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 in the first class cabin of yer Southern Rail for the daily commute idly glancing through an article ref David Attenbore and his long career of wildlife programming when over the Tannoy our Guard pipes up – “Ladies and Gentlemen I thought I would let you know that today is ‘meet the managers day’ hoorah! and starting at 0730 at London Bridge Southern Rail have arranged some victims to talk to you about your experiences with the service”. “If you have any difficulty with finding them just ask one of the station staff (AKA Bob Crows Army) and we will point them out for you – however they should be easy to spot as they will be the guys quaking in their boots somewhere close to the front of the station – enjoy!!”.

It was with a feral glint in the eye that we got off the train and as a mass trooped off to see who these half wits were. It was then we spotted the herd of Southern Managers the young and inexperienced in the centre safely surrounded by wizened old gits veterans of countless fob offs and excuses hiding just behind the ticket barrier close to the relative safety of the coffee shop. Prowling closely by the predatory commuters look for their chance to cut out one of the youngsters and give him a right rollicking. One of the younger sub-managers paws nervously at the ground looking down and glances around for the escape route wondering why he’s here and thinking that if he had revised more studiously for the McDonald’s degree in Burgerology (BBu(Hons)) he would be safely inside worrying about colony forming units of bacteria and not here facing this angry mob. Ah look a diversionary move by one of the older females ‘can you tell me which platform is for Victoria’ – oh over there platform 13 Luv responds the Alpha Manager. Too late he spots his error and two predators move quickly in and split up the herd isolating one of the newer managers who immediately cut off from the safety of the herd is pounced upon by a gaggle of ferocious wildcats. One cannot but admire the team working of this experienced pack – from an early time in the management training school of yer Southern Rail junior managers are able to divert complaints and back peddle at a rate of knots, but under the relentless pursuit of this angry crowd he is quickly worn down and soon becomes an exhausted sniveling wreck. One particularly stern lady caught my eye, and caught the guy she was laying into by the ***** as she gave him a right dressing down about over-crowding especially when he asked her to ‘calm down madam’ – which I always think is a marvelous way to up the temperature (needs to revise his ‘Handbook for Conflict Management on Southern Rail’ (10th Edition) notes) and drew the response ‘what do you mean calm down you little oik’ – ‘ I’ll have your b***s on a stick’ you talk to me like that!

She walked off obviously set-up for the day and cheerily responded to a request to take a sample of a chunky chocolate bar as a free gift on the station concourse – ‘No thank you’, she said, ‘I’ve had my quota of protein for today!’

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

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

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

It seems project managers and project leaders have seen quite dramatic pay increases (good news for some), but because all the lower level jobs have been outsourced or ‘offshored’ then there are fewer people to rise through the ranks. SSL (Salary Services Limited) carried out a study which clearly demonstrates the shift. Their research director George Molyneaux is quoted by Computer Weekly as saying that ‘Outsourcing jobs reduces the incentives to get into IT’. Not surprisingly, there are far fewer people taking IT as a subject at University – and there are fewer graduate level jobs in the UK. How on earth are we going to develop the future project managers who will understand the UK IT industry? I think this is a real time-bomb.

Yet the reply from one of the recruitment companies is that we need to increase marketing and highlight that there is a demand for IT people. Does this person think that today’s young people are completely stupid? It is clear from the above analysis that there are fewer jobs and no clear career path. The IT industry cannot continue to dump people like hot potatoes whenever they think they can get them cheaper elsewhere and then expect a good flow of graduates coming into their sector.

Better marketing is not going to resolve the issue. People will only start moving back into IT when they can see there really is a career for them.

There is a podcast about the drop in student numbers and the implications on the following link:Computer Weekly

An outsourcing transfer can be viewed as a form of transition. This change process involves involuntary movement from one company to another, with possible similarities, from the staff point of view, to mergers and acquisitions. The transfer may also include staff reductions or ‘downsizing’, and the new organization will make some effort to develop a relationship with their new staff in the form of organizational socialization. All of these transition processes are likely to impact upon perceptions of justice – in other words, whether people feel they have been treated fairly or not. These perceptions are important as there is substantial evidence that if people feel they have been treated unfairly they are far less likely to perform well. However, of specific interest here is the repeated finding that good attention to procedural justice concerns can increase perceptions of fairness even if the outcomes are unfavourable. If we assume that, at least initially, staff will view the likely outcome of being forcibly transferred to another organization as unfair, it may be possible that procedural justice will reduce their perceptions of unfairness.

What do we mean by Justice? Distributive justice considers perceptions of fairness of outcomes (equity, equality, and needs). Procedural justice emphasises the importance of fairness of the methods or procedures used (decision criteria, voice, control of the process), and Interactional justice is based on the perceived fairness of the interpersonal treatment received, whether those involved are treated wish sensitivity, dignity and respect, and also the nature of the explanations given.

I have had some people ask me why they should bother about how people feel if they are no longer working in their organisation.

For most companies who outsource, the staff will still be required to carry out work for them, albeit under the management of the outsourcing company. It is also possible that at some stage the organization will wish to back-source (bring people back in house). My ongoing research indicates that organizations will experience problems if they do not attend to the needs of their staff during the transfer process. To manage justice perceptions it is important to ensure you do communicate and that the process is viewed as fair.

Some of the practical considerations for the transfer itself therefore include; effective and ongoing communication of the business rationale, a focus on procedural and distributive justice, training of managers to ensure open two-way communication and interactional justice is enabled, and accepting and working with the emotional aspects of the transfer rather than pretending it does not exist.

An aspect not often considered at all by organizations is after the transfer. It will be important to ensure remaining staff receive clear communications regarding the changing roles (their own and their ex-colleagues). A balance will need to be made between letting go, so that transferred staff do not feel they cannot move on, and creating barriers to communication. Most importantly, consider how the contract influences your relationship with them. In the UK for example if the tupe agreement includes a mapping-on of salary increases or other awards it is vital that a process is put in place to ensure this happens, rather than forcing the transferred staff to continually monitor the situation.

So do think about the people side of the transfer if you are outsourcing, and remember that you need them to be motivated and to continue to perform. Achieving this will be difficult and should not just be left to the company you have chosen to outsource to.