LOW LABOR RATES ≠ LOWER RESOURCING COSTS

As global firms respond to the post-Great Recession regulatory and economic realities, efficiency of the back-office has become critical to ongoing success. Firms have responded by moving roles to lower cost locations globally to leverage lower unit costs, either “offshoring” within the company or via outsourcing. However, for firms who were primarily focused on capturing the labor arbitrage, this was often done tactically and piecemeal and gains from global resourcing were offset by incremental demand (e.g., additional compliance) and incremental coordination costs.

Over time, many firms discovered that aggregate resource costs (i.e., costs of internal and external personnel), comprising 45%-65% of total costs, have remained impervious to efficiency efforts, and the path to a quantum increase in resource productivity seems elusive.

A driver of the apparent intractability is often the staff augmentation mindset of managers, with staff who just happen to work very remotely and/or for another firm. In such a model, the manager continues to have the responsibility and accountability for ensuring productive use of this capacity. The accumulation of such resourcing decisions over time often results in:

1. Intense fragmentation of resources, preventing any scale economies from being realized
2. Proliferation of low value roles being performed in high cost locations, by employees and/or external resources, i.e., resource value misalignment

INTENSE FRAGMENTATION

Exhibit 1 below illustrates the fragmentation we observed at a large operations organization: For several ops groups, the extent of fragmentation was perilously close to 1 resource per city[1]. The fragmentation observed was fractal, i.e., sub-groups within the ones illustrated were equally fragmented.

IT organizations suffer such fragmentation too, even those with significant IT outsourcing. Given the “service model” of staff augmentation demanded by firms, IT vendors have no incentive to be very efficient.

RESOURCE VALUE MISALIGNMENT

Across multiple clients, we have observed significant misalignment of the value of role performed by the resource and the cost of the resource, as illustrated in Exhibit 2. This issue can be particularly acute in technology functions, exacerbated by dependency on IT vendors for (too) many key roles.  A more optimal realignment across locations offers a very significant opportunity, given the dramatic cost differences.

Technology & Operations leaders facing increasingly higher efficiency targets and inheriting such organizations can deliver lasting transformation by evaluating their current resourcing models, and aligning them to improved operating models to ensure greater industrialization. As such functions & capabilities are not well developed in many organizations, Kepler Cannon has helped it clients

1. Develop granular visibility into current resourcing, operations and economics via Kepler’s Operating Model Analytics, which rapidly diagnose issues and identify opportunities for transformation
2. Define robust operating and resourcing models, and change the engagement model with vendors to better align interests of both sides
3. Manage the process of operating model transformation with minimal impact to the ongoing delivery of services being performed by those functions

The magnitude of the transformation challenge in fragmented organizations is high, but application of our approach to even a small set of functions/groups can yield significant savings that can help fund additional rounds of consolidation/rationalization.

[1] Kepler’s Fragmentation Index is analogous to the Gini Coefficient in Economics; Fragmentation Index = 0 means all resources in 1 location, while Index = 1 means each resource is at a separate location. Part of Kepler’s Operating Model Analytics