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Location Matters When You Change Your Outsourcer!

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No matter how good the relationship with your outsourcer, the day will come when you ask yourself if your program could benefit from a new vendor. Of course, if your vendor relationship is strained, you will ask yourself this question sooner and more often. Ideally, you want long-term relationships with outsourcers, but if you manage multiple outsourcing programs, you must assume that some will miss their targets. You need to know if other vendors could do better. But how do you change your vendor?

The location of your outsourcing program is a major factor in how you approach a transition between vendors! Regardless of the location, any program can be successfully transitioned, but the farther the vendor is from your “home location," the higher the cost of transition. A domestic program is easier to transition than one located offshore, but not for the reasons you might assume. Let’s take a closer look at transitioning different outsourcing models…

IN-HOUSE: This used to be the most common form of outsourcing… for copy centers, IT centers, phone operators, and other co-located services. Outsourcers placed managers into the client’s physical space, and they took over the existing staff. The program started with a review of staff, and the formal transfer of some or all individuals. If the vendor has many other accounts in your area, they have the option of transferring replacements from nearby accounts.

Individual staff may want to stay with our account, may want move to another account, or may leave. In the UK, the transition process is governed by “TuPe” (Transfer of Undertakings, Protection of Employment), a law that addresses re-hiring and pay outs to employees when a new vendor takes over an account. Regardless of your location, taking over existing staff is an enormous advantage for the vendor, and dramatically lowers your risk. If your vendor has nearby accounts with similar staff, it provides additional insurance in case you lose staff. If your vendor has a lot of similar accounts in your area, it also means they have a training staff to document and update your training materials. This is the most flexible option, with the lowest transition cost.

However, the local market usually delivers more modest savings. Your cost drivers (space, labor, power, taxes, etc.) remain the same. If you need a cost improvement of 20%, 30%, or 40%, it's difficult to deliver with this model, without raising risk. You would need to aggressively re-engineer your work processes, and change your product or service in a way that is noticed by your customers. After you make those changes, you need to cut a high percentage of staff; if you don't cut staff, how will you deliver cost savings? Your vendor may also replace higher paid (more skilled) staff with less expensive (less-skilled skilled staff). The weakness of this mode is that when it is driven to very high cost savings, you give up the primary benefit, preservation of the skills and abilities of your old staff.

LOCAL: Moving to the vendor at a nearby office is more problematic than staying in-house. Every transition is unique, but the general rule is: the farther the move, the greater the loss of staff. The full staff may transition on day 1, but over the next 3-6 months you may lose 50% or more of your staff. Transition loss correlates with distance, but time may be a more reliable measure. A move of just 3-4 miles in a crowded city could add as much time as a 30 mile move in a rural area. A small move could add significant costs for employees: paying two bus fares, two tolls, higher parking fees, etc. The old office may have benefited from proximity to: school, day care, spouse’s work, shopping, etc.). If the new neighborhood is less safe or just less interesting, and if the actual office space is of significantly less quality than the old office, attrition will rise.

If you outsourced to reduce costs, some change is inevitable. If the new office is located very close to the old office, real estate and labor costs won't change significantly. Just like in-house, a local transition must eventually rely on the reduction or replacement of staff to generate savings. An experienced vendor may be more knowledgeable about wages and be able to tweak wages, but if they benchmark a $50,000 worker $30,000, that compensation must eventually be addressed.

NEARSHORE: Staying in your country, but moving out of the local labor market offers the opportunity to reduce costs. On shore cost reductions can match off shore, but transition costs are higher than the two earlier models. Business processes must be extracted and documented before your old staff leaves. Ideally, you would transition from the old to the new staff in stages, taking from months to years to complete (depending on the size and complexity of the transition). Many firms followed a staged transition when they first outsourced their business processes, but fail to accept that a staged transition is desirable between vendors who cannot transfer staff. If your operation is uncommon in the area (ex.: financial analysts in a small city in Alaska), more training time is needed before your new staff is ready. The difference between the skills you can hire, and the functions they will need to perform may imply weeks, months or more time to learn and practice these skills. For example, niche financial skills are easily found in New York. They can be found in New Jersey and Connecticut, but it will take a little more recruiting effort. Basic banking skills can be found in any large city, but expertise in these skills may be hard to find in a small town.

OFFSHORE: Offshore has the same problems as nearshore, but more so. Significant differences in laws and culture make certain skills rare in offshore locations. If you are moving work from domestic big cities to offshore locations certain cultural issue complicate the transfer of staff. Moving to the other side of the world helps with night staffing, since that’s usually daytime in India and other popular offshore locations. However, your daytime staffing is now the early hours of the morning for your offshore staff. Outside of a few big western cities, there are very few locations in the world that have a “night shift” culture, and working late at night is both difficult and undesirable. The most skilled outsourcing vendors can deal with these time differences, but less-experienced vendors are surprisingly unprepared for this issue.

Differences in culture, language, and education makes it more difficult to transition, but not impossible. This extra effort for transition can be translated into extra time…. For review of documentation, recruiting, training, etc. The problem is that during this transition period, you have staff working at two vendors, doubling the cost. Surprisingly, few clients have allowed for transition costs in their models. Of course, the client does not need to pay for the transition cost if the assumption is that the vendors will pay. If one or both vendors bear the cost of transition, the vendor that is not paid during the transition is at risk of pulling out resources before the transition is complete.

When you choose your model, you choose your problems. The specific risks that you need to address in a vendor transition (or taking an operation in-house), area a result of your outsourcing model. Models that offer the most immediate cost benefit today often have higher risks and costs later in their life cycle. All of these risks can be dealt with, but you first need to know that these costs exist, and that they need to be built into your model. Remember, any of these models may be feasible when you outsource, but if you fail to include all the costs, a transition to a more appropriate vendor, that will ultimately benefit your program, may look like a program failure in the short-term. If you understand the costs of transition, you retain the maximum control over your program!

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