Thursday, May 5, 2011

The Virtualization of Businesses: Controlling More With Less

Thursday, May 5, 2011

The paradigm shift

Very frequently I am asked for my opinion on where the outsourcing industry is headed. It's much talked about these days, especially now that the recession seems to be retreating. The market has reached an inflection point, say many. There is much more to it than that, if one were to analyze the underlying drivers.

[Deepak J. Patel]

Deepak J. Patel

Outsourced services that grew for years in different industries are continuing to do well. Most of the low-hanging fruit has already been taken up. It is therefore time to find new opportunities, and the time is indeed now, since businesses have clearly woken up to the imperative of becoming truly agile in order to succeed in the market place, especially with the recent economic turmoil and continued globalization of businesses. Outsourcing service providers thus have a unique opportunity to dive deeper into the core processes of their clients and move up the value chain.

Globalization's impact

Globalization has been a buzzword for far too long. But with it emerged the need for enterprises to focus on delivering the best quality product or service competing across national boundaries. There were also pressures from evolving consumer needs, tastes and localization. Globalization and personalization – customizing products or services "one customer at a time" – became the mantra. This means that at any given time, companies had their hands full understanding and aligning products to customer needs across multiple markets. And at the same time, they were reacting to competing offerings and innovations from new international players across national boundaries at unprecedented price points.

Given this scenario, it is easy to predict that a few years down the line most companies will be focusing only on their "core" business and will outsource the rest to specialized players focused in that functional area or process. With experience behind them (including a full blown recession), companies are beginning to re-think what should or can be outsourced and what should not, or cannot be. Much of what was core earlier is today considered non-core and is being outsourced slowly but surely.

We see a huge paradigm shift in the industry today and the scope of outsourcing has in fact quietly increased in manifold ways and is expected to continue to accelerate over the next decade. Outsourcing is now a strategic necessity, or lever.

How has the landscape changed?

Insurance companies that were averse to outsourcing in yesteryear due to a lack of expertise and data security issues today are readily outsourcing "core" insurance functions like underwriting, adjudication of claims, marketing, reconciliation, as well as back office functions like human resources, procurement and much more. In years to come, it will not be surprising that industries at large will focus on their product/service design, intellectual property, and a differentiated approach to the market and let specialized outsourcers take care of the rest of the value chain. This way, they get the benefit of leverage and world class service at attractive service level agreements while "variabilizing" their cost structures. That gives them the flexibility to scale up and down based on their needs and taking advantage of market cycles.

Even BPOs are outsourcing what they aren't best at. We have ourselves outsourced our HR and payroll processes recently. We know we aren't masters of the game there and do not need to be. These are best handed over to professionals. Not only do we get the required expertise, save on cost and time, but also leverage the aggregated scale of service providers. Another example that comes to mind is of companies that provide complete infrastructure solutions. It's a great boon for BPO firms that wish to expand quickly in different cities. They no longer need to buy or invest in facilities and find it more economical to acquire plug-and-play facilities by the seat and get going. At the same time, they have the flexibility to move out to a different location in response to client and market demands.

This will be a huge change in mindset which is also propelled by the fact that outsourcing has many more benefits than just cost reduction. It drives decreased time-to-market for new products and services, ensures a more accurate output since the work is now done by "category" experts and enhances "business knowledge" because of the up-to-date information and expertise companies get from their vendors.

Outsourcing for global competitiveness?

Building global competitiveness requires global competencies. To be globally competitive, companies need to focus on building competent skills in multiple processes in the areas of manufacturing, global sourcing and supply chain, human resource management, design and product development, financial operations, etc. If one could just outsource great chunks of this to an "expert service provider," it would improve the company's flexibility and value to all its stakeholders.

As a case in point, a leading manufacturer of athletic footwear decided to change tack and instead of producing shoes, its new mantra was to be a "sports and fitness company." Having decided that its core competency was not manufacturing shoes, but designing and marketing them, it became one of the first firms to use radical outsourcing techniques, divesting ownership of factories entirely except one small R&D site. Today, it is an iconic global brand dominating the sports and fitness space.

While it's a big decision for any company to outsource its processes, outsourcing is now altering the entire organizational structure. The opportunity is immense. Much of the market is still untapped and the face of business will change like never before in the coming decade.

—Deepak J. Patel is chief executive, Aditya Birla Minacs, a global business solutions company

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