Outsourcing is no different to the classic make-or-buy decision which was first formalised by Higgins in 1955. Simply put, what, how, who and where to source products and services are decisions governed by what we consider as value. This means the success or failure of a “make-or-buy” strategy depends on what we consider valuable and important at the time which the decision is made.
When it comes to deciding on what services to source externally the decision criteria is simple. We can potentially outsource all processes that are not core to the business and aren’t a director factor in the firm’s competitive advantage. The current economic climate and the availability of low cost resource pools in Asia mean that business leaders are now re-visiting the value of processes that are being housed internally. It is now a norm to outsource financial processing, contact centre activities and IT to third parties. This has been good for the outsource industry and its revenue is projected to rise from $370 billion to $479.3 billion by 2016.
Growth of this industry and large centralised service centres will herald a new era of innovation and will bring efficiencies to the outsource providers. But what do these mean to the outsourcing companies? It all depends on how well you are managing the functions before they are outsourced and how experienced you are in managing your outsourcer. To put it simply, you can’t expect great results from your outsource provider if you were not already managing it well yourself. In fact, the issues caused and dealt with in your own business environment can no longer be easily managed in an outsourced environment.
To manage commitments outsource providers dissect the processes into discrete parts which they manage through simple SLAs. This approach makes logical sense and will simplify the management of commitments made by the outsource provider. But it only works for their customers if impeccable management of SLAs are already embedded in their culture. Even when that is the case the nature of interactions among individuals with diverse priorities and cultures will surface new issues and breakdowns. Such issues cannot be avoided. We just need to have processes and people with defined responsibility and authority to generate action in place.
It is imperative to think of outsourcing not as a transaction but a mutual commitment to providing continuous services. As a result, the capability of the outsourcing partner alone does not determine the quality of their service. The nature of the relationship and where you rank in their priorities are also major factors. The only dilemma is that these characteristics are only really tested when things change or breakdowns occur, which they inevitably do. But you don’t need to wait until the contract is signed to find these out.
We all know that goodwill and flexibility from the people at the coalface are what make things happens. These traits need to be manifested from the culture of the organisation rather than being natural behaviour of a bunch people who could sooner or later leave the company. In fact we already know what we are going to get by listening to our suppliers reputation. Also, we can examine the type of the relationship and the style of the organisation during the selling and negotiation phase. Flexibility and goodwill can be tested when writing the contract!
The purpose of a contract is to document what each party is committed to. The best way to find this out is a conversation on exit clause. This is not a negative conversation but an opportunity to demonstrate commitment by making it easy to leave the relationship if it stops working or stagnates. The second most important conversation is the style of financial agreement. The willingness of your outsourcing partner to have a skin in the game not only demonstrates the confidence in themselves but their commitment to you. Finally, the contract needs to be easily and rapidly changed to reflect the uncertainty of the business world.
In summary, the three steps to successful outsourcing are
- Outsourcing is not a cultural change or an efficiency project. You need to get the business unit which is going to be outsourced to work well before considering outsourcing it. This means continuously delivering services to your internal customers, impeccably managing your customers so they provide you what you need to do your job and operate the business unit as efficient as you possibly can.
- Have the tough conversation about the exit clause, establish a win-win style of relationship and build flexibility into all your agreements during the early parts of the sales process and make sure they are all captured in the contract. You will save time, effort and money and avoid a resentful bondage style of relationship by dealing with these things upfront.
- You are the one that suffers if the services that are expected by your business don’t get delivered. Make sure you have processes and structures in place, both internally and with your outsourcer, to manage successful delivery of business results and to deal with breakdowns and changes. You will see the benefits when things go wrong which they inevitably do.