CONTINUED pressure on corporate profitability and the ongoing need to increase the effectiveness of business support functions has driven interest in global sourcing to a new level. More than ever before, today’s business environment demands that firms develop and maintain a competitive advantage through improved service levels, lower costs and innovation.
As a result three areas of global sourcing – namely outsourcing, shared services and offshoring – are becoming entrenched business strategies to the point of giving rise to a new era of collaborative partnering.
The 2012 Slovak CEO Survey conducted by PwC and Forbes magazine shows a high interest in outsourcing as 33 percent of firms in Slovakia had initiated outsourcing of business processes or functions in the past 12 months.
Outsourcing may be a powerful competitive weapon for businesses but it is certainly a double-edged sword. When used strategically it has the potential to make a material impact on the company’s performance but if it goes wrong it can drag a company backwards and leave it scarred. That is because the implementation of one of these programmes is comparable to a major corporate transaction.
The difference is that a major deal involves only one transaction while an outsourcing arrangement is much more than a single transaction – it is an ongoing relationship with an external, independent entity. Processes might be stripped out of a company but the regulatory and reputational risks remain within it.
For this reason outsourcing cannot be treated as just another procurement programme, executed and managed by the purchasing department. The chief executive officer or chief financial officer must drive these projects or they will fail. Poor structuring or poor contract management between the provider and the company can lead to a breakdown in the relationship. Getting the right management team and governance processes in place for the life of the contract is critical for successful outsourcing.
Many companies have already outsourced their IT and back-office functions or established shared service centres for their support functions and processes. They are now outsourcing even core activities like research, product development and tax and legal services as globalisation and connectivity enable new ways of doing business.
When SSC is an option?
In reviewing traditional models, companies may find a shared services centre (SSC) an effective delivery option for their operational strategy, especially if they need to keep certain processes in-house. Companies state two major reasons for implementing a SSC: improvement in quality through standardisation and optimisation of processes and better services; and reduction of operating costs for human resources and infrastructure.
Achieving the fundamental goal of higher quality services at a lower cost requires more than just a one-off effort. Companies that have already established a SSC are confronted with a number of challenges, both internal and external. To address these challenges effectively, a SSC needs to constantly review which services it provides, its level of service delivery and the structure of the company.
For companies using a SSC, continued optimisation not only generates additional savings but can also create operational flexibility if using the right strategy. SSCs are often separate business units with their own organisational structure and the SSC can even decide to transfer selected processes to an external service provider.
Alica Pavúková is a partner of PwC in Slovakia, providing assurance, tax, legal and advisory services.
This column is prepared in cooperation with AmCham, the American Chamber of Commerce in Slovakia. www.amcham.sk