Ten Lessons for Avoiding Outsourcing Disasters

By Phil Fersht

Many enterprises are now leaping onto the outsourcing bandwagon as they come to grips with the economic meltdown. More than 10% of mid-to-large enterprises are moving into application and business process outsourcing engagements for the first time.

Having spent several months focusing on survival strategies to ride out the recession, organizations are now turning to outsourcing, expecting an easy way to carve out operating cost. However, outsourcing initiatives that aren’t diligently evaluated and executed nearly always have the opposite effect, resulting in increased costs, business disruption, and embarrassed executive sponsors. How can enterprises moving into large outsourcing engagements for the first time avoid such outsourcing disasters?

1. Don’t just focus on core versus non-core, but evaluate what is fit and ready

Simply evaluating which processes you want to outsource isn’t enough. As attractive as outsourcing them might seem, not all processes are fit or ready to be moved. You must ensure that processes are well documented, stable, and standardized enough to make them outsource-able. Otherwise, you could spend millions of dollars on consulting fees getting into condition to outsource.

2. Don’t jump at the lowest priced offerings

In this tough market, a multitude of providers are willing to undercut everyone to win your business. Remember, you are looking at a 72-month-plus rather than a 12-month roadmap. Focus on how the providers will leverage technology and process expertise to drive value beyond offshoring of labor. Moreover, ensure there is a good cultural fit between the provider you select and your firm. Ultimately, you should seek a partnership that vests the outsourcer in the venture’s success and not simply a contractual agreement defined by penalties and service levels.

3. Temper executive expectations

Corporate leaders are frequently exposed to outsourcing stories where firms have driven out loads of cost through deep global partnerships with outsourcing providers. In most cases, it takes years to reach such remarkable success. Play down the possible business benefits until you have thoroughly examined and evaluated what’s possible and what’s not. Otherwise, you could end up being the bearer of bad news and losing confidence from your leadership.

4. Collect experiences of peers in other organizations

Because executives and the outsourcers are under pressure to impress, publicized examples of outsourcing engagements tend to conceal the truth. Get under the covers to discover the real experiences your peers in other organizations are having with outsourcing engagements. Attend some intimate focus groups to learn more about what really goes on with outsourcing. Peer forums, such as those at AMR Research, or industry networks, such as the IAOP (International Association of Outsourcing Professionals), or the SSON (Shared Services and Outsourcing Network) are good venues where where executives share advice on how to steer outsourcing efforts toward success and away from common pitfalls.

5. Think about future flexibility

Companies must consider how potential acquisitions or divestitures might impact outsourced business processes, or vice versa. Discuss these issues with senior management before finalizing any transactions, as many outsourcing engagements are highly expensive to undo in the event of M&A activity.

6. Think about your internal learning

Once you outsource processes, you may also lose the knowledge and expertise still needed to improve them. Make sure you understand the value of this knowledge before taking it out of the enterprise. In the same vein, if you are engaging a service provider over a long period, ensure your existing staff can learn from its experts too. For example, retaining up-to-date internal skills in SAP Business Warehouse can be a valuable asset for your organization, whether you outsource related processes or not.

7. Think about the strategic value of IT

Too many firms have been treating their IT function purely as a cost-cutting mechanism in recent times. In cases where IT plays a purely administrative role, it makes sense to drive out as much cost as possible. But in many other cases IT is inherently embedded in the future success of the organization. For example, a retailer may expect to generate over half its revenue through e-commerce, and that number may be growing as consumers shift further toward buying online. Since competition is high and differentiation is critical to success, retaining specialized IT expertise in developing, implementing, and maintaining e-commerce technology is crucial to success. Risking this by outsourcing could well be taking away a powerful revenue-generation capability for the future.

8. Evaluate the impact to the local community

In this economic environment, local media and politicians tend to frown upon any type of offshoring outsourcing. You must maintain the utmost discretion during the evaluation process and prepare a concise communications plan both internally and externally when you decide how to proceed. You may need to invest in a consultant with specific experience with outsourcing matters. Advisors such as Alsbridge, Deloitte, Equaterra and PwC and W Group have experience with such issues and can also help with broader outsourcing strategy.

9. Anticipate the impact to your corporate culture

Moving work outside of the company, and bringing an outsourcing service provider’s staff to work with you, can impact your culture dramatically. Work hard with your transition team to assimilate your internal staff with other work cultures. Hiring a staff with outsourcing governance experience is especially valuable in this case. You should organize a series of change management workshops to educate all staff that the outsourcing engagement will affect. These should cover how to work with foreign cultures and attitudes, in addition to how roles and responsibilities must change to operate effectively in an outsourced environment. Just because one of your staff was effective at managing a team of 50 developers doesn’t man she or he will be effective at managing a service provider relationship. Outsourcing consultants, especially those with large change management practices that focus on outsourcing such as those mentioned above, can often help with these initiatives. For example, Deloitte Consulting has a human capital consulting practice that serves this purpose.

10. Focus on broader outsourcing governance across IT, supply chain and financial processes

Managing offshore staff and dealing with complex transition and change management issues often pose the same challenges for leadership, whether they’re managing a supply chain, finance, or IT engagement. Many progressive organizations with ongoing outsourcing engagements underway are setting up broad senior-level governance organizations that have oversight across all outsourcing activity across all business functions. This enables these synergies across business and IT processes to be explored and maximized.

Conclusion

As the lessons above outline, the impact of outsourcing cuts far deeper than merely entering into a transaction with a service provider. Corporate leaders need to focus on their people, processes and technology in tandem when they evaluate and execute their outsourcing opportunities. Experienced outsourcing practitioners often use the “30% rule of thumb” when they evaluate an outsourcing business case: Simply put, if you’re not taking more than 30% of cost from the bottom-line, it’s probably not worth the upheaval to your business. Adhering to these 10 lessons should help you make that 30% worthwhile, if that’s your chosen path.