What Causes Outsourcing Failures?

Failure road signOne of the questions that continue to hound buyers and providers of outsourcing is how to mitigate the risk of failure. This is despite a longer history of outsourcing than you would suspect—outsourcing can be traced back to the Industrial Revolution. For 150 years, until 1900, industry in Europe outsourced its requirements. Functions like accounting and legal were near sourced. The creation of raw materials like cotton and oil seeds was outsourced to different nations (and is done even today). Before the IT revolution as we know it—largely pivoted around Y2K—the US was outsourcing manufacturing to countries like Mexico and Canada. Naturally, the last 200 years have created an equal amount of confidence in outsourcing as well as a fear of failure.

Outsourcing is much more complex today—an increasing number of companies are uncovering three key reasons to outsource:

  1. The skills or projects that are outsourced cannot be procured/ done in-house for a variety of reasons, including cost, the lack of appropriate talent and time factors
  2. The outsourced task requires quality processes that are not achievable in-house
  3. The outsourced process does not have much value when done in-house and requires more management overhead than it justifies

It isn’t surprising that outsourcing budgets are on the rise. One study, IT Outsourcing Statistics 2012/2013 , shows that IT budgets for outsourcing services is up 23% at the median in 2012 over the prior year.

Outsourcing will obviously fail if the reasons for it are not well thought out. But despite having the right reasons, outsourcing fails due to a number of key factors.

Seven Reasons Why Outsourcing Fails

  1. No strategic objective. There must be a clear goal for outsourcing. While cost reduction is a legitimate goal, it should not be the only one. Saving is an end outcome of outsourcing, not the primary reason. When cost reduction becomes the primary objective, the outsourcer is often driven to select the cheapest provider regardless of capability or resources. It’s only when strategic objectives are me that outsourcing finds continued success.
  2. Unclear requirements/expectations.  When a company outsources, for example code development, it must be clear about the process, tools, talent, SLAs, timelines, testing, outcomes, ownership, IP and commercials. For example, once a programming requirement is frozen, the outsourcer cannot ask for a mid-development demo if it was not included as an original requirement.
  3. Poor transition. Requirements and processes are often moved thousands of miles away from where they were originally carried out. Bridging the distance means the transition process should be rugged and accurate. Agreeing on the terminology, identifying the processes and capturing the metrics make the difference. The role of quality in transitioning cannot be overstated. However, tools to manage transition (for all types of outsourcing needs, not just IT) are becoming better as outsourcing grows. Ensure that your provider uses updated tools and quality standards that are suited for your industry.
  4. Rapidly changing needs of the buyer. Outsourcing begins with small steps but quickly acquires giant strides. When the buyer’s needs change, the provider is sometimes unable to change as quickly. A provider who is not nimble and flexible and does not understand your business environment can lead to failure.
  5. Poor communication. It is extremely difficult to keep tabs on teams that are spread out. But it is even more difficult to keep tabs on a team that is not under your direct supervision and is located perhaps 5,000 miles away and follows completely different works norms, ethics, standards, etc. from your own. Communicating frequently and clearly and sharing all business-related information is essential to keep the relationship healthy and therefore improve the outcomes of outsourcing. Buyers often feel that “communication” is a task for the provider. The provider settles down to the mandated reporting schedule—which could be a weekly presentation of performance metrics or reviews of development followed by some cursory remarks—and views this as “adequate communication.” When this happens, expect misalignment of missions and failure to follow.
  6. People factors. The provider has difficulty retaining talent. This means that either the provider will not have the team required to deliver the task or the constant churn will create teams that have no sense of loyalty or purpose. Such teams will lose focus and disengage.
  7. Over management/micromanagement. The provider may often have excellent skills and capabilities, but outsourcers are naturally paranoid and tend to over manage or micromanage. For the provider, this can become a real headache and over a period of time its patience will erode. You could be headed for a flash point that can destroy the outsourcing relationship.

By no means is this list of reasons complete, but paying attention to these is a vital starting point. Preventing failure depends on sensitive team managers who are both competent and determined to find business success in outsourcing. The overarching reason for outsourcing failure is the lack of will in top management.

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