Lessons to be learned from outsourcing nightmares

Lessons to be learned from outsourcing nightmares

Business consultancy, Leading Change, publish eight tips to help businesses and organisations unlock the potential of outsourcing. Outsourcing se

Business consultancy, Leading Change, publish eight tips to help businesses and organisations unlock the potential of outsourcing.

Outsourcing services and functions remains an effective way to reduce costs, though we’re aware of many examples where outsourcing deals failed to deliver on their potential. To help all businesses avoid ineffective outsourcing, Leading Change has developed an eight-point guide to support decision-making. The guide includes points such as ensuring a third-party company has a genuine engagement with the company and ensuring cultural compatibility between the business and third-party vendor.
The global market for BPO (Business Process Outsourcing), according to Global Industry Analysts Inc., is estimated to reach $262.2 billion by 2022. More and more businesses are beginning to seek third-party vendors, and outsourcing is becoming increasingly embraced by small and large companies alike. In sectors where outsourcing is mature we see second and third generation deals supported by deep experience in both outsourcer and vendor camps but diminishing scope for significant further cost reduction. In other areas, where outsourcing is relatively immature, there can be imbalance between vendor and outsourcer experience and the potential for downstream complexities and challenges.
Many businesses recognise traditional benefits of outsourcing; to reduce costs, consolidate functions and improve performance. Mark Bouch, the managing director of Leading Change, said: “The worst outcomes tend to happen when organisations have failed to deliver a service effectively themselves, seek to reduce costs by outsourcing to sub-prime vendors, but eventually end up with failed deals or financial and reputational losses due to poor customer experience and product quality”.
Cost reduction remains a key goal driving outsourcing decisions – we’ve heard of clients outsourcing to avoid the cost of building in-house capability but few, if any, do so to increase costs.  If cost reduction is your only objective, you may not unlock outsourcing’s true potential.  “Leading Change recognises outsourcing’s potential to build capability in a way that just isn’t possible with in-house assets. While cost-efficiency remains a vital driver of outsourcing decisions, building scalable capacity, improving service delivery and freeing up resource to focus on high value activities provides significant untapped potential to make organisations more effective and agile. This will be increasingly important in a fast-moving and uncertain business world”.
We can’t claim to have thought of everything, though organisations adopting our eight experience-based lessons will make better decisions and determine the right outsourcing strategy. With a clear and thoughtful strategy providing a realistic view of what success looks like, your decision will increase the chances of business success rather than a failed deal.
These lessons include:

  1. Abandoning quality for cost

A desperate need to reduce your cost base doesn’t always take account of the true costs of outsourcing, which can impact customer experience. Low rates often correlate with poor quality. Don’t compromise on customer experience to save a few pounds.

  1. Failure to understand/mitigate business risk

It’s generally accepted first generation outsourcing carries risks to supplier and customer. In an immature market it’s easy to under-quantify risks to supply chains and service functions. But experience shows it’s also possible to do so in subsequent generations of outsourcing. Operational rehearsal and/or pilot programmes to test proof of concept and continuity plans are essential to understand operational risk and minimise reputational fallout.

  1. Don’t outsource to compensate for weakness in your own business

Outsource service vendors are established to manage consistent, repeatable processes at reduced costs, not compensate for management deficit in your own business. Provide clear direction, influence internal opinions, overcome internal resistance and make key decisions. Successful outsourcers retain and reward experienced staff with the knowledge and skills  necessary to manage their own business and third-party vendors.

  1. Genuine engagement

It’s a fatal error to establish adversarial relationships based on the tyranny of KPIs, which can have unintended consequences. Involve outsourced vendors in your strategic intent – build with them a rich picture of what success looks like and why it’s important.  Leading Change facilitated a great example where a clinical trials vendor was regularly invited to key leadership team offsites to discuss strategic priorities, align objectives, integrate activity and build relationships – as a result they readily engaged in collaborative problem solving outside the transactional framework. If techniques work well to engage your own staff, think about how you can apply them to external vendors.

  1. Aim for a good cultural match

Understanding the cultural fit between your business and the outsource vendor is critical. Outsourcers often expect the vendor to adopt their business culture, but you need to recognise they have their own culture too. It’s a two-way street. Both parties need to embrace and adapt to each other’s culture, investing time to build effective relationships.

  1. Start with a collaborative mindset

Companies sometimes outsource business processes with an unhelpful mindset. It’s tempting to regard outsourced (often offshored) partners as employees, which they are not, or as a fully expendable resource to be stretched or eliminated at will.  When selecting outsource partners, a good match of values and an emphasis on building open, productive and collaborative relationships will help lead to success.

  1. Build on effective communication and oversight

Improving communication and oversight is commonly cited as a challenge in our organisational development work. Time-zones, language and culture play a role. It’s tough enough with organisational boundaries and geographically dispersed in-house teams, but when you throw in a different company, there is plenty of potential for misunderstanding and error. Getting work done with outsourced vendors is a team sport. It requires frequent exchange of concepts and ideas and appropriate, though not over-intrusive, governance. Social interaction, building trust and a willingness to engage in productive conflict is essential to developing cohesive teams.

  1. Lack of commitment

BPO deals tend to be of five-years duration, providing opportunities to reassess and change vendors. Changing course mid-contract will inevitably be a painful process, so you need to ensure organisational commitment, a supportive executive coalition and thorough stakeholder engagement before the deal is agreed and throughout its life-cycle.

Mark said: “We’ve worked in transformation and strategy implementation for many years. We’ve watched outsourcing evolve from a cost reduction tactic to a strategic play adding capability and scalable capacity to a business”.

Leading Change makes it clear that successful outsourcing doesn’t happen by chance. Good practice follows an informed, rational and structured approach to decision-making based on a clear understanding of their own business, the vendor and the potential risks of outsourcing. Companies then intending to deliver all the potential benefits of outsourcing need to plan and manage how they will set direction, provide effective oversight and build collaborative long-term relationships.