Why would any company outsource?
Properly crafted and effectively managed, outsourcing can increase flexibility, improve performance and free management to focus on core functions. But achieving that full potential requires that management give careful attention to what to outsource, why to outsource, with whom to outsource, and how to establish and nurture the relationship in ways that encourage continuous improvement.
It is essential to consider and evaluate outsourcing only with explicit goals in mind. Rushing into outsourcing without understanding why and taking the time to identify specific objectives is a recipe for disappointment and a failed relationship. If the client company does not know what it is trying to achieve, the outsourcing provider and the customer are probably headed toward a painful relationship in which unrealistic expectations of the users are unmet and both parties become disillusioned and dissatisfied. Sensible reasons to consider outsourcing are both strategic and tactical.
What are the possible benefits?
The potential benefits of outsourcing include cost reduction, increased satisfaction, access to requisite skills, and other effectiveness and efficiency improvements. If the function is not a core competency of the customer, the internal resources required might be better redirected to more important tasks. There are potential disadvantages to outsourcing, but these risks can be minimized, if not totally mitigated, by knowing the objectives, asking the right questions, using a methodical approach, negotiating a sound contract that is a win for both parties, and establishing an effective relationship management process.
What are the most important things to do early in the process?
Ask and answer the right questions. As part of the outsourcing evaluation, address questions like the following early in the process:
- What are the core competencies of our company?
- Which services and support functions are neither what we do best nor a core competence?
- Which vendors are the best-of-breed providers for these services and support functions that we know are not part of our core?
- Can/should any of our problems be fixed internally before outsourcing?
- Who are the key stakeholders who must be a part of the outsourcing evaluation-decision process?
- What can be better accomplished by an outside provider?
- What are our outsourcing objectives?
- What type of provider relationship is most appropriate?
- How do we best handle the people issues?
- Can the service be delivered onsite, offsite, offshore or some combination?
What do you mean by stakeholders?
Early in the evaluation identify who will take leadership responsibility, perform the analysis, and make the decisions. The persons who should be involved depend on what is to be outsourced and the circumstances surrounding the outsourcing decision.
An executive sponsor or champion is highly recommended, and in cases that involve organizational politics (almost always the case with large outsourcing evaluations and decisions) an executive sponsor is absolutely critical. For larger outsourcing initiatives, top management must play a key role. For smaller initiatives, middle-level managers might do the heavy lifting with the support of senior management. The team usually needs a mix of managerial and technical talent and representatives from user areas whose services will be directly impacted by outsourcing. User perspectives and objectives are essential for setting scope and assessing risks.
The size of the customer’s team depends on the scope and size of the project, but smaller teams are generally more effective. The team can be quite small in the planning phase and expanded when analysis begins. Teams with full-time members are often more focused and effective than teams composed of people who work part-time, although full-time allocation may only make sense for big outsourcing projects. It helps tremendously to have persons experienced in outsourcing on the team for the insight they bring to the issues and the realism they bring to cost and benefit estimates. Outside consultants are highly recommended.
What are the outsourcing trends of the last few years?
The trend that’s creating growth in the outsourcing market is the movement away from the old, 20th century integration model where, for example, GE owned all their factories for production – their entire supply chain. In today’s global e-business economy, you’ve got to be agile and be able to quickly create capacity in parts of the world where you don’t already have it. To own your own resources doesn’t make sense – you need to form outsourcing relationships or alliances with companies that can provide you with the capacity, capability, and agility you need to compete.
But to manage all those relationships, you need a different type of management. Whereas traditional management involves hierarchical relationships, companies today need lateral management: managing through influence, persuasion, and building trust.
Why does outsourcing require a different management style?
With outsourcing, a manager has to manage laterally both inside his/her company (users) and across to the service provider. There’s an excellent article on this in the Sloan Management Review called “Leading Laterally in Company Outsourcing,” (Winter 1999). The article says that companies are looking for four specific capabilities in managers responsible for outsourcing initiatives:
- strategic thinking (the ability to understand how to outsource in ways that improve competitive advantage),
- deal making, (the ability to broker deals that secure the right services from external providers and ensure their use by internal managers),
- partnership governing (the ability to oversee the relationship proactively to ensure service quality and financial benefit for both sides) and
- managing change (the ability to anticipate resistance to change and surmount it constructively).
How does the current outsourcing market differ from the recent past?
Executives today are more aware of the importance of relationship management. Five years ago companies tended to just hammer out a deal. The provider wanted to get the highest possible price and be held accountable for as little as possible. The client wanted to get the lowest possible price, feeling that the outsourcer would take advantage of them if they could.
In the last three years, companies have realized that, although they want to get a good deal, they must also create from day one an atmosphere that encourages a good relationship. By promoting trust of each other, you can find ways that, together, you can do more than you could do on your own. For example, outsourcing vendors today strive to continuously bring improved performance to the companies they’re serving.
Companies are also beginning to recognize the importance of creating a good relationship structure as part of the negotiation process. If you start out with a good foundation, you can manage the relationship properly from the beginning. You want to have a successful business “marriage” – and not have it end in divorce. Fortunately, there are lots of good consultants and attorneys with experience in outsourcing to help companies doing things right, which was not the case five years ago. Today, there’s no reason a company, even one that has never outsourced, cannot do a really good job, provided they retain the right people to help them. Clients are now going into agreements on a much more informed basis, so they’re not getting themselves into bad relationships as frequently as in the past.
The other major change is that, five to seven years ago, outsourcers were looking for total outsourcing deals. Clients are smarter now — they realize it’s unlikely that one provider is going to be best in class for everything. They also realize that some things should be kept in-house, and some should be outsourced.
What’s next for outsourcing?
The ASPs may represent the biggest phenomenon of the outsourcing era. They certainly are the next generation of outsourcing. The ASP is a way for companies to get the applications they need simply by paying as they go. They don’t need an IT infrastructure; they can just access applications through the Internet and pay for them as they use them. Of course, there are lots of companies out there claiming to be ASPs, and there are a lot of varieties of this business model. This market is still in its infancy, so we’ll certainly see a shakeout in the next year or so and see a few core companies emerge as pure ASPs. But I think that, over time, many companies, even Fortune 500 firms, will turn to ASPs as at least a partial solution.