UK: Beyond Outsourcing – Part I - Understanding The Total Cost Of Ownership

Last Updated: 31 January 2012
Article by Deloitte LLP

If you're considering an accelerated business process outsourcing (BPO) contract, it's important to take your time and build a Total Cost of Ownership (TCO) business case first. Without this crucial step, you're likely to leave significant savings on the table, especially if your company has complex processes. This step is particularly important in view of today's challenging economy.

Deloitte's three-part series, "Beyond Outsourcing," outlines three key actions we believe organisations should consider in their efforts to maximise savings, reduce risk and identify the optimal functional service delivery solution for each segment of a business process.

Accelerated outsourcing usually works best for companies with mature processes. Such companies' ready-made, well-documented and integrated processes often can easily be migrated with minimal risk to business continuity. If your organisation has experienced increasing difficulty in extracting useful and timely information from data; has a global reach but lacks globally standardised processes, or has large numbers of employees performing small pieces of multiple business processes (fractional FTEs), then you're not alone.

In our experience, many large companies face situations such as those just described. After global expansions, acquisitions, divestitures and new product launches, these companies often must transform and modernise their legacy systems and processes in order to reduce complexity and cost.

We believe TCO is a key concept that you should consider in your efforts to address these common problems. It's crucial for you to look at how services are delivered globally so that you can understand the true cost of various business processes.

TCO refers to the real and complete cost of delivering services across a global organisation. A TCO assessment is an important first step in the broader transformation effort, because it can help to determine a cost effective way to consolidate, standardise, re-engineer processes and deliver services to the business. TCO involves identifying a comprehensive set of business levers that can help drive improvement, instead of any single lever in isolation.

Outsourcing is one lever that you can use to drive cost efficiency and service improvement. But failing to evaluate other service delivery (onshore, offshore, hybrid, shared services optimisation) and process improvement options can lead to costly mistakes and foregone savings.

The TCO-based business case

Measuring TCO goes beyond a simple outsourcing contracting approach. A TCO analysis can help to determine the complete costs of delivering business processes globally – those retained, shared and sourced – to provide stakeholders with a total cost view.

A TCO-based business case is an essential foundation of any outsourcing or shared services journey. Such a business case can provide a realistic and detailed view of savings potential across each sub-process and exposes levers that could potentially add or destroy value.

A thorough and complete TCO analysis should:

  • Baseline current internal costs, on both an operating and capital expense basis.
  • Disaggregate and include any corporate allocated costs.
  • Compare current internal TCO costs to external vendor TCO costs.
  • Identify financial and transformational opportunities.
  • Support a service delivery and sourcing strategy with process-driven, stakeholder accepted data.
  • Be an ongoing effort during contracting and transition, and over the course of the contract.
  • Be deployed as the measure for scenario analysis comparisons.

Every business process transformation life cycle should begin with a complete strategic assessment that includes a TCO analysis (see chart below).

The output of the above phases should be a global delivery model that minimises TCO by utilising the right mix of captive onshore and offshore shared services, retained and sourced services.

Outsourcing is just one part of a larger savings Strategy

Outsourcing is one "lean" business lever that companies can utilise. The sequence of levers and degree of impact depend on a company's characteristics, desired end state, and organisational awareness.

By focusing less on the "transaction" elements of outsourcing, a TCO business case can identify which processes are ready for outsourcing, those fit for low-cost shared service centres, and processes suitable for more traditional re-design. Taking a comprehensive, data-driven approach is critical in obtaining buy-in from stakeholders who need to fully understand why a particular path forward is truly the best of several options.

An effective end-to-end TCO effort should also support:

  • Executable recommendations that can add measurable value through a portfolio approach to service delivery. This approach can be implemented and operated together with a robust governance model designed to promote and measure success.
  • More value through a rigorous, strategic assessment that evaluates the fitness and readiness of specific business processes for outsourcing.
  • Data-driven decision criteria well beyond simply making outsourcing recommendations; spanning the entire outsourcing lifecycle, including vendor selection, due diligence, contracting, transition and vendor management, in addition to shared services optimisation and process redesign.
  • Sound, unbiased, long-term decision-making designed to mitigate risk by preventing expensive, multi-year outsourcing contracts that don't realise savings or meet service expectations.
  • Effective negotiation with vendors with the required detail to support hard savings targets; preventing vendors from making abstract savings claims.

Identifying savings gained over time via different service delivery options

Our experience has shown us that once an effective TCO model has been created, it can provide the critical inputs required for a detailed financial model:

  • An accurate estimate maximum (vs. just labour arbitrage) outsourcing/shared services potential scope.
  • An implementation schedule based on economic value to the enterprise.
  • A basis upon which to prioritise processes to be outsourced.
  • Processes and systems that require improvement.

After a TCO business case is completed, stakeholders can easily compare different paths forward on a processby- process level. If the TCO business case shows that a company is already efficient at a certain business process, there may be relatively little to gain from outsourcing. In such instances, further process improvement and centralisation may be the recommended path forward. On the other hand, the TCO business case can also help to determine which processes are performed at above industry competitive cost, making them better fits for outsourcing. Each TCO business case should estimate net savings that will be gained over time via different service delivery options at a process level. With this vital information in hand, stakeholders can more effectively determine whether or not alternative service delivery is worth pursuing.

Further, a TCO business case should be a living document that is continually updated and refreshed throughout the sourcing initiative and resulting contract duration. An effective outsourcing business case should not only look into the future, but also provide a mechanism to measure results over time and go beyond a simple vendor contract to provide real value to the organisation.

Benefits of this approach

In our experience, developing a TCO business case and complete service delivery model encompassing the retained organisation, shared services optimisation, outsourcing and proper governance can typically help companies to:

  • Reduce costs through labour arbitrage.
  • Reduce transaction costs.
  • Convert fixed costs to variable costs.
  • Improve shareholder value.
  • Reduce implementation costs.
  • Reduce days payable outstanding.
  • Improve cash management.

Companies are more likely to realise financial benefits in a timely manner if adequate effort is invested in diligence on the front end of the outsourcing journey.

Getting it done

A TCO analysis can provide an holistic view – beyond outsourcing-only approaches – that can support an optimised total service delivery model.

By using a data-driven approach in the analysis of endto- end processes, internal costs, and existing third party vendor fees, we have frequently seen companies uncover additional opportunities to boost bottom line savings and minimise implementation/transition risk. It is critical to note that the overall goals of the business must be tightly integrated with this exercise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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