Outsourcing has been getting a bum rap lately because of the political connotations it carries. But the act of outsourcing is not what has many constituents up in arms; offshoring is. Sending jobs overseas in lieu of putting qualified, available American professionals to work has become a topic of hot debate as organizations justify its cost savings.
But why outsource at all?
Businesses outsource specific tasks (and in some cases entire divisions of their operations) as a way to focus on their core competencies, the functions essential to their business strategy. Outsourcing allows those companies to simultaneously enhance the competitive advantage for their customers AND accomplish those tasks more efficiently or proficiently by:
- demonstrating greater expertise,
- adding value, and/or
- lowering costs.
It’s not rocket science: delegate the things that others can do better than you could do internally, so long as it brings in more income and/or lowers the cost that you would have spent trying to do it yourself.
For a significant period during the ’90s, organizations felt the pressure to stay ahead of their competition by collaborating with some of the best partners money could buy in the IT, creative, and financial sectors.
In their book,The Relationship Advantage: Information Technologies, Sourcing, and Management, Thomas Kern and Leslie Willcocks analyzed the outsourcing practices of 250 large European and U.S. companies. Through their findings, they predicted that global IT outsourcing would reach $150 billion in 2004. Similarly, Gartner Research projected that spending on business process management would reach $234 billion by 2005 and McKinsey predicted that this number will reach $500 billion by 2008.
The outcome? All of their predictions came true.
Today, outsourcing is on the upswing again as companies prepare to ride this next wave of economic growth.
While some outsourcing can lower costs or decrease competition, it is imperative to recognize that they do not come without risks. Kern and Willcocks found that, in the 250 outsourcing customers they studied, only 15% of those surveyed reported significant cost reductions.
Avoid the Trap
This is a major insight for those companies looking to learn from the past. How did 85% of businesses who outsourced some portion of their business break even – and in some cases LOSE money – if their outsourcing were supposed to reduce costs while increasing value?
It helps to look at the most common problems reported by those organizations survey:
- Poor (vendor) staff (43%)
- Lack of (vendor) responsiveness (41%)
- Costs for additional services (38%)
- Vendor didn’t understand our business (37%)
- (Customer) corporate strategy and IT are no longer aligned (35%)
- Getting vendors and their subcontractors to work together (35%)
- Cost escalation due to contract loopholes (31%)
- Customer managerial skills inadequate (28%)
- In-house customer staff resistance (26%)
In seven of the top nine most common problems, relationship – and more specifically, alignment – issues were reported. Put another way, a disconnect between the teams (people) and the vision of the program prevented 85% from running as profitably as expected.
This is astounding when you think about it.
People – and the relationships they establish and develop – are the deciding factor in whether or not a program will be successful. Overwhelmingly, issues do not arise from a lack of technical capabilities or contractual issues, but from a lack of communication between organizations, teams, and individuals. Successful outsourcing depends not solely on technical expertise, but on managing key relationships within the project.
And as we have seen, the most successful projects are based on a trust developed by working together, both in proximity and frequency.
As Kern and Willcocks recognize this too, saying, “The case studies generally revealed that relational trust only develops in situations where key individuals were able to develop a rapport….[although] not every case achieved a relational level of trust. Most relationships tend to operate more at a formal level of trust, based on service performance that had to be reproved every day.”
We have spent the past 25+ years establishing and managing critical relationships between suppliers and their most critical customers. The next time your organization or department decides to outsource portions of its next initiative, it may be worth having S4:
- illustrate the importance of having a single relationship owner,
- coordinate regularly scheduled performance updates between you and your vendor,
- determine a meeting schedule at multiple levels between the two firms,
- help develop relationship assessments and ongoing conflict management plans.
These considerations may be the difference between costing or saving your organization millions of dollars over the course of the program.
Are your outsourcing efforts strategically aligned? Call 800-423-7839 to find out.
