Three root causes of badly managed outsourcing

Outsourcing is an integral part of modern business and plays an essential role in gaining competitive advantage. It’s also complex, with many organisations struggling to get it right.

Most organisations choose outsourcing as the most efficient way of transforming the delivery of key business processes, allowing them to concentrate on core business activities and become more agile in increasingly challenging markets.

But realising the expected bene­fits can be more complex than anticipated. Unpredictable growth and change agendas, heightened competition, economic turmoil and a rapidly evolving services market all complicate the outsourcing landscape.

So why do many firms persist with outdated approaches to outsourcing procurement and management? Badly managed outsourcing is typified by both clients and service providers feeling trapped in dysfunctional relationships that fail to deliver on either party’s expectations.

What begins as disillusionment often gets worse – these results are all too common:

– Poor service, – Spiralling costs, – Heightened risk, – Embarrassing litigation, – Loss of shareholder value – Damage to corporate and personal reputations

While the issues that result from badly managed outsourcing seem insurmountable, the three root causes are often simple:

1. Failure to clarify vision or strategy and objectives. Organisations often fail to define what they seek to achieve from outsourcing. Writing RFPs and documenting overly complex statements of work takes prece­dence over agreeing what success looks like and exploring the art of the possible. This lack of clarity leads to mismatched expectations and leaves both parties unclear about what they are trying to achieve.

2. Focusing on detail rather than business outcomes. Clients and service providers rush to define a solution and negotiate a contract, and the focus is all too often on writing detailed requirements which result in solutions that fail to meet expectations and poorly structured contracts that are only used as weapons in times of dispute.

3. Assuming benefits realisation is a passive activity. Even in the unlikely event that shared business objectives are clearly defined at the outset, there is rarely the necessary tools and knowledge to manage the benefits realisation process. Monthly performance rev­iews, ineffectual ‘boilerplate’ governance and the veiled threat of punitive service credits are ineffective methods for ensuring benefits are fully realised.

Delivering savings by moving discrete functions to service providers is simply not enough. Modern businesses, as an absolute minimum, must efficiently deploy an optimal mix of internal and external skills to the best of their ability.

This means estab­lishing mutually beneficial relationships with the right service providers. Getting this right makes it possible for outsourcing to deliver its promise; enabling transformational business change and strategic business growth while delivering significant commercial benefits.

Forward-thinking firms differentiate themselves from the competition by adopting a modern and innovative approach to outsourcing. There are some simple yet fundamental steps that organisations must take in order to derive maximum business value from outsourcing:

+Test your vision by asking difficult questions. To what extent are the vision, strategy and objectives clear, unambiguous and integral to the business? How well understood are they? To what extent do they have clear, visible support? How well communicated are they to all key stakeholders? +Focus on business outcomes. Define the objectives thoroughly and ensure they are communicated clearly, concisely, early and often. Understand the opportunities, their feasibility and potential risks by encouraging contributions from both service provider and legal communities. +Acknowledge that realising benefits requires effort. Be clear about the vision, strategy and objectives and ensure the right skills, knowledge and experience are available and funded. Support the programme with a robust management and governance framework and clear, consistent measures that reflect business requirements. Assess performance in complex areas such as innovation and flexibility. Don’t forget to regularly communicate successes (and failings) against the original goals.

To gain real competitive advantage, outsourcing cannot be viewed as simply a way of making marginal business improvements by offshoring low value-add tasks. It is an essential component of modern business that, when managed effectively, can create exceptional business value and help propel organisations ahead of their rivals.

Phil Bishop is founding partner at specialist sourcing consultancy This Partners