The Guide to Smart Outsourcing (Nov 06)

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1 The Guide to Smart Outsourcing (Nov 06) JOSH BERSIN, PRINCIPAL, BERSIN & ASSOCIATES The outsourcing market is on fire, proclaims one industry insider. Overall, companies are spending more on outsourcing this year than last with the biggest spending increases in technologyrelated outsourcing growing about 35% over the previous year, according Bersin & Associates. The second fastest-growing segment is e-learning content development, followed by the outsourcing of integrated learning and talent management solutions. This area includes services for outsourcing HR functions, recruitment and hiring, and technology platforms for performance and learning management. THE OUTSOURCING LANDSCAPE As spending in learning outsourcing continues to rise, the number of options for learning and HR managers is also increasing. According to TrainingOutsourcing.com there are more than 2,000 U.S. companies with more than $1M in revenue for learning-related services. Today s corporate buyers have hundreds of service providers to choose from across five types of outsourcing services: >> Content providers >> E-learning content developers >> Technology providers >> Process outsourcing >> HR and functional outsourcing companies WHAT ARE HOTTEST AREAS FOR OUTSOURCING? >> The outsourcing of LMS and other learning-related technologies. This sector is growing at a rate of about 30% to 40% a year; growth will likely remain high as more companies move to on-demand and other technology-enabled learning offerings. In particular, the market for outsourced learning platforms which meet the needs of mid-market companies (fewer than 10,000 employees) is growing by more than 60% per year. >> Demand for e-learning content development is also high. Most businesses now have some experience with e-learning. However, as companies get their feet wet, they often find it more complex than expected. Outsourced content developers have established tools, methodologies, and libraries of content for reuse. As a result, prices for e-learning content development have come down. A well-designed online course can typically be developed for $20,000 to $30,000 per instructional hour and even less depending on content complexity.

2 >> End-to-end outsourcing This is where companies outsource the entire learning function to a third party, and is still a relatively small market by volume. Companies such as Avaya, British Telecom, Boston Scientific, Dupont, and AT&T have all outsourced major parts of learning and development. Such outsourcing projects are typically driven by particular business needs such as a restructuring or consolidation. While often initiated for cost-savings, the actual benefits of these programs usually fall in other areas, such as speed to market, improved quality, increased accountability, and meeting variable demand requirements.we believe end-to-end outsourcing will grow over time as providers become more sophisticated and drive down costs. Costs Savings According to a Fortune survey, 48% of companies look to outsourcing as a way to cut costs. Bersin & Associate s study titled The Economics of Training Outsourcing, found that companies outsourcing strategic learning functions indeed reduce costs. Survey respondents that outsourced: No matter how you look at the learning outsourcing market, the view is positive. Buyers continue to increase overall spending on outsourcing services and, recognizing economic opportunities, more and more vendors are entering the market. As competition increases, vendors are refining services and more accurately projecting costs. Ultimately, buyers benefit since they have more choice, more competitive pricing, and overall higher quality service. THE OUTSOURCING PAYOFF One of the big changes in learning outsourcing is its perception. Three years ago, when Bersin & Associates embarked on a first study of the outsourcing market, many professionals viewed outsourcing as a risk and even a career threat. Now, most see outsourcing as a necessary strategy for maximizing the efficiencies of their organizations and available budget. In large part, this is because the benefits of outsourcing are becoming quantifiable and proven. >> On-Demand Expertise As corporate learning becomes more dependent on technology, many companies find themselves strapped for the skills, experience, and budget dollars required to implement and maintain critical systems. Even if an organization has access to IT resources, often the complexity of LMSs and related systems is outside the expertise of IT staff. For instance, our research shows that the three primary challenges related to LMS implementation are customization to business needs, content integration, and integration with HR-related systems. The skills needed to address these challenges are not core to most training organizations, or even IT departments. Outsourcers can help companies cost efficiently address these challenges by offering standardized customizations that can be leveraged across multiple companies; through content offerings and interfaces designed and tested for integration; and through modules and interfaces designed to meet needs for HR-related functionality and integration. Most technology outsourcers have >> Spent 31% less on perlearner costs ($827 per learner compared to the overall average of $1,191) >> Had 26% fewer staff members per learners (7.8 per 1,000 learners compared to 10.5 per 1,000). >> Had smaller administrative staffs even if they only outsource technology functions. About 35% fewer administrative staffers than companies that do not outsource (.9 per 1,000 learners to 1.4 per 1,000 learners) and have about 25% fewer general support staffers (1.0 per 1,000 learners to 1.3 per 1,000 learners). >> Some aspect of their LMS and/or other learning-related technologies,saw a 60% reduction in ongoing operational costs, a 42% reduction in technical staff (as percentage of total training headcount), and a 16% reduction in implementation costs when compared to companies that internally managed all aspects of learning technology. deep experience in enterprise systems, databases, AICC and SCORM, web development tools, and networking all critical elements in an enterprise learning infrastructure. Just as important as saving significant budget dollars, outsourcing also helps training organizations move from variable to fixed cost models. Traditionally, training has been a variable cost operation. Costs were directly related to the number of students taught. On the positive side, variable training models make it relatively easy to predict costs. However, in times of peak or unexpected demands,

3 this model hits a wall. Typically, training organizations cannot meet surges of need because of staffing constraints. Outsourcing some learning functions helps organizations move to fixed cost models, where costs for technology, content, and staff remain largely constant, whether training 100 or 1,000 employees. >> Provides Strategic Focus Outsourcing gives training organizations the opportunity to focus on truly strategic priorities, such as performance consulting and business alignment, measurements and analytics, technology evaluations, and planning and budgeting. The Bersin & Associates training investment model recommends that 40% of a training organization s budget and staff resources should be directed to those programs and activities that are strategic, supportive of corporate goals, and designed to help the enterprise win its market. Most organizations fall far short of this target. By outsourcing nonstrategic learning functions, training organizations can more effectively focus on programs that address business-critical skills, competencies, and processes. One way outsourcing helps organizations become more strategic is by allowing them to more effectively deploy staff resources. As an example, the chart on page 28 shows that companies outsourcing their LMSs have, on average, a significantly higher percentage of content developers and fewer administrative staffers. Outsourcing helps these companies address a challenge common to most training organizations the development of relevant training content by making it possible to allocate staff resources to this critical function. OUTSOURCING ROADMAP: FIRST, KNOW THYSELF Outsourcing relationships can sometimes fail to meet expectations. Companies can pay too much for services received. Service providers may not meet expectations whether because engagements were poorly defined or were ill-matched for the tasks. Sometimes business units are dissatisfied with service. >> Outsourcing demands that you first clearly define your needs, goals, and budget. Before any training organization investigates outsourcing options, it s imperative to follow the Golden Rule of Outsourcing: First, know thyself. You must know your own organization inside and out before you make any outsourcing decision. >> A self-examination of the training organization should identify and document critical objectives, short- and longterm strategies, and organizational structures and processes. The evaluation should also include listing the skills and competencies required to achieve your objectives and identifying which of these are truly core to your organization s success. Make sure you have clear business objectives for the decision to outsource. Is this a decision to save money or speed time to market? Is it a strategy to increase quality? Each objective could potentially change the nature of the services provided. >> You must also think carefully about the process you will use to manage your outsourced provider. While outsourcing will reduce your total headcount needs, it does not eliminate staff requirements. You will need project managers, budget analysts, and executives to keep projects on track and maintain involvement. You must still make sure you are managing your supplier with weekly meetings, schedules for deliverables, budget reviews, and periodic review of key success factors.

4 OUTSOURCING BEST PRACTICES Based on research of more than 400 companies that outsourced at least one learning function, these additional best practices can pave the way to successful outsourcing. Develop a business case and obtain executive support. The information you ve collected during the rigorous selfassessment process will help you make a sound business case for outsourcing. Your business case should cover: The business areas to be outsourced and the justifications. Potential areas for outsourcing could have high operational costs, require significant staff support, demand specialized expertise, or present ongoing challenges. If you identify multiple areas, it s best to prioritize. Many companies begin by outsourcing one initiative and then move to others as they gain more experience in outsourcing management and as partners prove themselves. The type of service provider best suited to your organization s needs. The market now offers a wide range of outsourcing providers from which to choose. For instance, if you need assistance in specific technology areas or with an implementation, a boutique services provider with years of experience in LMS implementations and integrations might best meet your needs. If your organization lacks specialized content expertise say, for a specific compliance program a small consultancy might be your best bet. If you re looking for assistance with a major enterprise- wide initiative, one of the large, veteran outsourcing providers with global experience and personnel might be the right fit. A timeline for results. Outsourcing isn t a quick fix, no matter what partner you choose. Identifying your expectations for deliverables will help frame discussions with potential providers. Budget range. By understanding your current operational costs, you ll have some idea of what you re looking to save or what you can afford to incrementally spend. It s important to note that outsourcing isn t all about saving dollars. In some cases, especially when an initiative requires specialized expertise that the training organization does not possess, outsourcing should be viewed as an investment that brings benefits such as faster time to market or a technology infrastructure that will yield strategic value over time. Expected benefits. Quantify the potential cost savings in reduced staff and elimination of duplicate resources, technology implementation and maintenance, and other such areas. If possible, show efficiencies in relationship to employees (such as in per-learner costs or staff per learner). Also be sure to document other benefits, such as speed to market for critical programs, increased consistency important for programs such as compliance, and improved and more focused support of business units. Develop a detailed plan for managing the service provider. One critical step is the identification of a leader or champion someone who will assume ultimate responsibility for investigating outsourcing options, evaluating providers, contract negotiations, and engagement management. Typically, this person will need assistance and support from a SWAT team of professionals drawn from various areas of the organization. In addition to providing expertise in various disciplines (such as instructional design, internal IT systems, and business knowledge, the SWAT team can be an invaluable internal resource when working with business units on initiatives such as LMS consolidation and providing ongoing oversight to enterprisewide outsourcing initiatives. The team can also assist in helping perform initial evaluations of potential service provider partners and perform the due diligence once a short list has been developed. Each team member can bring his or her specialized skills to bear when assessing a potential partner s expertise in specific areas.

5 Consider centralizing shared services. In many companies, training resources are dispersed across the enterprise. This can be good in some ways, since it allows for closer business alignment. But it also invites duplication of resources and services and inconsistencies. Before you make any outsourcing decisions, consider where centralizing shared services, those services used by all various business units, might make sense. In some cases, these common areas might be candidates for outsourcing. Remember that the decision to outsource is a decision to bring in experts. These experts should be leveraged across your organization if at all possible. Document volumes and learning processes. As part of the self-assessment process, be sure to examine carefully all learning-related processes. Document all details related to course assignment, registration and enrollment, scheduling, facility management, assessment and scoring, reporting, and certification. This will help you identify inefficiencies and areas for improvement that could be addressed through outsourcing. If you do not do this up front, the service provider could either overbid their services (to include their own research to get this information) or could encounter surprises later when the scope of work increases. For those companies considering integrating learning with performance and talent management, we urge you to include HR-related processes in this examination. Tying learning to talent management is becoming an increasingly important priority. Even if this is a longterm goal for your organization, it s important to factor this vision into major outsourcing decisions. Understanding how these important processes work for your company will be useful to any strategic outsourcing partner. Develop an RFP and short list. This exercise will force you to document and refine your requirements and specifications. It may help you decide what you want to do internally vs. what you want to outsource.with the help, you can identify the key vendors with experience in the areas you need. Do not include in your search vendors who have not already had experience in providing the service you are buying. Any vendor considered should have at least two to three customers to which you can speak. Develop a contract and manage the relationship. In most cases the contract should be developed and administered by your legal or contracting organization. Many engagements include a master services agreement which describes overall legal and financial terms, and a statement of work which details the work to be done.

6 WHAT S AHEAD FOR OUTSOURCING? Outsourcing should be viewed by every training executive as a potential business strategy. Its potential benefits and efficiencies are too compelling to ignore. Today you have many excellent service providers from which to choose. The increasing maturity of the outsourcing market is to the buyer s ultimate advantage. Companies have literally thousands of vendors to choose from, prices are much more competitive, and services have been refined, resulting in higher quality. But, with this choice comes one distinct disadvantage the selection process of potential vendor partners becomes much more difficult. Therefore, it s very important to clearly define your business objectives and specific needs in order to identify providers that specialize in the solution you seek. A few years ago, many viewed outsourcing as a negative influence on the training organization. In the intervening years, we ve seen that smart outsourcing can have a very positive effect on corporate training, and indeed, on the overall learning market. Companies plan to spend even more on outsourcing and will continue to be a positive force in the years to come. -- Josh Bersin is principal of Bersin & Associates, an industry research and consultancy frim serving the e-learning space for more than 20 years. Elearning!, 2006 B2BMediaco

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