The time for outsourcing to move from tactical to strategic is now. So why isn’t it happening?
By Jill Goldstein
With the development of new tools and capabilities in talent management, the practice of HR outsourcing has made significant advancements in its ability to deliver business value and strategic impact from its inception in the late 1990s. In best practice engagements, HRO is delivering—at last—on the transformational vision and promise of its pioneers. Analytics and industry-specific solutions that are deployed in a collaborative partnership between client and provider are enabling improved workforce performance and productivity. This is executed through better talent identification and development, more strategic workforce planning and management, and superior enterprise performance.
At the same time, it’s equally true that a significant number—if not the majority—of HRO engagements remain trapped in a transactional cost-reduction game that leaves both client and provider struggling to realize the full potential of HRO. Why are so many organizations unable to make the leap from cost savings to business value?
New research suggests that we may well be witnessing a contemporary example of the cobbler’s children that have no shoes. While the HRO industry has been intensely focused on developing the tools for identifying, developing, and managing enterprise talent, we have neglected to develop the skills and capabilities of the most valuable asset: the people responsible for implementing and managing HRO engagements. This is the key finding in a recent report from HfS Research, Is Good Enough Really Good Enough? The Great Talent Paradox in Outsourcing. In the people
+ process + technology = business transformation equation, talent seems to end up in last place in terms of establishing and managing outsourcing relationships.
The report points to alarming shortfalls in the investments organizations are willing to make in developing the people responsible for managing outsourcing relationships. According
to the research, barely one-fourth of enterprise buyers make formal investments in training and developing their outsourcing management staff in areas that are strategic to their business. Moreover, the shortfall coincides with a dramatic shift in the value proposition for business process outsourcing (BPO), from cost savings to business outcomes, and with the increasing adoption of outsourcing in middle- and front-office settings that serve customers directly.
The HfS research—based on a survey of 282 major enterprises engaged in outsourcing, as well as qualitative interviews
with buyers and providers—examines why many of today’s leading enterprises seem trapped in a “talent paradox” and suggests steps that governance leaders can take to better manage their outsourcing relationships for strategic and sustainable value.
Consider these findings:
• At a time when advanced outsourcing initiatives offer companies business value in their outsourcing relationships, two-thirds of all enterprise outsourcing buyers fail to achieve any value beyond cost reduction and efficiency. This “lights on” approach is preventing many enterprises from achieving greater business value from these relationships.
• Companies are surprisingly insecure about the quality of their talent. Barely one-third of enterprise outsource buyers believe their talent responsible for managing the service relationship have above average analytical skills or the ability to drive innovation and define business outcomes beyond cost and efficiency.
• Despite widespread awareness that their outsourcing management teams lack this expertise, and despite difficulty in recruiting the needed skills, few organizations are investing to develop these capabilities internally. Only 45 percent of companies have formal training programs in place for their outsourcing management teams in continuous improvement, and only one-quarter train their people in analytical skills. This has also proven to be a challenge for outsourcing providers. Only 40 percent of providers have formal training programs for their staffs to develop industry skills and only about half train their people in relationship management.
• The lack of career paths for outsourcing management staff leads to increased attrition, lack of motivation, and/or half- hearted performance. Collectively, the failure to invest in building skills is holding back value creation in the outsourcing industry. Only 34 percent of outsourcing management staff reports being satisfied with their career development opportunities.
These findings serve as a wake-up call for buyers and providers alike—particularly for HRO professionals—at a time when the outsourcing industry has evolved from a tactical cost-reduction exercise to a powerful enabler for achieving strategic business outcomes. Some enterprises are only just waking up to the reality that outsourcing is much more than a transactional contract. It
is an ongoing partnership that requires leadership, insight, and collaboration between an enterprise customer and its outsourcing provider in order to create real business value. Too many outsourcing relationships continue to focus on solving yesterday’s challenges, namely driving out labor costs, mitigating risks, and achieving a basic level of operational performance.
A Major Paradox
The study reveals that organizations are not blind to the importance of certain skills to achieve outsourcing success. In fact, two highly strategic business skills emerged among the top five objectives of today’s enterprises: defining business outcomes beyond cost reduction and efficiency, and influencing executives. The business objectives that have increased most in importance include improving analytics, defining business outcomes, and driving innovation. Sound familiar? All of these are critical to the successful realization of value from HRO.
However, the executives surveyed in this report said their teams are most proficient only in tactical skills, such as contract negotiations and adding additional volumes to existing services. This is because companies have appointed outsourcing governance leaders who tend to be operational managers with experience in managing large departments of operational personnel. They follow rules and processes to ensure a function operates efficiently, rather than seeking to align outsourcing relationships with corporate growth objectives and business outcomes.
Despite the gap, some enterprises are leading the way by recruiting transformational governance leaders. Successful firms emphasize relationship management, collaboration, and executive-influencing skills, which reflect the need to rely on and partner with service providers more. They view industry expertise and analytic skills as more important than operational talent—and that’s where they are relying on their providers.
On the provider side, high-performing BPO staff are evolving into business advisors, using industry expertise and process acumen alongside analytics know-how to identify opportunities that drive additional business value for their clients. At Accenture, for example, a significant effort has been made in building our people’s strategic skills, not only to help our clients become high performance businesses, but also to improve our own workforce retention and engagement. This has involved investments in such areas as industry alignment and training, analytics skills, and professional and leadership development. The results of our own “Grow BPO” program have been extraordinary. Retention rates have improved and the BPO line of the business has a significantly higher employee engagement score than the industry average.
Leaving Value on the Table
The bottom line is that many organizations are leaving value on the table when it comes to their outsourcing relationships. Two- thirds of outsourcing engagements result in little value beyond “operational” delivery. This means that the combined enterprise/ provider team is not enhancing its capabilities to access and interpret data, improve processes, or work together on a well- focused, regularly evaluated performance agenda.
The research separates outsourcing customers into three fairly evenly distributed camps based on their attitudes toward outsourcing and their relationship with their outsourcing providers:
• “Lights on” outsourcing camp. The main goal of these enterprises is to drive out expense without any costly disasters. They see little strategic value in the outsourcing of processes and so are not prepared to invest in developing the strategic abilities of the people who manage those relationships. These companies typically establish a small “no noise” governance team that cause management few headaches, as they are content to manage to the service level agreements and keep the proverbial lights on.
• Efficient outsourcing camp. These enterprises are happy to have saved that initial 30 percent or so from the outsourcing phases, but have likely hit a wall. They recognize that they can achieve more business value if they develop a management program to facilitate continuous improvement and efficiency gains, but are unsure where to start. They may not be investing to improve the skills of those running the outsourcing processes, but they know they need help in certain areas.
• Strategic outsourcing camp. These enterprises are experienced with outsourcing and have learned that simply moving work offshore only offers a short-term cost reduction benefit. They know that if they fail to invest in process improvement once these processes have been moved into their own shared service center or the hands of a third-party provider, performance of the business function will stagnate. They ask their provider to understand how to help define and improve business outcomes and know that talent needs to be managed strategically. They see the outsourcing people and retained organization as a team of employees who must be developed and regularly evaluated. They regularly set and monitor joint goals, and evaluate performance against the real business objectives of today, not from when they signed the original deal.
Although this research seems disheartening, the news is not all bad. Nearly all companies recognize the need to move beyond cost reduction with their outsourcing initiatives. As mentioned earlier, 83 percent of all executives surveyed listed defining business objectives beyond cost reduction as a top strategic business skill. CEOs know that their best chance at a competitive advantage lies within their people. Moreover, key goals of successful analysis, innovation, and business transformation hinge upon strategic skills.
Not surprisingly, clear expectations and communications can solve most of the issues outlined earlier. Enterprises can begin to leverage their talent and optimize the service of their providers by following these recommendations:
1. Manage governance organizations like business functions,
with specific value goals attached. Expectations about the value outsourcing can deliver have changed. The process needs to begin by training outsourcing governance teams to focus on business issues, not merely administrative cost reductions. In
far too many cases, tactically-oriented operational specialists and project management executives are left managing
the relationships. Formal training programs that develop communication skills, business acumen, and goal-setting capabilities, as well as their ability to align stakeholders and analyze data, are critical in moving outsourcing in the right direction.
2. Focus talent investments on enhancing core business skills, not replicating their provider’s skills. This means investing in
skills that will strengthen the organization’s competitive differentiation. When companies learn to leverage their service providers for operations management expertise, they stop investing in duplicating these talents. According to an executive at a large investment bank, “The core talent is what we invest in, and everything else is outsourced.” The bank focused on developing investment bankers and leveraged the outsourcing provider’s expertise in back-office processes.
3. Access providers’ strategic talent during the selection process. Operational capabilities are now viewed as “table stakes,” and so are no longer true differentiators when it comes to choosing a service provider. For example, one executive found that while his company’s finance and accounting (F&A) provider offered process expertise, it lacked subject competence. Meanwhile, its provider on the payroll side proved to be subject matter professionals, although weaker in terms of process. While the F&A service provider had not differentiated itself, the investment in talent by the payroll service provider demonstrated higher levels of customer value. At a time when strategic skills command a premium, quality providers make a serious investment in developing its team’s industry-specific and analytic skills.
4. Re-define skills expectations for the retainer team. Rather than focusing on operational skill sets, successful BPO companies must redefine the job competency models of individuals managing their service providers. What’s essential is a strategic view of the market forces that affect the customer experience. This may include analytical, influencing, process transformation and consulting skills.
5. Establish shared “stretch” goals that encourage the development and deployment of strategic skills on a regularly reviewed
basis. Many outsourcing relationships hit a wall, plateauing at some point. All too often, these relationships operate on the mentality of “if it’s not broken, don’t fix it.” The problem with this approach is that it causes the governance staff to become complacent and lose interest in challenging its organization and provider to continue to improve performance. Continuous step change is essential for enterprises that want to leverage their talent’s best capabilities, coupled with the need to focus on business issues rather than process performance metrics.
The picture painted by the report should be a wake-up call for everyone involved in the process of outsourcing. The research shows that the key to HRO improvement lies in the quality of the talent pool—both within the enterprise and its service provider. Too many outsourcing relationships are based on the goals of yesterday—reduced costs, maintaining service levels. We need
to make sure that our people are prepared for the challenges of today and tomorrow. With a little investment in our talent pool, outsourcing clients and providers can achieve the full potential of outsourcing.
Jill Goldstein is BPO offering lead for talent and human resources at Accenture.