Outsourcing pays – but only if you’re smart about it
As markets develop, outsourcing options proliferate. That’s a good thing, but we need to play the game cleverly.
In an ever-shrinking world we have an ever-expanding set of options to improve quality and productivity. We have a plethora of new technologies and new providers, and a lengthening list of service providers to take those non-core activities off our hands. Many of you will have heard stories of extraordinarily successful partnerships, but there are disaster tales as well. The reality is that outsourcing can be a very smart strategic option, but only if you know the basic rules of the game.
5 rules for outsourcing
Know what you are outsourcing and why
This seems like a really obvious statement, but many outsourcing project failures are deeply rooted in a lack of early clarity on intent. The reality is that you can outsource for many reasons. Cost is one that comes to mind.
Other key reasons are:
- error reduction (or other forms of quality improvement)
- enhanced access to talent, and
- access to a scale provider who can afford to invest properly in modern systems.
I have seen companies outsource for cost but take a bottom-line hit on quality. Even more subtly, I have seen companies not properly define what cost they are trying to control. For example, one company I know had outsourced system-maintenance to save money, only to end up paying a much higher rate of cost for unavoidable system enhancements. The net result was more money for less flexibility.
If all you do is outsource small parts of processes, you risk making the end-to-end performance worse. That’s why process engineers have as their mantra: “Every hand-off is an opportunity for error.” I have seen expensive (but broadly functional) customer on-boarding processes severely impaired when a job done by one person becomes a job done by three (two of whom are offshore and in different time-zones). If you bear in mind that extra hand-offs require enhanced control costs, you will see the right way to manage this risk. On the other hand, first-rate end-to-end process outsourcing, with the supplier taking overall outcome accountability, can save costs and improve quality.
Think like a partner
If all you want is a transactional relationship with your service provider, then don’t expect them to think long-term. If you consistently take unseemly advantage of a position of authority, manage only the contract and not the relationship, and constantly play the blame game, then you will not get a creative and inspiring service. The very best outsourcers think like partners and work with their clients to create long-term mutual value. This inspires the supplier to come to the table with innovations and opportunities that they have seen work elsewhere. Otherwise, why would they bother?
Get the contract-management right
This is all about how you and your service provider govern the service performance together. It is a classic error to build in the wrong incentives, or fail to incorporate the right ones. The very best incentives are long-term in their nature and provide opportunities for both parties to take advantage of productivity improvements. Getting too greedy here is a mistake, for it materially reduces the incentive for the supplier to innovate.
Don’t give away all the knowledge
Always keep enough of the capability knowledge in-house to manage the arrangement properly. One horrendous example I came across was a large company which outsourced its IT system, including all the knowledgeable people. Pressured by tight margins, the service provider made many of those people redundant. When the system failed and invoices could not be sent, nobody was celebrating the lower costs.
In today’s increasingly complex and competitive world, no company can do everything. We must all have outsourcing in our strategic arsenal. There are many stories of outsourcing success and they all offer the lesson: You need to give the intent and execution the focused intelligence it requires.
See the original article published in CEO Magazine here.
Roger Perry is the Managing Director of the Bevington Group, and one of the region’s foremost productivity improvement and organisational design experts. He has been an Assignment Director and Steering Committee member on over 40 transformation programs.