Industry leaders are viewing outsourcing as a prescription for change, according to the findings of a July 2003 survey conducted among 809 executives in the U.S. and Europe by Accenture, the global management consulting, technology services, and outsourcing company. While cost cutting is still a critical objective, 55% of the surveyed executives report that outsourcing allows effective implementation of ideas, strategies, and change at a faster and more controlled rate. The survey also found that 73% of the companies redistribute the cost benefits of outsourcing to either bottom line or growth efforts.
An effort to understand companies’ current perceptions of what they achieve by outsourcing, the survey revealed that 86% gain more control over strategic business results in a variety of critical areas, such as shareholder value and revenue.
“The survey conclusion is sort of counter-intuitive,” states Ken Lacey, managing partner, European Health and Life Sciences, Products Operating Group at Accenture. “Many people have an initial view that they need to keep a function in-house in order to have control. But the theme running across the surveyed industries (automotive, health and life sciences, manufacturing, retail, transportation, and travel services) is that people gain control through their outsourcing business partner.” Indeed, more than half (57%) of the interviewed executives say they experienced control gains in business results within the first eight months of an outsourcing agreement; 47% of them realized control gains immediately after the outsourcer took control of the function.
Leveraging the Provider’s Services
Why is an outsourcer able to achieve these business outcomes better and faster than an in-house operation? Lacey points first to the attitude of doing things “the way they’ve always been done” in a buyer’s organization. “Then there is the political component – how hard you can push to make things happen and how the internal service levels are enforced,” he explains.
Transforming a business often starts in areas such as finance and accounting, or IT. Many times, those are not the key aspects that make that organization the best in its class. But the outsourcing partner has expertise in these areas and will bring new insight and capabilities.
What becomes critical, Lacey believes, is how the outsourcing deal is structured. Buyers need to set service level agreements (SLAs) with their outsourcing partners so they will achieve exactly what they need and want from their outsourcing alliances. In-house service levels are not as well structured as an outsourcing arrangement. Gaining control over a function and driving it the way a buyer wants, from a cost and deliverables point of view, he says, enables control of enterprise strategic objectives.
The Accenture survey revealed that 57% of respondents measure service level outcomes as the barometer of outsourcing’s value. Even so, the trend is moving to a strategic agenda. “The strategic value achieved in an outsourcing arrangement is additive,” states Lacey. “It does not replace the tactical measurements.”
For outsourcing to be successful, he adds, there must be a partnership approach. Buyer and provider must understand what needs to be delivered for both parties to be happy. Accomplishing that requires performance metrics and an agreement as to where the relationship is headed and how to get there. It also requires an oversight functionality that allows the two organizations to govern the relationship and move forward with their mutual objectives.
Looking at the Upside
The traditional view of outsourcing, states Lacey, has been to supplement internal resources or to reduce costs. Now it is viewed as improving the service and providing strategic value, in addition to the traditional objectives. What’s driving the trend toward a more strategic focus in outsourcing? Lacey says it’s that “executives have seen that outsourcing works well in cost reduction and that they are gaining more control. So they are now looking at the upside – standardizing and globalizing operations to be more effective. They’re looking at what they need to do in their business and how outsourcing can play a bigger part in achieving such goals.”
Survey participants were split evenly between companies with greater than $500 million in sales and those between $250-500 million in sales. Only 14 percent plan to use outsourcing on a temporary basis and return the functions in-house once efficiencies are realized. More than 80 percent of the executives Accenture surveyed say they are committed to outsourcing at least one business function permanently.
Lessons from the Outsourcing Journal:
- Outsourcing allows effective implementation of ideas, strategies, and change at a faster and more controlled rate.
- A buyer organization’s attitude of doing things “the way they’ve always been done” and its inability to push to make things happen or enforce internal service levels are primary reasons why an outsourcer can accomplish business transformation faster and more efficiently.
- For outsourcing to be successful there must be a partnership approach with an understanding of what needs to be delivered for both parties to be happy. Accomplishing that requires performance metrics and an agreement where the relationship is headed and how to get there, as well as a relationship governance functionality.
- Most executives experience control gains in business results within the first eight months of an outsourcing agreement; many realize control gains immediately after the outsourcer takes control of the function.