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In the Headlines
How the September 11 Attacks Changed Offshore Outsourcing

Everest Voice
Total Value Equation Focuses on Strategic Solutions, Not Cost

Everest Best Practices
How to Maximize the Alliance Factor in Outsourcing

Getting Hitched

Contracts and Negotiations
IT Contracting With the Financially Challenged Survivors of the New Economy

Focus on Healthcare
Maintaining a Healthy Output Swiss Hospital Makes Printing an Outpatient

Focus on Data Warehousing
No Matter How You Slice It: Data Warehousing Solution

ASP Focus on CRM
ASP Helps Hanover Direct Track Traffic

These days, many outsourcing conversations initially begin discussing cost savings. Companies are searching for ways to cut costs to buoy their earnings in this difficult economy.

Typically, they usually focus on a particular process like IT. For a company that generates $1 billion in annual revenues, the IT yearly budget could total $50 million. Outsourcing can typically save 10 percent or more, returning $5 million or so back into the company's coffers. While this savings only represents one half of one percent of revenue, it has a far greater impact on pretax profit and other needs of the business.

This type of outsourcing typically solves the immediate problem, but often times falls short of creating and capturing the real underlying value of outsourcing.

Discussions with the executive team often times reveal what they really want, and it's usually more than just fixing a single process. They are looking for a business partner who can help take them to the next level and add value, not just an outsourcing supplier who may be best at executing a single process. Together, the two partners can make an investment in the business that potentially will have a much bigger impact on the entire enterprise. We've found that if you look beyond a single process and take a broader approach the additional leverage and value can increase significantly. Often times the benefits for a single process solution such as IT can increase 10 fold. Using our IT example, a $5 million savings could increase to $50 million or more and result in a far greater impact to the business. Which sounds better to you - a 10% impact on a specific function, or a 5% impact on the overall business. You do the math !!

Successes like these have little to do with the server farms and desktops that an IT supplier typically worries about. It can be difficult to link IT initiatives with enterprise business problems since IT is typically viewed only as a business tool. The solution is to have a broader more strategic approach.

TVE^SM: Progressive Thinking, Strategic Solutions

A supplier can only produce that kind of impact by outsourcing across multiple areas. As companies evaluate an enterprise sourcing strategy, it becomes obvious they need a bigger framework to evaluate their options. At Everest we call this new concept the Total Value Equation (TVE^SM). TVE^SM is all about strategic thinking and fostering enterprise changes - and becomes a mechanism for transforming an organization by aligning outsourcing objectives with the corporation's core corporate initiatives. TVE^SM almost always implies some kind of reengineering between the enterprise's core and non-core processes.

To do this, executives must view outsourcing as a way to create and capture value, not just a way to save money. Outsourcing efforts that only focus on cost contribute significantly less value than those that impact the entire business. Instead, outsourcing with TVE^SM helps the company focus on total value and strategic solutions.

It is impossible to accomplish an enterprise sourcing strategy without support and participation from the corporation's highest executives and leadership. They must be the decision makers and coaches that can make things happen. This is top down driven, rather than a typical IT outsourcing engagement that typically has a bottom up processing orientation.

TVE^SM outsourcing also requires new types of service level agreements (SLAs) since the goals of the outsourcing partnership are now different. With TVE^SM, the supplier seeks to implement a business initiative to solve more than process problems.

TVE^SM also requires both partners to look at allocating risk and reward in a new way. TVE^SM often requires the supplier to make a substantial investment to accomplish the requisite reengineering. The partnership has to find a way to allow the supplier to recoup its investment and share in the added value (savings/profits) that are created and captures. Today suppliers are willing to invest in the green "Strategic Impact" zone of the chart because they understand the upside potential of these changes.

Currently, sophisticated and educated buyers are demanding better services at a lower cost in a down economy. Companies have to find a way to grow and maximize cash flow in this tough environment. TVE^SM is one way to frame these possibilities. At Everest, we evaluate outsourcing options in the context of business needs and the potential outsourcing can bring to the enterprise.

Lessons from the Outsourcing Primer:

• Outsourcing a process like IT can produce savings. Outsourcing across an organization has a greater financial impact on the corporation's bottom line than just outsourcing a process.
• The Total Value Equation^SM concept moves the outsourcing conversation from a discussion of costs to a discussion around value based on strategic solutions.
• TVE^SM almost always includes a reengineering between core and non-core processes.
• TVE^SM happens from the top down not bottom up. The top management must be the champions of TVE^SM.
• TVE^SM requires a new allocation of risk and reward since the supplier is making sizable investments to achieve maximum savings and profits.

Publish Date: December 2001

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Copyright © 2001 - Everest Partners, L.P.

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