Economic downturn opens doors, but more due diligence is necessary
Difficult economic conditions around the world have encouraged many executives to look at alternative service delivery models such as outsourcing and offshoring as a means of addressing various short- and long-term business concerns.
These models provide significant opportunities, but additional care should be taken to assess and understand the complexities of an increasingly volatile market. Only then can executives make effective decisions that will stand the test of time.
The financial crisis that began in the debt markets has now escalated into a global malaise affecting developed and developing countries alike. Stock markets around the world are in constant, unpredictable flux, causing a significant erosion of shareholder value. Volatility in the currency markets has exacerbated the situation and, from a macro-economic standpoint, growth in many industrialized countries is already in decline.
In the face of these unprecedented challenges, organizations typically “freeze” in an effort to minimize risks until more stable times. They tend to focus on immediate operational and tactical issues and defer mid- to long-term growth or improvement initiatives.
Don’t stand pat
Standing on the sidelines is not an efficient response in these uncertain times. Even in the best of times, outsourcing solutions require careful planning and structuring to deliver full value. The temptation now is to move quickly to extract additional value. But, with growing economic uncertainty and increasing market complexity, outsourcing arrangements demand a higher level of scrutiny and focus.
There are specific actions that organizations can take to review, refresh and reshape sourcing strategies, contracts and relationships to reflect new economic and market realities (see sidebar).
The current market conditions have provided new opportunities for organizations that are already outsourcing, or planning to outsource, back-office functions to reap financial and non-financial benefits from the arrangements. Greater market complexity and risk are concerns that require serious consideration, but they should not stop organizations from taking a step that could enhance flexibility and competitive strength when the economy recovers.
Madhav Murti is a vice-president based in the Toronto office of PricewaterhouseCoopers who specializes in offshoring and outsourcing advisory services. He can be reached at [email protected].
The big decision
Considerations for outsourcing in new economy
Organizations looking to enter new outsourcing arrangements should consider the following imperatives in the new market environment:
Scale and scope determination: Determine or validate the scale and scope of work appropriate for an outsourcing arrangement, with additional emphasis on options to accelerate the rollout or expand the scope to maximize any new value-extraction opportunities.
Service provider evaluation: Ensure evaluation of potential service providers includes a thorough assessment of the impact of the current crisis on current and future operations to understand the risk perspective as well as additional value-extraction opportunities. Focus on the service provider’s ability to service debt liabilities and fund required investments as well as any potential impact of commitments made to or by other clients within the portfolio.
Consider currency hedging as an important aspect of the business case assessment.
Enhance focus on risk assessment and mitigation early in the evaluation process. A more detailed due diligence process may be required with potential partners and service providers.
Structure of the arrangement: Consider new locations (near-shore or offshore) that may offer an attractive proposition to structure the delivery model. As service providers are moving towards periods of slower growth, encourage profit sharing and performance-based incentive arrangements.
Consider cost of financing leverage (access to capital at more attractive terms than service provider) to structure cost-effective payment terms.
Organizations with existing outsourcing arrangements should consider the following imperatives in the new market environment:
Business continuity: Assess and understand the viability of the service provider as a going concern. Review the service provider’s expectations and commitments in existing arrangements and identify areas that need additional focus. Direct special attention to obligations requiring additional investments over the next 12 to 18 months and consider alternatives where appropriate.
Scope change: Assess whether the objectives of the original business model and business case are still being met and have been adjusted to account for any change to the business strategy or requirements.
Consider the need to change the scope, scale, terms and focus of the current arrangement to reduce or increase commitment level.
Assess the current and future impact of the downturn on the service provider and determine its ability to continue to provide service and value. Evaluate additional service providers to either augment or replace current providers. Consider rationalizing the number of service providers under contract. Any evaluation of providers and the arrangement should allow for additional complexity factors.
Termination or renegotiation: Assess the likelihood the service provider arrangements will support evolving business needs in response to the downturn. Review and understand contractual obligations and rights. You may not be able to exit without penalties but in unprecedented times, both parties may be happy to renegotiate to release and re-allocate precious resources.
Consider adjusting location strategy in light of new opportunities. Engage immediately with the provider to minimize the impact of termination.
