Outsourcing: Opportunities & Challenges
Companies around the world have derived significant operational efficiency and profitability due to the global labor force and the flattening of the world. Outsourcing is about sourcing talent from where it is best available, without being constrained by national boundaries.
Outsourcing has allowed companies to break down service and manufacturing activities into components, with each task performed in the most efficient, cost-effective way. Several companies have mastered the art of orchestrating a global network of vendors to deliver high-quality products to its customers. In manufacturing, there are several examples such as Li & Fung, a company that specializes in global sourcing, that orchestrate a worldwide network of vendors to deliver high quality products to their customers. A product may be assembled in Texas, with components coming in from China, Japan and India.
The services business is new at this compared to manufacturing and is learning to modularize business processes. Unlike manufacturing, IT and Business Process Outsourcing involves information and interaction with people which makes it more personal and challenging.
Your odds of succeeding are about 50/50. With Information Technology sourcing, it’s worse. Of all IT deals, a staggering 80% don’t achieve desired results according to a study by Gartner. The reason behind this shocking failure rate is that sourcing is far from strategic. Companies jump into outsourcing without the experience and planning. They draft contracts with short-term goals.
However, if you do it right you will create a unique competitive advantage due to the signification cost savings and efficiency gains by outsourcing certain processes.
The typical sourcing lifecycle consists of four phases:
- Outsourcing Strategy
- Vendor Evaluation & Selection
- Contract Negotiation
- Engagement Management
The problem is that many companies focus excessively on the vendor selection process and getting the contract in place. They go into it without any strategy and don’t have a plan to manage the outsourcing relationship from an operations and tactical standpoint.
Start with Engagement Management
It’s important to get the operations and your plan right.
- What are your expectations and goals for the project?
- Define key metrics to measure success and ROI
- Identify and allocate the resources with the required skills and experience from your team who will be assigned to the initiative.
- Create a steering committee that will be responsible to take key decisions.
- Identify a process to correct problems (you will run into issues!)
If you are exploring outsourcing, you must answer a fundamental question: What precisely do you expect to get out of it? You have to be clear on what you are trying to solve and how you will manage the process before you jump to outsourcing as a solution to save cost.
- Create a business case
- Identify capabilities that your company wants
- Define the precise business problem that needs to be solved
- Identify the right mix between internal and external resources
- Be aware of risks and ways to avoid common pitfalls
- Create achievable and realistic metrics for measuring success
- Make sure the strategy is based on long-term benefits and vision
Cost savings are useful for all companies. However, lower costs alone are not the true measure of success. You should use outsourcing to change a process or function in a fundamental way. Think more aggressively about what to outsource. Focus on the work, not where it is done or who does it. A well though out outsourcing roadmap will lead to better decisions. The right strategy can deliver tangible, measurable and predictable value that does more than reduce costs — it increases shareholder value. Most importantly, create a strategy with long terms goals in mind. Short-term benefits such as cost savings alone will result in a poorly thought out plan.
Good Advice — Talk to People
Get someone on your side who has been involved in outsourcing deals. The right advisor will know the price for the work and help you with the vendor selection process using a tried and tested methodology. This person can help you identify the right questions to ask and avoid common pitfalls. The advice should of course be independent and impartial. Good counsel can help you select the right outsourcing partner.
Explore — Meet Multiple Vendors
You should shop around when selecting your outsourcing partner. Competition is good. You will save money and get a contract that works in your favor. Negotiations and evaluations help you get clarity. Stay away from providers that promise to do everything under the sun. I feel that RFPs are a waste of time. Try to evaluate the vendor on qualifications, references and if you feel you will be able to trust them and build a relationship. Look out for how flexible the vendor is because things are never constant and you will need a partner that is open to change and quick to change direction if required.
Cost — The Right Price
Don’t automatically assume that the cheapest deal is the best one. Outsourcing deals are almost always pitched on the basis of cost savings. Clients tend to underestimate the ongoing cost of managing the relationship. Look for business benefits and new capabilities, not just cost shedding. Vendor expertise, collaboration, flexibility, trust, understanding and culture are more critical for success than a low price. Work to create relationships with trusted providers who understand your industry and put mutual interest before self-interest. You vendor relationship is an ongoing partnership and thus you have to ensure that both sides win over time. You deserve excellent service at a reasonable cost. At the same time vendors should make a profit and enjoy an open relationship with the client. While it is easy to find vendors that promise cost savings, it is much harder to find partners who can deliver on their promises. If the provider isn’t making money on your deal, service level will suffer as time goes by.
Describe the essentials of the deal in clear language and great detail. Outline all the functions that the Outsourcing Partner is expected to perform including roles and responsibilities. There is always a cost attached for extras. Build flexibility in the Statement of Work. Service Level Agreement (SLA) should be well structured.
Culture & Communication
Focus on “soft” skills such as communication so that you can motivate and coordinate team members from vastly different cultures. Teams from different cultures have different strengths and working methods, which must be matched to their assigned tasks. Formal requirements are no substitute for frequent communication, which is critical for resolving unanticipated problems.
It’s important to create an infrastructure — a set of tools and standards for sharing data — that allows dispersed teams to work together seamlessly. Failure to do so puts a project at risk. In 2006, Airbus revealed that its flagship A380 aircraft would be delayed two years, at a cost of billions of dollars, because partners’ use of different versions of design software resulted in 300 miles of wiring and 40,000 connectors that did not fit together. A company’s success is increasingly tied to its ability to orchestrate and integrate the efforts of hundreds of global partners.
People & Leadership
People are key to outsourcing success. Build a seamless team with multiple touch points and the right people. Get management involved. Assign the right people from your team to the project. Determine the roles people will need to play to make the relationship work. Identify the required competencies. Find an executive sponsor with vision and a solid general manager to take charge. Outsourcing provides an opportunity to do more — to hire ever-greater numbers of people with high levels of expertise in an ever-widening range of disciplines.
Once your deal is signed, the work has just begun. Sourcing partnerships can quickly go out of alignment due to miscommunication and lack of clear understanding of expectations. Put a mechanism in place to monitor and correct problems. Are expectations realistic?
Benchmark key metrics before you start outsourcing to give you a baseline. Measure performance on a regular basis. Reward partners for exceeding expectations. It’s not a numbers game. Benchmark performance constantly and maintain open and frank communication with your provider. Treat them as a Partner and not a Vendor.
Outsourcing & Innovation
Focus on core business activities. Use innovation to move up the value chain. Changing skill levels to stay competitive. When companies free their employees from the mundane transactional work, they can actually spend more time servicing the customers.
Use innovation to move up the value chain, and create new products and services which your competitors have not been able to do. Use outsourcing to result in higher productivity or higher revenue per person. Your employees need to be trained and equipped to manage changing demands of today’s global environment. The existing skill levels of the labor force must be improved to stay competitive.
Companies can’t afford to stick to the old approach of trying to do everything on their own, not with the pace of change in technology, and the competitive market. Thus, the biggest benefit of Outsourcing is that it enables companies to focus more attention on core business activities.