By Bill Huber, Director, CPO Services, TPI
As companies look for opportunities to apply outsourcing or offshoring to their business support functions, they rely on a business case to understand their best option. The most common (and “safest”) approach to developing a business case is to model estimated future costs for various solution options; largely through an adjusted projection of current and past year costs. Service provider pricing is inserted into this model in a way that ensures a rigorous “apples-to-apples” comparison.
The limitation of this approach is one of transformation. By modeling options on an “apples-to-apples” comparison, the result tends to be a business case based on a “lowest common denominator”. This type of normalized baseline is an excellent approach for cutting through the sales promises of various differentiating “bells and whistles” in the service provider’s solution design, and allows for consideration of additional value added services that can be reliably defined in the model. However even with such adjustments, the business case ultimately is completed on the basis of service delivery costs. As such, the only “transformation” that gets factored into the business case is generally the implicit change in the service provider’s pricing, which creates a reduced cost of delivery. Transformation with improved capabilities that create other benefits to the customer – i.e. improved business intelligence, reductions in receivables, or improved realization on sales contracts – tends to be a qualitative differentiator, but not explicitly built into the business case.
This creates a problem, because when customers negotiate outsourcing agreements their eyes are always on the business case. This focus tends to drive many of the “non-essentials” out of the solution in order to minimize the ultimate contract price and maximize cost savings. Thus the realm of the possible is overruled by the realm of the verifiable, and we often remove the budget that will enable much of the transformation. So how can companies develop a different type of model that will factor in the benefits and risks associated with transformation? The answer is often a situation-specific, rigorous model built around the unique transformational assumptions of the relationship.
I’ll be hosting a panel of executives next month at the SIG conference to discuss some of the approaches that they have taken. As the evolution of better industry standards will presumably create a better environment for transformation, we expect to see continued focus on this area in the future.
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