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Considerations for External Sourcing in Conjunction with Captive Shared Services

Bernhard Fischer.pngAuthor: Bernhard Fischer, VP Solution Mgmt. Shared Services, SAP AG

While the times are long gone when outsourcing was considered the ultimate evolution of captive shared services, it remains a challenge to unlock the maximum benefit of carefully mixing captive and outsourced delivery. Not only are most external sourcing decisions surrounded with political sensitivities but executing on them without negative repercussions over the entire life of the contract is an art.


This article will not elaborate on the politics of external sourcing but instead will discuss best practices to make selective outsourcing successful.

Make yourself a working commercial proposition to your outsourcing service provider

Your company has a long history in Human Resources, reflected in multiple management practices and systems. That makes you a unique client to any outsourcing service provider -unique in a sense that there is little to share with other clients and little economies of scale to be unlocked. 

Surely, there are fragments of processes that can be standardized, but handing over these process fragments to external party fragments process control and process governance.  And for your outsourcing partner, taking over your unique systems and processes is not attractive either. It would be a sizeable up-front investment with little potential for re-use and for economies of scale.

An approach that has become a de-facto standard in HR is to let the outsourcing service provider do what they do most efficiently:  source and manage personnel in low-cost locations. This externally-sourced Shared Services staff then logs on to your HR systems and operates your HR processes as if they would be your HR administrators, with the benefit being that you are relieved from the challenges of hosting a large labor force in a foreign location. You are relieved from the risk of hiring and firing staff as there are variations in work volume. And still you unlock the cost advantage of a low-cost location with immediate returns for your business case. Plus, the external staff can conduct your business as it is – no infrastructure standardization or process harmonization is required as a prerequisite to start reaping cost benefits.

Why is that a winning proposition to your outsourcing service provider as well?  The outsourcing service provider can focus on a capability he can easily multiply across multiple clients – host and manage staff. 

Minimize risk

Process definitions and process infrastructure are essential assets in conducting any business. Consider both handed-over to a third party for a time-period of 5+ years and you will have likely lost the capability to operate the process in question.

That is what happens in an outsourcing arrangement when you don’t just outsource labor but also process and infrastructure ownership. Theoretically this so-called ‘comprehensive outsourcing’ promises many benefits. But these are promises, while the risk of lost control is an unfortunate reality.

It is only a probability that the outsourcing service provider may go out of business or get acquired during the duration of the contract. But what is sure to come is the end of the outsourcing agreement and – at that moment – you are expected to regain control over the execution of the said process.  If you don’t retain that flexibility, you find yourself tied to your service provider and exposed to arbitrary changes of commercial parameters upon renewal.

People turn out to be the most flexible element in that equation. It takes longer to re-establish the system infrastructure and to re-establish working processes than it takes to hire and train staff.

The logical conclusion is once more to stay in control and ownership of processes and infrastructure and outsource labor. 

Drive business improvement

The outright sentiment in organizations that have outsourced business activities often is ‘why should we continue to invest in business process advances? If we do so the outsourcing service provider benefits and we bear the cost’. That’s a dangerous proposition as it paralyzes the organization and disables progress until the competition has overtaken it.

The outsourcing arrangement needs to support evolution of business practices. It is a common expectation that the service provider brings a wealth of experience to the table, instilling best-practices on your business.   But this is counter-intuitive to the paradigms of service provision.

It will be key to the longer-term success of the outsourcing arrangement to factor in your service provider’s position.  For them stability is good. It minimizes risk of interruption of operation and helps maximize profitability. For you, agility is key and that involves change.

If you want to retain your agility in an outsourcing arrangement, that provision needs to become a firm element of the contract from day one. Agility will raise the service price quoted by the outsourcing service provider, but if you try to escape that logic, you will find that service providers who negotiated to the lowest cost per unit, processed in a well-defined setup, will charge you excess premiums if you dare to change anything on that setup midway.

So what are best practices to consider?

      1. Own process definition and infrastructure, outsource the provision of labor
      2. Define service levels and cost based on the status quo of process definition and infrastructure setup
      3. Define change to be a foreseen element of the service contract
      4. Share gains from improvements of process or infrastructure with your outsourcing service provider. Insert a gain-share provision into the contract by which any cost-decrease or performance increase will be shared in a defined manner between you and your service provider.
      5. Make your provider interested to instill change. For example, define a bigger share of the benefits attributed to the outsourcing service provider for any changes initiated by the outsourcing service provider. But don’t go too far as this might result in a war for ‘ownership of the idea’.

Will an outsourcing service provider drive change even when you decide to own infrastructure and processes? 

Absolutely. They can bring their experience to the table and help you with ideas on process and infrastructure improvements. These changes will not require the outsourcing service provider to take major investment decisions and will not de-stabilize his arrangements for other clients.  With a gain-sharing arrangement in place your outsourcing service provider WILL bring their experience to the table and help you with ideas on process and infrastructure improvements. 

What does the above come down to?

There is imminent logic in the statistical fact that outsourcing labor and retaining process and infrastructure ownership is the most widespread setup.  And there is logic in the statistical correlation that outsourcing isn’t widespread and even less widespread at companies achieving world-class performance.

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However this alone isn’t sufficient. What is required to make the arrangement successful in the longer term is the evolution of people, processes and infrastructure from good to world-class. With gain-share arrangements in place, the outsourcing service provider will be have the incentive to to bring their process expertise to the table and support you in evolving your processes and infrastructure.


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