Information Technology Outsourcing (ITO)

Jump to:

• ITO Introduction
• ITO Forecast
• ITO Marketplace
• Market Opportunity
• Outsourcing Adoption
• Selling Outsourcing
• Outsourcing Trends
• Outsourcing Key Performance Indicators (KPIs)
• Outsourcing Resources

An Introduction to ITO

 

While the market is highly fragmented with a variety of business models, -- ranging from staffing IT model, to data center hosting to solution providers, to consultants, and outsourcing companies  -- there exists significant growth potential as the number of businesses outsourcing continues to grow (nearly half of mid-market companies today at outsource at least one component of IT compared to only 1 in 5 a decade ago) and the scope of what is being outsourced continues to grow and evolve as well.

The business models that are most profitable and emerging as the leaders have a high degree of “recurringness” i.e. the revenue model is recurring revenue oriented with long-term client relationships coupled with multiple contacts representing products, services, and solutions.

 

While there are a number of IT service providers today, only a handful have well-defined industry client concentrations. Even fewer have well-established, multi-year managed service contracts coupled with an economically efficient services delivery model.

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ITO Forecast

At the core of the IT function, is the promise that IT will make the business more safe, efficient and productive.  The information technology and outsourcing needs of small and middle market companies are evolving and shifting towards being primarily "Business-centric" and "Worker-Centric"; as opposed to IT as a stand-alone function.

 

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The Mid-Market Outsourcing Marketplace

The outsourcing marketplace is a highly competitive and fragmented industry that is poised for enormous growth in the next decade as companies fight to maintain their competitiveness and profitability. Ephor Group’s continued focus on the outsourcing industry is driven by several key trends including:

1. The need for all small businesses and emerging enterprises to outsource multiple business processes and functions to remain cost competitive and to gain access to capabilities/expertise/resources/tools otherwise unaffordable;
2. Evolving market dynamics such as the increased need for mobility, risk management and governance requirements;
3. Highly fragmented market;
4. Economically efficient model driven by recurring revenues (long-term contracts, valuations, high switching costs);
5. Operational performance driven by people performance, scalable customer acquisition and cost models;
6. Increased dissatisfaction with service levels from Fortune 500 vendors presents small business and mid-market opportunities

The outsourcing marketplace is a multi-hundred billion dollar industry encompassing tens of thousands of providers selling hundreds of different products and services. When you consider that virtually every business outsources some business process, you can appreciate the total size of this unique marketplace. If you are an outsourcing provider, aggressively targeting small business and the mid-market enterprises, it is critical to secure your position of this marketplace. [ BACK TO TOP ]

Outsourcing Market Opportunity

In the early days, the term "Outsourcing" typically meant that a single process, such as payroll or benefits, was handled by a 3rd party. Today, the small business and mid-market outsourcing market encompasses almost all business functions and processes; essentially anything not deemed to be core or a competitive advantage can (and perhaps should) be outsourced.

Currently, outsourcing takes many forms as some organizations contract outsourcing service providers to handle distinct business processes, such as benefits management or marketing. And many organizations outsource entire functions. In fact, the majority of businesses outsource to three or more business processes ranging from very common (payroll, benefits, staffing and information technology outsourcing - ITO) to entire functions: financial and administration (F&A) processes, human resources (HR) functions, call center and customer service activities, procurement (supply chain) and logistics.

In fact, the average business outsources part or all of at least two (2) business processes and/or functions. Furthermore, once executives make the decision to outsource the number of processes/functions expands as evidenced by a recent survey: Over 75 percent of the finance executives plan to expand their outsourcing programs in 2010 and over 85 percent of the finance executives are satisfied with the benefits.

 

Not only are companies challenged with becoming more efficient to maintain the status quo, competition is eroding margins, globalization is causing changes in cost structures, and technology is either a hindrance or a helper.

 

 

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Outsourcing Adoption

Most Common Outsourced Functions and Processes

Why did outsourcing take so long to catch on among mid-sized companies?

One key reason is the lack of stable, sizable outsourcing partners focused on the middle market. Big consulting firms and outsourcing providers have not developed efficient customer acquisition and operating models to service the small business mid-market with their high set-up expenses and the shorter contract lengths on which many smaller firms insist.

While there exists a plethora of smaller, thinly capitalized operations – often offshoots of CPA or bigger company consulting firms that cover just one city or region, the market opportunity to solve the outsourcing needs for small business is prevalent.

Business segments typically outsourced include information technology, human resources, facilities and real estate management, and accounting. Many companies also outsource customer support and call center functions like telemarketing, customer service, market research, and web development.

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Outsourcing Types & Descriptions

• Business Process Outsourcing (BPO) is the contracting of the operations and responsibilities of a specific business functions (or processes) to a third-party service provider. BPO is typically categorized into back office outsourcing - which includes internal business functions such as human resources or finance and accounting, and front office outsourcing - which includes customer-related services such as contact center services.


• Financial Administration Outsourcing (FAO): Finance & Administration Outsourcing (FAO) is a maturing market, driven by the need to improve finance and accounting performance, flexibility, controls, and cost. Some analysts see analytical services superseding the FAO market over the next decade as organizations have data overload yet are short on analytical talent, and ripe with business challenges requiring decision-making information. FAO analytical services can provide:


• Process work to focus on decision-support and solving business problems using financial domain expertise, analytical tools, data simulations, and modeling.
• Leading organizations are looking at their entire life-cycle of financial management from sourcing (paying vendors) to customers (sales and collections).
• In this view, analytical services (e.g., revenue leakage, pricing elasticity, cash flow modeling, and market-mix/churn simulation) can be used to generate benefits beyond labor arbitrage and process standardization to improved cash flow, spending, sales, and market share. Analytical services are rapidly being seen as an extension of FAO and generating benefits outside the walls of the CFO’s organization. While the majority of work priced in contracts is full-time equivalent (FTE) or transaction-based, clients are looking for their FAO partner to take greater accountability for improved business results, such as days payable outstanding, days sales outstanding, and closing days. This holds especially true for companies that are looking to their FAO partner to assume responsibility for end-to-end process, supporting systems, and/or need more performance accountability than standard service levels provide. Depending on the FAO scope, another variation is gain-sharing, in which multiple companies invest to provide a capability or solve a problem and then split the benefits based on some predetermined formula. FAO agreements with these types of structures need a level of transparency, integration with the client, and partnership governance model to work effectively. It is becoming prevalent that more existing FAO relationships will evolve to incorporate outcome-based pricing, and captive-shared services centers will be pressured to contract internally at these leveraged market levels.


• Procurement Outsourcing: Procurement outsourcing is the transfer of specified key procurement activities relating to sourcing and supplier management to a third party — perhaps to reduce overall costs or maybe to tighten the company's focus on its core competencies. Vendor management of indirect materials and services are typically the most popular outsourced activity. Procurement outsourcing solution that addresses the total procurement value chain for maximized results, including sourcing, savings implementation, and transaction management.


• Human Resources Outsourcing (HRO): Multi-process refers to contracts that encompass more than one outsourced capability but do not rise to the level of covering most or all HR functions. Most of the contracts in the midmarket, therefore, are not end-to-end HRO deals that would be comparable to the comprehensive contracts in the large-company market.


• Recruitment Process Outsourcing (RPO): Encompassing recruitment and staffing this includes searching for and hiring new employees and a wide variety of services from job boards to staffing and relocation firms, testing and assessment technologies, applicant tacking technologies, executive search/placement firms, background checking services, etc. For the most part, this category ends when the employee is hired.
• Employee Benefits Outsourcing: This category encompasses a wide variety of employee benefit and related services from traditional health and welfare benefits to worksite/voluntary products, pharmacy benefit programs, benefits administration and communication software, third-party administrators, retirement plan services, and workers' compensation/disability insurance services.
• Talent Management: This category includes all the human resources services related to managing the individual once they are hired as an employee -- appraisal, evaluation, recognition, promotion, retention, and succession planning services.
• Training and Development: This category includes the many products and services related to training and developing employees from instructor-based training to eLearning solutions.


• Payroll Outsourcing: This includes everything from payroll processing companies to companies specializing in specific payroll and compensation services, compensation design, and salary statistics services.


• Compliance Outsourcing: This category includes all the services related to complying with and managing the various aspects of labor laws, labor relations, legislation, litigation, alternative dispute services, OSHA, HIPPA, etc.


• Knowledge Process Outsourcing (KPO) is a form of outsourcing, in which knowledge-related and information-related work is carried out by workers in a different company or by a subsidiary of the same organization, which may be in the same country or in an offshore location to save cost. Unlike the outsourcing of manufacturing, this typically involves high-value work carried out by highly skilled staff. KPO firms, in addition to providing expertise in the processes themselves, often make many low level business decisions—typically those that are easily undone if they conflict with higher-level business plans.

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Selling Outsourcing to the Small Business & Mid-Market

Economic conditions require employers to operate more efficiently and achieve more with fewer resources. But today's strategic partnerships are also about achieving ongoing efficiencies, innovation and improvement to the mutual profit of both partners. Outsourcing deployed effectively can reduce costs, increase agility, improve service levels.

Beyond startups, there is always a group or committee responsible for evaluating and purchasing outsourcing solutions. The sales challenge as a provider is identifying these committee members, their roles, and creating buying and sponsorship from all influencers.

Outsourcing Decision Drivers: The Two-Headed Monster

1. Cost/Value aka Price-to-Value
2. Relationship or Emotional Motivation of the Buyer

Both decision drivers are required to get a deal done.

What to look for in an outsourcing provider?

1. Pricing:
• Implementation Fees,
• Training costs
• License versus Subscription versus Pay-per-Transaction
  (pay-for-performance)
2. Services Delivery Model: Technology Augmentation versus Platform Providers
3. Holistic versus Point oriented
4. Flexibility and/or customization requirements
5. Success Stories

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Outsourcing Trends

Employers are looking at outsourcing to better control costs and remain flexible costs structures. Technology is also a major consideration as most companies do not want to manage multiple providers and point solutions nor do they want to re-invest in upgrades or replacements.

Prevalent Outsourcing Trends:

1. An opportunity for mid-market niche providers to emerge as major consolidation among the larger providers continues.
2. Buyer adoption will continue to prefer a “Phased” over a “Big-Bang” approach.
3. The demand for analytics will continue to increase.
4. Industry specialization will continue especially from services-oriented and labor-demanding industries.
5. Mid-market adoption will continue and more demand from manufacturing, healthcare, and services sectors.
6. SaaS adoption.
7. Shift towards more strategic projects.

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Outsourcing Key Performance Indicators

What Are the Keys to Creating a Branded Company in the Outsourcing Sector?

1. Vertical Practices and Solutions;


2. Perform Culture that continually innovates and improves account management, shared services, quality, and productivity;


3. Communication systems, vehicles and formalization; and


4. Engagement synchronization regarding the performance against targets/expectations:
• Advanced coordinated metrics,
• Shared accountability.

Outsourcing Key Performance Indicators:

"It's difficult for mid-tier companies to find a partner with the right organizational fit and scalability, particularly if they need services on site in a number of locations; however, forward-thinking organizations have adopted online services delivery models are realizing results." – Garry Meier.

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