4 Ways CIOs Can Get Outsourcers to Focus on Business Value

When it comes to cutting costs, outsourcing is delivering the goods, according to the State of Outsourcing 2011 survey conducted by analyst firm HfS Research in conjunction with The Outsourcing Unit at the London School of Economics. Of 1,135 survey respondents (which included outsourcing buyers, providers and analysts), 95 percent agreed outsourcing was an effective way to reduce operational costs.

That’s good news in tight times, but bottom line benefits only go so far. “A marginal improvement in a non-core process’s efficiency pales in comparison to other boardroom imperatives,” says HfS Research Founder Phil Fersht.

To Fersht’s point, 30 percent of the survey’s respondents said outsourcing is not effective at all in gaining access to new business process acumen, 31 percent said it is not effective in delivering new technologies, and 35 percent said outsourcing relationships fail to provide new and creative ways to achieve business value—also known as innovation, that holy grail of outsourcing.

Fersht recently published advice for providers who want to deliver more than just a temporary bottom-line bump to customers. Among his recommendations: drive the adoption of best practice process workflows among clients; aggressively introduce new and unique technology platforms to customers; and institute innovation plans at the start of outsourcing deals.

The problem with Fersht’s suggestions is that IT service providers aren’t likely to change their approaches unless buyers demand more from them. Therefore, IT outsourcing customers who want to move beyond cost cutting must put business value at the forefront of their outsourcing arrangements. Here are four ways to accomplish that goal:

1. Stop taking the low-cost bait. Cost cutting deals will deliver cost cutting. Period. “If you can’t calculate the value created for the business by [outsourcing] the function, don’t sign-up for it,” says Fersht. “Labor arbitrage isn’t sustainable value and should be excluded from value calculations.”

2. Contract for value. Real business value gets short shrift in most outsourcing deals. “Success isn’t measured by the number of full-time employees [on an outsourcing account] or the quantity of transactions. It is measured on contributions to corporate objectives,” Fersht says. “Make that the basis of the commercial relationship between buyers and service providers.”

3. Have the courage to change. Be willing to abandon processes and technologies that don’t deliver, says Fersht. It won’t be easy, but the true benefit of outsourcing is taking advantage of the millions of dollars the service provider has invested—and that you haven’t—in best-in-class systems and processes.

4. Look beyond SLAs to business outcomes. Service level agreements are important but business value is tantamount. Work with your provider to create outcome-based metrics for the relationship to supplement the deal’s operational SLAs. “We encourage buyers and service providers to institute monitoring of leading key performance indicators and adopt formal root cause analysis processes,” Fersht says. “In this manner, issues are detected before they become critical, and once detected, can be eliminated forever.”