With the economy on the mend, organizations’ strategy for outsourcing business transformation is likely to focus more on value creation, not just cost containment. As a result, the hospitality sector will see an uptick in outsourcing this year, according to David Skinner, a Partner with Morrison & Foerster in London. At the heart of hospitality transformation is the need for modern IT systems.
Larger hospitality groups often lack integrated systems because they were formed by the merger of various companies, or they have not upgraded existing systems because of costs constraints.
“They need systems that improve the customer-facing reservations aspect. More importantly, they need the ability to manage their inventory more effectively and to optimize revenue management by cross-selling other products and services, tracking key customers, and connecting with other travel service providers to offer integrated solutions to customers,” explains Skinner.
Outsourcing is a strategy for hospitality companies to access new systems and managed services on the back of new platforms offered by specialist travel providers such as Amadeus and Travelport. These providers used their experience for airline systems to develop solutions that are specifically tailored to hotels, car hire companies, and rail/bus providers.
But the hospitality sector undoubtedly will face challenges as it transitions to outsourcing this year, as is true with early adopters in any industry or business function starting to be outsourced. Skinner points out three primary risk areas for the hospitality sector. First, they are likely to buy systems that go beyond what they really need. This is especially problematic, he says, because “all systems require internal business process change, which is difficult to implement and often more costly than what a company budgeted.”
In addition, it will be difficult for companies to handle the issues associated with data migration from existing systems. An even bigger hurdle is the amount of time and money that will be required to train staff to use the new systems.
As to mitigation strategies for these areas of risk, Skinner recommends that companies “carefully manage the procurement process, and the project team needs to be realistic on the actual budget. They need to carry out due diligence and customer reference site visits to ensure that the systems meet their needs. They should also carefully consider whether an off-the-shelf system is overall better even though it requires internal business process change. A bespoke system may not be worth the additional cost.”
Changes in approaching transformation
Morrison & Foerster’s prediction for increased outsourcing in the hospitality sector is one of several predictions recently published in its Global Sourcing Trends report after canvassing the firm’s sourcing practice attorneys throughout the United States, Europe, and Asia.
The report’s authors also conclude that business process outsourcing will bounce back because of its value-creation opportunities. However, the attorneys believe this year’s outsourcing arrangements are likely to be smaller in scale and not involve large-scale business transformation.
“We don’t think this has to do with any negative view on the risks versus the possible rewards of transformation,” states Julian S. Millstein, Senior Counselor at Morrison & Foerster in New York. He says it’s due to the current focus on short-term cost reduction. “This appears to be driving most procurement decisions and, by its nature, this focus simply does not allow for creative transformational deals.”
A primary focus of transformation for many companies to date has been customer retention; transformation enables delivering a consistent, optimized customer experience enterprise-wide. One might assume that, with fewer deals aiming for transformation this year, this trend will negatively impact organizations’ ability to achieve their customer service objectives.
However, Millstein comments that “transformation eventually must happen to any business as competitors implement new service paradigms and new competitors take advantage of technology and other developments to shake up existing business models. Outsourcing buyers that have an appetite for the right kind of transformational deals have an opportunity to put pressure on their competitors.”
In contrast, companies that focus primarily on saving dollars may find they are not ready to compete when business rebounds in coming months. Millstein says every organization must decide its appetite for transformation based on its own markets and business prospects.
According to Morrison & Foerster’s Global Sourcing Trends report, another influential impact on outsourcing arrangements this year is the multisourcing aspect — the practice of partnering with multiple service providers for specific functions or processes in which they are best of breed rather than sourcing the entire scope to one provider.
“Best of breed is the way to go — until a transformational opportunity arises,” says Millstein. The multisourcing approach has proved to be the best strategy for accessing optimal expertise in each outsourcing process, but it causes interaction challenges that can make it more difficult to achieve business transformation.
What is the best practice contractually for risk mitigation in structuring transformation outsourcing arrangements in a multisourcing environment? Millstein says, if transformation is essential, it’s important that the buyer has “the ability to modify or terminate existing deals to take advantage of a seismic shift in the way business needs to be.”
Flexibility will be a key aspect in outsourcing deals this year, especially to accommodate different stages of the economic cycle, states the Global Sourcing Trends report. A key strategy for achieving such flexibility is using short-term contracts, but this approach hinders achieving greater value in a long-term relationship.
Millstein states that protecting flexibility in the short term while aiming for long-term success requires that the contract gives the buyer the right and ability to leave the relationship at little cost if necessary. A short-term contract that has little up-front investment by the provider should have an easy and cheap termination-for-convenience right. At the same time, the buyer should have a long-term perspective when selecting its service provider.
“Even though the contract may be for the short term, an organization should contract with a provider that has the wherewithal to consider modifying the services and retaining the relationship,” says Millstein. “The ability to realistically terminate provides the customer with real leverage in obtaining modified services, but only if the provider sees a future in the deal. There must be value on both sides and an open path to contract modification to achieve it.
How this study was done: At the beginning of each year, Morrison & Foerster surveys its Global Sourcing Group lawyers in Asia, Europe, and the United States regarding the current state of the world’s outsourcing market, emerging trends likely to shape that market over the next 12 months, and key business factors affecting their current outsourcing projects. The lawyers’ views are based on what they have seen in their outsourcing projects the previous year as well as views expressed by service providers, outsourcing consultants, and clients.
Lessons from the Outsourcing Journal:
- Trends in outsourcing this year include focusing more on value creation, not just cost containment.
- A short-term cost-reduction approach to outsourcing does not allow for creative transformational deals.
- If transformation is essential and the buyer has a multisourcing (multiple best-of-breed providers) environment, it’s important that the buyer have the ability to modify or terminate existing deals to take advantage of shifts in the way business needs to be done.
- Even though a short-term contract is a good strategy for flexibility, buyers should select providers that have the wherewithal to consider modifying the services and retaining the relationship for a longer term.
- The hospitality sector is experiencing increased adoption of outsourcing, especially for business transformation. A primary objective is access to new systems that enable improving the customer-facing processes and delivering more revenue. However, buyers need to be aware of risk areas including difficult (and costly) implementation, difficulty in migrating data from existing systems, and the time and cost involved in training staff to use the new systems.