Sourcing Speak

Many years ago, I walked through a client’s IT development organization where all the “Onshore” resources from the client’s ADM provider sat in a sea of cubicles. I was there to identify the causes of some issues that had been troubling the relationship and recommend solutions. Having reviewed the contract before the walkthrough, I wasn’t surprised to see a large supplier team present at the client. What did surprise me was how all of the “Onshore” resources appeared to be from the same offshore location where the supplier was based.

Prior to this encounter, my previous experience was that “Onshore” rates typically applied to the client’s former US-based, rebadged resources or other U.S. based employees assigned to the client’s account by the supplier. But something was different this time. It turned out to be my first introduction to “Landed” resources – foreign workers performing onsite work under short term visas.

Given the cost of transportation, visas and temporary living arrangements, I assumed that in order to compete with U.S. Based resources, the supplier must be paying a lot less for these resources. Otherwise, why would 100% of the resources be from offshore? When I asked about the salary cost differential, the supplier said that there wasn’t any and that “by law” they had to pay a prevailing comparable salary.

In a previous post, TUPE: Service Provision Change, we discussed that the UK Government had issued a Call for Evidence to review the current Transfer of Undertakings (Protection of Employment) Regulations 2006 (“TUPE 2006”) as part of its wider review of reforms to UK employment laws. The Call for Evidence concluded in 2012 and the UK Government has now launched a consultation on its proposal to amend TUPE 2006, which it believes will improve and simplify the regulations for all parties involved.

The Proposed Changes

The Government’s proposed changes to TUPE 2006 include:

2013 began with a flurry of articles about companies insourcing work or rethinking their sourcing strategies. The reasons for this vary by company, but often include a perception that outsourcing has not delivered the cost savings, innovation or other value the companies had hoped to realize, particularly in information technology outsourcing (ITO). In contrast, we continue to see high levels of satisfaction among companies that have outsourced facilities management and other real estate functions. This makes us think the ITO industry might benefit from some of the best practices used in FMO deals.

First, let’s define what we mean by FMO. FMO involves the outsourcing of functions necessary to keep a company’s leased and owned buildings operating. FMO deals typically include core functions like maintaining building systems, performing repairs, and handling custodial and landscaping work. They will often also include higher value services like energy demand management and procurement, space planning and support for critical facilities like data centers and lab space. They may also be part of larger outsourcing relationships in which a company outsources responsibility for managing construction projects, lease administration or brokerage transaction management. For companies with sizable real estate portfolios, the annual spend covered by an FMO deal can be in the tens of millions of dollars.

Now let’s outline some of the key reasons we think FMO deals seem to have a relatively high success as compared to other types of outsourcing.

A recent special report in the Economist focused on the general state of the offshore outsourcing industry, with a particular focus on the emerging trend of companies relocating the performance of IT services from offshore locations to locations closer to home in the United States (known as “re-sourcing”). The report cites a number of reasons for this trend, such as the increase in wages in offshore locations, performance issues by offshore service providers, and the inherent challenges posed by the distance between a U.S.-based customer and the offshore service provider. The Economist isn’t the only one to take notice, a recent article on CIO.com cited a number of similar factors contributing to the new attractions in keeping outsourced resources stateside.

The Economist notes that 67% of American and European outsourcing contracts have some element of offshore outsourcing, so most customers with any sort of outsourcing agreement are impacted by the changing landscape of the offshore outsourcing industry. However, deciding to move services back from an offshore location isn’t as simple as flipping a switch (or sending a notice of termination). There are major risks in terminating and transitioning IT services, and the service provider, having been notified that their services are no longer required, is hardly in a motivated position to help mitigate those risks.

Common risks associated with terminating an outsourcing contract include potential disruption to, or degradation of, service, loss of critical resources (e.g., people, equipment, software) and loss of historical knowledge relating to the impacted environment (i.e., scant or insufficient knowledge transfer by the service provider to the customer or the successor provider). Put another way, at the time when the customer is most vulnerable to service disruptions and unanticipated costs, the service provider has the least incentive to provide quality assistance and services. The question that follows is, what can a customer do to protect itself from the pitfalls of re-shoring services either by taking the services in-house or sourcing them to a successor provider?