A large percentage of outsourcing arrangements fail to meet expectations. This is understandable since a surprising number of business leaders don’t invest sufficient time and effort into an obvious and critical step in outsourcing: articulating their expectations.
This is not to say that business leaders enter into outsourced arrangements without goals or expectations. Instead it means that a failure to be specific regarding their goals or expectations often has two unexpected results.
The first is that in the absence of well defined and mutually agreed upon goals and expectations, business managers will typically develop their own set of goals or expectations. These can be wide-ranging and, in the absence of facts, quite unrealistic. This creates confusion in the definition of success. The second unexpected result is just as serious. The outsource service provider will also interpret requirements and expectations, and structure service delivery, support and pricing on misguided and unclear directions. All of this leads to that familiar axiom “any road will take you there if you don’t know where you’re going”.
When frustrated expectations interfere with internal and external relationships post-outsourcing, it is difficult to backtrack and recalibrate expectations to match the agreement or to change the agreement itself. When a mismatch between the provider’s capabilities and the organization’s requirements occurs, the surprise is rarely of the “happy birthday” variety. This can lead to significant investment of management time and expert resources to assist you as you try to salvage the arrangement or find a way to untangle it.
Outsourcing is serious business. Your customers and employees won’t differentiate between products or services rendered directly by your company and those provided by your outsourcer. As you move through the phases of outsourcing, the time you invest in planning and communicating will serve your company well. Take the time to define specific expectations and to get agreement from key sponsors and stakeholders prior to moving forward with your plan to outsource.
‘Non-core’ business is a high-level definition of a good candidate for outsourcing. But it’s one of those terms in common use that is quite ambiguous. Looking for ‘non-core’ candidates to outsource is unlikely to get you any closer to determining whether outsourcing is the best possible alternative to operating that aspect of your business yourself.
It is more useful to look into your business and decide which areas are problematic or about to become problematic. Transactional activities are typically good places to start. Once you determine that outsourcing is a potential solution, you will want to understand the potential ‘value proposition’, assess the risks, determine if and how risks can be mitigated, then decide whether anticipated value from outsourcing sufficiently justifies the risks and assists the company achieving its long-term goals.
Determining the value proposition
The first step, determining the value proposition, doesn’t have to be overly complicated. Consultants and outsourcers will happily provide you with a lengthy list of the benefits of outsourcing that may only serve to confuse you. There is nothing wrong with taking a simple approach. Most benefits that can be achieved from successful outsourcing can be summarized under three headings:
1. Financial benefits
These benefits are not mutually exclusive, nor do you have to achieve benefit from every possible source.
Financial benefits include direct and indirect cost reduction, cost control, cost avoidance and converting fixed to variable costs. As you go through due diligence, you will establish your current costs of doing business. You may have determined that you have exercised all available cost-reduction measures but are unable to reduce your costs further. Or you may not be able to improve efficiency due to small scale. An outsourcer generally has a stable, scalable infrastructure. In theory, taking advantage of their scale should allow you to reduce your existing costs. Since this is their core business, you can expect the outsourcer to be more efficient, being able to do more for less. Or they may operate some or all of their business offshore, in a lower-cost environment, and pass lower employee costs on to you.
When establishing a pricing structure and negotiating the details, it is important that you consider future changes to your business requirements, whether they are in the form of volume increases, volume decreases, or changes to the services rendered or the need to upgrade or change technologies. If you have been thoughtful in constructing pricing, you will be in a good position to predict and control costs as your business grows or changes. Cost avoidance normally comes from a need to upgrade your technology or platform, and levering the outsourcer’s investments may be a better option than investing in new or upgraded infrastructure yourself.
Access relates to people, processes or technology.
With respect to people, it can be difficult for organizations to attract and retain the best and brightest people in specialized fields if there is a limited ability to provide them with interesting personal growth opportunities. Your loyal, home-grown talent may enable a stable operation, but they may not have the broad experience or resources to take this part of your operation to the next level. The talent that you either can’t attract in the first place or are most reluctant to lose often gravitates toward those companies that are leaders in their field. And you can correctly assume that the outsourcer’s management quality is superior to your own, given the depth and breadth of expertise offered by a specialist organization. The second form of access is to processes developed by these specialist firms, using superior talent, technology, workflows, or systems that can improve the quality or efficiency of the operation. Finally, capital is always scarce and the kinds of technology investments that will advance your operation or improve efficiency are often beyond the means and resources of your organization. Remember that your requirements are the core business for a specialized outsourcer that they must invest in to survive.
Competitiveness is what it’s all about. Competitiveness can mean reducing your speed to market for new products and services, freeing up management time and attention in order to focus on other parts of the business, and developing new business lines. Reducing your speed to market can be a result of a smooth-running operation that can readily absorb more content and complexity. Or it can mean working with your outsourcer in a highly collaborative fashion, leveraging expertise from both companies to create new business opportunities, redesign processes or improve your customers’ experience.
Outsourcing transforms your responsibility from running a hands-on operation, along with the intense focus on day-to-day operations, to managing the interface and monitoring the outsourced service provider’s performance, or increasing market share. This should free up management to scan the competition, deepen their expertise, find the time to develop new sources of value, or concentrate on the organization’s core business. When expectations are met, and there are few surprises on either side, management time and attention is freed up, which can be turned to higher-value activities.
Paying attention to the three key aspects of the outsourcing ‘value proposition’ will help steer you in the right direction and ensure that your outsourcing arrangements meet everyone’s goals and expectations.
Linda Tuck Chapman is Vice President, Strategic Sourcing for Scotiabank Group. She is based in Toronto and can be contacted at linda.tuckchapman@scotiabank .com.