“Outsourcing” used to be such a dirty word. Despite occasional reports to the contrary, though, it is now a given that outsourcing — not to be confused with offshoring — helps companies save money. A new Deloitte report claims to confirm this, with 83 percent of the companies surveyed saying they achieved ROI of at least 25 percent on their outsourcing initiatives.
However, the same Deloitte study, Why Settle for Less: 2008 Outsourcing Report, also indicates that more than one in three executives said they wished their companies had spent more time on vendor evaluation and selection. One-half of respondents said that if they could go back and do something differently, they would define service levels that aligned better with their companies’ business goals at the beginning of the project.
Among those in Deloitte’s survey who said they were dissatisfied with their outsourcing relationships, common reasons included underestimating the project’s scope, higher-than-expected costs and poor-quality communications, service and reporting from their service providers.
In other words, outsourcing programs are too often hampered by poor planning, narrow focus on cost savings and an altogether short-sighted view of their outsourcing contracts.
Based on analysis of the survey, it seems companies that implement outsourcing programs with proper financial analyses, methodologies and governance strategies can overcome many of the shortcomings identified.
Deloitte and others offer the following suggestions.
Define a Clear Strategy
Companies must ask themselves if they are outsourcing the right things for the right reasons. “Transferring a dysfunctional operation to a vendor in hopes of saving costs through economies of scale or arbitrage can be a case of ‘your mess for less,’” says Deloitte.
Begin by defining, in clear terms, the strengths and weaknesses of your business. Consider keeping your strengths in-house and farming out your weaknesses. Then, break down business projects into sub-projects.
Have a Solid Foundation
Companies should ask if they have defined and quantified what they expect from outsourcing. The creation of a business case and the establishment of effective service level agreements (SLAs) should not be given short shrift; in practice, however, this is too common.
SLAs “can’t be too explicit,” according to Avnet CIO Steve Phillips, who offered his own tips for outsourcing success at InformationWeek in November. “The more detailed and measurable they are, the easier it will be to define success. You should also make sure they map to business objectives as well as IT metrics.”
Select the Right Service Provider
Selecting a vendor is hard enough for both large companies and entrepreneurial startups. Companies need to select a service provider that is capable of delivering strategic process improvements as well as cost reductions, says Deloitte. “When things do not go well in outsourcing, most companies automatically scrutinize the service provider, but do not recognize that their decision to select a vendor on cost alone may be the actual root of their problems.”
Craft a Sound Contract
Contract negotiation is a pivotal point in the outsourcing process, says Deloitte, so companies must ask if their contracting process is “mutual and flexible.” When drafting a contract, clarify not only the specific services you expect to receive but the quality of the delivery, as well.
“In the business of outsourcing,” according to Phillips, “the individuals assigned to your account matter. You are, of course, buying a proven methodology and service, but the quality of people providing that service can make all the difference between success and failure.”
Follow-Through
Signing an outsourcing contract is not the culmination of the outsourcing process. In reality, says Deloitte, “effective performance management, especially the insistence that service providers actively search for, develop and implement strategic improvements, is the crowning component of an effective outsourcing initiative.”
After the deal is signed, continue to ask if you are getting what you paid for.
Phillips suggested using an independent company to perform quality assessments:
If you’ve negotiated your contract in good faith, you already should be clear on how you have defined success. By mandating that a third-party perform quality assessments, you’re building some healthy tension into the relationship and creating an independent view into the work provided. If you’ve established bonuses for over-performing, these independent parties can be honest brokers in the evaluation process.
Using third-party quality assessments in an outsource relationship ensures an unbiased view of how both the in-house and outsourcing teams are operating together, and to motivate the outsourcing partner to get things right the first time.
Many organizations continue to fail in their outsourcing initiatives. Often, this is due to being short-sighted. Sending a function or business process to another location — whether to the edge of town or to another continent — can prove to be a complex, frustrating and time-consuming venture. Outsourcing often brings enormous and painful change, but leveraging that opportunity to achieve much more value than just cost savings is both practical and beneficial. Realizing the various ways in which this can be accomplished can be highly empowering.
On the other hand, success stories prevail that show while outsourcing is often viewed as a way to reduce costs, the most successful companies focus less on saving money and more on improving performance. Patience and thoroughness win in the end.
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