In this video Prof Strassmann considers, in a very careful way, whether Outsourcing can be profitable. The short answer to this is yes if it is done corrrectly and he points to the main reasons for failure steming from managements inability to manage the process correctly. Especially it seems when it comes to deciding which functions should be considered.
Overall a very erudite and insightful contribution.

The last part to the outsoucing process concerns carrying out a well-managed and transparent process

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 and use a term sheet, this helps drive and track the discussion and allows apples to apples comparison -over time the term sheet can evolve into a contract. Good note taking then transference to the final document of the substantive requirement and agreements made during the discussion is important. Do not leave anything out of the agreement that important to you that was discussed and agreed elsewhere – if it is not in the agreement it does not count.

Partnership rhetoric will appear at some time in the discussions especially from the vendor side. Unfortunately partnership usually means giving all the risks to the vendor from the customer side or to closing off competition from the vendor side (sole sourcing). On the positive side partnership can be invoked to get over tricky points and put them off until later stages in the negotiation – however as we point out later some things should never be put off until after the contract is signed. Partnership should be based on performance and strict business principles not waffle.

Never ever 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. An old saw from the collective bargaining days is very apposite here: ‘It is better for the negotiation to break down rather than the agreement’. All-important details must be cleared before signing a contract – never sign until they are or you are courting disaster.

5.0 Set up a well executed communication process

Manage the up and down communication channels carefully. Make sure no senior management speak to vendors and control vendor access to senior management strictly. You will have to brief senior management about the risks of this issue. In best practice the rules of engagement will state that suppliers who circumvent the process automatically disqualify themselves. Some vendors are good at getting around the formal process to the senior management and exploiting this 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.

Keep talking to vendors and meet frequently to discuss the proposals – the more open and interactive the better the eventual outcome. Ask for alternative proposals reordering or cherry pick ideas from several contenders to shape the deal you want.

Communicate internally at an early stage and keep your own people up to speed at all times. Don’t imagine for a minute that you can hold discussions in camera and keep an outsource negotiation secrete. We cover this aspect in more detail elsewhere but bring staff on board at an early time can generally increase chances of success. Indeed the staff to vendor fit is a key success criteria for the whole business success of the process so informing must take place as early as practicable.

Last but not least when the deal is done do the deal – as quickly as possible begin to execute the agreement. We have heard of examples where the transference can take many years to actually take place and this is a disaster for all concerned.

The Five Steps to Outsourcing – Part Two

3.0 Organise for success

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 the team carrying out the supplier proposal evaluation may be completely new compared to the last time the outsource process was run through. It may be very wise to engage a contract consultancy to handle (or mentor) your side of the whole process.

A point that is often missed is to plan the capacities of the customer team that will be creating then managing the outsource process. In a large bid the job is fulltime and often key members of the customer bid team will also have a day job to contend with – don’t forget this (or holidays etc.) plan capacity 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. Do not be put under pressure by poor capacity planning or too optimistic time schedules.

Just a few words on the differences between the types of bid document commonly encountered during the bid process. A RFI is a high-level document inviting 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 RFP invites a formal response and takes longer for the vendor and the customer to evaluate. In a significant bid the costs associated can run very quickly into hundreds and even millions of pounds there fore before starting the whole circus make sure that you intend to place business. Ensure we are being realistic and take care that the quality and clarity in the RFP promotes conformance in the proposals received to ensure comparability. I always favour a clear template approach that forces answers in a clear structured way and allow suppliers to put all the waffle in the attached appendices.

4.0 Set up a competitive bidding process

You need to decide on sole source versus competitive sourcing towards the market. Sole sourcing is usually suggested (by the vendor) if there is a history between the companies and there is a time constraint – but there are significant downsides. Loss of leverage, not being able to compare alternatives, less aggressive pricing, 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 true competition.

It is our view that a competitive bid process has a better chance of realising cost savings, suppliers can come with more innovative proposals that the in-house supplier – although a well managed internal bid can address this problem. 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 side competitive bidding is more resource intensive, for the supplier as well as the client and this has to be planned for. Be careful about inviting a supplier to the party just to act as a market testing benchmark when the intention is really to squeeze the in-house supplier. You may do this once but will be pre-qualified out of any future by business by suppliers. In principle this is business be open and prepared to do business with other suppliers it keeps the market healthy.

Be precise, not prescriptive, comprehensive but concise in the way you pose your requirements – 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.

Introduction

The jury is still out as to whether outsourcing can deliver measurable business improvement and better-cost performance. Many outsource deals fail to live up to the grand promises made in the press releases and back sourcing or early closure of deals is becoming an increasing trend. Having said this there are key principals that if followed can greatly increase the chances of success of the whole process.

1.0 Scope the demand

There must be clear scoping of the demand and what is being put to the market. This need to be on the basis of knowledge of what and how the service is being carried out now and how much is being paid for it. Outsourcing on the basis of lack of understanding or frustration is the poorest reason and almost certainly will lead to poor decisions and no benefit. It is best practice to fully assess the current service as provided even to the extent of allowing the internal organisation to prepare an ‘ internal’ bid for the service. This allows a thorough scoping of the service and an accurate benchmark. It will also expose the fat which contributes to high cost in the current ways of working and the profit to be made by the outsource vendor should you go to market without assessing the current cost structure.

2.0 Clarify the objectives

Within the objectives for the outsourcing there must be consistency and reasonableness of demands – cost reduction, as a key aim coupled with a demand to increase service may be inconsistent. Sign off and agree internally why we are doing this and determine what is driving the whole process within the organisation – this is important from the vendor’s perspective as well. If the vendor knows that cost reduction or technology refreshes are key objectives the response can be tailored to precise needs.

We should be aware that objectives can change over time and the original case for an outsource can be undermined by events. Revisiting the rational is an important task during the process – don’t be driven by the running train. And be prepared to get off if the rationale changes. It makes no sense to go on when the entire rational and benefit case has disappeared.

I was reading in the outsourcing trade press this week about the political debate in the US about job losses in the outsourcing market. The debate centres around one of the most vexing questions in the outsourcing market as to whether outsourcing, or more specifically off-shoring, creates or destroys jobs in the outsourcing home country. This furore is particularly felt in the US where a political backlash threatens to develop that may result in government measures to remove some or all of the advantages of outsourcing – such as denial of tax relief on expenses as one example.

The problem is particularly acute if we consider off-shoring where the jobs in the home country are transferred to a receiving country such as India. And as a result the jobs disappear in the host country and those people in the US are let go. So what is the truth in all this and what factors are at play when we consider work restructuring due to outsourcing?

There have been several attempts to justify job losses by recourse to ideas that outsourcing actually creates more jobs than are lost – ergo we threaten this process by any talk of protectionist actions. Although there is no evidence base for any of these ideas they are starting to gain traction as the industry fights back to try and extinguish any legislative activity that may restrict their current free rein.

The arguments seem to boil down to three main points:

• The savings yielded by outsourcing leads to higher investment in the business and as a result further job opportunities are created.
• The inward investment in the offshore country increases their standard of living and the demand for American goods and services which leads to increases employment in the US.
• Any form of protectionism (or legal protection) acts to increase employment expenses and thus to reduce employment opportunities.

Is there anything in these points?

The main problem with the first one is the assumption that outsourcing yields value at anything like 50% as claimed by some writers that can be invested per se. As an example I attended a recent conference in London where it was revealed (from a large scale European survey) that although around 60% of outsourcing organisations claimed some financial savings of these only around a quarter had any idea how this was measured – the rest had no way of assessing success and had no clue where or if this was done in their organisation. This means only15% of organisations can state that they have achieved any savings with any surety. Other researchers and consultancies have also shown that getting any benefit from outsourcing is proving to be a surprising intractable nut to crack – so where’s the money coming from for this investment?

Secondly all of the main offshore countries are notoriously closed as far as inward business is concerned – we have been hearing for years these potential advantages in the UK but we have yet to make any real impression in business terms in the very protected markets in Asia. In the UK we send unemployed princes on foreign trade missions that seem to yield very little of substance and just involve giving away our technology at knock down prices. American trade missions have had little more success and you don’t have princes with time on their hands! Furthermore, the idea that Indian sweat shop workers are queuing to buy American high tech goods is fanciful at least.

Lastly employment law and protectionism are stated to be one of the core reasons preventing job creation. Any restriction on the ability of businesses to move employment from one place to another or to offer any protection as far as workplace rights or working practices is seen as an anathema and opposed by recourse to a ‘jobs being destroyed’ rhetoric. From this perspective outsourcing is seen as an efficiency mechanism acting on employment cost – and the target (of the outsource) depends entirely on where the cost advantages lies at a point in time whether in the US or not. Thus if used correctly outsourcing can allow cost advantage to be maintained over time by switching between suppliers. It is in affect a re-working of the investment idea where the removal of all restrictions on organisations to do what they want can facilitate job creation.

My take on this is that job losses are inevitable in outsourcing but the problem is it is a particular type of loss that occurs and is felt differently across society. It is the entry level IT jobs, lower skilled activities, voice services or manual production tasks that are going offshore – and they are not being replaced like for like. What this means is that specific sectors of our society are being affected and their ability to make a living stopped by outsourcing – it is their jobs that are going offshore. Jobs that used to be for high school graduates or those less successful in education or could only work part-time are going and are not being replaced. So our fundamental question is are we happy with this – is it justice?

It strikes me that the arguments for or against employment losses misses out on another fundamental aspect – the experience of outsourcing of those who go through it. Loss of identity, stress, and feelings of powerlessness occur all to frequently when we carry out an outsource badly. One of the key points about this type of employment structuring is it acts to move workers from the primary sector to the secondary sector. In the secondary service sector employment tends to be fragmented, short term with wages set by the market and overall is much less secure. All this acts to make the experience of work much more instrumental and tightly controlled and denies people any of the positive aspects of work.

We must do better than this. People do want to do a good job, be loyal, and serve customers well – and be rewarded and treated fairly for doing so. Outsourcing is unstoppable but it is controllable for the better good of our society.

REM

Lawmakers in more than 25 states and in the United States Congress have identified foreign outsourcing as a threat to US employment and prosperity. Legislators must ban federal or state contracts with companies that would outsource jobs to foreign countries.

If no action is taking, US companies will continue to fire American workers in significant numbers and replacing them with foreign workers in low-wage countries such as India, China and Eastern Europe.

Of course, outsourcing is nothing new. The US and State governments and American Corporations have been outsourcing domestically for decades such services as data base management, janitorial services and payroll. The recent increase in foreign outsourcing in which US companies buy services from foreign-based providers has been make increasingly cost effective due to the personal computer and the Internet.

According to the data from several experts, over one third of the world trade growth has been achieved by means of foreign outsourcing to other countries. This has caused the loss of hundreds of thousands of jobs in the United States and has had a major effect on the US Economy. Foreign outsourcing has changed the demand for skilled and unskilled labor and altered the structure of wages in the United States. Foreign outsourcing sends production to countries where labor costs are lower than in the US.

As a professional web designer, I have seen many American businesses outsource their web projects to foreign countries. American businesses fail to realize that they are spending their money overseas and not supporting the US economy. They are causing American workers to lose their jobs.

Mitch Webb

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Foreign Outsourcing of American Jobs

Although the reality is very different a recent article in computer weekly (a UK based IT Magazine) suggested that companies are being more flexible and attempting to spread the risk by outsourcing to different suppliers in different countries. As Leslie Wilcox of the LSE suggested the process looks like ‘spread betting’. Although this was a nice idea at least in print the practice of doing this for real is proving more difficult as the basis of off-shoring is often to move low value commodity call-centric services to locations where the language matches that of the home country. Accordingly much of the UK based off-shore market has naturally gravitated to India where a large number of skilled, low paid and disciplined people are available to man the phones. The Indian subcontinent turns out twenty to thirty thousand IT graduates a year for example and as a corollary of their degree course often speak English to a high standard. Another factor that causes management heartache with multi-shoring is the problems of managing several off-shore suppliers – its bad enough with one as the practice has shown.

Although innovation is appearing as more important at least in surveys when deciding on outsourcing the main attraction for off-shoring still remains labour arbitrage – i.e. cheaper wages. However in India of late they have been ‘enjoying’ 25% wage inflation in the outsource industry as highly skilled graduates are demanding better salaries – furthermore the attrition rate is extremely high and it seems that graduates do not relish a long term ‘career’ in a call-centre but treat the job as a stepping stone into the world of work. It is these factors (rather than risk reduction) which is causing companies to explore the world more carefully looking for the next low wage spot. Unfortunately there are not many options and talk of using Malta, Singapore are fanciful and only really in the margins, and Russia and China have immense language barriers to overcome before they can be considered

Another remark was made in the article that rather than always going down the low cost route ‘companies are asking for more innovation’ from their suppliers – this is not borne out by any evidence of course and is not clear what is meant by innovation but there is something useful in this comment. That’s the idea is that outsource providers can take up the proposition of innovation and actively improve their service, be more efficient, deliver in more up to date means, whilst constantly improving the cost base. In my view you can have innovation and cost improvement at the same time and suppliers rather than resting on their laurels after the deal is closed should from day one start to improve the service and pass on a fair part of this to the customer. Can you imagine what it would be like to be a customer of such an outsource provider? Working to improve their part of your business to make it more efficient and effective whilst reducing your bill year-on-year – rather than the account manager just turning up once a month to make sure you pay the bill and renew the contract! If suppliers did this they would probably have continuous rights to the business and be invulnerable to critique and outsourcing would look something more like a real partnership based on performance rather than just a mechanism gaining access to the market without much risk.

Royston

see more of my posts on the Bizface Forum

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

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

From a justice perspective, followers, or in this case the ones on the ‘receiving end’ of the outsourcing change, will judge the leadership exercised as to the degree which it is fair. That is leaders can motivate followers by following ‘fair procedures’ and followers can as a result become more supportive of the direction or goals being proposed and exercise good organisational citizenship – even when the goal being proposed is adversely affecting them.

This can be sharply contrasted if you think of a more distributive type of process where the person affected by the change only sees the instrumental issues – how the change is materially affecting them (loss of income or job for example). What this forces us to consider is how people apply different yardsticks when looking at an organisation’s position and how this can inform us why a person could simultaneously ‘respect’ the person who is communicating the bad news whilst keeping this distinct from poor justice perceived at an organisational level – or from another person or department  elsewhere. I.e. is it seen as fair what the company is proposing as articulated by the manager compared to the way it is actually carried out at a company level. For example an outsource in order to gain cost advantages over an incumbent workforce would I suspect be judged adversely in a distributive justice sense, whereas a correct and fair application of the selection of the people affected by the outsource, as done by the manager, could be seen as procedurally fair if done with integrity – you would probably hear things like ‘he’s only doing his job’ or ‘he has no say in the matter’ but never the less ‘he’s a good chap.’

You could also take another view more directly related to identity and leadership: followers internalise the leaders perspective and construct an identity congruence to the leaders (buy in to the vision) and the issues around Identity in terms of the organisation (letting go and the processes involved in breaking the psychological contract) and constructing a new identity with the new organisation in outsourcing or ‘downsizing’. These types of processes also affect those left behind – i.e. be distanced from the organisation as a consequence of a poor outsource process. These sorts of processes could also help us ‘explain’ a differential response to the different players within an organisation (respect the manager but despise the organisation) – this is seen a lot in downsizing or outsourcing organisations people leave and organisation with a bitter taste in the mouth. It should not be forgotten that poorly outsourced people are probably lost as customers for the rest of their lives!

What this means is that the response of workers to an outsource can be greatly affected by the way messages and procedures are actually executed. A fair and equitable approach delivered by a well trained and respected manager can actually help in reducing resistance to change – in effect stopping causes of resistance at source.

Royston