Sourcing Strategy Drivers: Incentive to Automate?

By Peter Allen, Partner & Managing Director, TPI

In May, I posed Three Big Questions with regard to sourcing strategy. The last question is one of the more common concerning the alignment of incentives, specifically around the topic of automation and process improvement. The argument goes along the lines of: If you’re being paid for effort, what’s the motive to become more efficient?

Lest you think this is one more negative artifact of wage-based contracting, I’d remind you that this is a topic linked to the lingering issue of “innovation” (or lack thereof) through traditional outsourcing, too. 

And, while it’s more acute for considering the outsourcing option, I also hear it in the context of moving a process to a captive offshore location. 

At the risk of stating the obvious, service-based relationships tend to work when the objectives of the parties are made to align.  In the outsourcing industry, I’ve long felt that there is an inherent conflict for many relationships that lack an overt design around motivations for improvement. That is, most service providers tend to gear their client support organizations around an objective for revenue expansion/growth.  This is commonly diametrically opposed to the priority for the client, which is to spend less money.

We guide our clients to focus on enabling the providers with the ability to enhance their profit margins over time.  This means that they need to be remunerated for output, not for effort.  Conversely, our guidance for the provider community is to elevate the significance of profitability over revenue growth.

Doing this will motivate the parties to reduce errors (reduces cost from rework and rectification) and to commoditize/standardize services so that they can be undertaken by less skilled and lower paid staff.

Without a strategic sourcing design in place, it’s quite common for the “same mess for less” to result.  That said, I can tell you that the benefits of automation, process improvement, and leveraged investments are absolutely possible if the relationship is designed with that end in mind.

Comments

[Anupam Tantri]

Peter:

I wholeheartedly support your comment that providers need to focus on profitability or margin expansion over revenue growth. "Your mess for less" will only work by throwing in more bodies to support the work, resulting in perhaps higher revenue but will not result in margin expansion. Margin expansion will only come by taking cost out of the equation. The only way to take cost out of the equation is to relentlessly focus on process improvement and tirelessly work on process innovation by embracing technology.

Perhaps providers have strategically not given much thought to packaging high value (and hence high margin) work with the traditional outsourcing work to increase profitability. For example, providers could package high margin internal controls assessment with traditional transaction processing.

I am absolutely certain that under the current economic and cost pressures and head count objectives, clients will gladly pay a higher price if they perceive that they are getting superior value. And this superior value will come by focusing on the things I mention above.

If you or your readers would like to engage in this dialog further, please drop me an email.

Anupam Tantri