The Extended Global Enterprise (EGE) is the next level of maturity in global business services. In this model, leading companies are going beyond labor arbitrage and transactional processing. Instead, they’re breaking down functional silos and assembling capabilities – whether retained, outsourced, shared or distributed around the world – into seamless processes.

Ultimately, any enterprise of scale will eventually need to pursue an EGE to continue delivering value in global services. But some organizations may be farther along than others. If your sourcing strategy is still uncertain, what should you do with your outsourcing contracts in the meantime?

The key is to build flexibility into long-term outsourcing agreements, enabling you to move forward with service delivery while the strategy takes shape. With the right contract structure, your current relationships can eventually be subsumed into a larger EGE initiative.

To keep your options open, consider stipulations such as the following:

• non-exclusivity, permitting you to use more than one service provider
• partial termination rights, enabling you to turn off certain parts of the services
• discrete pricing elements, ensuring that services in your contract are priced separately
• optimized term length, creating flexibility while enabling providers to recoup their costs.

Keep in mind that just because an EGE may be on the horizon doesn’t mean you have to renegotiate every deal. You may have the flexibility you need in smaller, shorter-term agreements. For others, it may come down to timing: Depending on the schedule for an EGE implementation, it may make more sense to let your contract ride out than to renegotiate it.

The point is to look at your current contracts with an eye to the future, addressing short-term tactical requirements while keeping a flexible position should the strategy change.

For more information on creating flexibility in outsourcing contracts, please see our paper Keeping Your Options Open with Flexible Outsourcing Agreements. For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

KPMG Management Consulting recently completed a market study assessing how North American-based medical device firms are approaching efforts to improve to global business services (GBS). Other KPMG research conducted across multiple industries typically finds firms employing a mix of shared services and outsourcing efforts, along focusing on improving efforts already in the field, as the top means to achieve these goals.

While shared services and outsourcing are tools being employed in the medical device industry, the more traditional approaches of internal process improvement or process re-engineering was the top means cited both to improve service delivery as well as reduce service delivery costs (see figure below).

Top Means to Improve Service Delivery/Reduce Costs

KPMG research and client experience has found that many organizations feel that process improvement efforts can only take them so far. Often more radical change, in the form of shared services or outsourcing, is required to take efforts to the next level. It is possible that for participants in this research study greater use of shared services or outsourcing could result from the process improvement efforts. Or it could be that medical device firms place less value on shared services or outsourcing, though the study did find satisfaction levels with outsourcing for those firms that had undertaken it in line with other research findings.

For many adopters, shared services have delivered early gains but then improvement efforts have slowed or stagnated and outsourcing efforts have hardly been the panacea envisioned by some of its adopters. This being said the use of shared services and outsourcing continues to grow. Recent research conducted by HfS Research found that across major industry groups more than 70 percent of firms currently using outsourcing plan to expand efforts in the next three years and more than 50 percent of shared services users plan to increase those efforts. It’s these growth levels that create the foundation for and drive the maturation of global business services.

The best means to improve business services delivery and improve cost levels will vary across different industry groups as well as geographies and economies. It is important, however, that organizations assess all available options and tools as their disposal, recognizing the best solution is often likely a complex mix of multiple means and methods.

For more from KPMG on shared services and outsourcing, visit the Shared Services and Outsourcing Institute. For KPMG’s latest thinking in the Healthcare industry, visit the Healthcare and Pharmaceutical Institute.

When you established your IT outsourcing agreement, you probably did the deal and put it in a drawer, so it may have been a few years since you’ve thought about IT contracts. But now that your contract is coming up for renewal, how can you make the most of the next generation?

The IT outsourcing market has matured since you signed your original deal, and price is no longer the No. 1 driver. Indeed, there’s only so much you can squeeze your service provider on price before you start squeezing quality as well. Instead, next-generation deals are about improving service delivery, managing risk, staying current with the IT market, and positioning your business for an uncertain future.

As you prepare for renewal, consider these five factors:

1. Partnership and innovation. Look for your service provider to step up as a true partner on innovation. That could mean making investments to solve problems or providing industry insights to help you excel against the competition.
2. Cloud computing. Cloud solutions are not one-size-fits-all, so make sure your contract has the right solution for your company’s needs.
3. Flexibility. As your business continually adapts to the marketplace, your ITO agreements should be adaptable as well – in terms of the commercial offering, contract terms, staffing and delivery location.
4. Price. Price will always be important, but keep in mind that next-generation contracts usually don’t offer as much opportunity for price reductions as the first time around. Remember that a myopic focus on price can threaten the quality of operations.
5. Cross-functional service delivery. Consider how IT services can drive new value by improving back-office functions throughout the enterprise.

To learn more about these considerations, please see our white paper IT Outsourcing: The Next Generation. For more from KPMG on this topic, visit the KPMG Shared Services and Outsourcing Institute.

KPMG recently released the results of its inaugural real estate and facilities management (REFM) outsourcing Pulse survey.   This survey is the newest additional to the Pulse family of research studies.  Results from the REFM Pulse are based on surveys and interviews with more than 200 end-user organizations and REFM service providers globally.

The traditional REFM service delivery model was to perform all activities using internal resources.  Over time outsourcing has become more common with leading organizations today focusing on how to enable integrated facilities management programs, often on a global scale.  Most end-user organizations that outsource REFM services prefer to have in-house staff perform most of the more strategic and management-related activities.  This is changing, however, as a growing number of service providers are demonstrating advanced capabilities enabling them to move up the value chain in terms of services offered.  They are becoming better able to integrate into existing business operations to provide more high-value and strategic services (e.g. portfolio strategy planning).

Exploring the trend, KPMG polled REFM outsourcing buyers and service providers on changes to demand and preferences for a range of outsourcing delivery and management model options.  The emphasis was on to what degree are buyers moving towards a more holistic and integrated management model across the totality of their REFM outsourcing efforts.  The issue tested was whether buyers, as they become more sophisticated and their REFM outsourcing efforts more complex, will move towards a more portfolio-based approach to managing their outsourcing efforts.

Addressing this point, REFM Pulse respondents ranked changes in service delivery model preference on a one-to-five scale, where one represents significant decrease in preference or demand and five represents significant decrease in preference or demand (see figure below).

There was general consensus between buyers and service providers on the direction of change in demand for various REFM sourcing models.  Scored highest by buyers at 3.27 on the one-to-five scale was bundle increasing number of individually contracted services, but retain internal control over high-level management functions of services. Service providers scored this approach even higher at 3.57.   Ranked a close second by buyers at 3.23 was bundle and outsource increasing number of individually contracted services, and outsource key management functions of services in a model such as Integrated Facilities Management (IFM), including transfer of personnel to provider.  Providers ranked this approach at a 3.87.  Ranking on the lower end of the scale were trends of continuing to manage multiple services with individual contracts and reversing REFM outsourcing investments by insourcing services currently provided by service providers.

These results support the trend towards more bundling of REFM deals as well as the growing acceptance among buyers to have service providers perform key management functions over those outsourced activities.  This is not to imply this is the best course of action for all buyer organizations, but rather highlight the increasing sophistication of both the buyer side and the sell side in the REFM outsourcing marketplace and illustrate what is being pursued in more sophisticated scenarios.

For more from KPMG on REFM, including the full REFM Pulse survey report, visit our library.  Be sure and read our related blog, Taking a Pulse on the REFM Outsourcing Market.

KPMG LLP (US) and KPMG Holdings Limited (UK) recently released the results of its inaugural Real Estate and Facilities Management (REFM) Pulse survey.   This survey is the newest addition to the Pulse family of research studies.  Similar to the other KPMG Pulse surveys, this study assessed current REFM outsourcing market trends and conditions, deal drivers, challenges and service delivery models, global REFM sourcing trends, and REFM outsourcing deal attributes.  Results are based on surveys and interviews with over 60 end-user organizations undertaking REFM outsourcing efforts and over 130 REFM service providers.

The challenging business climate that exists is exerting great pressure on end-user organizations to reduce REFM costs and improve their process performance and their global delivery and operating models.  For many organizations, REFM costs are the second largest cost behind personnel.  Outsourcing REFM services has become a compelling solution for many firms that can potentially reap annual savings from outsourcing of 7 percent to 20 percent off of pre-outsourcing levels (based on EquaTerra* and KPMG member firm client engagement experiences).

The growth of REFM outsourcing is part of a larger trend of how organizations deliver and manage core operating systems (e.g., REFM, IT, F&A, HR, customer care) globally. Leading organizations today employ a broad range of service delivery models and techniques, including alternative delivery models such as shared services centers (SSCs), offshore captive operations, and IT and business process outsourcing (ITO/BPO).  KPMG member firms have developed a model labeled the Extended Global Enterprise (EGE) that provides a framework to design, build, deploy, and manage service delivery globally.

The traditional REFM model was to perform all of its activities using internal resources.  Over time it has evolved from out-tasking, outsourcing (bundling of services), and integrated facilities management to a global integrated facilities management model—an REFM instantiation of the general EGE framework.  Most end-user organizations today still prefer to outsource REFM tactical services and have in-house staff perform most of the strategic activities.  However, a growing number of service providers are demonstrating advanced capabilities enabling them to move up the value chain in terms of services offered.  They are becoming better able to integrate into existing business operations to provide more high-value and strategic services (e.g. portfolio strategy planning).

These trends are reflected in the bullish position REFM service providers are taking on near and especially longer term demand for REFM outsourcing.  Service providers polled in the REFM Pulse were asked about their projections on buyer demand for REFM outsourcing over the next 12 months (see figure below).  While 21 percent of service providers expect demand levels to increase over the next one-to-two quarters and an equal number expected demand levels to decrease, longer-term expectations are stronger.  The number of service providers expecting REFM outsourcing demand levels to grow increased for both three-to-four quarters and 12+ months out.

Higher, longer-term demand projections from service providers were tied to expectations for an improving economy in 2012 and less economic uncertainty among buyer organizations, a factor cited as slowing deal flow.  Recent market events, including the equity market crashes of early August, bring this position into question but the longer term trending for increased REFM outsourcing seems clear.

For more from KPMG on REFM, including the full REFM Pulse survey report, visit our library.

Would you like your service provider partners to deliver innovation in your organisation’s outsourcing contracts? The answer is probably yes. Can you define innovation? The answer is probably no. This is a scenario experienced by many managers of outsourcing contracts getting to grips with innovation.

Before continuing any further I should state what I believe to be the definition of innovation in the context of outsourcing relationships. This being: ‘innovation is new ideas or ways of working to drive commercial gain and competitive advantage.’ Innovation is not to be confused with continuous service improvement – in my view, it’s radical change rather than incremental change and is likely to create business-wide benefits. I should also clarify that innovation is not, in my view, applicable to all service provider relationships.  For example, smaller or highly transactional contracts may not benefit from focusing on innovation – the return on investment is unlikely to be appealing.

Delivering innovation requires more than introducing a contractual obligation for your service provider to be innovative. If you want to challenge your service provider to be innovative, it’s important to ensure that your organisation is up to the task.

Are you ready to innovate?

Do you have a role dedicated to leading and managing innovation activities? Clearly innovation is far more likely to be sustained where an individual or team has this specific remit. As well as the human resources, do you have the necessary financial resources to provide the budget needed to implement any new, innovative solutions?

Another question to address is, does your organisation have the right culture – is there a willingness to take the risks needed to achieve innovation? Just as importantly, your organisation should be willing to share its strategic vision and facilitate interaction between business stakeholders and service providers. This level of engagement is essential as the service provider needs a sound understanding of your business and future aspirations in order to incorporate innovation into the relationship. For the same reason you will also need to dedicate the time needed to maintain a good understanding of the capabilities of the service provider.

So, if you’re wanting to enjoy the benefits of innovation in your outsourcing relationships, you can’t assume innovation will happen by itself. Trust, open and honest communication and having a mutual understanding of financial and business objectives are central to successful innovation.

For further insights into the subject of innovation read the full Get in Shape if You Want to Innovate paper, and my recent blog co-authored with my colleague Karene House, Driving Innovation through Collaboration.

John Masley, Senior Manager, KPMG Shared Services and Outsourcing Advisory

Just about every outsourcing contract has a benchmarking clause. The threat of the word itself strikes fear in most providers. Objectively, can your business really manage the time-out, direct and indirect costs, and scorched relationships consistent with traditional benchmarking activity?

In the world of outsourcing, one size does not fit all.  No two operations are exactly alike. And even direct competitors within the same industry don’t have the same environments. Add the complexity of time, as each contract is executed under different conditions, and benchmarking becomes an exercise in dumbing things down to common denominators. Typically, the only party that comes out ahead after this exercise is the benchmarking firm who was paid to handle the study itself.

An all-too-frequent scenario

Let’s say there are two companies each looking for a service desk cost-per-user benchmark. Both clients are currently experiencing a cost of Y. Are they are both market-appropriate situations?  Let’s look deeper.

Company A likes standardization. They are running a single desktop OS, a single ERP system with minimal customization and three hardware models, all Windows based in a locked down desktop environment.

Company B is running three versions of desktop OS, dating back to N-2. They have multiple ERP systems, including a legacy system with a “black-box” interfacing to one of the other ERP systems. B has 10 hardware standards, including both Windows and Mac, and an open desktop environment, allowing users to load their own software without limitation.

Who is getting the best deal?

While Company A seems to have its act very together, Company B is getting a lot more out of its vendor for the money. But without a more complete business picture, companies can make all sorts of poor business decisions and evaluations of the current state.  Company A might be a single-location start up, so initial standardization is easy. Company B may sound like a mess, but it might have a long history, far reaching locations and an embedded culture that would require an extremely tedious, expensive, and tumultuous implementation to change.

In short, in a market where the service desk cost-per-user ranges from X to Z, Company A might just be paying too much, and Company B might be getting the best deal. But even that isn’t very refined because a deeper investigation is necessary regarding each situation:

• Scope of services delivered
• Special or unique terms and conditions
• Service level variations

Getting to YOUR best deal

So how do you really know the market price is in the X-to-Z range, and how do you know where you fit in the scale? The best way can be to work with companies who have a large, recent database of current contract signings.  As the current market is the real arbiter of what makes a good deal, you can find similar deals based on scope, service levels, volumes and geography. Where you sit in relationship to the range of these deals will give you a much better idea about the situation you have. With little effort, you can learn if your costs are in or out of line, if it’s time to renegotiate with your current vendor or time to start writing the RFP.

Here, you’ve been presented with some of the challenges associated with benchmarking along with the value in a more comprehensive market assessment approach; so it might be surprising to learn a benchmarking clause is still recommended and market standard. The obvious next question for you becomes, “Why?” Great question. That’s for next time.

Learn more about benchmarking through our other blog posts on Benchmarking and the Benchmarking page of equaterra.com’s library.

KPMG is pleased to release the Europe, Middle East and Africa (EMEA) region (RC) market findings from its 2Q11 Global Sourcing Advisory Pulse survey. These findings represent an extract from the Global 2Q11 KPMG Pulse survey, and are based on the views of our firms’ advisors that primarily support clients in the EMEA geographic market segments.

These Pulse surveys provide insights into trends and projections in end-user organizations’ usage of shared services, outsourcing and third-party business and IT services. They are gleaned from KPMG firms’ own field advisors who are working closely with buying organizations actively exploring or undertaking shared services, outsourcing, offshoring and other service delivery initiatives.

This edition of the advisor and service provider Pulse surveys reflects business and IT service market activity during 2Q11 as well as projections for the balance of the year. The survey findings point towards a ‘new normal’ in third-party service usage emerging that is more pragmatic, measured, cautious and realistic. Some of this is cyclical and some systemic, with a return to mega-outsourcing deals and vague, open-ended transformational efforts unlikely to ever return.

Reducing operating costs were cited as remaining a top priority for EMEA organizations’ service delivery improvement efforts, but buyers are also seeking a variety of other benefits above and beyond cutting costs. These include things such as improved global service delivery capabilities, greater financial and business process flexibility, and improved process performance. As a result, a key challenge remains balancing cost cutting and process improvement agendas and needs.

Buyers continue to face many challenges to successfully undertaking service delivery improvement efforts involving shared services and outsourcing, especially when pursued across multiple functional areas and on a global scale. The top challenges cited in EMEA include retained organization, relationship management and outsourcing governance issues, inadequate change management focus and capabilities, and balancing competing needs, agendas and requirements.

For the 2Q11 Analysis of Trends in EMEA extract report, click here.

How are you driving innovation with your outsourcing providers and, if you’re a supplier of outsourced services, how are you delivering innovation for your clients? What’s working and what’s not? How do you measure its impact and how can it be improved?

As part of a wider research programme, in May 2011 EquaTerra*, in conjunction with the National Outsourcing Association (NOA), launched a survey with senior executives from both the outsourcing user and supplier side to find out more about innovation in outsourcing.

Key findings included:

• Innovation is considered to be important, but it seems that buyers are not yet taking it seriously enough.
• Investing in (enabling) innovation is key and can increase quality, reduce costs and improve time to market.
• Both outsourcing users and service providers need to take a lead role and appoint named leaders for innovation.
• Mechanisms that support innovation should be implemented. This does not just mean an appropriate governance structure, but also an innovation framework, methodology, funds and training for example.

However, above all, the success of innovation processes should be measured, and this should be done collaboratively by both the client organisations and the service provider.

For further insights, see the management summary for Driving Innovation through Collaboration on equaterra.com, which covers some of the interim findings from the research; the full report will be published by the National Outsourcing Association.

*In February of 2011,  KPMG LLP (US), KPMG Holdings Limited (UK) and KPMG International acquired the business and subsidiaries of advisory firm EquaTerra Inc.

In the KPMG 2Q11 Sourcing Advisory Global Pulse survey, we polled the firms’ sourcing advisors as well as leading third-party business and IT service providers to assess the skills of typical end-user organizations around various cloud computing capabilities such as understanding the  technical underpinnings of cloud computing or assessing the risks associated with cloud computing.  Providers and advisors ranked typical buyers’ skills to perform seven different sets of activities using a one-to-five scale where one represents very unskilled and five represents very skilled (see figure below). Results show there is clearly room for improvement in typical buyer skill levels.

•     The highest score given by advisors at 2.39 on the one-to-five scale was for understanding the technical underpinnings of cloud computing—how it works. Service providers scored this skill slightly higher at 2.73.

•     Service providers scored buyers’ skills at 2.81 for understanding how cloud computing options can complement or supplant traditional enterprise systems and/or outsourcing investments, while advisors scored this skill at just 2.03.  The ability to determine where cloud computing fits into the service delivery continuum that includes shared services and outsourcing (delivery models themselves which that can embody cloud computing capabilities) is important to deploying an extended global enterprise (EGE) model.   It is a skill area, however, where providers, and even more so advisors, feel most users are challenged.

•     Coming in at the bottom of the rankings according to both advisors and third- party providers were skills relating to both sourcing and managing cloud computing initiatives.

Despite the potential of cloud computing, if buyers cannot successfully execute on its implementation, its adoption could create more problems than it solves.   It is not surprising that many buyers possess limited cloud computing skills given the immaturity and fast moving nature of the market. The situation is not dissimilar to the early days of the Internet when buyers struggled to define and execute on strategies to exploit its business potential. It is critical, however, for buyers to leverage past experiences, particularly with outsourcing, to accelerate ramping up cloud computing skills and knowledge. Many problems associated with outsourcing deals and major enterprise system initiatives arise from inadequate buyer business cases, sourcing, transition, and governance capabilities. This, too, will likely prove to be the case for many buyers with cloud computing efforts.

The key challenge for buyers in the short term is to address the less glamorous aspects of cloud computing.  This includes tasks such as defining and refining cloud strategies, assessing migration options for existing environments, and building realistic business cases that measure the true potential performance improvements and cost savings from cloud computing.   The biggest potential from cloud computing, however, will come from buyers’ capabilities to leverage its potential for more broad-based business transformation efforts.

Learn more about these trends by reading the full 2Q11 KPMG Sourcing Advisory Global Pulse survey.

The family of Pulse surveys provide insights into trends and projections in end-user organizations’ usage of shared services, outsourcing, and third-party business and IT services. The learnings are gleaned from advisors at KPMG’s network member firms, who are working closely with end-user organizations that are actively exploring or undertaking shared services, outsourcing, offshore, and other service delivery initiatives, as well as from leading global business and IT service providers.  The Pulse surveys are a continuation of a research program EquaTerra started in 2004.   The research program has been expanded under KPMG to include new editions that focus on topics such as cloud computing (due October 2011), real estate and facilities management outsourcing (September, 2011), and HR transformation (January, 2012) and well as a new edition (October 2011) of the Legal Pulse.