Jerry H. Seibert, Principal, Metrus Group
Delivering great value for stakeholders is an ongoing challenge for internal functions. Just as the organization must continuously respond to market forces, each department must adjust to the evolving needs of internal customers and changing technology. Furthermore, an organization’s ability to deliver on its value proposition to the customer and to fulfill the brand promise is only as strong as the weakest link of the value chain. That includes Shared Services and other internal functions that add or subtract value, and which often rely on outsourcing partners.
Yet for most functions, only about half of their stakeholders rate them as delivering good, or very good, value. In a Metrus Institute study which included respondents from more than 500 companies, the range of good/very good ratings ranged from 44 percent to 56 percent for groups including IT, HR, Finance, Procurement and Legal. Hardly a resounding endorsement.
Functions which were outsourced in whole or in part received even less favorable ratings. Why would this be? We would expect a specialist vendor to deliver better service, at a lower cost. Yet we have found that the more operations that are outsourced within a department, the less favorable the feedback from stakeholders.
Outsourcing can be a key mechanism for increasing value, but only if goals beyond financial savings are achieved. In outsourcing arrangements, financial goals are, in fact, met more often than not – at least 56 percent of the time. Cost savings are usually the primary incentive, so this is to be expected. But other goals are generally not met. Productivity goals are met slightly less than half the time (47 percent) and customer service and quality goals even less often (39 percent and 37 percent, respectively).
"The specific value drivers and their relative importance will vary from one company to the next, but these results underscore the importance of understanding the patterns"
From a holistic perspective, outsourcing is often not delivering the greatest return on investment that it could. Perhaps that is why in Metrus Institute research, companies that relied the most on outsourcing were less likely to be leaders in their industry.
In our research, the most common reason cited for failing to reach goals or targets was supplier capability, insufficient skills, knowledge or resources, which frankly begs the question of what criteria were used to select the suppliers in the first place. The second most common reason for failure was communication issues. Communication breakdowns and inadequate buyer – supplier collaboration make it difficult to align the supplier with the client organization. Also, the more reliant on outsourcing a Delivering Value beyond Cost Savings company was, the more likely it was to identify its own supplier management skills as a problem. Supplier management is a responsibility often given to individuals or groups who previously had some responsibility for delivering the same service in-house. Such experience does not necessarily translate into the ability to manage a complex vendor relationship.
How can we deliver greater value in these situations? Advanced analytics can help guide us. A large Metrus Institute study looked at four functions across hundreds of companies: Procurement, IT, HR and Finance. Using an advanced modeling tool known as Relative Weight Analysis, we were able to determine what factors were having the most impact on the value judgements of stakeholders.
For Procurement and Finance, the top value drivers were all about specific processes and deliverables, such as the purchasing process (requisitions and issuing purchase orders) or budgeting process (preparation, review and assistance with budgets). In contrast, the top drivers for HR and IT were more service related. For IT, it was possessing the required knowledge and skills, and for HR it was having the necessary resources to meet stakeholder needs. This focus on service dimensions rather than specific deliverables may reflect the higher frequency of direct interaction between each of these latter two departments and their stakeholders. Interestingly, that top driver for HR (having sufficient resources) was the least important driver for Procurement (14th out of 14 factors). HR typically has a broad portfolio of services, and stakeholders may see a disconnect between that scope of responsibility and the resources allocated to the function. The specific value drivers and their relative importance will vary from one company to the next, but these results underscore the importance of understanding the patterns.
What do groups that are delivering a high-level of internal value do differently? For one, they are more likely to ask for feedback from their stakeholders. About half proactively sought performance feedback, while just over a quarter of departments delivering lower value did so. They are also twice as likely to have mutually agreed on performance metrics, and three times as likely to have SLA's in place. These are the table stakes for delivering great value to stakeholders. But what happens when these basics are not met –particularly in cases involving outsourcing initiatives? This is an important question considering the resources companies invest in preparing to outsource, selecting a supplier and in managing the transition. We have found that over a third of companies have reversed course on at least one outsourced function, significant failure rate. They reported that the costs were not what they expected; there were surprises from suppliers, and internal costs arose that simply had not been anticipated.
This is a distressing pattern, given the transaction costs and displacement of talent that accompanies outsourcing initiatives. The benefits for units delivering high levels of internal value go far beyond meeting their targets and developing an outstanding reputation with stakeholders. By delivering better value and service, they are 4 to 5 times more likely to be cited as having helped their stakeholders achieve financial cost savings, better service, improved quality or increased productivity. In other words, they have a real and measurable impact on the success of other departments, which cascades upward to the success of the company.
There is a wide range of value being delivered by Shared Services and other functions which rely on outsourcing as part of their value equation. Best practices for delivering value include focusing on measurement and feedback beyond transactional satisfaction surveys. With solid, comprehensive stakeholder data, advanced analytics can be used to identify and prioritize key value drivers. Understanding such differences can help you structure the most effective outsourcing initiatives and avoid costly failures.