Get more from transformational outsourcing

By Randall Wiele 

‘Your mess for less’ is out. Transformation is in.

Traditional, large-scale labor arbitrage outsourcing deals that use offshore labor to lower operational cost are no longer state-of-the-art. They are being replaced by transformational outsourcing. The key distinction: in traditional outsourcing the focus is on providing the same or similar service at a materially lower cost (often referred to as “your mess for less”) whereas with transformational outsourcing the focus is on providing the function using a distinctly new and improved approach; hence, a transformation. The benefits of transformational outsourcing expand well beyond labor arbitrage and are typically measured via their direct impact to the business and performance:  increased revenue, faster speed to market, reduced functional cycle time, higher levels of actionable information, and increased customer satisfaction, in addition to lower cost.

KPMG recently worked with a health care payer organization that used transformational outsourcing in IT and operations to materially transform their business. Doing so provided access to new technology, automation of routine business processes, enhanced data and analytics capabilities, and provided access to new customer portal environments.

Over the years, outsourcing service providers have learned much from providing various processes to multiple clients in many different ways. They are taking this experience and leveraging it to develop standardized and improved solutions to deliver transformational business processes.

For transformational outsourcing to be effective, organizations must adopt these new business processes and allow the service provider to deliver them with minimal amounts of customization. While an organization could implement a customized, one-off solution, which would be a transformation from their current environment, that approach would become stagnant over time and require a larger investment. Additionally, customization will reduce quality and speed to market. That is why delivery using minimally customized managed services or as-a-service delivery models is key.

Partner to achieve synergies

Transformational outsourcing leads to internal transformation by interjecting an outside partner and using outsourcing as the driver. We call this “outsourcing-led transformation.” Without a partner, it is more difficult for a typical organization to change on their own. The reasons include:

• Scale – a service provider has additional resources that can focus on the transformation
• Expertise – a service provider that has developed an offering to provide a particular business process will have expertise that can aid an organization’s ability to implement
• Cost – the cost of implementing a service provider standard solution will be lower than an individual organization creating a transformed capability on their own
• Process excellence – the service provider solutions have been tried, tested, and improved over time with experience from multiple clients

Developing a transformation program that includes outsourcing as a driver can also provide change management, training, and other services benefits that can be used to further enable the transformation.

Enacting the transformation: Insource vs. outsource

From an ongoing operational perspective, there are two choices:

1. Outsource the building of the transformed service, but keep the operations internal
2. Outsource both the build and the operation of the transformed service

In the early days of outsourcing, the decision was to either outsource or build an offshore captive center. Often the expertise to build the center was obtained from service providers in a build-operate-transfer (BOT) model. Both outsourcing and captive centers provided the processes with minimal changes for significantly reduced cost.

The same model could work in today’s environment but, there are other considerations. One of the biggest is the service provider’s use of automation. Automation is a key driver of transformation and organizations tend to struggle with the build or buy decision relative to developing automated processes, often ending up with a hybrid model of both. There are reasons for each and organizations should develop a comprehensive approach to automation that maximizes the value. As they develop their approach, it is important they ask, “What additional value am I losing if I insist on providing the process with my own resources?”  In many instances the transformed service will involve a significant degree of automation, thereby rendering the resource decision moot; no resources required.

KPMG

The decision to use external services to provide internal business operations may be hard, but generally, the answer is obvious: Why recreate the wheel—and distract yourself from your core focus—when tried and tested solutions already exist? The ERP systems that run most organizations were once custom developed applications. Today very few companies would even consider developing a custom ERP system due to the time, investment, and expertise involved. Similarly, when standard services are available to perform internal functions that are not strategic and do not offer market differentiation, organizational leaders are wise to consider such options.

Realize the benefits now

Transformational outsourcing and outsourcing-led transformation provide significant benefits to organizations seeking to more quickly reduce cost and improve operational capabilities. Coupled with a change management program and stringent program management, the ability to transform is easier now than ever. So why wait? Let us show you how to improve service delivery, quality, and costs by exploring KPMG’s outsourcing library.