Profit Through Change

Outsourcing Management

Why Outsourcing Fails

Whilst it can be shown that the number of companies entering into outsourcing arrangements is most definitely on the increase, there is also evidence to suggest that some companies have started to bring previously outsourced functions back "in-house". Furthermore, in some sections of the press, the whole concept of outsourcing is maligned and criticised as strategically inept, and unlikely to realise the expectations that form the basis of any business case promoting outsourcing.

Management

Profit Through Change has reviewed and studied this subject in great depth, and concurs with very many aspects raised in the 2005 Deloitte report into outsourcing. If there are two themes of that report that stand out more than any others, it is that (1) outsourcing arrangements fail as a result of a failure to manage and support the outsourced service provider, and (2) that it is often difficult to truly know what you will actually pay for a service:

  • 62 percent of participants found that outsourcing required more management efforts in comparison to the original estimates
     
  • 81 percent of participants have limited or no transparency to a vendor's pricing and cost structure, resulting in increased chances of paying additional costs and difficulty in negotiating contract charges
    Source: Deloitte Consulting 2005

Profit Through Change believes that outsourcing should be a partnership, with both parties working together around a common goal, with the management of both companies working together to ensure that the goals of both companies are attained.

The ongoing management of the process is critical, yet so often overlooked. Invariably, once the decision to outsource is taken, the implementation is passed to a temporary "project manager", and then once in place it is dumped on someone or some department to oversee it, with no additional resource or funding to support this additional workload. In addition, typically trips to visit the supplier and to audit their operations fail to occur, feedback is not given to the supplier, monthly meetings are missed, and the whole outsourcing agreement stutters.

It is no wonder therefore, that the contractor is often left to their own devices, and without looking to berate the contracting fraternity, this can enable the contractor to stretch margins, and allow service levels to drift. This leads ultimately to the associated business and financial targets being missed, and a misfounded desire to bring the functions back in house.

Service Level Agreement

It is also important to realise that preparation of a clear, accurate, detailed and complete service level agreement is essential - this is the critical statement of what is required of the contractor. Vague definitions or incomplete information will lead to either service, financial or contractual issues down the line. Taking the time to prepare this accurately and precisely will make an enormous difference to the ultimate success of the arrangement.

Contract Flexibility

Whilst loathed by lawyers, contract flexibility is essential to the ultimate success of any outsourcing relationship.

It is of paramount importance that a detailed and precise contract change process is established to allow unforeseen changes to be incorporated into the agreement quickly, and without conflict or dispute. Changes will almost always be required at some stage for a variety of reasons, and whilst the legal costs can be off-putting, these are a necessary cost that should be factored into the overall budgets.

Financial Characteristics

Financial characteristics can impact on all outsourcing arrangements, either for the outsourcer or the outsourcee. These need to be expected and anticipated. It is essential to identify variable costs, for example logistic costs that can rise with the cost of oil, and ensure that these are factored into any financial projections. Bonus and penalties should also be highly transparent enabling service failures to be penalised, and credit given where targets are surpassed.

In addition, with some foresight, additional financial benefits can be enjoyed, for example volume related rebates for additional turnover given to the contractor, or strategic business reengineering cost reductions.

Exit Strategy

In any arrangement however, it should always be remembered that things can and do go wrong. Times change, and it is essential to have an exit strategy in such a circumstance to cover continuity of service delivery, ownership of assets and intellectual property, and for personnel. Understanding this, and being prepared, will make any change more palatable.

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