Much has been written about the numerous benefits
and ills of outsourcing. Nonetheless, it is now a business imperative for most
companies, underpinning the need to ensure a successful outsourcing
relationship.
Being a strategic decision
with long term impact, the success of outsourcing depends both on the service
provider and the outsourcer’s commitment. An analysis of outsourcing
relationships that have not been successful reveals a certain pattern. Based on
our extensive experience in outsourcing engagements we have identified the eight most common but serious mistakes enterprises are likely to
commit while outsourcing their processes to a third party service provider.
This paper analyzes each mistake in detail and outlines measures to avoid these
pitfalls.
The following illustration
highlights these eight common mistakes.
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Poor
Governance
This is one of the most commonly encountered
problems and a key cause of failure of an outsourcing relationship. Organizations
often take a tactical approach to outsourcing and do not pay attention to
executive sponsorship, which is an important ingredient for success. Lack of a structured
governance mechanism has led to the “untimely demise” of several outsourcing
relationships.
A good governance model ensures a strategy which clearly defines the objective of outsourcing, prescribes
a working model that is flexible and collaborative, sets up SLAs and decides on
a mechanism for arbitrating issues. Most outsourcers, however, under invest in
the ongoing governance and management of the service provider relationship and
this invariably spells trouble for the engagement.
Shortsighted
Focus on Cost Savings
Most enterprises cite cost savings as the key reason
for outsourcing their IT requirements. According to a survey of more than
800 executives in the US and Europe, cost saving is still the primary driver
for outsourcing. This often raises unrealistic expectations with reference
to continual cost savings. Owing to this myopic view, enterprises fail to consider
other benefits such as process efficiency, improved focus on core business
areas, better ability to plan, higher levels of operational reliability, and
more rapid implementation of new strategies and initiatives.
A broader and long term approach is essential to
set pragmatic goals, spread over time for evaluating the success of a relationship.
Enterprises should seek access to flexible, scalable and easy to maintain
systems — leeway to focus on core strategic functions, access to high caliber
labor and more importantly risk mitigation. When enterprises broaden their
vision and visualize outsourcing as a strategic function, they will be able to adopt
a more balanced approach as opposed to viewing it as a pure cost reduction
mechanism.
Lack of Preparation
- Seeing Outsourcing as an Instant Solution
Using outsourcing as a quick fix to alleviate immediate
problems is another commonly encountered issue leading to poor results. While
outsourcing does result in some operational sweet spots, it should not be the primary
reason to employ this strategy. This mindset leaves an enterprise under
prepared for outsourcing.
Many a times, companies start the request for
proposal (RFP) and contract negotiation processes before they have thoroughly
evaluated the outsourcing decision internally. Outsourcing being a complex
decision, such an unplanned approach will jeopardize the future of the
relationship. To ensure a successful and lasting outsourcing engagement, the
organization must prepare itself for the change it will have to undergo during
this transformation. Issues such as job loss and resistance to change will crop
up during the transition and needs to be guarded against.
Outsourcing
High Touch Activities
Not all work is ideal for outsourcing. Understanding
what processes to outsource is an important part of the planning process. Against
this backdrop, it is useful to consider a framework such as the one shown below
and categorize work into four broad buckets -
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Outsourcers sometimes do not invest enough time
to do such a mapping and may end up outsourcing the wrong processes leading to disastrous
consequences. Then again, organizations that outsource projects with low
business value, or too many hand offs, may not enjoy the right results. If the
project requires considerable interaction, the management overheads are likely
to increase exponentially leading to questions over the possible benefits.
Failure to Develop
an Effective Communication Program
In a recent survey by a leading association, 28
percent of the 1,000 respondents had pointed out poor communication as the top
reason for the failure of an outsourcing project.
Communication is a key factor in delivering results in an outsourcing
engagement. Sharing of information is essential for –
- Clarity of expectations and objectives
- Alignment of interests
- Compatibility between the two parties
Factors like distance, time, language, and cultural
differences create barriers for communication. In cases where cost cutting is
the only reason for outsourcing, communication often takes a backseat. For a
successful outsourcing relationship, the outsourcer and the service provider
need to work in a collaborative manner. Key elements for overcoming barriers
for communication include:
- Establishing clear communication channels
- Standardized format for content, frequency, levels and modes
- Interactive and proactive communication
- Escalation
mechanism
- In global outsourcing relationships, showing diversity
Improper Evaluation
of Outsourcing Service Providers
Often
companies invest less time and money on selecting service providers and put the
complete project in jeopardy. Proper evaluation and selection of providers is
crucial.
The pitfalls of choosing the wrong service
provider are many. At the minimum it would give sub optimal returns and in the
worst case, it may lead to the outsourcer abandoning the engagement. Therefore,
it is essential to thoroughly evaluate service providers on their contextual
understanding. Before selecting a provider, or even drafting a RFP, it would be
a good idea to know the big and up-and-coming providers in that space. This due
diligence can come in handy while short listing providers.
It is better for a company to stay in control and
remain focused on the key criteria, essential for the success of the engagement.
Ranking the providers based on certain pre-defined criteria is the best
selection method; this also minimizes the subjective influence on the
selection.
Poor
Cultural Fit – Compatibility of Parties
An outsourcing relationship works best when the
chemistry between outsourcer and service provider is right. Given that people
are at the center of an IT outsourcing arrangement compatibility is essential.
“Off late, CIOs who consider cultural fit to be
as important as cost savings have experienced the most successful outsourcing
relationships,” says an AMR Research article. The
finding is not surprising given that outsourcing is becoming strategic and long
term in nature. Consequently, it has become all the more important to find an
outsourcer who has similar work ethics, values and ways of doing things. Businesses
are also beginning to see the value in bringing in external consultants to help
bridge cultural gaps and iron out differences during negotiations. As a rule,
compatibility issues needs to be addressed during the selection process. In
addition, effective communication is essential to ensure good cultural fit.
Improper Definition
of Metrics and KPIs
Often businesses believe that a set of predefined
metrics will help them monitor the performance of the service provider and
retain control over the relationship. However, the wrong set of metrics or an
overdose of KPIs can do more harm than good to an outsourcing relationship. In
the first case, the outsourcer may not get the true picture of whether the
relationship is moving in the right direction, and this is dangerous. In the
second case, fatigue may defeat the value of the tracking.
Thus, the recommended approach is to choose a few
apt metrics that gives the outsourcer a sense of where the engagement is at any
point in time. On line dashboards are becoming increasingly common as a means
of providing visibility on metrics and KPIs to the buyer.
Conclusion
Progressive companies have demonstrated a
multitude of benefits by adopting an outsourcing strategy. However, not appreciating
these critical success factors could result in either failure of the engagement
or disappointment on the part of the outsourcer.
This article first appeared in Global Services Magazine
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