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Outsourcing vs. Shared Services: Factors to Consider

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by Kevin Lewis

As organizations grow in size and complexity, they often consider outsourcing some functions, developing a shared service approach or applying a combination of the two. Both approaches offer value, and each has specific strengths and advantages. An effective decision requires an objective appraisal of each approach in the context of business needs and risk appetite. Here are the ISG Top 5 key considerations to keep in mind when evaluating shared services versus outsourcing options.

1. The maturity level of internal processes. Clients should assess the extent of standardization and documentation of functions under consideration. Are tracking and reporting mechanisms in place? Are they accurate and relevant, and are they applied to enhance quality? If not, a third-party service provider can deliver the expertise, tools and technologies to apply process discipline and drive standardization.

2. The level of complexity of the interactions involved in a given process. While basic transactions might lend themselves to outsourcing, complex and unique functions are likely better suited to staying in-house. Client organizations should also consider the drivers of complexity: is customization necessary and does it add value? Or is it a result of inertia and established practice? If the latter, enterprises can leverage an outsourcer’s economies of scale and standard set of services.

3. The number of people performing a function. Traditionally, the sweet spot to engage a multinational service provider is 100 full-time employees (FTEs). As the outsourcing market becomes increasingly competitive, large providers are taking on 50 FTEs to gain a foothold and launch a “penetrate and radiate” strategy. If the scope is relatively small, a niche provider might be a better fit than a large multinational. Service bundling – whereby, for example, five functions involving 20 people each are combined into one initiative – is a potential option if the objective is to attract a larger player.

4. The geographic distribution of workforce performing a function. When identical or similar functions are performed in multiple sites without clear documentation or process control, decentralized “tribal knowledge” inevitably develops, with every location essentially doing things its own way. In such a situation, outsourcing can rationalize and standardize the multiple processes being employed. At the same time, if the multiple sites cross national boundaries, regulatory and legal requirements could make outsourcing a less viable option.

5. The existing operational environment and future requirements. A baseline of existing costs, service quality and process maturity is an essential prerequisite to an effective sourcing decision. Potential future costs must be assessed and can include the costs of setting up a facility as well as investing in technology for maintaining ongoing operations. While an internally managed environment may be cost-efficient, changes in the competitive landscape could require massive investments in new tools and technologies. In this case, an outsourcer could be more well-positioned to transition to the new environment.

For additional information on this topic, download  this ISG white paper or contact Kevin Lewis to discuss further.

 
About the author

Kevin brings more than 25 years of experience implementing and managing all aspects of global business services. He is a multi-disciplined leader with a proven track record working with cross-functional teams to accomplish targeted business objectives. Kevin has helped organizations in North America, Europe and Brazil create operational efficiency and business transformation through shared services, business process improvement, organizational reengineering and sourcing strategy alternatives. Prior to joining ISG, Kevin held positions with Infosys BPO, Everest Group, Metromedia Restaurant Group, Yum Brands and Price Waterhouse. He is a CPA and Certified Global Management Accountant.