Who Drives Your Outsourcing? Regaining Control of Outsourcing from Your Service Provider

Some months ago I wrote an article titled, “Outsource Operations — Not Responsibility: An Outsourcing Service Model,” published by Sourcingmag. Since then I have received enormous amounts of useful feedback. The overall theme of the feedback has been that outsourcing is sometimes treated too theoretically — the decision whether to outsource being treated almost as a religious conversion where one should ultimately arrive only at a single answer — the affirmative. There are two major problems with this approach.

–> Problem #1: You Need To Focus on Business Objectives not on Outsourcing

Focusing your sourcing approach exclusively on whether or not “to outsource” places insufficient focus on your business objectives. Outsourcing is a tool — not a strategy in itself. Companies who outsource successfully spend time thinking about what their strategic objectives are and what sourcing model they need to support this. They spend much more time doing this than thinking about whether or not to outsource.

The “right sourcing option” will appear more clearly when you are clear about why you want to change your sourcing model — for example, planning to grow a service line where the capacity required will be difficult to achieve and maintain in the local market. In today’s marketplace outsourcing is just one of a broad number of sourcing models being considered by clients. These include shared services, offshoring, co-sourcing and other alternatives.

Insight: Be clear about your sourcing model by deciding what will best deliver on your business requirements. Avoid discussing outsourcing and focus on how you will get your desired benefits.

–> Problem #2: Outsourcing Isn’t Simply a Theoretical Decision

A very theoretical approach neglects some the “on the ground” realities, which will impair your likelihood of success in implementing your decision. “Outsourcing was a good idea but impossible to implement” is the familiar “lesson learned” of the outsourcing theorist. The practical truth is that outsourcing can deliver huge benefits to your business — but you mustn’t underestimate the complexity of implementing an outsourcing model.

Treat implementation seriously. Don’t expect the service provider to do it for you. The major success factor in outsourcing will be your ability to realign your organization to the new model. The vendor will show little interest in supporting this process from the client side. After all, this is how you’ll ensure they’re measured effectively.

Insight: Many organizations underestimate the effort required to implement an outsourcing decision. Don’t assume that the service provider can fulfill all implementation responsibilities. You need to establish your own service management function staffed with the appropriate skills as well as ensure broader organizational readiness.

I draw attention to these two areas because:

  • They are prevalent reasons why outsourcing fails.
  • They are symptomatic of an outsourcing dynamic that has traditionally been driven by the vendor community rather than the client community.

Create Your Own Sourcing Strategy

Have you found yourself endlessly reviewing proposals from outsourcing service providers? Do you feel like they’re trying to create something that exactly meets your needs, but they never really succeed, so you just don’t feel comfortable with the engagement process?

Chances are you’re not really clear about what it is you want. You’re being driven by the vendor — not your business. In successful outsourcing arrangements clients are clear about what they want from the beginning. They ask the vendor for a proposal that meets all of their strategic objectives. These may focus on areas such as cost control, cost reduction, flexibility, access to new skills, scalability and so on.

No two clients have the same requirements. You can’t avoid the process of documenting your requirements — whether it takes a half-day workshop with the key stakeholders or a six-week evaluation process. And remember that different people in your organization may have different requirements. The CFO may be view cost control as his or her top requirement. The CTO may feel that access to new skill sets is more important. Prioritise these before you talk to service providers.

Decisions become focussed on outsourcing rather than business benefits because vendors tend to make specific proposals to clients. These proposals usually focus on the vendor strengths — rather than the client requirements. It’s a mistake for clients to ask vendors for “an outsourcing proposal” without telling them what they specifically want from such a proposal. It is a high risk option that may lead to problems and ultimately more effort and cost further down the road. Lack of client clarity around business requirements can cause serious problems during negotiations (for you). If you don’t actually know what you want, effective negotiation is impossible.

Treat Implementation Seriously During the Decision Making Process

Have you heard this statement from a company executive? “I have read lots of analyst reports and assessed our strategic objectives — I think we should outsource.”

Shareholder pressure to outsource can be very high. Analyst opinion and global trends should be a valuable input into your decision making process. However attention to implementation planning should also be also a key part of your decision process. Get your senior operational executives involved. Feasibility assessment demands attention to issues such as the following.

Local Vendor Capability

Can a vendor offer the service you want to outsource? Do they have a mature and proven service offering? Can they do it to the level you expect? This is critical to any decision-making.

Clear Service Definition

Frequently, services are outsourced because they’re a problem area. The trouble is that outsourcing a broken service is difficult. This not because outsourcing trouble spots is wrong per se — there are examples of transformational outsourcing where fixing the service is part of the business driver. However, services must be clean, simple and well understood in order to outsource them successfully. Otherwise they’re impossible to define and measure, and this is key to being able to make your new model work.

Organizational Readiness

Is your organization ready to accept or be motivated to accept a new sourcing model? An outsourcing arrangement won’t work if it’s resisted by your team or the organizational structures haven’t been put in place to manage the new sourcing model. We usually refer to this as the new service model.

It’s worth noting that only one of the three issues above is likely to be high on your service provider’s radar — this is clear service definition. Clear service definition is important to the service provider because this is how they commercially define their offering. Service providers sell “services” and therefore need to be able to separate it from the rest of the client functions. Leaving the service measurement up to the vendor, however, is the wrong approach. It’s important for you to be clear on your services — and more importantly to define the measures (service levels, volumes, etc.) Letting the vendor define these has been the source of significant issues in outsourcing arrangements we have observed, inevitably leading to higher costs on the client side than originally anticipated.

Local vendor capability, by definition, is an area that outsourcing providers will have a clear view on — they all believe they’re the best for whatever service area they operate in. As a client it’s important for you to be in a position to take an objective view (and advice if necessary) as to whether the vendor community in your market is mature or competitive enough to make outsourcing worthwhile for you. This is an activity that isn’t in the interest of the vendor community to drive — the client organization must take responsibility to ensure this happens.

The particular area of organizational readiness I’d like to draw your attention to is the so-called “retained layer.” This is the team of people within the client organization who will be responsible for managing vendor performance and any changes necessary in the service. This is an area that has traditionally been badly neglected in outsourcing contracts. Vendors will ensure that the appropriate interfaces are in place so that the service can be delivered into the clients. It’s rarely in their interest to focus too heavily on the effectiveness of the retained layer to manage vendor performance. While this is understandable from the service provider side, it also illustrates why you as the client need to take responsibility for this area.

Insight: Best practice in outsourcing is very clear on the service provider side. Its focus is on ensuring that a clearly measurable service can be delivered into a client at maximum efficiency while meeting the client’s agreed-upon customer levels. Best practice is equally important on the client side. You should expect to reach out to advisors and others with experience to share client-side best practices to support your outsourcing decision making and implementation.

Devising your outsourcing strategy is a broad but critical business activity. A large number of stakeholders will be involved in devising your sourcing strategy — CEO, finance, operations, compliance, legal, HR, service owners and so on. The two issues I focus on in this article are by no means exhaustive in terms of the activities you need to conduct to ensure that your strategy will support your business objectives.

Useful Links


Sourcingmag.com’s “Outsource Operations — Not Responsibility: An Outsourcing Service Model”