The Outsourcing Market Journey: From Lift & Shift to Transformation

The BPO market has seen considerable developments over the past two decades. It began with a  labour arbitrage model focused on “lifting & shifting” activities to low-labour cost countries with continuous process improvements and has now evolved  to business outcome based offerings that integrate business processes, applications and infrastructure outsourcing.

The new model brings considerable benefits beyond cost savings. Mature transformational outsourcing providers do not only generate labour arbitrage and efficiency gains over time but also ensure crucial business outcomes such as minimizing financial closing times, reducing inventories and receivables and limiting indirect procurement spend. The transformation approach is underpinned by best-practice methodologies and toolsets such as Capgemini’s market leading Global Enterprise Model (GEM).

Why the German Outsourcing Market is not as mature as other markets

Looking at Germany we do know that the maturity of the outsourcing market is not comparable to other countries and regions such as the UK, US and Northern Europe. One reason for this is probably the very important principle of “social peace” which in Germany is not only seen as an “economic necessity” but rather part of the collective consciousness of German society which constitutes a key component of the “social market economy”. This principle not only considerably reduces disruptions due to social actions but it is also a key criteria for foreign investors to chose Germany as a location relative to other European countries. In other words, the social peace in Germany has to be seen as both an economic and a societal asset. While this explains a slower development of Business Process Outsourcing (BPO) in Germany in general, it does not explain why most German companies who have shifted at least some of their production to low cost countries are often still hesitant to outsource administrative functions. This raises the question as to why  white collar workers are more protected under the social peace paradigm than blue collar workers.

Why do German companies still prefer Lift & Shift outsourcing?

What is even more difficult to explain is why a significant portion of German companies are not taking advantage of a transformational outsourcing approach despite the substantially higher  benefits beyond cost savings (which of course remain and integral and important part of any business case).  Instead, many seem to prefer the traditional “Lift & Shift” approach and seemingly want to repeat the same lengthy development journey that their more ‘outsourcing mature’ counterparts have taken over the past decades.  This can hardly be explained by the social peace principle because the social impact of “transformational outsourcing” is not really different from a “lift and shift approach”. In other words, the social peace aspect has a key impact on the decision as to whether or not to go down the outsourcing route but has no relevance on the type of outsourcing approach to take.

For those companies who are outsourcing as part of an urgent restructuring need it might be “subjectively” understandable to opt for a lift and shift approach to ensure rapid cost savings. However,  the transition approach to a more standardized and optimized business process is less risky and faster to generate higher cash-flows  – provided the outsourcing provider has an exhaustive and detailed proprietary best practice process model which is “ready to implement” with few adaptations to address specific business models and regulatory needs. But even “cash-rich” German companies who do not have “restructuring and time pressure” often seem hard to convince to decide for a more transformational outsourcing approach.

While there are certainly companies in Germany who are more innovative when it comes to BPO it will be interesting to see how the overall market will develop over the coming years and when more German companies will capitalize on the benefits of transformational outsourcing.