Outsource Magazine

I recently wrote about the challenge of dealing with troubled outsourcing relationships, and our need to get beyond the blame cycle to a more “sane” approach to addressing challenges (http://www.outsourcemagazine.co.uk/articles/item/3968-troubled-relationships). This approach begins with asking “why” – digging into the causes of conflict – and then taking a hard look inside, at the ways we might have contributed to the situation.  I am not suggesting that companies should accept poor performance from their outsourcing providers. But I have seen time and time again that when companies understand the root causes of the problem and how they have contributed to the situation, they are much better positioned to figure out how to make things better.  In my next few pieces, I’ll explore some of the common causes of outsourcing challenges, and what companies can do to achieve better results.

One common source of problems with service quality, delivery timelines, and customer satisfaction relates to the outsourcing business model, and a lack of understanding regarding what each side needs to do to support the business model.  Different outsourcing arrangements have very different goals – some are focused on cost reduction, others are about flexibility, innovation, access to expertise, or desire to focus on core competencies within the buyer organisation.  And there are different ways providers can deliver on these goals – cost reduction can come through labour arbitrage, economies of scale, or improvements to processes and tools, for example.  What is common is that, for the provider to deliver, buyer must take steps to ensure success, and those steps are different depending on the value desired and the provider’s plan for delivering the value.  Let’s consider a few examples.

Achieving Labour Arbitrage

To reduce costs by using lower-cost labour, providers need to quickly transition work to offsite (sometimes offshore) employees, who have to get up to speed on the customer’s business needs and requirements as soon as possible.  But moving to remote delivery isn’t easy; investments must be made in structures and mechanisms that allow parties to work effectively across geographies, timezones, and different cultures.  Adequate knowledge transfer is also critical, often requiring availability of experts and thorough, up-to-date documentation, with means for frequent and timely communication.  Sometimes it takes a few missteps – like quality problems or missed deadlines – to recognise gaps in knowledge transfer, or insufficient investment in tools and structures to allow for long-distance teaming. Temporary co-location, on-site account managers, and direct management and coaching of offshore resources are all possible means for addressing these challenges that buyers should consider. 

Leveraging Economies of Scale

Generating savings through scale is very different from labour arbitrage.  Taking advantage of scale economies requires some degree of standardisation. For example, if you are outsourcing your global IT application maintenance to save money through scale, you may need to move to a more standard IT platform across user types and geographies, rather than have your provider support multiple legacy applications. 

Standardisation is often difficult, however.  In many organisations, it can be hard to determine, at a business unit or geography level, which specific application functionality is critically important to the business and what is simply a product of different ways of doing things that can be changed with minimal negative impact.  Additionally, many end users are (understandably) resistant to change and therefore push back at attempts to standardise.  In some cases, this is a result of the way the deal was “sold” internally – if your business units were persuaded that outsourcing was a good idea because not much would change for them, they’ll naturally resist requests to standardise. Such push-back requires the provider to negotiate every requested customisation, draining time (and savings) with each conversation about scope. 

Achieving savings through scale economies requires robust internal communication with affected business units and end users to understand how much customisation they really need (and want to pay for), including aligning internally on the objectives for outsourcing prior to implementation.  This is made possible through strong internal governance, staffed with individuals who are skilled at negotiation and influence, and who can arbitrate trade-offs between standardisation and customisation.  When you are experiencing difficulties with internal alignment and repeated, frustrating conversations about scope, consider reassessing your internal governance model and whether you have the right individuals playing key governance roles. 

Focusing on Core Capabilities

Buyers often talk about outsourcing “non-core” functions so that they can focus their attention and efforts on more strategic activities.  In HR, for example, you might outsource employee data management or payroll so that your retained HR professionals can turn their attention to other activities such as workforce planning. This value proposition often falls apart, however, when individuals on the buy-side who were formerly responsible for managing the function are charged with managing the provider relationship. Rather than focusing on those “core” activities, retained managers end up applying even more time and energy to managing the work they were no longer supposed to worry about. 

Freeing up valuable resource and management time and attention requires a willingness to let go of certain aspects of the function.  If your retained staff is unable to shift resources to other important, planned activities, ask yourself – have we articulated our critical requirements internally?   Have we communicated those effectively to our provider?  And importantly – have we gotten out of the way of the details of service delivery?  If not, shifting responsibility for management of the provider relationship to someone who is skilled in relationship management (vs. having a long history with the function) may be in order.

Often the first step in addressing a troubled outsourcing relationship is taking an honest look at the root causes of the challenge and what your own organisation has done to contribute to the problem.  Sometimes getting out of your own way can lead to dramatic improvement.  In my next column, I’ll write about another frequent challenge – metrics that focus on what is easy to measure, rather than what is important – and some ways to use better metrics that drive desired behaviour.