A recent Coopers & Lybrand survey of 428 high-growth companies revealed some disquieting news. Over half of the companies surveyed were dissatisfied with the overall results of their outsourcing agreements. Things, they said, just didn’t get “better.”
So, how good do you want to be? How much “better” do you need to be in order to stay competitive? You should know the answers to those questions before you start planning an outsourcing relationship.
To measure what’s “better,” you need to understand what exists. To stay competitive, you need to measure your business against the “best of breed” in your industry. This is where comparative analysis comes in. It allows you to determine your company’s own internal costs and quality levels and compare those levels against the best of breed. (If you find a wide gap, you have plenty of company. Out of all the three-years-and-longer-in-place outsourcing arrangements reviewed by COMPASS in 1996, only one was close to providing best of breed performance levels.)
Armed with the comparative analysis information, you can determine whether outsourcing makes sense. If it does, you have what you need to select an outsourcer and develop a win-win relationship.
How do you identify “best of breed”? By definition, best of breed:
- are identified by name, industry type, national or international location
- are among the top 10% of organizations analyzed in terms of unit costs -
- regardless of industry or geographical location
- have high production quality
- have had COMPASS analyses performed
- do not achieve efficiencies at the expense of clients or good business practices
You’ve done the comparative analysis. You know the size of the gap between your company and the best of breed. Now come the big questions. How much “better” can the situation be? Is there a true opportunity for an outsourcer to deliver cost and quality improvements to your operation.
Then you look at the question that goes straight to the bottom line? Can you negotiate an outsourcing agreement based on identified and achievable levels and? The information you’ve gathered can serve as a guide. For example, if your current internal costs are $10 million a year, but an outsourcer offers a services contract for $9 million annually, that may seem like a good deal — unless your information tells you that best of breed costs are only $8 million a year. Then you’ll know you’re leaving money on the table at the $9 million figure.
The baseline also serves another need. It can provide a record of any outsourcer’s claims of achievements in production, quality, or costs, after the contract is established. Many relationships fail because of issues that arise when no accurate baseline was established in the beginning.
Comparative analysis is not a one-time process. Your outsourcing contract should allow you to compare performance against the best of breed annually and provide recourse if the results stray beyond a defined acceptable level. This measurement also can establish bonus arrangements for outsourcers achieving better than best of breed levels.
Lessons from the Outsourcing Primer:
- Before you decide on an outsourcing agreement, conduct a comparative analysis of your company against the “best of breed” in your industry.
- Determine whether a true opportunity exists for an outsourcer to deliver cost and quality improvements to your operation.
- If you decide to go ahead with an outsourcing relationship, use the information gathered as a baseline for negotiating the agreement.
- Do a comparative analysis annually.