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How to Make Outsourcing Work

Moving non-core activities performed in-house to specialists outside the company helping the  business to focus on core competencies and improve performance standards is the main premis of outsourcing. The growth and rewards of this practice can be quite high but the downsides are daunting.

So what are the pros and cons of outsourcing?

The potential from outsourcing and BPO related activities:

  • Savings in terms of cost from labour arbitrage
  • Productivity improvements from access to experienced and up-to-date skills
  • The potential to focus on the core business without the distractions of a difficult function in-house
  • Enhanced access to expertise (but at a cost)
  • Operational cost control as the cost becomes very transparent and controlled
  • Improved accountabilityas you know who is responsible for what service
  • Flexibility to reallocate resources and meet company goals
  • Improved Human Relations management in terms of career development potential for peripheral functions.

As for the downside of outsourcing  the list would include the creation of a dependency mentality coupled with a  lack of innovation and integration with the core business – along with a loss of competitive edge. Outsourcing can garner these ill-effects mainly when used as a short term technique to reduce costs.  To avoid this Outsourcing has to be planned carefully going beyond mere cost control and with carefully thought-out strategies and logistics in place to ensure success. A productive nurturing culture is imperative, especially in the beginning, to set the backdrop for a successful relationship.

How to make the most of outsourcing

Apart from reducing the development time and the cost for example new services  an outsourcing relationship can free up resources and orient them towards innovation that can really add value to the core business. It is this potential for the sources of innovation to be focused on the core business competitive needs that is at the heart of the aphorism ‘to focus on core competences’ – In fact it means to build the core. There must also be good communications and systematic tracking and measures in place to help understand how the service is evolving and how improvements can be made. This goes well beyond simplistic SLA types of measures and is in fact an example of proactive innovation.  An outsourcing provider who is willing to learn and understand the business drivers of the client organisation and who can provide the right kind of expertise to a client at the right place can be a company sttrategic asset. The type of proactive innovation can make all the difference to an outsourcing partnership.

Tips for the Outsourcer

  • Treat outsourcing as a strategic investment, clearly defining goals, strategies, objectives and time lines.
  • Choose a firm that has goals you can identify with and a track record that you can use productively in your industry.
  • Set up control processes to manage the interface between the two organisations – treat them as part of the business which is in fact what they become.
  • Once you have outsourced a service  trust the service provider to do the job – heavy handed control or excessive monitoring can get in the way of good service and can only add to costs.
  • Build a contract that has concrete objectives performance measurement strategies and incentives in place – this will clarify things for the provider and provide sustained motivation.

Tips for the provider

  • As with the outsourcer outsourcing is a strategic investment – define goals, strategies and objectives.
  • Build a contract with the client that spells out performance measurements on the basis of concrete objectives – use it to streamline processes
  • Develop an open rapport with the client build a relation that aligns the interests of the outsourcer, the vendor and customers.
  • Build a measurement system to montitor progress and make sure robust management processes. are in place – use it to negotiate changes and upgrade performance responsibilities.

The paranoia surrounding outsourcing is slowly waning and being replaced by a grudging acceptance and recognition of how both sides can benefit. Reports are coming in that well crafted outsource deals restate the value of outsourcing – and add to the stability of the concept. According to a Global Insight study sponsored by the ITAA (Information Technology Association of America), the benefits of offshore IT outsourcing added $33.6 billion to real gross domestic product in the United States in 2003. During 2008, real GDP was expected to be $124.2 billion higher than it would be in an environment without IT software and services offshore outsourcing.

There is value to be achieved by Outsourcing what is needed is a well crafted management strategy to deliver the promise that Outsourcing offers.

Royston

How to start off a successful outsource project

How to start off a successful outsource project

1.0 Know what you want

There must be clear scoping of the demand and what is being put to the market. The objectives for the outsourcing must be consistent and reasonable – cost reduction, as an aim together with increase service may be inconsistent. Sign off internally why you are doing this and agree what is driving the whole process – this is important from the vendors perspective as well. If the vendor knows that cost reduction or technology refresh are key objectives the response can be tailored to your precise needs. Furthermore, objectives can change over time and the original case for an Outsource can be undermined by events. Revisiting the rationale you agreed internally is an important task during the process – don’t be driven by the running train take a time out to check you still need to do this.

2.0 Put in place a clear process.

Decide whether you are asking for a sole source versus competitive bid from the market. Sole sourcing is usually suggested (particularly by the vendor) if there is a history with the supplier and there is a time constraint – but there are significant negatives. Loss of leverage, not being able to compare alternatives, less aggressive pricing to name but three – and a sole source could have high impacts such as the legitimacy of the deal. Last but not least, the process may actually take longer as there is no time pressure that comes from a competitive environment.

In a competitive bid position cost savings have a better chance of being realised and new suppliers can come with more innovative proposals than the in-house incumbent – at least in principle. The process can actually be quicker as the client can drive the competitive process – by a strict time based approach to the process for example. But on the other hand competitive bidding is more resource intensive, for the supplier as well as the client, so make sure you resource well.

Be precise, not prescriptive, comprehensive but concise in the layout – focus on key objectives. We need the ‘what’ not the how – avoid laying down all sorts of preconditions about how the service is to be delivered – that’s the suppliers job in the proposal. I have seen in several RFP’ s detailed specifications of what packages to use and how precisely the service is to be delivered – effectively closing off all innovative solutions that may have been available from the vendor. Also specific demands will drive up the cost – the vendor may be able to offer off-the-shelf solutions that will work just as well as your specific demands but at very favourable rates.

A request for informartion (RFI) is a high-level document inviting a general response and can be used as a test for possible solutions and to pre-select candidates for the bid. Usually there is no bid price given by the suppliers – nor should we expect too much detail here. An request for proposal (RFP) invites a formal response and takes longer for the vendor and the customer to evaluate. In a large bid this cost can come to millions of dollars so make sure before you issue a RFP you really mean to go ahead. Ensure you are being realistic in your demands and take care that the quality and clarity in the RFP promotes conformance in the proposals received.

3.0 Manage the Communication Channels

In negotiation avoid shortcuts and set specific goals – and ensure they are delivered. Evaluate, clarify and frame negotiations to keep competition alive. Document all discussions and carry out frequent self-assessment. Use a term sheet as this helps drive and track the discussion and allows apples to apples comparison – over time the term sheet can evolve into a contract so it is well worth the effort to create one.

Manage the up and down communication channels carefully. Make sure no seniors speak to vendors and control vendor access to senior management carefully. Some vendors are good at getting around the formal process to the senior management and exploiting this access to short-circuit the tender process. We all know of ‘golf course’ deals that cut through a bid process and enable vendors to return to the customer team informing them they ‘know’ the requirements of senior management. Most golf course deals end in disaster so should be avoided like the plague.

Keep talking to vendors and meet frequently to discuss the proposals – the more open and interactive the better the eventual outcome will be.

4.0 Cover the Details

First of all vendors to this for a living – often the vendor sales team have been doing this for years and when this is done will move onto the next. The customer side on the other hand may have not done this before or at least the team carrying out the supplier proposal evaluation may be completely new compared to the last time the outsource process was done. Also some of the customer team will have a day job to contend with – don’t forget this (or holidays etc.) and plan capacities well. Plan well, resource well and set realistic time scales – time pressure can act in the vendor’s favour and allow skipping of important details.

Never let issues that should be solved at negotiation drift into ‘we will solve this later’ discussions. They never are and these can be a source of major conflict later. A trade union official some time ago told me: ‘It is better for the negotiation to break down rather than the agreement’. All-important details must be cleared before signing a contract.

Partnership rhetoric will appear at some stage in the discussions from the vendor side. Partnership usually means giving all the risks to the vendor from the customer side or closing out competition from the vendor side (sole sourcing). Partnership can be invoked to get over tricky points and put them off until later stages or to close out competition. Partnership should be based on performance and strict business principles not waffle. I know it is often said we can handle the things we forgot later in a change process – I have personally never found this to be free of major problems and cost – so beware of this.

Final point maximum gain minimum vendor pain during the proposal stage – and remember to ask yourself what you are looking for from outsourcing until you know what it is!

Royston