequate
Strong IPR regime Real estate
Environment Good availability of office space
Government support Quality of office space
Policy on FDI favourable Good availability of quality residential estates
Relaxed labour laws Transportation
Bureaucratic & regulatory burden is relatively low Good scale of road and rail network
Level of corruption is low Quality road and rail network
Culture Good airport connectivity
Compatibility with prevailing business culture Power
Level of business ethics compatible High power availability
Shared religious, historic and other backgrounds High power reliability
Similar organisational cultures and management styles
Similar attitudes to hierarchy Costs
Similar attitudes to individual vs group think Labour costs
Low average wages for skilled workers
Living environment Low average wages for skilled managers
Overall quality of life considered good Infrastructure costs
Serious crimes per capita low Low Internet access costs
Proximity Low Power costs
Travel time reasonable Low Office rents
Flight frequency is good Cheaper access to specialist equipment
Time difference is minor Corporate taxes
Appropriate tax breaks
Good, non beauracratic tax regulations
Tax incentives for FDI
Fig. 13.3 Offshore destination – detailed decision model

13.3 Criteria to Assess the Location Decision 179
of factor X they are willing to give up for a little more of factor Y. This process must
also generate consensus amongst the firm’s key stakeholders, with respect to project
priorities.
13.3 Criteria to Assess the Location Decision
These criteria need to be organised into a hierarchy to enable better assessment and
ensure the full range of criteria are identified and evaluated.
13.3.1 Factor Weightings
Figure 13.4, Offshore destination criteria weighting – courtesy of Governance

Director, illustrates the weights to be applied. These priorities are generated by
Governance Director from a mathematical algorithm that rationalises and makes
Fig. 13.4 Offshore destination criteria weighting

the stakeholders really reflect on what is important, by using a technique called

pair-wise comparisons. The result is that weights are rational weights, rather than
just arbitrary guesses, influenced by emotions or personal biases.
13.3.2 Country Evaluation
A rational compliance assessment against the full decision evaluation criteria can
result in a very different picture than would otherwise be expected – e.g. Fig. 13.5,
a rational country comparison using detailed decision model – courtesy of Gover-
nance Director, shows India actually scoring relatively low in comparison to other
countries – a finding that would not have been expected without the detailed and
rational analysis.
13.3.3 Relative Merits of each Location, Based on a Rational

Analysis
On paper, India is seen as a leader in the field (both ITO and low end BPO), with a
long track record, significant cost advantages, a huge skill pool and has established a
“Brand” – largely thanks to NASSCOM.
IRELAND POLAND
Rationally Ireland is the strongest, only let down by living environment. Rationally Poland is strong, expect when it comes to living environment.
It excels in most areas: experience, skills, choice, infrastructure … It excels in proximity, macro environment and proven delivery capability
SOUTH AFRICA INDIA
Based on typical decision

model as used by UK end users
Rationally South Africa is strong when it comes to the environment and Rationally India is quite weak, but its proven capability, vendor choice, cost
infrastructure, but weak in terms of risk – but in BFSI is has a solid base and skill pool overpower the weaknesses
reputation
Fig. 13.5 A rational country comparison using detailed decision model

13.4 Effects of the Recent Political Unrest on Offshoring 181
Fig. 13.6 Rational relative merits of each country – courtesy of GovernanceDirector.com
South Africa offers higher end BPO and good grade call centre services, with
well spoken skills, it is seen as a “nice” destination and contrary to reality, seen as
relatively safe – the inward investment agency has been promoting the country
significantly (and doing a good job) in the last 2–3 years.
Ireland has been a leader in IT outsourcing and slowly encroaching on the call
centre industry as many UK firms seek near shore locations (either as a global
strategy or as an alternative to offshoring). Its economic problems will mean it will
be a relatively cheap destination also.
Poland has been a leader in near shoring, originally in ITO, then becoming a hub
for shared service centres for general back office tasks. However, it still has a fairly
benign image in the UK.
Portugal is unheard of in the outsourcing space, no one really has any idea of the
cost advantages (initial view for most is that it is expensive), access to skills (the news
of the innovative nature of ICT in Portugal has not travelled beyond Portugal) – it
does not feature on the radar of anyone looking for outsourcing.
However, it is surprising what a different perspective a decision based on
emotions and heuristic reaches versus a decision based on rational analysis. A
rational analysis would suggest India doesn’t appear to be the favourite destination
compared to some of the other destinations considered here – see Fig. 13.6 (rational
relative merits of each country – courtesy of GovernanceDirector.com.)
13.4 Effects of the Recent Political Unrest on Offshoring
During the early part of 2011, various countries went through an upheaval whether
manmade as in Tunisia, Egypt, Libya, Syria, Bahrain, Yemen, or nature’s effects, as
in Japan’s catastrophic events, Chile’s earthquake a couple of years, and New
Zealand’s recent earthquakes. Then there were the terrorist attacks in Mumbai a few
years ago. Clearly geopolitical and natural disasters are elements that are considered
in the choice of an offshore country, but the weight that may be given to these is
changing. Long term ingrained understanding of political factors and condition have
been upset and business leaders need to be wary of changing conditions and what
that means in terms of continuity of service delivery – many will reflect on their
original decision and consider whether things now need to change. Customers of
organisations and certainly the insurance providers will be asking if the organisation
has attempted to re-risk their offshoring strategies. Many organisations have made
noises about creating resilience in their service delivery to de-risk effects from a
specific country, some have voiced a preference for near-shoring rather than
offshoring and only a handful will consider bringing the service in-house.
It is not clear if this is just a knee jerk reaction; after all, geo-political and natural
risks have always been part of the decision criteria mix, however the fundamental
assumptions that may have been made about a particular country’s risk may need to
be re-visited. What we are likely to see is no less in terms of offshoring (cost has
always been and will always continue to be a driver), but a mix of countries that are
used – so the dominance of India and Philippines may be challenged by other
countries, not because they are better or cheaper, but because they offer the ability
to diversify risk.
13.5 The Outsourcing Industry in Asia
The outsourcing industry in Asia has matured over the years, with major players
like India, China and the Philippines accounting for about 75% of the global
outsourcing revenue, growing at an annual rate of around 30%.
However, the recent global economic crisis created a significant negative impact
on traditional markets for Asian outsourcing companies. In the United States,
industry specialists and legislators are now more inclined to limit American
corporations from outsourcing business processes to offshore providers in a bid to
protect jobs.
With this on the horizon, Asian companies involved in the outsourcing industry
are now looking to open doors for new markets and industries, particularly in Asia,
Latin America and to a limited extent Europe, where the global financial crisis has
not taken as heavy a toll, as well as looking within their own geographical
boundaries for new market opportunities.
India is the predominant centre for offshore outsourcing in Asia, followed by the
Philippines and now China. Aside from these countries, major outsourcing
destinations include other Southeast Asian countries like Malaysia, Vietnam and
Singapore. Asia is home to a large English population, coupled with the technical
skills and competencies exhibited by trained technical graduates at labour costs that
are much more competitive than Western countries.
Silicon Valley was the first to jump on this bandwagon as early as the late 1980s
when many companies began offshoring software development and coding work to
13.5 The Outsourcing Industry in Asia 183
outsourcing firms in India. Cost was the main reason; companies saved a significant
amount of money while generating quality outputs. Soon, other low-cost but highly
skilled IT service providers began emerging in countries such as the Philippines,
which also offered other types of services such as call centres, help desks, business
process outsourcing, financial and accounting processes, and human resource
management.
The Asian outsourcing industry, despite the significant downturn in their key
markets in the United States, reflected superb stability despite this gloomy eco-
nomic outlook. In fact, the industry still reflected significant growth such as the
12% upswing in India despite cutbacks from U.S. and European markets, and the
70,000 employment increase in the Philippines during the height of the economic
crises in 2008 and 2009.
India maintains a strong-lead in terms of language skills and vendor maturity,
together with an enviable track record and strong albeit slow legal system. Evi-
dently, the Indian IT industry went overboard in exploring new markets, scouting
for talent and investing in new service lines to offer end-to-end solutions across
verticals due to the revival of fortunes. The Indian IT industry has 450 delivery
centres in 60 countries worldwide, which is an unparalleled global value chain. The
industry has resumed enhancing its global workforce by hiring specialised talent in
developed markets and building a truly global delivery model. Rising costs pose a
tough challenge that is likely to continue in the year ahead however.
Vietnam and Philippines have emerged as strong competitors to Indian players
with their cost-effective structures.
China leads on infrastructure development and growth in education, but its legal
system lacks transparency and it suffers from the obvious lack of language skills.
Singapore some 20 years ago was a leading outsourcing destination, but has
today been overtaken by lower-cost countries now competing to establish them-
selves as service centres.
Philippines is getting exponential business in the case of call centres, largely as
firms relocate there from India to the Philippines. It also has language skills
unmatchable in the region and a very good cultural alignment with the USA. It
also offers one of the lowest wage locations and offers low cost telecommunications
services.
Malaysia‘s economic stability, its diverse language skills and the investment the
government has made, in the Multimedia Super Corridor and Cyberjaya, to estab-
lish the country as a regional IT hub, are driving the region as a outsourcing
destination.
Thailand, Indonesia and Vietnam have also seen significant declines in telecom
costs, while slower growth rates have moderated wage inflation. However they lack
the language skills, scale and labour arbitrage afforded by India. Thailand and
Indonesia will likely remain challenged by lesser English language capabilities and
concerns over their economic and political stability.
Sri Lanka and Pakistan, although they offer many of the same advantages as
India, suffer from their relatively smaller population-base and obvious concerns
over internal security.
New Singapore
Australia Chile China India Malaysia Philippines Thailand Vietnam
Zealand
Scale
Labour costs
English proficiency
Euro language skills
Education system
BPO market overview
Government incentives
Political / Geo security
Cultural compatibility
Data / IP Security
Infrastructure
Fig. 13.7 Relative attractiveness of Asia-Pac countries
Australia and New Zealand offer attractive destinations in terms of language,

cultural alignment, legal systems and infrastructure, but lack the scale and costs
structures that others in the region can provide.
Figure 13.7 illustrates the relative strengths and weakness of countries in Asia.
13.6 The Outsourcing Industry in India
India currently dominates as the country that is the destination for most offshore
outsourcing. Many multinational corporations refer to India as the “electronic
housekeeper”. An early low end software service that benefited India was the
need to fix the so-called Y2K problem (the need to upgrade computer programs
to work with the dating systems post the new millennium).
The Indian Information Technology Outsourcing (ITO) and Business Process
Outsourcing (BPO) industry is estimated to have aggregate revenues of about US
$72 billion1 in FY2009 and to generate employment for over 2.2 million people.
The service provision industry consists of around 4,000 vendors, approximately
structured as follows: (NASSCOM 2009)2:
• 7 with revenues above US$1 billion;
1
The export revenues are estimated to gross US$47 billion in FY2009, accounting for 60% of the
total IT–BPO industry revenues. The USA remains the largest export market with 60% of the
share, however a large part of the incremental CAGR of 41% if coming from the UK and
continental Europe with 51% CAGR. The Banking, Finance and Insurance industry accounts for
the largest vertical sector user of total revenues with over 41% of the total, but the hi-tech/
telecoms, manufacturing and retail sector follow behind.
2
NASSCOM Strategic Report 2009 – NASSCOM is the trade body and the chamber of commerce
of the IT–BPO industries in India.
13.6 The Outsourcing Industry in India 185
• 80 with revenues between US$100 million and US$1 billion;

• 350 with revenues between US$10 million and US$100 million; and
• 3,500 vendors with revenues less than US$10 million.
India offers advantages over many other possible offshoring destinations for a
number of reasons: scale, skills, quality and its constitution, which provides a stable
backdrop to the country and its outsourcing industry. India’s comparative
advantages include:
• Democratic government and relative political stability, with an independent
judiciary and Western legal and accounting systems together with a well devel-
oped banking system and capital markets;
• Access to a large pool of low-cost computer literate English speaking
professionals with strong technical and quantitative skills. Investments in edu-
cation and infrastructure over time has resulted in a large labour pool of skilled
workers;
• Economic advantages: Offering savings in the range of 40–60%3 from labour
arbitrage;
• The world’s fifth largest public sector telecommunications network with rela-
tively low telecommunication costs; and
• Quality: Work practices largely comply with international quality assurance
standards (SEI-CMM Level 5,4 ISO 9000,5 TQM,6 Six Sigma,7 BS 7799,8 and
COPC9 for instance).
NASSCOM Strategic Report 2009 suggests that as of December 2007, over 498
Indian centres had acquired quality certificates with 85 companies certified at SE1
CMM level 5 – higher than any other country.
For all the potential benefits that India offers, there remain many challenges to
successfully outsourcing to India. These challenges include those related to poor
infrastructure, its relatively weak legal system which implies the unenforceability
3
NASSCOM Strategic 2009 review suggests it’s as high as 60–70%.
4
The Capability Maturity Model (CMM) in software engineering is a model of the maturity of the
capability of certain business processes. The Capability Maturity Model involves maturity levels:
A five-level process maturity continuum – where the uppermost (fifth) level is a notional ideal state
where processes would be systematically managed by a combination of process optimization and
continuous process improvement.
5
ISO 9000 is a family of standards for quality management systems.
6
Total Quality Management (TQM) is the organization-wide management of quality.
7
Six Sigma is a business management strategy, initially implemented by Motorola that today
enjoys widespread application in many sectors of industry. Six Sigma seeks to improve the quality
of process outputs by identifying and removing the causes of defects (errors) and variation in
manufacturing and business processes.
8
BS 7799 was a standard originally published by the British Standards Institute (BSI) in 1995. A
second part to BS 7799 was first published by BSI in 1999, known as BS 7799 Part 2, titled
“Information Security Management Systems”.
9
Customer Operations Performance Center (COPC) Certification provides defined processes,
measured metrics, and outcomes to highlight qualified suppliers.
of contracts, potential differences between inter-firm relationships with respect to

human resource management, culture, as well as specific HR issues, such as high
employee attrition rates.
13.6.1 Infrastructure Challenges
The 2007 Global Information Technology report released by the World Economic
Forum has Networked Readiness Index (NRI) rankings, which benchmark
countries in their capabilities in Information, Communication and Technology
(ICT). NRI measures the propensity of countries to leverage the opportunities
offered by ICT for development and increased competitiveness. India is ranked
low on this Index – its performance overall in leveraging ICT appears to be
hindered by weak infrastructure, with a very low level of individual ICT usage.
In 2002, India spent only $31 billion on infrastructure while China spent $260
billion. Low spending on infrastructure over an extended period of time has
resulted in a scarcity of infrastructure in the country. This scarcity includes
poor quality roads, limited power generation/distribution, limited fixed telecoms
networks and poor health care systems. Such infrastructure problems not only
result in the need for further expense, such as power generation and back-up
facilities, but also affect quality of life, which may deter many employees from
the West moving to India for extended periods, making knowledge transfer and
control more difficult.
These infrastructural problems have led to a concentration of the outsourcing
industry within a number of major cities; putting pressure on the availability of
reliable and affordable real estate – again impacting the achievement of one of
the key drivers, i.e. lower costs in the long-term. A limited number of major
cities in India10 are preferred destinations for locating IT-Enabled Services
(ITES) businesses, due to better quality infrastructure, access to talent and the
presence of support services (e.g. legal and accountancy services, research
facilities, etc.). Secondary cities are following behind, but lack adequate support
services.
13.6.1.1 Education and Employment Challenges

A key benefit has been its low cost, qualified workforce. However, India has a
literacy rate of only 61%.11 This is unlikely to change in the near-term, given that
the government only spends around 0.37% of its GDP against 1.41%, 1.07% and
0.50% of US, UK and China respectively on higher education.12 This is likely to
constrain the availability of teachers and suitably qualified personnel in the future.
10
E.g. Mumbai, Delhi, Bangalore, Chennai and Hyderabad.
11
United Nations Development Programme Report 2007/2008.
12
According to industry body ASSOCHAM, as reported in the Economic Times, by Vivek Sinha
on 5 January 2007.
Furthermore, according to the Academic Ranking of World Universities (2007),13

not a single Indian university ranks in the top 100 of world universities.
The World Development Index, Edstats, notes that in India, less than 13% of the
population in the relevant age cohort received a tertiary education in 2004. In the
USA the corresponding share is over 60%. Meyer (2007) notes the quality of
education is also not identical, with only a fraction of the graduates being deemed
suitable for jobs by industry – in Germany and the US it is around 80%. A study
conducted by McKinsey found that just 10% of all Indian students with a general
degree and 25% of those with an engineering degree are regarded as suitable to
work in Multi-National Companies (MNCs).
Kuruvilla and Ranganathan (2008) claim that four critical and interlinked HR
challenges threaten the near and long-term prospects of the Indian outsourcing
industry. Macro level HR problems include a shortage of skilled HR, and the
difficulties India’s advanced education and training infrastructure will face as it is
tasked with producing the high-skilled manpower the industry will need. The
“micro” HR problems include high average turnover rates, which in 2007 were
about 20% in the software segment and 50–60% in the BPO segment, and the
rapidly rising HR costs in the BPO industry (particularly at the low end).
The authors note that in the case of BPO, 50% of employees who leave a firm
exit the industry completely, while 50% move to another company. They suggest
four reasons for the high turnover:
• Dissatisfaction with their immediate supervisors, who tend not to have the
required levels of experience in staff management, and the actual nature of the
work which is seen as being un-interesting with limited career progression
opportunities;
• The nature of worker demographics – most young people who work in low end
BPO use this as a stepping stone to better jobs with better salaries;
• A high proportion of the workers in low end BPO are women, many of whom
leave once they get married; and
• The requirement to work night shifts is also affecting employee turnover.
The above factors may disproportionately affect low end jobs and thus the
difference seen in employee turnover rates between high and low end jobs.
The factors affecting attrition rates can be divided into two categories – push and
pull. Some of the prominent “push” factors, include stressful work environment,
monotonous work, long commutes, a sense of powerlessness or lack of control at
work, daily physical confinement, over-regimentation (the feeling of being spied
on), odd work hours, and abusive clients. The main “pull” factors that entice people
to leave their jobs, the report notes, include a good job market, good pay, better
working conditions, knowing someone who already works in the business, and a
well-known brand name. Indian call centres are sometimes referred to as ‘new-age
sweatshops’.
13
Shanghai Jiao Tong University, 2007 – Academic Ranking of World Universities.
This concern for talent has been acknowledged by NASSCOM, in its Strategic
Report 2009, noting that even though over 3.5 million graduates and post graduates
are added annually to the talent pool, enhancing graduate employability continues
to be a key focus for all stakeholders within the Indian IT–BPO industry. The report
suggests that student output quality is relatively low, and have thus set up the
NASSCOM Assessment of Competence (NAC) centre – an employment skills
assessment scheme – something however, which carries no guarantee of solving
the underlying problems.
With a potential shortage of qualified labour, together with concerns over the
requisite skills, client organisations may need to develop training programmes
which can be delivered to vendor employees working with them. Given the
shortages in talent, inevitably there will be concern for increased wage inflation.
According to Budhwar et al. (2006), in 1999 the average pay packet of an entry-
level BPO agent was $160–180. In 2006 it was $300–350. The report notes that
every employee who quits, costs the company another $900–1,100 to recruit and
train a replacement. Although clients may feel somewhat protected from increased
wage inflation through their longer term contracts with the vendors, the impact of
lower margins may well incentivise the wrong behaviour in their vendors.
Employee attrition presents challenges not only for the vendor but for the client
as well. Knowledge transfer from client to vendor can be a time consuming and
resource intensive activity – having to repeat such an exercise will not only add to
costs, many of which are invisible to accountants, but will extend project timelines.
Developing trust at an individual level will be difficult with such high employee
attrition rates.
13.6.1.2 Legal Challenges

The Indian legal system is a common law one, which undoubtedly adds to uncer-
tainty when compared to a more highly codified system.
Nevertheless, although India is described as a common law country, having
inherited a common law legal system from the British, many of its laws were in fact
codified during British rule. This was then overlaid with further legislation when, in
post-independence India, the government implemented a socialist reform agenda
encompassing all areas of commercial activity (Armour and Lele 2008).
A serious pitfall is that the legal system is notoriously slow. In 1952 Mr. Motilal
C. Setalvad, the first Attorney General of India, wrote: “A burning problem which
the citizens, lawyers and judges face alike is that of the congestion of Courts of law
and the consequent inordinate delays in the administration of justice. . .” (Setalvad
1952). Three and a half decades later in his Law Day speech, the then Chief Justice
of India painted a very dismal picture, “I am pained to observe that the judicial
system in the country is almost on the verge of collapse. These are strong words
I am using but it is with considerable anguish that I say so. Our judicial system is
creaking under the weight of arrears. . .. In spite of efforts having been made and
being made, and support provided by the Government, it is a matter of concern that
there are huge arrears of more than 2½ crores of cases (25 million) in courts. . ...”14
The 120th Law Commission report15 of India found that India had only 10.5
judges per million people, compared to Australia which has 58 judges, Canada 75,
UK 51 and USA with 107 judges. Data available from Doing Business 2008 India, a
joint publication of the World Bank and International Finance Corporation suggests
that on an average, it requires 1,420 days of litigation and costs 39.6% of the claim
value to enforce a contract. The same study also shows that in a sample of 181
countries, India ranks 180 in enforcement of contracts.
A termination dispute, for example, contested until all appeals are exhausted,
can take up to 20 years, while writ petitions in High Courts can take between 8 and
20 years in India (Chakrabarti et al. 2008).
Procedural laws in India, particularly with respect to civil litigation, facilitate
delays and are often abused to frustrate genuine litigants. The legal system
magnifies the delays through the creation of layers of rights to appeals and revision
(Armour and Lele 2008).
This creates a real dichotomy between theory and practice. On paper, India has
some of the best investor protection laws in the world. In reality, an extremely slow
judicial system, marked by overburdened courts, makes application of those laws
far from a simple matter. Corruption continues to be widespread. Consequently,
many firms, particularly small ones, rely more on informal mechanisms of contract
enforcement and dispute resolution than on the courts of law. In India, relationship
based systems are usually far more important than the explicit arm’s length systems
of corporate governance and contracts observed in Western businesses (Chakrabarti
et al. 2008).
Outsourcing clients would be embarking on a risky strategy if they were to
contract and attempt to enforce contracts under the Indian judiciary. However under
Indian law, parties are free to stipulate their terms of contract and lay down the law
by which the contract is to be governed. Indian Courts follow customary Private
International law rules.16 Choice of law made by parties is acceptable, meaning
parties to contract may choose under which national law the contract is governed.
Given the slow legal system, many organisations resort to using arbitration as an
alternative form of dispute resolution. The Law Commission, recognising such
problems, encouraged the setting up of Tribunals. Party autonomy is the basis of
14
Prime Minister’s address on April 8, 2007, available at http://pmindia.nic.in/lspeech.asp?
id¼520
15
120th Report on Resource Allocation for Infra-Structure in Judicial Administration – a contin-
uum of the report on Manpower Planning in Judiciary: A Blue Print.1988.
16
Private International Law is the law which regulates which courts should take charge, which law
should apply and whether judgments should be recognised and enforced across borders in cases
with an international dimension. It also includes mechanisms for co-operation and exchange of
information between governments and courts in different countries, where these are designed to
support mutual recognition of each other’s laws and judgments.
every arbitration agreement, however, court intervention is necessary to have

certain measure of control over the arbitration process and ensure its efficacy. For
instance, arbitrators have no power, by themselves, to enforce awards. One of the
most important areas of court intervention is that of setting aside or refusing to
enforce an award. Thus, court intervention is a necessary evil which cannot be
eliminated completely.
13.6.1.3 Data Protection and Privacy Challenges

In many outsourcing arrangements, there may be a need to transfer data to the
Indian service provider for processing. Under such circumstances, applicable laws
and regulations governing data protection may need to be examined carefully. The
EU Data Protection Directive (95/46/EC) imposes obligations on the data controller
rather than the data processor. This means that it is the customer in an outsourcing
arrangement which must give careful consideration to compliance requirements. A
recent empirical study by internationally recognised consultants (AT Kearney
200517) asserted that India has one of the best information security practices of
any of the top 40 outsourcing destinations around the globe,18 nevertheless few
countries have data protection laws that are sufficiently robust to comply with
European Union minimum standards. The EU has identified countries which are
deemed to have adequate data protection laws (known as the ‘adequacy club’),19
India is not amongst them as yet. Most outsourcing agreements should include the
EC Directive’s Model Clauses,20 as a means of complying with these regulations.
13.6.1.4 Intellectual Property (IP) Challenges

The sharing and creation of IP across multiple jurisdictions creates very real
potential vulnerabilities because of the ‘territorial’ nature of IP rights. This means
that the host country’s (India’s) IP laws may control IP related disputes adjudicated
in that country. In other words, third country IP laws may not be applied in India
17
For example, the AT Kearney Global Services Location Index 2005 ranks India highest in a
detailed analysis comparing 40 sourcing destinations across the world. The fact that India is very
secure, from a data protection viewpoint, has also been confirmed by independent surveys by
various credible organisations including the Financial Services Authority and the Banking Code
Standards Board in the UK.
18
There are legal remedies for privacy breaches in India but they are not codified in one single
place. For example remedies can be provided by Indian Contract Act, 1872; Indian Penal code,
1960; Special Relief Act, 1963; Consumer Protection Act, 1986; and the IT Act 2000.
19
As of July 2006, the following countries outside of the EEA had been confirmed as adequate by
the European Commission: Argentina, Canada, Guernsey, Isle of Man and Switzerland. In addition
to findings relating to the above countries, the Commission has also made a finding regarding
specific transfers to the United States of America by the use of Safe Harbor.
20
The EC has approved three sets of standard contractual clauses (known as model clauses) as
providing adequate protection to transfer individual’s personal information. Two sets of model
clauses relate to transferring personal information from one company to another company who will
use it for its own purposes. The other set is for transferring personal information to a processor
acting under your instructions.
regarding IP ownership disputes even if the operative contract has an unambiguous

governing law provision calling for a specific third country’s laws to govern.
Logically following from this idea, it can also be the case that a third country
court may not apply its IP laws, but rather India’s IP laws, to decide issues involving
the ownership of IP notwithstanding the operative contract’s governing law and
venue provisions.
India provides express statutory protection for patents,21 copyrights,22
trademarks,23 designs24 and mask works.25 While many may perceive India as
providing superior protection for intellectual property (IP) rights relative to the
majority of other developing jurisdictions, its IP laws and particularly enforcement
mechanisms are nevertheless weak compared to Western IP laws and practices.
13.6.1.5 Quality Standards Challenges

Levina and Vaast (2008) noted through interviews with a global banking client and
a vendor from India that even though the level of process maturity within the Indian
company was somewhat higher, when working with CMM level five certified
companies, all the client managers interviewed felt the processes were not on the
par with their expectations. As one interviewee commented, pp 315:“it is funny,
right, when any Indian provider comes in the first thing they talk about is their
CMM level, which is hysterical, cause they don’t even know what that means. . . .
Then when you move work there and try to look for a repeatable process or
documentation, it is not existent. . .”.
13.6.1.6 Possible Change of Direction for the Indian Outsourcing

Industry
The local market for business process outsourcing in India has actually grown by
more than 50% during the last 5 years, and has generated revenues of up to $1.6
billion. This is in line with the prediction of Ernst and Young that the local BPO
market in India has the potential to have an average growth rate of up to 38%, which
will eventually reach $6 billion by 2012, with a still untapped market potential
between $15 billion to $19 billion.
For India this means future economic recessions in the west will not impact the
outsourcing sector to a great extent.
21
The Patents Act, 1970 and the Patents Rules, 1972.
22
The Copyright Act, 1957 and the Copyright Rules, 1958.
23
The Trademarks Act, 1999 and the Trademarks Rules, 2000.
24
The Designs Act, 2000 and the Designs Rules, 2001.
25
The Semiconductor Integrated Circuits Layout Design Act, 2000 and the Rules, 2001.
13.7 The Outsourcing Industry in China
More and more Chinese companies that are benefiting from the economic boom that
China enjoys are now more open and receptive to outsourcing some of their
business functions to either local outsourcing firms in China or to more established
outsourcing companies in other Asian locations.
Aside from the geographical destinations that are opening doors to outsourcing
companies from Asia, these companies are also looking towards providing services
to other industries that were not traditionally being outsourced to Asian
destinations.
China’s outsourcing industry is fast picking up, though it currently occupies a
small fraction of the global outsourcing market. China stands second only to India
in the preferred outsourcing destinations globally by some analysis. In 2009,
revenues from outsourcing services in China increased by a record 152% to $10
billion, according to data from the Commerce Ministry. China’s growing presence
in the global outsourcing industry is influenced by many factors such as strong
infrastructure, huge talent pool, diverse language skills, government support, and
demographics.
Besides, China is the most preferred destination for outsourcing and shared
services for companies in Asia-Pacific region taking the lead over India, according
to a report from KPMG, an auditing firm. KMPG estimates the China’s outsourcing
market to reach $44 billion by 2014.
In August 2010, to promote growth and compete with India’s dominance in
outsourcing industry, China announced business tax exemption of 5% for the
outsourcing companies that will extend to the end of 2013. The tax exemptions
will apply to all companies offering Information Technology Outsourcing (ITO),
Business Process Outsourcing (BPO) and Knowledge Process Outsourcing (KPO)
in 21 cities in China. Furthermore, China was the among 15 economies that most
reformed their business environment over the past 5 years, according to a Novem-
ber 2010 report from International Finance Corp. (IFC) and the World Bank (WB).
China has a vast talent pool that is hardly tapped. China has yet to establish
outsourcing companies that can match the sizes of their counterparts in India. On
average, a software developer in China, with the same level of educational back-
ground and experience, cost only half of what he could do in India. This fact brings
a huge advantage to China for attracting companies that are willing to outsource
business functions such as software development and IT services to offshore
locations.
One of China’s major strengths in global outsourcing is its vast talent pool of
hardworking skilled technicians and engineers. The latest official estimates show
that 6.1 million university students graduated in China in 2009, more than 730,000
of which are engineering graduates, compared to 490,000 in India, 70,000 in the
United States and 23,000 in the UK. China also produced nearly 70,000 PhD
graduates in the same year, 4,000 of which have computer science specialties.
Another source of high quality talents is the large number of Chinese returning from
13.8 The Outsourcing Industry in Philippines 193
United States, Canada and the United Kingdom with degrees from top universities
in those countries.
China is already the largest offshoring destination when it comes to Japan, South
Korea and many other Asian countries. In recent years, Indian outsourcing
companies including Infosys, Wipro and Tata have all established footprints in
China in order to complement their existing work force to deliver large-scale
contracts with increased cost-effectiveness.
No country in the world has made as much investment in infrastructure in recent
years as China has, enhancing the credibility of China‘s global position in
Outsourcing. The Chinese government has authorised major capital expenditures
to ensure a steady power supply and modernised telecommunication network with
high-speed broadband connections in key strategic locations and major cities. More
upgrades are on the way as the government invests a further RMB four trillion
(GBP£ 370 Billion) in infrastructure to boost the domestic economy.
All this is not to mention the new software parks and technology centres with
state-of the- art facilities that have sprung up in the major cities in China.
Both Chinese officials and companies that specialise in outsourcing have
recognised the need for good English language skills to win business from western
markets and to compete with rival locations in India, South Americas as well as
many South Asian countries. The Chinese government has made English teaching a
strategic priority at universities through to primary schools where English as a
foreign language is now mandatory.
The official statistics prepared by the Chinese government shows that there are
currently over 300 million people actively learning English as a foreign language in
China. It is projected that by 2014 the total number of Chinese people learning
English will surpass the total population of English speakers in the world.
13.8 The Outsourcing Industry in Philippines
The BPO industry provides services to different countries all over the world.
Around 65% of the services are exported to the US, 25% to other ASEAN countries
(India, China, Hong Kong, Singapore, Japan and Taiwan) and the remaining 10% to
Europe (United Kingdom and Germany). Other markets include United Arab
Emirates and Saudi Arabia. Emerging markets are Australia, New Zealand and
Canada.
There were about 630 firms providing BPO–IT services in the country in 2008,
roughly distributed as follows: 76% BPO companies, 19% software development
companies, and 5% the rest. Under BPO, 124 are call centres (24%), 100 firms are
into medical transcription (19%) 70 firms are into animation (14%), 62 firms are
into back-office processing and 27 firms are into digital content (5%).
Having captured around 15% of the global BPO market and 7% of the global
BPO -IT services, the Philippines has established itself as a favoured BPO service
provider next to India. The industry aimed to pursue its global inroads by gaining
10% of the BPO–IT market in 2010. The key success factor of the country’s BPO
industry rests mainly on its low cost but highly qualified English-proficient labour
pool, its close affinity to USA culture, and the improved telecommunications
infrastructure ideal for outsourcing operations.
The Philippines is considered as the centre for excellence particularly in voice-
based services. The educational system of the Philippines, wherein the medium of
instruction is English, produces graduates who are highly proficient in the language.
American clients more often prefer Filipino call centre agents as compared to their
Indian counterpart, because Filipinos have English accents almost similar to the
North American agents.
With the advantage of strong English-language skills, the country has emerged
as the leading outsourcing destination for contact centre services. In 2009, revenues
from contact centre services occupied more than one third of the overall BPO
revenues of Philippines. For the year 2010, the Philippines is estimated to earn $5.7
billion from call centre services, overtaking India’s revenue of $5.5 billion,
according to the Everest Group, an outsourcing advisory firm.
Notwithstanding the strengths in the BPO industry, the high electricity cost and
the poor business environment pose risks for investors in the Philippines. Electricity
rates in the Philippines are the highest in Asia. The country also ranks very poorly in
the business environment criteria. Transparency International (TI) ranked the
Philippines far below the other major BPO–IT players.26
13.9 The Outsourcing Industry in Europe
European countries play a dual role, as a client outsourcing its process or functions
and as a destination for other client organisations to outsource to.
Europe had been lagging behind the United States in terms of outsourcing
identified functions to offshore providers in Asia. However, the global financial
crisis made outsourcing a viable option for European companies to cut back on
costs and remain competitive. Companies such as Wipro, Tata, and Infosys are
penetrating the German and European markets and have even expanded and have
established sales and marketing offices in these countries.
The German and European outsourcing market is expected to increase between
7% and 10%. Much of this will be focused not only in the banking and financial-
services, but also in the automotive, chemical and telecommunications industries.
With respect to Europe as an outsourcing destination: Czech Republic, Hungary,
and Poland the leaders in the region are now losing ground to emerging locations,
such as Bulgaria and Romania. Continued improvement in the business environ-
ment in the Czech Republic and Hungary cannot offset deterioration in cost
competitiveness.
26
Philippine BPO–IT industry performance and prospects – Congressional Planning and Budget
Department House of Representatives 2009.
13.10 The Outsourcing Industry in North America and Latin America 195
Czech
Republic Hungary Ireland Poland Portugal Romania Russia Slovakia Spain Ukraine
Scale
Labour costs
English proficiency
Education system
BPO market overview
Data / IP Security
Infrastructure
Fig. 13.8 Relative attractiveness of European countries
The Baltic States, Estonia, Latvia and Lithuania still lack the infrastructure of
their European neighbours, and suffer from their relatively small size.
Russia the new kid on the block offers strong technical skills, but lacks the
infrastructure, language skills and cultural alignment that some of the newer EU
members or prospective members offer.
UK and Ireland score relatively highly and would be leaders were it not for their
high labour costs. Both countries offer stable political and economic environments
with strong legal systems, excellent infrastructure and access to good resources,
albeit smaller in population size than the Asian counterparts.
Figure 13.8 illustrates the relative strengths and weaknesses of the countries in
Europe.
13.10 The Outsourcing Industry in North America

and Latin America
Outsourcing companies are also looking for new markets in South America with
firms like Tata, Wipro and TCS setting up global delivery and IT centres offering
lucrative software and maintenance services. Establishing these centres is a way to
address the variable time-zone issues between their main operations in India and the
host market. Not only that, these centres are also intended to increase the trust and
confidence of government organisations that are often sceptical about sharing
proprietary information to Indian companies.
Spurred on by India’s success, governments throughout the region have
recognised the potential of the export services sector, particularly in the context
of providing near-shore support to North America and Iberia. Brazil has begun to
leverage the traditional strengths of its indigenous IT sector, rapidly expanding
university enrolment and quality certifications, together with the scale it can offer.
Argentina Brazil Canada Costa Rica Mexico Panama
Scale
Labour costs
English proficiency
Education system
BPO market overview
Data / IP Security
Infrastructure
Fig. 13.9 Relative attractiveness of North and South American countries
Chile, Mexico and Argentina have seen significant sector growth and some
increases in graduation rates. Chile continues to benefit from the best business
environment and tax structure in the region. Mexico leverages its proximity to the
US, Argentina offers relatively lower costs, whilst Costa Rica was a traditional
leader in the region but has been overtaken by other heavyweights moving in.
Figure 13.9 illustrates the relative strengths and weaknesses of countries within
North and South America.
13.11 The Outsourcing Industry in Middle East and Africa
Middle Eastern and African countries are increasing their visibility as remote
services locations. Egypt, Jordan and the United Arab Emirates are all trying to
establish themselves as outsourcing hubs. The former attracting a number of Asian
vendors to the region as they run short of skilled and cost effective labour from the
home markets. Egypt has become a prime location for Information Technology (IT)
and call centre outsourcing. Egypt’s Smart Village has been the preferred destina-
tion for call centres and exported IT services in Egypt. The Village currently hosts
some 12,000 employees working for more than 100 multinational companies – most
of them in outsourcing – who have call centres serving English and non-English
speaking clients around the world. From providing cell phone services and cus-
tomer support (Vodafone call centre) to R&D centres (Orange Business Services)
that provide solutions to the IT and Telecom sectors, Smart Village is positioning
itself for anyone seeking to enter Egypt’s outsourcing market. Smart Village
expects to host 80,000 employees by 2014, which is more than six times the current
number. Xceed has been Telecom Egypt’s call centre arm since 2003 and is
considered to be the biggest call centre in the local market. Wipro joins Satyam
13.12 Take Aways 197
Egypt Ghana Jordan Kenya Mauritius Morocco Tunisia Senegal South Africa
Scale
Labour costs
English proficiency
Education system
BPO market overview
Data / IP Security
Infrastructure
Fig. 13.10 Relative attractiveness of Middle East and African countries
as the second Indian company to find conditions there suitable for its outsourcing
operation. With a 20% growth rate in Egypt’s IT and call centre sector in 2007,
outsourcing has already played its part in contributing to the local economy’s
growth, up by 7% from the previous year.
Mauritius a leader in the African region offers good infrastructure, political,
economic and business climate, but lacks scale. Morocco and Tunisia reflect
growing interest in locations with the ability to serve francophone markets.
Ghana maintains its position as a low-cost English language location in Africa,
while South Africa is fast becoming the India of the African world.
Figure 13.10 illustrates the relative strengths and weaknesses of countries in
Middle East and Africa.
13.12 Take Aways
• Offshoring will be on the rise, as are the number of destinations.

• A rational analysis shows the traditional favourites may not necessarily offer the
best environment for outsourcing.
• A detailed assessment model should be created to examine offshore countries
and the criteria weighted rationally.
• A rational analysis of offshore destinations may bring about unexpected results –
India for instance has many weaknesses that an emotional decision would
overlook.
• Multi-shoring is likely to rise, given the recent global political unrest and spate
of natural disasters, which highlighted the risks of putting all your eggs in one
country for offshoring.
References
Armour, J., & Lele, P. (2008). Law, finance, and politics: The case of India, Centre for Business
Research, University of Cambridge, Working Paper No. 361.
Budhwar, P., Luthar, H., & Bhatnagar, J. (2006). The dynamics of HRM systems in Indian BPO
firm. Journal of Labor Research, 27(3, Summer), 339–360.
Chakrabarti, R., Megginson, W., & Yadav, P. (2008). Corporate Governance in India. Journal of
Applied Corporate Finance, 20(1), 59–72.
Kuruvilla, S., & Ranganathan, A. (2008). Economic development strategies and macro and micro-
level human resource policies: The case of India’s “outsourcing” industry. Industrial and
Labor relations Review, 62(1), 39–72.
Levina, N., & Vaast, E. (2008). Innovating or doing as told? Status differences and overlapping
boundaries in offshore collaboration. MIS Quarterly, 32(2), 307–332.
Meyer, T. (2007). Offshoring work, not jobs, Deutsche Bank Research, April 12, 2007.
Setalvad, M. (1952). Problems before legal profession. All India Reporter (Journal Section), 39,
AIR, Journal 2.
Managing Cultural Differences
14
Managing cultural differences when outsourcing and offshoring remains a major

challenge for organisations – these cultural differences are influenced by
differences in hierarchy, management styles, group relationships and motivations.
This chapter examines the basis of these cultural differences and how these might
be minimised.
14.1 Introduction
The distance, cultural, coordination and communication differences between off-

shore destinations and Western countries are significant:
• Language barriers can create communication problems. This may hamper
knowledge transfer between the parties and increase the likelihood of false
specifications. Similarly, control and coordination is likely to be more difficult
and expensive;
• The geographic distance between offshore destinations and the outsourcing firm
can be significant. Although new technologies are enabling virtual meetings as a
replacement to physical meetings, these do not provide an environment for the
transfer of tacit knowledge and the development of trust; and
• Cultural differences can make information exchange, control and management
more challenging. Case studies on offshoring from Anglo-American countries to
India indicate that opposing attitudes towards authority, hierarchy and power
may cause differences in criticism and feedback behaviour between client and
service provider personnel.
To demonstrate some of these cultural differences, this chapter will predomi-
nately use India as an example of how these cultural differences manifest
themselves.

200 14 Managing Cultural Differences
An increasing problem cited by many service providers in India (and their

clients) is the high level of attrition of their employees. This not only adds costs,
it also leads to a depleting pool of skilled and knowledgeable workforce within the
service provider organisation, whilst making the task of trust building more
challenging.
A key challenge when outsourcing offshore is the management of cultural
differences between the two parties, without which, building of trust will be
difficult to establish.
Indian professionals for instance tend to implement prescribed specifications
with little reflection, and strongly adhere to hierarchies. Hofstede et al. (2002)
through the analysis of perceptions of junior managers and professionals working
during the day and attending evening MBA classes at local universities, suggests
one hurdle to be overcome, is different traditions of corporate governance.
Hofstede (2007) in his paper, building on his early study of 15 possible goals and
the relative ordering of these within four countries; China, Denmark, India, and the
USA, found that for example, four of India’s top five goals are among Denmark’s
bottom five, and respecting ethical norms comes top in China but among the bottom
five in India. Hofstede’s seminal work has been the benchmark for cultural analysis
for the last 3 decades. Although it has been subject to criticism on both the
theoretical and empirical levels, it remains highly influential.
It is vital for outsourcing clients and vendors to understand each other’s cultures
in some detail, otherwise there is wide scope for misunderstanding and goal
differences, which will hamper the success of the outsourcing initiative even before
the project commences. Sharing of goals, aims and objectives between the parties
from early in the outsourcing process is vital in bridging differences. The process of
vendor selection, the setting of SLAs and negotiating contracts becomes important,
not only in terms of the outsourcing process itself, but in aiding understanding of
cultural differences and aligning goals.
There is a significant need for employees on both sides of the effort (Western and
Indian) to learn and respect the other’s culture, while maintaining a healthy respect
for their own. The commonality of language (English) should not be mistaken for a
commonality of world-views.
These cultural differences are explored further below.
14.2 Cultural Influences on Management Style
Indian academics characterise the Indian management style as one that

demonstrates an unwillingness to accept organisational change or take risks, a
reluctance to make important decisions in work-related matters or lack of initiative
in problem solving, a disinclination to accept responsibility for job-related tasks and
an indifference to job feedback, compared to the USA and UK.
14.3 Cultural Influences on Hierarchy 201
When looking at cross-cultural comparison of individualism1 – collectivism2,

the United States ranks as the most individualist with an index of 91, while India’s
index is 48. In his study, Hofstede (2007) found Western countries all scored above
average on individualism.
The Collectivism versus Individualism distinction clearly has implications for
the kind of management that is appropriate within a culture. India emerges as a
cultural Island of the 13 countries studied (US, Canada, Australia, Japan, UK,
France, Germany, Italy, Korea, Brazil, Argentina, Mexico and India) by Sparrow
and Budhwar (1997). Both they and Perlow and Weeks (2002) suggest that in the
U.S., an individualised identity is highly prized, whereas in India, there is a lack of
regard for, and at times a discouragement of separation and autonomy. As a result,
groups in India have priority over individual needs, desires, beliefs and values.
These differences mean management styles will themselves need to be adapted
for managing the outsourcing relationship between Western and Indian companies.
These differences will mean traditional incentives within a contract may need to be
modified; the methods of communication and monitoring will also need to be
appropriately changed and the decision making process itself may need to change.
14.3 Cultural Influences on Hierarchy
Indian culture is often viewed as having a high power distance, implying an

acceptance of hierarchical authority and associated work behaviours. Indian com-
pany structures are perceived by their onshore counterparts as being “too
hierarchical”.
Private-sector organisations in India tend to recruit their relatives to top
positions, and accordingly practices related to promotion, transfer and benefits are
manipulated as a result of social contacts and personalised relationships. A profes-
sional approach (based on impersonal formal rules) to managing HR in Indian
private-sector organisations is generally not adopted because it is perceived as a
threat to the owners’ ability to enforce control.
This hierarchical system also extends to the nature of communications used
within the Indian organisation. Indian firm’s communication is generally top down,
driven by the hierarchical system.
1
Individualism stands for a society in which the ties between individuals are loose: everyone is
expected to look after himself or herself and his or her immediate family only – Cultures and
Organisations – Intercultural Cooperation and its importance for survival – Hofstede, Geert
(1994).
2
Collectivism “stands for a society in which people from birth onwards are integrated into strong
cohesive in groups”, which throughout people’s lifetime continue to protect them in exchange for
unquestioning loyalty – Hofstede, Geert (1994).
14.4 Cultural Influences on Group Relationships

and Motivations
Indian management tends to be paternalistic with preference for personalised

relationships, rather than a more divorced performance orientation. This generates
a “tendermindedness” and “soft work culture” that is associated with a reluctance to
take bold decisions and see them through to the end.
Success is judged on a moral consideration of the text and strict observance of
ritual, not on actual behaviour, absolute principles or rules. Indian work culture
dictates a distinctive style of transformational leadership, which has been called the
‘nurturant-task leadership’ style. In such conditions the motivational tools have to
have a social, inter-personal and even spiritual orientation.
14.5 Cultural Influences on Negotiation Styles
Negotiating is a large part of Indian culture – much more so than some other
countries, and the very nature of negotiations will differ. Along with the business
practices and values, cross-cultural differences in negotiation are also important to
understand.
The time factor becomes important in the context of cross border exchanges as
people belonging to different cultures have different perceptions of time. While in a
more collectivist culture, people may prefer to develop relationships during
negotiations, people in more individualistic cultures like the USA may not prefer
to bring the relationship dimension into negotiations.
The study by Gulbrow and Herbig (1999) through around 40 surveys from
Chinese-owned, Latin American, French, Italian, Japanese, and German firms,
found that negotiators from a more collectivist culture would devote more time to
non-task negotiating and positioning activities. Similarly, the people from high
power distance cultures were found to spend less time compromising.
14.6 Distinctions Blurring Between Cultural Dimensions
However, the labels “collectivist” – “individualist” and “low power” – “high

power” hide as much as they reveal. The influence of culture manifests in the
different assumptions and beliefs about careers and about how success is achieved.
Assumptions are shaped by national culture, but occupational and organisational
cultures also influence the way employees behave.
The level of cultural differences may not be as stark as researchers suggest. A
study by Woldu et al. (2006) based on a study of 1,852 responses collected from
the four countries over a period of 5 years (1998–2002) led the researchers to
claim that employees who work for similar organisations and on similar
positions are culturally converging. They suggest Indian and Polish managers
for instance, show similarities on a significant number of cultural dimensions,
14.7 Cultural Differences in Evidence 203
even though the overall respondents of both countries demonstrated significant

cultural difference. This appears to be confirmed by Ravishankar and Pan (2006)
who conducted field-work via 50 in-depth, open-ended, face-to-face interviews
with 42 informants from four organisational business units. They suggest, given
the high status of large Western client firms (their higher symbolic significance
and economic wealth) vendor employees may identify more readily with the
client organisation as opposed to the offshore vendor company, and the
distinctions between Indian and Western cultures may become blurred. How-
ever, although there may be some blurring, cultural differences remain highly
significant and are likely to remain so for the foreseeable future. As Woldu et al.
(2006) notes the similarities between employee cultures are not always easily
explainable.
Thus the key issues that a client organisation must consider when offshoring
include:
• Directness of communication by the vendor organisation staff and its
implications;
• Different life/business experiences mean different assumptions;
• Native language differences which may make communication between the two
organisations difficult;
• Hierarchy and status differences and implications of how organisations manage
the relationship;
• Decision making differences between the organisations impacting the how
control is exercised, and how dispute resolution is managed;
• Individual versus group thinking;
• Perception of the importance of time; and
• Management Style differences between the two organisations.
14.7 Cultural Differences in Evidence
Working in or with Indian based companies is not to be taken lightly. India is not a
homogeneous country – it’s a collection of linked markets, each with its own set of
specific characteristics. India has 28 states and seven union territories, 22 official
languages, more than 2,000 dialects, each state with its own set of laws and
regulations, and above all each with its own history and cultural traits.
The following illustrates the practical cultural differences seen when working
with an Indian company – some have been slightly exaggerated to illustrate the
point (I apologise to my Indian readers).
The classical “yes” syndrome
• In Indian culture, people avoid giving negative responses. Junior individuals
may not speak on an issue without permission by a supervisor. If someone asks
an Indian counterpart if the task can be completed by the end of business
tomorrow and the answer is “yes,” it does not mean “yes, it will be done”.
This is more likely “yes, I’ll do my best.”
Commonality of the English language should not be mistaken for a commonality

of views
• You should not assume everything you say will be immediately understood and
you must test the level of understanding – the same words have very different
meanings in India – customer service standards for instance vary hugely between
here and India – a shop assistant following you around intensely can be really
irritating here, but seen to be quite normal in India.
Hierarchy and status rule
• Indian culture is often viewed as having a high power distance – in academic
worlds – what this means in the real world is that there is an acceptance of
hierarchical authority in India. Indian company structures are perceived by their
UK counterparts as being “too hierarchical”. When entering a meeting room,
you should always approach and greet the most senior figure first. Meetings
always commence with some conversation which is part of the “getting to know
you” process. In the private-sector, organisations tend to recruit their relatives to
top positions.
In-decision in Decision making
• In UK culture, a person’s capacity for taking initiative is generally praised, and
we do not like our behaviour to be restricted by too many bureaucratic structures.
In India, people’s choices are much more restricted, and employees prefer to
obey clear guidelines rather act alone and take a risk. Therefore you should not
generally expect initiative and forthright improvement suggestions coming from
your Indian counterparts.
We are family – individual versus group think
• In the UK, people value personal freedom, and freedom of speech – but Indian
culture has a far more collective attitude. Freedom of speech is subordinated to
the good of the group, so individuals are careful about what they say. Investment
horizons may be much longer in India than they are in the UK, as they will not
only, be looking at today’s profit, but the legacy that can be left for their children,
and grandchildren.
Time is NOT money
• The UK usually equates punctuality to politeness. We see time as valuable and
do not like to overrun schedules and miss deadlines. In India, time is viewed in
Stephen Hawkins terms – something that is elastic and can be bent. . .Family
responsibilities take precedence over business, so last minute cancellations are
possible when doing business. . .flexibility and patience is paramount when
doing business in India.
If it was that important, why didn’t you say so?
• UK managers in general do not ask for frequent progress reports, since that
would be considered as a lack of trust in the employee. In India, if you do not
follow up frequently, then they will treat the task as an unimportant one.
It’s the process, not the output that is important
• Indian employees and businesses tend to judge success on a moral consideration
of the text and strict observance of ritual and process, not on actual output – they
14.7 Cultural Differences in Evidence 205
will happily follow your processes, even if it throws out garbage – so you need to
be careful how you devise service level agreements.
Patience is a virtue
• If your business dealings in India involve negotiations, always bear in mind that
they can be slow. If trust has not yet been established then concentrate efforts on
building a rapport. Decisions are always made at the highest level. If the owner
or Director of the company is not present, the chances are they are early stage
negotiations. Indians do not base their business decisions solely on statistics,
empirical data and exciting PowerPoint presentations. They use intuition, feeling
and faith to guide them. Always exercise patience, show good character and
never exhibit frustration or anger. When negotiating, avoid high pressure tactics.
Do not be confrontational or forceful. Criticisms and disagreements should be
expressed only with the most diplomatic language. Indian society has an aver-
sion to saying “no” as I said earlier, as it is considered rude, due to the possibility
of causing disappointment or offence. Listen carefully to their responses to your
questions. If terms such as “We’ll see”, “I will try” or “possibly” are employed
then the chances are that they are saying “no”.
The law is for whimps
• Indians tend to avoid the legal system, and for good reason – the legal system
although based on English common law, and looks great on paper, is incredibly
slow.
Looking at recent Delhi 2010 Games for lessons:
• The good old yes syndrome – delivery deadlines passed by without much
concern – how many times did we hear it will be done tomorrow?
• Commonality of language – standard of accommodation and cleanliness were
apparently seen to be different from western standards. . .
• Hierarchy and status – problems had to be escalated up the hierarchy, causing
even more delays. . .
• We are family – as you may have heard, one of the members of the organising
committee was trying to give contracts for the construction of a project to his
son’s company, keeping it in the family. . .
• If it was Important why, didn’t you say so – A large part of the blame must go to
the Commonwealth Games Federation, who didn’t quite understand Indian
culture and assumed that just because they had an agreement all was going to
be well – without regularly checking on progress – i.e. it was poor
governance. . ..
• It’s the process, not the output that is important – as you saw when the games did
start, most of the stadiums were empty – but the organising committee were still
congratulating themselves that they managed to open on time, and not looking at
the output – that for the games to be successful, they needed to get the country
behind them. . .
• The law is for whimps – the slow legal system, meant there was delay in the
games committee acquiring the required land – the democratic process only
slowed things down further. . .
Nevertheless, in the end, they pulled it off – like a good old fashioned Indian
marriage, with an extravagant opening and closing ceremony, the games proceeded
without much fuss and were generally seen to be successful.
So the moral of this story – India can deliver, but you need to be mindful and take
action to ensure they deliver on time, to the standards required, give it the priority is
deserves and you manage the relationship so you don’t need to resort to the legal
system.
Clearly, India is used as an example here, but each country will have its own
cultural differences that must be recognised. The organisation must understand how
these differences manifest themselves in the outsourcing programme and how these
can be managed.
14.8 Take Aways
• Managing cultural differences requires a deep understanding of the basis upon

which differences arise from hierarchy, management styles, motivations and
negotiation styles, and mechanisms introduced to minimise its adverse effects.
• These differences can be seen in action in the case of India.
• Over time, as personnel from countries start converging and co-mingling in
work, social and educational settings, these cultural differences begin to lessen,
although subtle differences will continue to exist. The organisation’s need to
accelerate the process of cultural convergence by introducing cultural training,
social interaction and introduce different approaches to management.
References
Gulbrow, R., & Herbig, P. (1999). Cultural differences encountered by the firms when negotiating
internationally. Industrial Management and Data Systems, 99(2), 47–53.
Hofstede, G. (2007). Asian management in the 21st century. Asia Pacific Journal of Management,
24, 411–420.
Hofstede, G., Deusen, C., Muller, C., & Charles, T. (2002). What goals do business leaders pursue?
A study in fifteen countries. Journal of International Business Studies, 33(4, fourth quarter),
785–803.
Perlow, L., & Weeks, J. (2002). Who’s helping whom? Layers of culture and workplace
behaviour. Journal of Organisational Behaviour, 23, 345–361.
Ravishankar, M., & Pan, S. (2006). The influence of organisational identification on organisational
knowledge management (Km). Omega-International Journal of Management Science, 32(2),
221–234.
Sparrow, P., & Budhwar, P. (1997). Competition and change: Mapping the Indian HRM recipe
against world wide patterns. Journal of World Business, 32(3), 224–242.
Woldu, H., Budhwar, P., & Parkes, C. (2006). A cross-national comparison of cultural value
orientations of Indian, Polish, Russian and American employees. International Journal of
Human Resource Management, 17(6), 1076–1094.
Implementing Successful Strategic
Outsourcing Programmes 15
The successful implementation of strategic outsourcing, having made the appropri-

ate decision to outsource, requires the successful implementation of eight
principles, that are based on both academic and practitioner experience. The
application of these eight principles is likely to see the successful implementation
of a strategic outsourcing programme. However, the investment required in
operationalising these principles is significant and should not be entered into
lightly. The organisation must determine that this investment is appropriate given
the nature of the outsourcing programme.
15.1 The Eight Principles to Success
Successful outsourcing to service providers calls for a combination of a strong

legal contract together with a partnership approach between the two parties, built
on trust.
There are some important principles which may help organisations reduce the
chances of outsourcing failing:
1. Building strong, yet flexible contracts that avoid offshore legal systems wher-
ever possible, and which aid in building trust;
2. Using governance as a framework for control, monitoring, dispute resolution and
relationship building at all levels;
3. Implementing effective controls which enable monitoring of performance,
which aid in guiding vendor behaviour and positively influence the development
of trust;
4. Building commitment and mutual dependence, which drive both parties, and in
particular, the offshore vendors to perform contracted tasks to a high level of
performance, and wherever required performance beyond the contract, using
concepts such as motivation;
5. Alignment of goals and objectives both within the client organisation and
between the client and vendor, using the concept of consensus building,

208 15 Implementing Successful Strategic Outsourcing Programmes
especially given that the personal drivers within each organisation may differ
significantly;
6. Building individual and institutional trust to enable parties to perform services as
prescribed in the contract, which adjusts where necessary to environmental
changes. Institutional trust is important as building individual trust may be
difficult because of the high levels of employee attrition in many vendors;
7. Managing effective collaboration and knowledge sharing between both parties,
including appropriate group interaction; and
8. Using communication as a key linking tool. Communication is a central tool for
change management both within the client organisation and for the effective
implementation of the preceding risk mitigation strategies.
In what is clearly a complex relationship, with the scope of risk being significant,
a straightforward transaction model is likely to prove ineffective in achieving all the
aims of both parties over the foreseeable period of the relationship. A partnership
model, built on trust, it is argued, will prove more beneficial to both parties. A
partnership model can be characterised as having at least some of the following
attributes:
• Commitment from senior management (and goal congruence in terms of wider
organisational strategy and with organisational stakeholders);
• Open communication channels (within and between organisations);
• Clear delineation of customer and service provider roles and responsibilities (for
effective control and monitoring);
• Good governance, with management tools available to avoid common problem-
atic issues (including effective dispute resolution);
• Pricing granularity, that details the pricing of specific services and how these
change given changes in the environment, together with financial incentives that
drive parties to behave in a “partnerial” way;
• Acceptance that change will happen and thus include balanced and open change
control processes; and
• Balance liabilities and iron out termination rights and post termination assistance
from the very beginning (acceptance that the outsourcing project has a finite life
and at some point the outsourced activity may need to be brought back in house
or transitioned to another vendor). This alleviates the common hold-up problems
that clients may encounter in markets with limited suppliers or where transaction
costs are high.
Implementing these is resource intensive and cannot be entered into lightly, by
either the client or vendor. Unless both parties are committed in seeking a long-term
partnership relationship, it may be more cost effective for parties to engage in a
simple transactional relationship without implementing trust building mechanisms
– accepting the possibility of not achieving success – for this may provide a better
trade-off.
The initial search by the client for possible vendors (partners) needs to be based
on an initial strategic decision about the proposed long-term nature of the proposed
relationship. This must take account of not only the hard factors but also the soft
factors when evaluating possible partners. It must be used to determine if the
15.2 Principle 1: Strong Yet Flexible Contracts 209
establishment of trust between the parties is desired by both, and whether the parties
will dedicate the necessary resources and commitment, such that trust and its
required constructs can be achieved.
The rest of this chapter discusses the implications for organisations of the eight
principles that have been identified above.
15.2 Principle 1: Strong Yet Flexible Contracts
As discussed earlier, it is possible in some jurisdictions to contract under the

jurisdiction of another country’s courts. It is vital for clients looking to outsource
offshore, to explicitly state under which law the contract should be governed and
precisely define which elements within the contract can and cannot be subject to
another jurisdiction.
Outsourcing arrangements are usually long term, and it is often difficult to fully
anticipate, describe and manage contingencies and change conditions in the agree-
ment. Contracts that shift from merely specifying deliverable outcomes to
providing frameworks for bilateral adjustments may facilitate the evolution of
highly cooperative exchange relations. In addition, the process of contracting
may itself promote expectations of cooperation consistent with the concept of
relational governance and the development of trust. In this respect, outsourcing
agreements should include within the contract, broad procedures that describe the
process the parties will follow when changes occur in the relationship, without
having to re-write the contract. It is important for organisations to appreciate from
the outset that outsourcing agreements are more successful where companies view
the relationship as long-term and based on mutual respect and underpinned by trust.
Procedural explicitness and transparency provides a valuable mechanism for pro-
moting flexibility in the long-term.
The activity of negotiating complex contracts requires parties to mutually
determine and commit to processes for dealing with unexpected changes and
determine penalties for noncompliance (this also helps build institutional trust). It
is therefore important that the contracting process is seen as being an activity for all
stakeholders and not merely left to the lawyers, as companies in some cases have
done. The very nature of negotiation between the various stakeholders can posi-
tively affect future exchange performance and mutual trust through the develop-
ment of social relations.
Formal contracts should at the minimum, cover the following:
• Law and place of jurisdiction – essentially avoiding the offshore legal system;
• A statement of rights and obligations of each party;
• Confidentiality provisions;
• Transition-in support requirements from the vendor;
• A clear and comprehensive description of services to be outsourced, including
scope and process for adding services in the future;
• Clearly defined performance measures and targets;
• A clear pricing, charging and payment structure, including appropriate incentive

scheme;
• Change management provisions with appropriate implications and an allocation
matrix of responsibility and costs;
• Liability and limitations of liability clauses;
• Indemnification/disclaimers/warranties clauses;
• Limits on subcontracting provisions;
• Insurance and guarantee requirements;
• Narrowly defined Force majeure provisions, which ensure service continuity
wherever possible;
• Audit rights and provisions;
• Regulatory obligations and allocation of responsibility and costs of meeting
these;
• Security requirements and arrangements for the vendor;
• Contract breach clauses and provisions for compliance;
• Penalty clauses, including the possibility of cash penalties for breach;
• Incentives, including cash to motivate the service provider to exceed perfor-
mance requirements or provide superior performance;
• Conflict resolution provisions;
• Escalation procedures;
• Arbitration clauses, a definitive place of arbitration and rules to govern arbitra-
tion process;
• Disaster recovery and business continuation plans;
• Protection of Intellectual Property provisions;
• Effective provisions for the application of the EU Acquired Rights Directive (77/
187/EEC), or its equivalent requirements by the host country;
• Effective data protection as required by legislation and additional obligations
introduced through contract;
• Clauses addressing the impact of local taxes and regulations; and
• Contract renewal, termination clauses and transition-out support – i.e. assistance
in transitioning the service either back in-house to the client or to another service
provider.
Clients should negotiate an outsourcing agreement with at least two service
providers. Dual track negotiations, it is suggested, allows customers to get a real
time comparison of the legal differences between two organisations (which may be
from different jurisdictions) that will be transposed to the outsourcing agreement.
Sometimes a seemingly well priced deal by one service provider is clawed back by
proposed clauses in the agreement that shift too much risk back to the client.
15.3 Principle 2: Effective Governance
Trust is predicated on both social interactions at individual and inter-organisational

levels, as well as familiarity, mutual understanding and confidence between the two
parties.
15.4 Principle 3: Effective Control and Monitoring 211
Governance structures thus require clear authority and staffing structures, with
the relevant staff empowered to make decisions. Governance must focus on proac-
tive and collaborative management of the relationship. In this respect, governance
must focus on ongoing communication processes, performance review standards,
overall project management and the evolution of the services required and
provided. Governance in this sense must go beyond simple monitoring of contrac-
tual obligations. Ongoing governance requires the following to be actively pursued:
• Project management, including: communication, collaboration, and monitoring
of the service provider;
• Relationship management – helping interaction and collaboration between
stakeholders, managers, and team members;
• Change management – ensuring that standardised procedures are used for
efficient, prompt handling of all changes; and
• Risk management – including identifying, analysing, and responding to
outsourcing partnership risks.
Managing an external supplier requires different skills to those associated with
managing an internal business function; this challenge of managing across
organisational boundaries is a major one in all sub-contracting relationships.
Many organisations lack the knowledge and often the skills to implement an
effective outsourcing strategy. For the outsourcing relationship to work success-
fully, it is important for clients to fully understand all the technical, commercial and
legal issues of relevance. This calls for a multi-disciplinary team, consisting of
consultants, lawyers, accountants, tax specialists, technology experts,
benchmarking and others with the requisite expertise within and external to the
organisation.
In the context of governing performance management, a “dashboard” of key
metrics which combine pure Service Level Agreement (SLAs) metrics and some
operational metrics (that could explain the reasons for the divergence of service
delivery targets) aids in understanding what changes should be implemented by the
service provider. Sharing this information between the parties can help reassure
each other that both are working under a partnership model, creating incentives for
each to invest further to build trust.
15.4 Principle 3: Effective Control and Monitoring
Trust is a prerequisite to cooperative relationships. It is effective in lessening

concerns about opportunistic behaviour, better integrating the partners and ensuring
both parties are satisfied with the relationship.
However, objective representation of performance, effective discouragement of
opportunistic behaviour, and evidence of commitment is required for the develop-
ment of trust. High levels of trust cannot be built immediately, but must be nurtured.
Formal controls and monitoring are important as they help build trust overtime.
SLAs are important in this respect as they focus on measuring and managing
productivity and service quality improvements, and determine the true value of an
outsourcing engagement. Well defined SLAs correctly set expectations for both
sides of the relationship and provide targets for accurately measuring performance
to those objectives. They act not only as metrics of performance by which to
measure the service provider, but also as a means of providing both parties with
meaningful information on which to base fees, costs, remedies, and performance
incentives/disincentives.
SLAs should be defined and incorporated into the agreement by personnel at the
operational level and not just left to lawyers. This process ensures not only that the
SLAs are set at correct levels, but attempt to secure the buy-in of client employees,
who may be affected by the outsourcing arrangement.
Metrics should be segmented into those that need to be reported as part of the
SLA and those which need to be reported separately for operational reasons. Those
that are reported as part of the SLA management system should be simple and
concise, whilst operational reporting should be more extensive and shared at the
operational level between the parties. The term “SLA management system” has been
used deliberately, to suggest that effective control requires not only the setting and
agreement of SLAs, but effective organisational systems to measure, verify, commu-
nicate and discuss the SLAs and what the implications are of not meeting them.
At the heart of an effective SLA is its performance metrics. During the course of
the outsourcing engagement, these metrics will be used to measure the service
provider’s performance and determine whether the service provider is meeting its
commitments. For SLA metrics to be effective, parties must:
• Choose measurements that motivate the right behaviour – each side must
understand the other side, its expectations and its goals, and the factors that
are within their respective control;
• Ensure metrics reflect factors within the service provider’s control – the metric
should be two sided. If the service provider’s ability to meet objectives is
dependent on an action from the customer, the customer performance must
also be measured;
• Choose measurements that are easily collected – If the metrics in the SLA cannot
be easily collected, then they will eventually be ignored;
• Avoid choosing an excessive number of metrics. If the metrics generate too
much data, the temptation will be to ignore the metrics; and
• Set a proper baseline – To be useful, metrics must be set to reasonable, attainable
performance levels.
15.5 Principle 4: Building Commitment and Mutual

Dependence
Commitment and mutual dependence are important because they encourage parties
involved in day-to-day operations to work at preserving relationship investments by
cooperating with the exchange partner and resist attractive short-term alternatives
in favour of the expected long-term benefits of staying with the existing partner.
They are the pillars upon which trust is built.
15.6 Principle 5: Ensuring Goal/Expectation Alignment 213
Traditional outsourcing relationships have relied on rudimentary pricing models,

based primarily on volume of output multiplied by the unit price per output unit
model. This basic model is disadvantageous as over time the interests of the two
parties diverge (e.g. the service provider consistently searches for methods to drive
up the amount of service consumed by the customer, whilst the client increasingly
searches for methods to reduce the units of service consumed and constantly shops
around for a lower per unit rate service provider).
The use of “incentive pricing” models, which attempt to ensure the interests of
both parties are served in trying to improve performance – creates both mutual
dependence and commitment. There are numerous types of incentive pricing
models that may be deemed appropriate, such as:
• Incentive pricing models based on achievement of various milestones;
• Project specific gain share incentive models e.g. requirement for each party to
invest a given percentage, with a sharing of savings between the parties in
proportionate amounts equal to investment amounts;
• Shared pricing models where the service provider’s remuneration is shared
between a fixed price fee and an incentive fee. The incentive portion can be
based on any number of metrics;
• Gain-sharing models where the provider receives a percentage of the improve-
ment based on achieving or exceeding targets. The provider does not however
forfeit income for lower-than-expected improvements; and
• Risk/reward models – these incentive schemes build on the gain sharing concept
by adding the downside risk.
When negotiating incentive models, the objective must be the achievement of
overall organisational goals and must not be seen as being a mechanism to penalise
the service provider. Their purpose is to build mutual dependence and commitment.
In this sense, it is also important for the client to define clearly what is actually
controllable by the service provider and therefore, gain a level of commitment to
these from the vendor.
Clients must avoid negotiating the service providers’ prices too low – this may
drive the relationship towards a market based one and will not create the right
incentives for the service provider to engage in collaboration or trust building.
15.6 Principle 5: Ensuring Goal/Expectation Alignment
Trust requires both parties (and their respective stakeholders) to strive towards the
achievement of goals through joint commitments and mutual dependency. The
central thesis being that both parties not only understand the goals and expectations
of each other, but such goals and expectations are in congruence. As noted earlier,
to realise the potential for improved competitiveness, outsourcing drivers and
decisions should be strategic and made in accordance with organisation strategies.
This requires that the factors driving decisions to outsource, to be in congruence
with the strategic goals and competitive priorities of the organisation.
Congruence therefore includes: goal congruence with strategic objectives within

the client; goal congruence between the two organisations and goal congruence
with the respective stakeholders within both organisations.
The importance of taking account of additional stakeholders that maybe affected
by outsourcing have largely remained unaddressed to date. Not knowing the entire
range of stakeholders and their goals, makes goal congruence impossible.
Many parties fail to recognise that the other has their own set of expectations,
which may be very different. It is generally assumed that outsourcing failures or
difficulties arise due to problems created by, or misunderstanding by the service
provider. Often it, it is argued, the customer’s failure to clearly define or set
appropriate expectations at the outset that leads to many of the problems within
such relationships. This presupposition from an early stage within the relationship
leads to the development of mistrust between the parties. Moreover, when there are
problems, the onus is assumed by the client to be on the supplier to rectify, even
where it may be the client that creates the problem. These assumptions prevail due
to the lack of open and collaborative discussions between the two parties about their
respective goals and expectations.
Internal political interference or power play within a customer organisation can
also have the effect of creating poor decision making and weak communication
between the customer and service provider. It is therefore important for both parties
to be fully aware of the issues each other faces and understand each other’s
expectations, limitations and the extent of commitment before deciding whether
the parties should proceed to formalise the relationship.
A good starting point for doing this is during the Request for Proposal (RFP)
process. Many parties treat the RFP process as simply a gating process and use
standard boiler-plate templates, without putting in the necessary level of effort to
use the process as a joint learning exercise. This exercise can be used to start
forming a relationship and the development of trust. The approach the service
provider brings to the table in negotiating the terms and conditions may be a test
of the approach that it may bring in dealing with the inevitable problems that will
arise during the term of the deal; clients it is argued should be willing to test the
level of disagreement in a setting where the consequences of not seeing eye-to-eye
are relatively insignificant.
It is important to ensure the team that is assembled to undertake the task of
outsourcing and selecting a service provider consists of all the appropriate skills and
experience that such a complex task demands, rather than simply being
implemented by the procurement department within the organisation or by external
advisors. In many cases the effects of an outsourcing programme are wide ranging
and impact not only the internal organisations, but its customers and other
stakeholders. Without active involvement of those affected by an outsourcing
decision, it will be inevitable that such stakeholders will not fully participate
positively in the outsourcing process, which may lead to goal divergence. In such
a circumstance, it is also likely that all the possible risk mitigations actions that
could be implemented will not be willingly volunteered by the affected
stakeholders.
15.8 Principle 7: Managing Effective Collaboration and Knowledge Sharing 215
15.7 Principle 6: Building Individual and Institutional Trust
Institutional trust is the belief that a trustor has about the security of a situation
because of guarantees, safety nets, and other performance structures. As trust
primarily emerges on the basis that the other party will fulfil its commitments and
on the repeated observation of counterparts’ ethics and behavioural routines, the use
of effective dispute resolution is vital in building institutional trust. Quickly escalating
disputes up the chain of management often resolves problems prior to litigation and
helps build trust. Parties should always strive to make decisions and address issues at
the lowest possible level – this not only helps solve disputes quickly, but creates shared
values throughout the organisation and at individual levels.
Where simple dispute resolution fails, parties should use arbitration as a first
point of call before embarking upon the litigation route. Litigation tends to harden
positions and diminish trust. However, the process of arbitration is not governed by
a well established set of case law and rules like litigation, so waiting for a final
award can often be lengthier than may be imagined. The arbitration process should
therefore not be taken lightly.
15.8 Principle 7: Managing Effective Collaboration

and Knowledge Sharing
The development of trust requires parties to effectively collaborate with each other, in
circumstances where each party may have different practices, processes and
competences. This requires parties to facilitate the development of shared identities
and practices. Underpinning this is the sharing of knowledge between the two parties.
Project planning and management are important disciplines to enable successful
outsourcing, and smooth transition management is a critical success factor in
outsourcing. Transition management, includes the detailed desk-level knowledge
transfer and documentation of all relevant tasks, technologies, workflows, and
functions (and in some cases employees).
It is argued that the transition period is the most complex stage of an outsourcing
process lasting up to a year to complete. Transition management should involve the
following:
• Developing a transition plan (key activities, milestones, resources, and
dependencies);
• Facilitating transition of operations and/or initiation of projects;
• Transferring knowledge of internal procedures and processes;
• Managing strategic and operational communications;
• Managing employees – redeployment, transfer, or termination; and
• Documenting lessons learned to improve ongoing service provider management.
One of the core challenges is the importance of motivation of client members to
share knowledge and collaborate with the offshore vendor. The fear of client project
members being replaced and losing their jobs may lead to information hoarding. It
thus has to be resolved to let positive motivational factors evolve. This may require
gradual restructuring with no large scale immediate downsizing, and the adoption
of formal change management techniques.
The scope for disagreements to arise during the course of an outsourcing agree-
ment is significant, especially if the internal commitment and processes within the
customer have not been fully aligned. Having a single point of contact within both
organisations which liaises with the each other on a day to day basis – what some
researchers call boundary spanners, e.g. Oshri et al. (2007), may be useful – but
should not stop open dialogue at various levels between the two organisation’s staff.
15.9 Principle 8: Effective Communications
Trust requires open, honest and repeated exchanges between the two parties, good
governance and decision making across the chain of command within
organisations, sharing of goals and expectations, collaboration and sharing of
knowledge (both explicit and tacit). In this respect, effective communications
goes to the heart of the achievement of these and thus an outsourcing programme.
Effective communications must be inherent from the start of the outsourcing
process; in the RFP process, in transition management, in project management and
for effective governance.
Face-to-face communication is important to minimise uncertainty where cultur-
ally diverse personnel are involved, but is also the most expensive to adopt. Tech-
nology can be used in order to spread information to all stakeholders; however this
should complement rather than replace face to face communications. Face-to-face
interactions are especially important at the problem definition stage, and can be used
periodically to signal commitment and promote identity required to work through
problems. Such devices are especially necessary in offshoring, since cultural and
communication problems could easily be misattributed to motivational issues.
15.10 A Summary of Strategic Outsourcing: Risks, Rewards

and Relationships
15.10.1 Don’t Start at the End
Too many outsourcing engagements start with the typical question being posed by
the CxO “which vendors shall we start to talk to?” This should be the last act within
the decision management process, not the opening question.
An organisation needs to consider “carefully” the advantages and disadvantages
of outsourcing as an option (yes it is only an option, and not always the correct
option). The major considerations should include:
• Is outsourcing and managed services in line with and contributing to the business
strategy and objectives? What are the business objectives to be achieved by
Outsourcing?
• What would be the requirements for the outsourcing deal so that outsourcing
complements the business?
15.10 A Summary of Strategic Outsourcing: Risks, Rewards and Relationships 217
• What is optimal scope for outsourcing and what is the practical scope of the
operations to be outsourced today?
• What are the specific targets and objectives for the outsourcing deal?
• What are the criteria for a successfully managed service?
• How will you ensure accountability in what will be a hybrid matrix of
responsibilities?
• How should the organisation manage the outsourcing process, what are the
interfaces and governance structures required to ensure success?
• Is the organisation ready for outsourcing – will the culture inhibit possible
success?
• And finally, how should you select the managed service provider?
The decision process should not only be seen to consist as the transfer of a
specific function from the organisation to the service provider, but in defining the
interfaces to all relevant organisational units. To this extent, the decision making
process must include all facets of the operator and key personnel – for the last thing
you need is your key personnel leaving you, when you need them the most.
The key overriding consideration should not be the decision to outsource but the
decision to build a process for successful outsourcing. You need to clearly differ-
entiate between outsourcing as a project, and outsourcing as a business-as-usual
activity. If outsourcing is to deliver the benefits you seek, it must be an
organisational wide undertaking, being integral to the business – not a project
that a few people work on in their spare time.
The organisation needs to be mindful and respectful of the various stakeholders
within the decision process and in the ongoing implementation and management of
an outsourcing programme. Not all stakeholders will deem the outsourcing
programmes’ Raison d’être to be reducing costs (see Fig. 15.1).
Customer’s Senior Managers

Contractual commitments
Customer’s Senior Live within budget Customer’s Staff
Managers Performance of service provider
Business benefits Impact on jobs
Added value
Customer CFO
Customer CEO Lower costs
Better business focus Lower capex
Profitability How do you
reconcile?
Customer Procurement
Customer Legal Commercial deal
Lower Risk Performance management
Compliance
Supplier’s Senior Management

Supplier’s Staff
Maximize profits
Technical/process focus
Supplier’s Contract Keep customer happy
Management
Service and profitability targets
Fig. 15.1 Stakeholder conflicting requirements

This task of decision management and consensus building has been fraught with
difficulties. Complications such as the need to keep activities off the radar of the
media, often ensures that proper consultation is omitted amid security and PR
concerns. The hope of things being all right on the night sometimes works out,
but often, you can get things seriously wrong.
Installing a new decision management and governance process with system
support using tools such as GovernanceDirector.com helps an organisation to
build a robust decision process that is so desperately required, and to embed this
within the organisation.
A decision management and governance system doesn’t just help an
organisation achieve a robust outsourcing programme, but helps understand if
outsourcing is even the right solution this year, next year and the year after, for
there are always others options, and conditions change overtime.
Each business situation is unique and numerous issues and drivers have to be
weighed up. Outside expertise from specialised consultants can certainly help with
this process.
15.10.2 Establish What is Core
When deciding on the scope of outsourced activities, the most important question is
“What is core today and in the future”? This must be driven by the organisation’s
overall competitive strategy. Core activities are those key areas, which the
organisation believes it can do better than the competition and thereby gain
sustainable differentiation and competitive advantage. Not all non-core activities
should be outsourced however. . .
15.10.3 Establish What Success Means
Business targets need to be clearly understood and defined before entering into
detailed planning and implementation of an outsourcing programme. Selected
drivers need to be prioritised and further clarified to a degree that business relevant
measurable targets can be defined – you need an organisational wide agreement on
the definition of success – reducing OPEX may make the CFO’s day, but if that is at
the cost of diminishing quality, the customer service director may not be too
pleased.
15.10.4 Measuring Success
Organisations going down the outsourcing route need to put in place robust and
comprehensive (yet simple) Service Level Agreements (SLAs) built around Key
Performance Indicators (KPIs). KPIs will typically (although this may not be the
best) be based on the performance measures already used by the organisation’s
internal teams, together with additional measures intended to prove the outsourcing
arrangement is working to the benefit of the organisation.
SLAs are a critical part of the contract and complement the relational aspect of
the outsourcing programme. All outsourcing agreements are governed by formal
contracts; therefore these must be used as part of the relationship management
process. SLAs enable certainty and help publicise common beliefs and expectations
and align goals. Negotiation of contracts and SLAs can in itself be used as a
relationship and trust building process – the process can aid in developing the
balance between formal contracts and trust.
It is worth saying that successful outsourcing isn’t necessarily about tight
contracts and meeting SLAs, success is more aligned to the relationship between
provider and customer, nevertheless good SLAs should be seen as the grease that
promotes a smooth relationship.
Good SLAs should include not only outcome based measures, but processes and
dispute resolution procedures, as well as the roles and responsibility of various
people involved in the outsourcing relationships. In setting SLAs and the associated
KPIs, care must be taken in how SLAs set expectations and guide behaviour
(positive and negative). An SLA must clearly define the boundaries in terms of
the functions and services that the service provider will give to the organisation, the
volume of work that will be accepted and delivered, the acceptance of criteria that
will be used and a level of quality for the network.
Although service sometimes may be imperfectly measurable, it is still worth
negotiating clearly formulated business objectives. The difficulties in measuring
performance is exacerbated by the fact that some of the outsourced services may be
dependent on other services. Performance degradation in one service area often has
a ripple effect on other areas, thus rendering performance measurement even more
difficult. To effectively evaluate provider’s performance, two things are necessary;
(1) measurement metrics in terms of business objectives and (2) incorporating the
notion of interdependencies among services in the evaluation process.
Use outcome based incentives as a governance mechanism. Penalties/rewards
associated with the services stimulate the provider to encourage its employees to
put in their best efforts. The challenging issue here is quantifying the appropriate
“level” of service since the goal for this type of SLA is to reduce the knowledge loss
for the customer. The lack of clarity associated with the knowledge gained by the
provider and lost by the customer can makes it difficult to derive optimal incentives
outcomes.
15.10.5 Making It Happen: Ever Had a Yearlong Migraine?
Business is today marked by volatility – there is continuous technology innovation,

competitive clashes, price wars, and changing consumer behaviour – in this envi-
ronment, forecasting a few years ahead for the value of the outsourced activity is
impossible. Hence the key word for successful outsourcing must be flexibility – and
the ability to renegotiate. Managing the change process with the supplier is more
vital than the ability to manage a contract in the first place.
In order to successfully outsource, an organisation must determine both the
scope and timing for the introduction of outsourcing: whether to undertake a phased
approach with more thought and analysis and less haste, or if there are pressures to
outsource in a big bang manner (a means of quickly turning around the business). In
either case, the organisation must define a long-term roadmap for outsourcing.
A phased approach can minimise risk, as elements can be “tested” in limited
scope before going for the next phase of implementation. It also enables an
organisation to choose best of breed vendors, although the costs of governance
need to be factored in. You also need to consider if a fragmented supply chain can
deliver the transformational changes you need and if economies of scale can be
generated to give you the cost savings you need.
A large one-time transition will undoubtedly result in short-term challenges to
the organisation, with consequences for personnel as well as organisational shock.
However, a phased approach may lead to continued uncertainty for organisational
staff – either way, there is going to be a challenge.
15.10.6 The True Picture
The hidden costs of outsourcing could fill a small book: not all of them will turn into
nasty surprises, and not all of them could be conceived upfront, nevertheless, the
contingencies that need to be built into the business case can seriously affect the
perceived returns (try including exit costs – bringing the service back in-house as
part of the business case and you’ll see what I mean).
The more successful outsourcers (there are a few) look for business outcomes.
Does the deal increase revenues and overall profitability? Does the deal increase our
speed to market? Have we managed to tap into innovative technology? These
outcome based measures (not all of them are quantifiable) should form part of the
business case, as opposed to a simple desire to restructure the balance sheet (in fact
many outsourcers, create extremely precise business cases, processes maps, and
forecasts – and like any forecast, they may look good, but are rarely accurate).
There are always hidden problems which might change the financial picture, but
a little realism, a bit of rational thinking and debate during the planning process
might save many organisations from disappointment (and senior managers their
jobs) later.
15.10.7 It’s Not All Plain Sailing
Pressure on organisations to optimise their cost structures, while simultaneously

seeking new services to drive growth, means the organisation must re-evaluate and
potentially revamp its entire business model. Outsourcing and sharing, in particular,
reflect aggressive new business designs that transform the relationship a business
has with its value chain activities (and possibly its customers). While outsourcing
and sharing can provide significant financial benefits, these deals can be complex
and fraught with risk.
15.10.8 Impact on Strategy and Value Retention
Organisations need to truly understand the outcome of the outsourcing/sharing

agreements and position themselves accordingly. The outsourced activity could
re-emerge as a key component in an organisations’ product and service strategy
going forward. Outsourcing/sharing core processes/functions means sharing the
decisions concerning future investment and development. While the partners may
have very different strategies, they both need to be sure that the future (shared)
resource will be consistent with their own strategic aims.
15.10.9 Don’t Overlook the Challenges
Parties contribute different resources and capabilities and are looking for an
appropriate return. It is easy for disagreements to arise over whether each is getting
a fair payback for its investment. There is a risk that these tensions may overshadow
the wider benefits being delivered.
Sharing generally involves significant up-front investment in rationalising the
organisation’s activity and decommissioning overlapping infrastructure before the
cost benefits start to flow. Thus the short term business case is harder to prove.
Outsourcing may provide more immediate benefits (but lower savings than a
sharing deal) over the long term.
15.10.10 Organisational Change
One of the biggest and most frequently underestimated hurdles is the size of the
cultural shift required to enter a sharing deal with a rival organisation (or even
straight forward outsourcing). The corporate mind-set has to move from that of
historical head-on competitive hostility in the marketplace to a degree of coopera-
tion, and away from an product view of the world to one focused more on customers
and brand. Differences in business culture between the two organisations may cause
misunderstandings and ultimately the demise of the deal.
The service provider organisation should adapt their project organisation to the
client organisation, something called “mirror structuring”. This consists of having
clearly defined hierarchical and cross-organisational communication and reporting
structures. This is especially important when the service provider is from locations
that tend to be more hierarchically orientated than western organisations.
15.10.11 Cultural Adaption
The use of standardised templates and forms based on a glossary of terms that the
client team and vendor agree on can help. This effectively means all personnel have
a shared understanding. The use of replay sessions to make sure that all parties
understand the functional and business requirements and expectations of the client,
can reaffirm such shared understanding.
Cross-cultural training workshops and more active hands-on training, including
secondments or site visits for project managers should be integral to the outsourcing
programme.
15.10.12 Detailed Contractual Agreement
Contracts serve as the basic instrument for communication in any exchange rela-
tionship. Although it is never possible to foresee all future contingencies at the time
of contracting, the customer’s efforts should be directed at making the contract as
detailed and complete as possible. One option is to include a change process in the
contract where requirements, performance and expectations are revisited on a
periodic basis.
15.10.13 Knowledgeable Resources
Crafting service level agreements to cater to the unique organisational knowledge

needs is a non-trivial task, and much of the success of the service provisioning
model is dependent upon the precision of the agreements. This is not possible
without having personnel, from both sides, with in-depth knowledge about the
process being outsourced. Coming up with the proper performance measurement
metrics, implementing them, and monitoring the provider’s performance continu-
ously are significant activities for the customer. However, the challenge arises in the
cost associated with the retention of such resources, as the primary skills of such
resources may seem to be less relevant to the organisation as it outsources its
knowledge process.
Clients should try to become actively involved in the project member selection
process of the vendor and include clauses within the contract to ensure key vendor
project members stay with a given project for its lifetime, to alleviate vendor
employee attrition and loss of knowledge.
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# Springer-Verlag Berlin Heidelberg 2012

Printed on acid-free paper

Springer is part of Springer Science+Business Media (www.springer.com)

1 Role of Strategic Sourcing in a Changing World . . . . . . . . . . . . . . . . . . . . . . . 1

2 Globalisation and Convergence: Drivers

3 Social and Philosophical Considerations of Outsourcing . . . . . . . . . . . . . 21

4 From Tactical to Strategic Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

5 Outsourcing Within Industry Verticals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

5.5 Retail Sector . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74

6 Strategic Outsourcing: Risks, Rewards and Relationships . . . . . . . . . . . 81

8 Strategic Outsourcing Decision Governance . . . . . . . . . . . . . . . . . . . . . . . . . . 101

8.3.11 Single Versus Multi-Sourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113

9 Transition and Relationship Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117

10 Insights from Academic Research on Outsourcing . . . . . . . . . . . . . . . . . . . 133

11 Minimising Risk Through the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151

12 Minimising Risk Through Relationships . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155

13 Offshoring Leaders, Laggards and Hopefuls . . . . . . . . . . . . . . . . . . . . . . . . . 175

13.11 The Outsourcing Industry in Middle East and Africa . . . . . . . . . . . . 196

14 Managing Cultural Differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199

15 Implementing Successful Strategic Outsourcing Programmes . . . . . . . 207

Further Reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223

Fig. 2.1 An interconnected world . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

Fig. 5.12 Key issues for consideration within public sector

1.1 Economic Drivers

B. Vagadia, Strategic Outsourcing, Management for Professionals, 1

1.1.1 Challenging Times Leading to Changing Business Models

1.1.2 Contrary Forces at Work

1.1.3 All Eyes on Cost

1.1.4 All Aboard

What we are also seeing is the diffusion of outsourcing to a wider business

1.1.5 Mixed Fortunes for the Outsourcing Industry

1.1.6 Changing Commercial Models

1.1.7 Getting it Right

1.2 Take Aways

• Outsourcing becoming more popular – although still a lot of uncertainty.

The two transformational forces of the twenty-first century; globalisation and

B. Vagadia, Strategic Outsourcing, Management for Professionals, 7

2.2 Convergent World

Friedman talks about convergence in a limited sense around horizontal collabora-

Effects of convergence can be seen at the macro level

Migration of manufacturing to lower cost countries

Local stock Focus on Finance, Banking, Insurance industries

Fig. 2.1 An interconnected world

A World where globalisation and convergence are interconnected

2.3 Raising Barriers to Globalisation and Convergence

A country could attempt to counter the forces of globalisation and convergence by

2.4 Adapting Businesses to Compete on a Global Level

These pillars of business transformation are illustrated in Fig. 2.2.

Achieving Competitive Advantage –5 basic pillars for adapting to the new

Focus Efficient Skills and Technology New products

and distribution channels

Fig. 2.2 Pillars of competitive advantage

Achieving competitive advantage in a converged market therefore requires the

Table 2.1 Surviving in a competitive global world

Table 2.1 (continued)

Looking at each of the above in turn:

2.1 Seeking raw materials globally at lowest possible cost

4.2 Distributing knowledge throughout the organisation and its partners

2.5 A Case in Point: The Rise of India

Inbound Vertically integrated organisation

Fig. 2.3 From a vertically integrated organisation to an allianced organisation