Outsourcing Lessons Learned - Take Heed of These 4 Items
by Ralph Welborn and Vince Kasten
Once upon a time it sounded so simple. Just send part of your operations to someone else to deal with and sit back and enjoy your new, streamlined, ever-more-profitable organization. But those companies that have taken the outsourcing
plunge have found that reality is more complicated than theory. A lot more complicated. If you’re one of them, take
comfort in knowing you aren’t alone. If you’re considering joining them, you can benefit from studying the challenges that have blindsided your intrepid colleagues.
Consider the statistics:
* Today, only 19% of U. S. businesses have an outsourcing strategy. However, the percentage skyrockets to 95% if only Fortune 1000 companies are considered.
* Outsourcing grew 30% a year between 1995 and 2003. Worldwide business process outsourcing (BPO) services—which include finance and accounting activities like accounts payable and accounts receivable—are expected to grow from $110 billion in 2002 to $173 billion in 2007, an annual 9.5% growth rate.
* By 2008, the outsourcing market is expected to grow to over $500 billion, of which nearly $380 billion will be information technology outsourcing (ITO), with the balance being BPO. This is up from $335 billion in 2005.
* Approximately 36% of the overall outsourcing activities are occurring in the manufacturing, transportation, retail, and communications industries.
Outsourcing continues to experience double-digit growth. Yet outsourcing providers are facing lower profits, shorter contracts and unhappy customers. And few of the $100 million deals signed will generate the expected revenues. Why? Because, at its core, the outsourcing industry rests upon an old business model based on inflexibility and cost reduction that doesn’t account for either the predictable patterns of technology adoption or for the demands customers face for providing more “value” and “service” rather than simply reducing costs for their customers. Times have changed; customers have changed; markets have changed. But the underlying logic of outsourcing contracts, and relationships, has yet to change.
Here’s the gist of the problem: Once the work leaves your organizational walls, you lose visibility—and some say control—over what gets done how and by whom. In other words, you run, immediately, into the “execution gap”—the difference between what needs to get done and what actually does get done.
Consider these four lessons learned about the challenges and difficulties of global outsourcing:
1. If it looks too good to be real…it probably is. At least 50% of outsourcing deals “fail”—don’t return the results promised to customers—and 80% don’t produce any savings at all, according to the Gartner Group, an industry analyst. Forrester Research, another industry analyst group, recently reported that more than 25% of North American customers are dissatisfied with their outsourcer’s ability to hit cost and service level agreement (SLA) targets, while 69% of European customers reported failure to meet expectations for innovation. The key reason? Lack of contract flexibility and the one-size-fits-all approach. The world changes; customer needs change; technologies change. What doesn’t? Too frequently, the answer to that is outsourcing contract terms. Outsourcers, understandably, try to lock customers into long-term deals based on contract terms and pricing that will be out of date six months after the contract is signed. The result? Frustration, irritation, and a sense of impotence regarding lack of understanding and insight into why the sales promises of outsourcing aren’t meeting up to its delivery realities.
2. Too many outsourcing deals suffer “death by change order.” Here’s what happens: Outsourcing firms don’t always do the homework up-front in regard to understanding its clients’ processes. Thus, it underestimates the amount of work it will take to meet its promises. Often this is an honest mistake, but other times outsourcers may under quote on purpose, just to get the business. Then, when it gets further into the contract, it says in essence: “Circumstances have changed and we’re going to need more money.” Naturally, customers aren’t happy about it, but because they have so much invested in the outsourcer they have little choice but to pony up. When change orders occur several times over the course of the relationship, irreparable damage may occur. Companies lose profits, yes, but they also lose faith in their outsourcing firms . . . and what is supposed to be fruitful partnerships goes sour and possibly even comes to a bitter end.
3. The prevalent “core vs. context” approach—outsourcing what’s not important to let us focus on what is important—is becoming outdated. The “core vs. context” argument states that companies should focus on what is “core” to them—things that directly impact shareholder value or that the customer cares about—and outsource everything else. Examples of “core” things would be R&D—or any type of new product or service innovation—and “context” things would be customer service (call centers) or accounts payable (A/P) and accounts receivable (A/R). This distinction may have worked in the past, but today? We don’t think so. Underlying the “outsource context” chant has been that owners had to know only that the service was being provided to them and their customers, but not necessarily how it was being done; after all, if customer service calls were meeting their targets in terms of number of calls taken and number of complaints resolved, then all is good, right? Wrong! Dell Computer had to take back (“in-source”) its outsourced customer service centers because of the huge number of customer complaints they were receiving about it—and the drop-off in number of additional sales that usually accompanied customer service calls. And, on the “core” side, Procter & Gamble, one the world’s leading companies known for its innovative product design, has now “outsourced”—or more appropriately “co-sourced” —its product innovation process for a simple reason. Procter & Gamble has 1,500 “product designers”—those people who come up with new product ideas that consumers globally clamor for and Wal-Mart sells to us all—but the world has 15,000 of them. So, P&G, realizing 15,000 people developing product ideas would far out-innovate/out-create product ideas than could 1,500, created a co-sourced innovation model with product designers around the world—harnessing the brainpower of people well outside their organizational walls. Recognizing that such new models of innovation and strategic value are occurring, quickly and all over the place, forces all of us to reconsider the role, impact, and type of “outsourcing” relationship that makes sense—and that far too often is ill- or not-at-all considered because of the tired old outsourcing model underlying and offered by most service providers.
4. Outsourcing firms are suffering from the Botox Effect. There’s a reason Barry Manilow and Mary Tyler Moore can’t smile anymore without making it painful for us to watch. Botox takes out their wrinkles but inhibits normal facial expressions. This isn’t so different from challenges outsourcing firms face as they get into the “upgrading” portion of their contracts. Around year three to five, they were supposed to have taken out lots of the “easy” process-based costs and added in the simple automation they promised. The problem is, they discover lots of “gotcha stuff” they didn’t know about back when the contract was signed. Turns out, they oversold. The “technology refresh” is a lot more expensive than they thought—and they’ve got so many operational challenges and cost pressures just to keep going (“keep the smile on”) that they can’t afford to do the promised investments when they promised to do so. They’ve become inflexible. They push out the timeline for the technology refresh. They smile, but it’s an artificial one . . . and the change orders keep coming.
So . . . in the face of all these challenges, how can companies ever “get outsourcing done”? There are certain steps you can take to minimize the pitfalls and maximize the opportunities. Outsourcing is here to stay; it will change, evolve, mutate. And knowing that it will do so—helping “make sense” of these changes and the opportunities—is critical to helping companies “take action” on them. But the single most important thing you can do, the thing that underlies everything else, is just this: know thyself. Make sure you understand your own business inside and out before you do the outsource thing.
Blueprint your business processes to get visibility into what’s really going on. You need to know what connects with what, where, when, how and how much. There are far too many potential pitfalls and risks as well as real jewels and innovation opportunities for you to not have this type of visibility. After all, the outsourcing game is no longer just about reducing costs; it’s also about creating value. It’s no longer an “either-or” game.
Ralph Welborn and Vince Kasten have nearly 40 years of combined experience focused on business transformation,
performance analysis, collaborative strategies, business and IT partnership, systems integration and management, and solution deployment. Welborn and Kasten also co-authored “The Jericho Principle: How Companies Use Strategic Collaboration to Find New Sources of Value.”
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