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This document is intended as a general primer for customers in outsourcing
transactions. As a general purpose primer, not all of the items in this
primer will apply to all transactions or issues. Although most of the issues
are of interest to both vendors and customers, this primer will provide
the backdrop for potential outsourcing customers in the Philippines, and
the current status of the outsourcing or IT-enabled services industry.
I. INTRODUCTION
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Outsourcing is not a new phenomenon, but it continues to evolve.
Early in October, 2002, the Philippines was identified by the Gartner
group as an “offshore destination of choice by global companies
looking for their backroom” . The release was based on a Philippine
IT competitiveness review which concluded that the Philippines is
an important offshore player. Apart from its educated and proficient
workforce, various factors point to the Philippines as a global outsourcing
choice, such as government participation and encouragement in outsourcing
investments in the Philippines. |
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A. |
Background |
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Outsourcing is not a new business practice. Companies
have always hired outsiders to perform certain services, or provide
consulting and advice, hence the term “outsource” or to
obtain support/functions or operations from outside resources.
There has been a fundamental shift, however, in the way businesses
approach outsourcing. No longer just a tactical solution for bits
and pieces of work in non-essential areas, outsourcing is now a
strategic imperative. Companies that wish to stay one step ahead
must use every tool available to maintain a competitive advantage.
Outsourcing important business processes, functions and services
that may not represent core company competencies, has emerged as
a key strategy for success in today's economy .
Primary market drivers is behind the intense competition and rapid
growth of the outsourcing industry around the world. These are:
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Globalization. As markets open worldwide, competition
heats up. Companies may engage outsourcing vendors to provide international
services. |
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The Internet. Barriers to entry, such as lack of capital,
are drastically reduced in the world of e-commerce. New competitors
enter the market daily. |
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Growing economy, complemented by competent and affordable
labor. Building a competitive workforce is much harder and more expensive,
but companies in advanced countries can afford competent processes
from countries that offer inexpensive labor. |
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Technology. Technology is advancing at such an accelerated
rate that companies often lack the resources, workforce, or expertise
to keep up |
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Deregulation. As private industries such as telecommunications and
energy deregulate, markets open and competition increases. |
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B. |
Outsourcing Categories |
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Outsourcing activities can be divided into three categories,
with vendors dedicated to each.
Business Process Outsourcing (BPO). Outsourcing an entire functional
area, such as Customer Care, Human Resources, or Manufacturing.
As businesses move from a task-oriented focus to a business process
oriented focus, they are more likely to outsource the entire process.
Information Systems Outsourcing. Outsourcing information technology
services such as help desks, data management, network management,
etc.
Processing Services Outsourcing. Outsourcing services such as payroll,
payment processing, financial transactions and data input.
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C. |
Benefits of Outsourcing |
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There are many benefits associated with outsourcing
business processes, services and/or functions. Among other benefits,
specialization by outsourcing companies result in increased quality
and efficiency of a process, service, or function. The clients can
also tap the provider's expertise, best practices and leadership.
By outsourcing, companies are freed from the risks, and expense
involved with costly outlays for capital investments and the related
operating expense. Clients also save on hardware and software maintenance
and upgrade requirements. Payments to outsourcing companies are
deductible as direct business expenses and will not have to be depreciated.
Contracting out non-core business processes and/or non-revenue
producing areas allow the client to focus resources on their core
profit-generating business
The client will no longer have to maintain its own staff and equipment
giving way for increased scalability and flexibility, and the ability
to respond quickly to changing market demands.
Companies that outsource may also experience reduced frustration
and expense related to hiring and retaining employees in an exceptionally
tight job market., reduced time to market for products/services,
and access to business opportunities through vendor network.
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D. |
Choosing an Outsourcing Partner |
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Once the company makes the decision to outsource, it
must create standards by which the prospective outsourcing provider
will become the company’s partner. The provider must not only
demonstrate its value-added capability, it must be able to quantify
the same. Pricing is also a consideration, and this is an advantage
since the market remains very competitive. An established provider
can readily provide you with references, and it should have a solid
reputation as well as expertise in your industry. The provider must
also be financially stable, and it should have a good cultural fit
with your company so as to avoid friction between your systems and
workforces and the provider’s.
In order to be able to determine the viability of a provider, every
bidder or prospective partner should provide you with a complete
submission of the following:
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Detailed description of services to be performed, "scope
of work" |
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Detailed description of vendor resources that will be
dedicated to your account |
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Transition team and process |
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Performance measurements |
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Performance standards and consequences/incentives for under/over-performing
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Reporting requirements |
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Confidentiality, ownership of data |
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Clearly defined escalation and dispute resolution processes |
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Emergency/contingency plans |
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The process of outsourcing begins before a provider
is selected; the following tabulates the questions companies must
ask before tapping an outsourcing provider: |
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Strategic Planning: Determine Company’s Needs |
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Before any external search begins, define the goals
of your company and the specific expectations for outsourcing. Address
your current situation and ask why the company is considering outsourcing
and what the company hopes to accomplish by outsourcing.
The company must ask itself if it is currently focusing on its
core competencies, whether it is utilizing personnel to their fullest
potential, and whether its present delivery system achieving company
goals.
Additionally, the company must conduct an internal cost analysis
Review the activity, the costs involved with performing it, and
the overall budget of the organization. Decide whether the company
should have an internal project team, or rely on an external consultant
to lead the selection process and the outsourcing services. In any
case, the decision-maker must have adequate knowledge and power
to make the crucial decisions. |
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With the budget figures in hand, revisit the company’s
vision and challenge it. Be sure you can realistically support an
outsourced solution. |
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Set Standards |
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If all indicators are still leading you to outsourcing, the next
step is to determine what capabilities are available in the industry.
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Request for Information. The request should contain a summary of
your project, and a list of questions for potential outsourcing firms
relative to your needs. |
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Ask firms to send you general information about their company and
services, as well as examples of services that are similar to the
ones you are seeking. |
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Send your request to a broad selection of firms, in order to screen
out firms whose capabilities and cultures do not match your needs.
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Once you obtain the responses, narrow the list of qualified candidates.
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Request for a proposal from the qualified candidates. This is their
opportunity to provide detailed information on how each player will
specifically approach your project. |
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Ask questions that help you gauge the vendor's method of delivering
services, its business philosophies, its experience with similar projects,
and its time requirements for implementation. |
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Evaluate Vendors/Providers |
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As the candidates draft their respective proposals, they will likely
need more information to craft their responses; be prepared to be
forthright about information and ensure the confidentiality of the
same through confidentiality agreements. |
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Host a pre-bid for the vendor candidates. These may be video conferences,
teleconferences or on-site sessions. These will enable you to present
your vision in greater detail, and illustrate current delivery practices
and technology at one time so all vendors get the same information.
In turn, vendors get to ask questions so they can customize their
actions or proposals as completely and as specifically as possible.
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Provide comprehensive information. Describe your operation, particularly
the specifics that are directly applicable to your project such as
systems, processes, and telephone call/inquiry levels. |
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Use the conference as an exchange of corporate culture. Try to get
a feel for how the vendor works, and for the compatibility of its
people with your own. In turn, provide the vendors with a realistic
picture of your company. |
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Review The Proposals and the Providers |
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Using standard evaluation and rating methodology, review the proposals
to narrow the list as appropriate to your project and other identified
needs. |
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After the proposals have been submitted by the vendors and reviewed,
it is appropriate to visit their sites. |
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Look over each vendor's operations. Note how efficiently the business
seems to run, the sophistication of its technology, and how well the
firm is organized. |
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Meet the people who will be charged with implementing your project,
as well as other staff members. This is another opportunity for you
to compare corporate cultures. |
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Request demonstrations of systems or procedures that may be used
in connection with your project. Also confirm that the vendor is flexible
enough to adapt its methods and systems to meet your company's needs
now, as well as in the future. |
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Ask your top candidates, up to three firms, typically to come to
your office and present their final proposals for the project. This
effort should be very specific to your needs, and include a refined
pricing schedule. They should be very clear about why they want the
work, and why they should be selected. |
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With all the information in hand, your company will be in the best
position to make the right selection. |
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5. |
The Contract and Execution |
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Once you have selected an outsourcing provider, your interactions
must take on a new level of detail. The first step is to negotiate
the contract specifics. Ask for the final and best pricing, and settle
on the price. Working with your vendor partner, specifically detail
the services to be provided.
On the other hand, execution and implementation of the outsourcing
agreement will require that the partner set up the system. There
must be a seamless transition and scalability with your system.
Scheduled testing and going live should be at set schedules, as
well as regular evaluation and maintenance. The operative word is
partnership, to emphasize the commonality of success as a goal for
both the company and the partner-provider. |
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