Most organisations expect outsourcing to deliver a range of benefits, including reducing costs, improving service, de-risking non-core activities and providing opportunities for non-core staff.
Yet industry statistics show that outsourcing deals can fail to deliver the expected benefit, as many organisations set out on the outsourcing path with one intent – but in the process loose sight of expected outcomes and benefits.
Why organisations outsource
There are many reasons why organisations choose to go down the outsourcing path. A reason for this could be that a function is deigned to be ‘non-core’ and would be better done by a specialist service provider. Other reasons include:
- Something is broken with the current business (or infrastructure) and there is no resource or capability to resolve it, so it’s outsourced to a larger specialist service provider such that they have the capability and spare capacity to resolve it
- A significant investment or upgrade is needed and the business chooses to defer the investment by placing a ‘make good’ clause on the end date of sourcing contract – making the issue the sourcers problem
- Current costs appear to be out of control/ratio, are invisible or unknown
- Current practices are highly variable and non-standard and standardisation is required
- Support resources have become scarce/the scale operators will have deeper resource pools
Why can it go wrong?
There are many myths and misconceptions around outsourcing. Namely, these things can be easily assumed:
- Process & Practice: Current processes and practices are portable (not key-man dependent, highly customised, undocumented, fractured and fragile).
- Risk: Outsourcing will lay off the risk to the service provider.
- Brand Damage: In the unlikely event of a breakdown, the outsourcer will protect your brand as part of the service relationship.
- Scale operations can thrive on tight margins: By outsourcing your sloppy processes to a scale operator, you can leverage the scale of their operation to deliver a lower cost operation to your business.
- Large scale operations can fix: Because of their size and spare bandwidth, they have the capacity to ‘fix’ your neglected infrastructure within the negotiated operating fees of the contract (large scale operations have 3 teams – 1. Experts to fix; 2. Transition specialists to lift-n-shift and 3. Low cost operators to adhere to standards).
- Penalties: Penalties will drive the right behaviour in sourcing contracts (the service provider will prefer to perform all processes consistently, rather than opt to incur penalties on the difficult pieces).
- Technology is scaleable: Older technologies are always portable and can seamlessly stack on top of the Scale Operators Infrastructure.
- We all speak english: The culture of your organisation in servicing current processes will seamlessly be transitioned and supported by the new sourcer (you have our values, you think and speak our language, you handle risk and make decisions, operate on our time scale, as we do).
The 6 things to avoid when outsourcing are
- Outsourcing too much. If you shift too much knowledge from your own organisation to the service provider this has a major impact. It means that the outsourcer knows more about your business operationally than you do, but worse still, you’re no longer an ‘intelligent client’ and will have difficulty evaluating any proposals for change from the outsourcer, even if they would deliver significant improvements.
- Resisting any change to your current processes. The more customised your processes the harder it is for the outsourcer to achieve economies of scale or deliver consistent improvements. The outsourcer should be able to deliver best industry practice (if not, it’s the wrong provider) but can only do so if multiple clients are using the same systems and processes – they can then invest across the board and pass on benefits to you.
- Resisting any change to your new processes. If the outsourcer is on the ball then they should be proposing changes whether initiated by external triggers (e.g. regulatory changes) or internal improvement initiatives.
- Screwing the price down too far. If you squeeze the provider’s margins too far then resources will be over-stretched and service levels will suffer, or you’ll be hit with bills for changes if your contract permits.
- Demanding unrealistic service levels. The only way the provider can hit excessive service levels is at excessive cost. As with very low prices, even if you negotiate such service levels then there will be tension from day one and something will ‘break’ at some point.
- Rushing into it. The old adage that ‘failing to plan means planning to fail’ is very germane in outsourcing and brings together all the tips already mentioned. Contract negotiations will inevitably take time, but even before that you need to be clear about your requirements (not necessarily in detail, but broad scope and objectives) so you can have informed discussions with the provider.