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Why Outsourcing often does not deliver value

Why are the benefits of outsourcing only rarely achieved

In a recent Dun & Bradstreet report they noted that “25 percent of all outsourcing fails” completely and over 50% of all outsource deals do not deliver any substantive benefit at all. Outsourcing failures are often the result of companies rushing into transactions with unrealistic or unsubstantiated expectations of cost savings and performance improvements that cannot be met because the client does not communicate its requirements in a clear way either internally or to the potential vendors. The outsourcing of many business processes besides IT also has the same less-than-stellar results – call centre problems are almost a
cause célèbre. Some people believe you need hundreds of pages of detailed specifications as complex as War and Peace to make outsourcing work at all tying up the whole thing in a tight contract that covers every possibility – clearly not a practical proposition.

The main causes of failure in an outsource in my view are :

  • The buyer’s unclear expectations up front as to its objectives – poorly defined goals and requirements and a lack of outsourcing contract management capability are two of the top reasons for IT outsourcing failures.
  • The parties’ interests maybe aligned up front but become misaligned as the buyer’s business environment or needs change over time (as they will inevitably)
  • The provider’s poor performance against service level agreements – which in some cases is dramatic.
  • The parties do not consider each other’s interests to ensure their relationship is mutually beneficial – the naturally conflicting objectives and the need for vendors to make money are often not really internalised by clients.
  • Poor governance structure for managing the ongoing relationship – in some cases this is left just to account management.
  • Poor cultural fit compatibility of the parties – asymmetric sizes between client and vendor as well.
  • Poor communication; the parties do not proactively share necessary information with each other – the relationship deteriorates rapidly when information is hidden

In another recent work I have been involved with there have been several instances of buyers and outsourcers in direct conflict and not inclined to acknowledge their own influence on outsourcing failures. The blame game starting early on in the relationship. Hidden costs, high staff turnover and poor cross-cultural communications are also some of the key causes of offshore outsourcing failures. Another big source of outsourcing failures is the way that outsourcing vendors tend to “sell high,” pitching their projects to the CEO rather than to the IT staff and managers who really know how to run the business – this enrolment of ‘C’ level managers is often the source of great difficulty when the real discussions take place. They have bought into a process based on high level aphorism that have little practical value on the street corner.

If you choose to look at global outsourcing as an opportunity, as numerous companies do, you may quickly realize that making it work requires a carefully planned and orchestrated approach. I suggest, though, that the current failure rate of performance improvement in outsourcing is only tolerated because the full extent of failure is disguised; few organizations or individuals are willing to admit the extent of failure on a major outsource contract. Failing at this game can have career damaging consequences.

See more at Bizface in the Outsourcing forum

2 comments to Why Outsourcing often does not deliver value

  • Joe Nosotti

    Interesting article. From reading similiar articles I find that outourcing will deliver short term finincial savings, the long term issues will be operational. I disagree with you on detailed specifications. If the scope of work is not detailed enough an item not covered could become a change notice and an additional cost. What is the title of the D & B article?

  • Hi Joe,
    My experience is otherwise – in a project sense we can always put in change notes yes but… The problem in outsourcing is as clients we often assume that particular services are included and they are not. When difficult issues are confronted like sorting out the details in the contract rather than sorting them out you often hear lets sort it out later we will act ‘in the spirit of the agreement and so on.

    It never is sorted out and I have reams of interviews with outsource clients of the heartache caused by hasty agreements with the bulk of the detail ommited only to come bak to bite them later.

    RoyMogg

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