Outsourcing Strategy – Successful Client-Vendor Relationship
Information technology (IT) offshoring grows rapidly along with the availability of developing client-vendor relationship in the case of offshore IT/IS outsourcing. The new realities of outsourcing and offshoring present information systems .. ment (papers # and #), vendor-client relationship. (papers # and. The list of lessons learned can suitably guide client and vendor firms in their to better understand and position the relationship for success.
Cost and Speed of Implementation Very generally speaking, an outsourced offshoring arrangement can cost less up front to set up and implement, and can be implemented more quickly, than a captive center. A pure captive center typically requires the parent company to make a significant up-front investment in time and money to build the infrastructure, hire the people, and meet the requirements of the local government.
A collaborative captive model may enable a company to set up an offshore center relatively quickly, but working with a vendor or joint venture partner may result in substantial financial costs.
Outsourcing Strategy – Successful Client-Vendor Relationship
Because of its potential short-term cost and speed advantage, outsourcing can be an attractive option for companies that are looking for more immediate cost savings and speed of implementation. When it comes to long-term cost savings, the difference between captives and offshoring may not be as clear-cut.
On the one hand, the greater control a parent company typically has over a captive can make it easier to negotiate changes to processes, service levels, and chargebacks with a captive than with an outsourced service provider. For example, one company that initially realized substantial savings by its cash applications process found, after changing its cash applications policy some time afterwards, that the policy change generated many processing exceptions at several times the original contracted cost.
Unable to negotiate changes to the contract, the company wound up paying the outsourcer significantly more than originally expected.
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Recent outsourcing contracts, for example, often include volume threshold flexibility clauses to avoid issues such as the one described above. The lesson here is not that outsourcing is necessarily more or less challenging than a captive model with respect to flexibility and cost, but that effective governance is critical to realizing ongoing value in either case.
Offshoring Support Services: Outsourced or Captive? | The Shared Services & Outsourcing Network
To determine the importance of flexibility in its sourcing arrangements, whether outsourced or captive, a company should always consider the ability of new service models and contracts to accommodate change when deciding what model fits its needs. A business that anticipates significant change — one that is pursuing an aggressive merger, acquisition, and divestiture strategy, for example, or that expects to grow or expand rapidly — should think carefully about how such events may affect its relationship with its support service providers.
The management time and attention needed to negotiate and resolve service level changes can be significant.
In our experience, negotiations with an internal captive center can be easier to revisit than discussions with outsourcers, which may be one reason for companies undergoing rapid change to consider a captive model. For these reasons, companies that have no local presence whatsoever in their country of choice may find an outsourcing or collaborative captive model more realistic than trying to manage the process of creating a captive wholly on their own.
One company, for example, that lacked a local hiring license to set up a service center in Panama turned to a BOT to serve as its legal agent in that country.
When the company obtains its own Panamanian hiring license, the employees will be terminated by the vendor and hired by the parent company. If a company employs business leaders in its home-country offices that are originally from the selected country, or who have extensive experience in that country, it may be possible to assign those leaders to oversee the development of a captive without assistance from a vendor.
This decision, of course, will depend on how much risk the company is willing to take and the level of trust it has in the leadership team to execute. Data Protection and Intellectual Property A company with a high degree of concern about data security, privacy, and intellectual property issues may be more comfortable with a pure or collaborative captive model, in which the parent company has greater control over both the information handled in the center and the people who do the processing than would be the case with outsourcing.
It can be challenging to verify that an outsourcer is following appropriate handling procedures for intellectual property, which can have regulatory as well as security and privacy implications. Access to Talent There are two considerations around access to talent that come into play in evaluating outsourcing versus a captive model.
The first question is whether a company can attract enough qualified people to staff the captive center. Because these markets are typically very dynamic, staying on top of the "war for talent" can be a daunting effort.
An outsourcer, besides having an established brand in the marketplace, may maintain a much broader recruiting and training engine to replace open positions, and is likely to have strong processes for recruiting, hiring, training and retaining offshore employees. A company without a brand in the local market may need to spend considerable time and effort to build one up before it can effectively recruit staff, which can be one reason for such a company to consider an outsourcing or collaborative captive model.
The second question regarding access to talent is whether the company is interested in using a captive service center as a recruiting ground for talent to transfer into mainstream operations. If the people who work at the center are employees, a company can identify and recruit those who contribute value or have "hot skills" important to the business.
This mining of talent would be impossible with an outsourced service provider. Additionally, any investment a company makes in training its own offshore employees stays within the company, at least as long as the employees remain at the center. Ease of Exit Companies generally find it easier to leave an outsourcing relationship than to close down a captive center.
Leaving an outsourcing relationship is usually a matter of executing the termination clause in the contract. Shutting down a captive center can not only be more time-consuming than terminating an outsourcing relationship, but also force a company to pay significant severance and infrastructure expenses.
Outsourcing Strategy — Successful Client-Vendor Relationship Outsourcing strategy is on the top list of the best techniques used by companies to grow their businesses. The advantages accruing from outsourcing outweigh any potential risk that may come with this business strategy.
Proper client-vendor relationship is necessary for successful outsourcing. A company should work hand in hand with an outsourcing company in order to achieve the best result.
As noted earlier, outsourcing is a team work involving both the vendor and the client. Proper relationship between these two parties to the contract is necessary for the success of the final outcome.
Offshoring Support Services: Outsourced or Captive?
It all begins with the selection process. A company should use the best possible selection process to decide who the best candidate for its outsourcing requirements is.
Among other factors, effective communication between the vendor and the client is the major key to achieving success with outsourcing strategy. This is a great way to get each party committed to the contract.
Also, any breach of agreement can be compensated adequately when a strong contractual relationship is put in place. Both the client and the vendor are bound by the terms of the contract.