Why Settle - Consultancy.nl Deloitte - Global... · (CEO Levi9) 4 Introduction. Why Settle for Less...

Version 1.1 Amstelveen, December 2009

Why Settle for Less in the Netherlands? An application of Deloitte’s global outsourcing survey for the Dutch market

3 Why Settle for Less in the Netherlands? An application of Deloitte’s global outsourcing survey for the Dutch market

Foreword

The economy has changed dramatically - the world has been hit by a financial crisis and economic recession. These developments have raised numerous questions: What effect does the recession have on current outsourcing initiatives? Are companies still satisfied with their outsourcing initiatives? In these poor economic times, are companies more inclined to outsource parts of their activities? And how is the Dutch outsourcing market coping with the recession?

To shed some light on some of these questions and to gain more insight into the recent developments in Dutch outsourcing activities, Deloitte conducted personal, in-depth, qualitative interviews with 31 C-level executives of organisations headquartered in the Netherlands.

Yours sincerely,

Stef Oud(Partner at Deloitte)

It has become clear that the economic downturn does indeed have an impact on the outsourcing landscape in the Netherlands - more than ever, outsourcing opportunities are regarded as a chance to reduce cost and support the overall strategy of focusing on margins rather than the top line.

For the coming period, the focus on reducing costs, increasing productivity and at the same time maintaining or improving quality will be the main challenge. Outsourcing in these difficult economic times could lead the way in this. We trust that this study and our outsourcing report is relevant for your organisation and that it also provides well structured “food for thought” for your aspirations in outsourcing.

Yours sincerely,

Bernhard van Oranje(CEO Levi9)

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Introduction


Background

Despite this apparently positive result, Deloitte believes that the true potential of outsourcing has not yet been fully achieved; hence the title of the report, “Why Settle For Less?”. To gain more insight into the recent developments in Dutch outsourcing activities, Deloitte conducted a study among C-level executives in the Dutch market.

This report presents the findings and impressions that were received during the personal in-depth interviews conducted by Deloitte with 31 C-level executives. The interviews were conducted in face-to-face settings, enabling vivid discussions and the exchange of opinions and explanations of points of view. A typical interview lasted for 1.5 to 2 hours and was conducted with respondents that had significant decision-making authority over outsourcing deals in their organisations.

The structure of this report and of the interviews follows that of the global report and is based on the different stages of the outsourcing lifecycle, answering the following vital questions:

• Rightsizingthedeal–Areyououtsourcingtherightthings for the right reasons?

• Buildingasolidfoundation–Haveyoudefinedandquantified what you expect from your outsourcing initiative?

• Vendorselectionnowmeanssomethingdifferent–Haveyouchosentherightserviceprovider?

• Strikingthedeal–Isyourcontractingprocessmutualand flexible?

• Afterthedealissigned–Areyougettingwhatyoupaid for?

In late 2007, Deloitte performed a comprehensive study to determine trends and developments in the global outsourcing market. After interviewing a group of 300 executives involved in outsourcing services, it appeared that overall satisfaction with regards to the Return on Investment (ROI) generated by the companies’ outsourcing initiatives was high.

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Results

“The next 5 years will see the majority of the activities that are still currently performed in-house being outsourced at a higher pace. This will be fuelled by the current economic crisis and its increased focus on cost reduction”


Dimension I: Rightsizing the Deal

More than ever, outsourcing is regarded as a means to reduce cost and support the overall strategy of focusing on margins rather than the top line.

Every outsourcing project is characterised by certain benefits that should be obtained and a level of risk that must be managed in order to realise those benefits. In most cases, companies have indicated that these benefits are of a financial nature. Interestingly, companies also admitted that non-financial benefits are often not well understood at the start of outsourcing projects and tend to be more difficult to realise than originally assumed.

The Dutch outsourcing market is relatively cost-focused; organisations might not be taking full advantage of the other benefits outsourcing has to offer.

The vast majority of the executives interviewed indicated that, when it comes to their largest outsourcing contract, cost reduction was the primary driver in their decision to outsource.

Although lower cost is a good way to “initially sell” outsourcing solutions, companies should also focus on maintaining quality service levels at the same time.

For the coming period, the focus on reducing costs, increasing productivity and simultaneously maintaining or even improving quality will be the main challenge.

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“We do not monitor the status of our outsourcing initiative well and are therefore unaware of the success of outsourcing”


Dutch companies seem to prepare their outsourcing decision rather well by setting up a business case and defining the sourcing strategy prior to their decision to outsource. However, they do not monitor the status of their outsourcing initiatives well and are not aware of the performance of their outsourcing deals.

Every organisation needs to be able to deal with changes in strategy, planning and its business environment. The business case needs to reflect these dynamics to ensure its relevancy and accuracy throughout the entire outsourcing lifecycle.

After the business case is set up, it is vital to plan how the performance of the outsourcing initiative will be measured, by creating a benefit and cost tracking plan as well as defining key performance indicators (KPIs) to monitor and track progress throughout the initiative.

The majority of the executives revealed that they had set up a business case and conducted a Total Cost of Ownership (TCO) analysis, but only a small number of interviewees reported having performed a financial assessment. Another interesting finding is that executives who had not analysed TCO reported that they would not consider doing it in a new initiative either, implying that they do not see it as an important aspect of their outsourcing initiatives.

The majority of our respondents also indicated that the decision for IT outsourcing, for example, is made either jointly between IT and business or that at least the business input is considered when IT decides to outsource. Interestingly, the execution of outsourcing isinmostcasesanITproject.Butitisoftenwrongtoassume that IT will also take care of benefit monitoring.

Dimension II: Building a Solid Foundation

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“Cost-cutting triggers resulting in a ‘shortcut’ in the vendor selection process can cause a mismatch of expectations, so take your time in vendor selection and evaluation”


Dimension III: Vendor Selection

Price is considered the most important criterion for vendor selection. The lack of emphasis on service quality is most worrying as this will result in future satisfaction constraints.

Vendorselectionisatimeconsumingandcomplexprocess but it is essential as it can make or break your outsourcing initiative. Investing time and effort into the vendor selection process will help you prevent having to stay with a sub-optimal service provider for years to come.

Compared to the results of our global survey, a clear shift towards the importance of price can be seen in the Netherlands. In the global report, pricing was seen as oneofthemostimportantcriteria.However,businessand industry expertise as well as customer service were just as important.

Nevertheless, the Dutch focus on price is not surprising as it is in line with the dominance of the cost reduction goal in the outsourcing strategies noted earlier as well as the tough economic situation organisations are operating in.

The prominent focus on cost reduction further strengthens our belief that organisations are taking a narrow view on outsourcing and are often neglecting its non-cost and transformational aspects.

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“Outsourcing contracts require the right level of flexible terms to deal with contractual pitfalls, in view of the strong increase in contract disentanglement”


Dimension IV: Striking the Deal

The majority of respondents have signed outsourcing deals with a contract period between 3 and 5 years. Compared to the global survey, Dutch firms tend to favour shorter contract terms compared to their global peers. This could be standard practice on the Dutch outsourcing market, but it could also indicate the tendency to avoid ‘lock in’ while keeping the flexibility to swap service providers if circumstances require it.

As contracts become more complex, there is an increasing need for flexible terms and conditions. Our research indicates that flexible terms in contracts are becoming a standard requirement.

Engaging with a single service provider that performs all the outsourced work is not always possible or desirable, so using multiple service providers is becoming more and more common. This also brings an advantage in terms of spreading the risks, though it increases the complexity of the deal.

Key components of the outsourcing contract are the Service Level Agreements and their associated pricing models. These should ensure that organisations get the correct level of service at the optimum price for the services the vendor delivers. A good contract will provide transparency in both of these areas and will reduce the chances of being surprised with additional costs or sub-standard service. In addition, the contract and vendor relationships should apply sound governance structures. This would support the efforts to keep service risks and unforeseen costs to a minimum.

Organisations feel less of a “lock in” effect with shorter contracts. Market changes, organisational changes, economic developments, and new outsourcing possibilities and trends can make it necessary to reconsider existing contracts.

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“In the past, we have seen that it is easy to blame the failure of an outsourcing initiative on the service provider, however, outsourcing failures often stem from issues within our own organisation”


Dimension V: After the Deal is Signed

In the current economic climate, there is no sign of an alarming decrease in companies being comfortable withoutsourcing.However,wenotethatthereisalsoacautious stance; overall, the vast majority of companies are moderately comfortable with outsourcing - which indicates that outsourcing is a viable option. It is certainly not yet a standard process estimated to be under full control.

Many executives stated that they experience poor qualityreporting.However,experienceshowsthatreporting often meets contractual standards, but does not meet the actual requirements for managing the relationship. This implies that reporting itself is not the only problem; the problem may be that companies do not themselves know their critical metrics. As one of our respondents stated clearly, “If the right expectations are set, service delivery is not a problem.”

The gap between contract reality and expectations cannot be bridged by basic relationship management alone. Organisations should view vendor management in a broader strategic context.

Strong vendor management offers a sustainable solution to get more value for your contract, as it can improve your returns, create a competitive edge, support the realisation of corporate strategy, and drive the performance of the vendor above and beyond the agreed levels.

Although organisations have implemented the basics of relationship management, many executives still feel that they do not reap the full benefits of their outsourcing deals. All executives surveyed encountered communication and relationship management issues at some point during the life of their outsourcing contracts.


Concluding remarks

Fully in line with the current insecure economic backdrop, outsourcing is a means to reduce cost and support the overall strategy of focusing on margins rather than the top line. Almost all the outsourcing basics are well thought through and secured within Dutch organisations, for example, a business case prior to outsourcing decisions and relationship and vendor management basics. Dutch companies seem to prepare their outsourcing decision rather well, however, the lack of monitoring regarding the status of their outsourcing initiatives from both financial benefit and sourcing strategy perspectives is rather astonishing. However,fromourexperience,thecommoncomplaintamong service providers is that client companies were not well prepared for outsourcing. Many organisations do not have a solid plan and lack the reliable operational data needed to build a solid outsourcing case. Furthermore, clients’ senior executives seem to have a very short attention span. So take your time - think before and while you act!

We believe that Dutch outsourcing practice is well beyond the early stages and is growing towards maturity. Tracking the benefit of the outsourcing deal should be an essential part of a company’s daily concerns. Senior management attention after the outsourcing deal is made is paramount to reaping maximum benefits. Thus, the “Why Settle for Less” remark is applicable to the Dutch market too.

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Contact

Stef OudPartnerDeloitte Consulting P.O.Box3765600AJEindhovenThe Netherlands t: +31(0)882881806m:+31(0)[email protected]

John RoelofsSenior ManagerDeloitte Consulting P.O.Box3001180AHAmstelveenThe Netherlandst: +31(0)882885366m:+31(0)[email protected]

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