Ferenc Szelenyi, vice president EMEA public sector services at Dell Services, says that although outsourcing is a hot topic at the moment it is actually a practice that is over 100 years old. As such people should not try to resist it but rather manage it better.
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I think outsourcing is a lot older. Didn’t the Romans outsource and even offshore soldiery and war?
But here is his view on the current hype surrounding outsourcing to cut costs in the public sector. He also gives advice about how organisations can avoid some of the pitfalls of outsourcing.
By Ferenc Szelenyi
“Although outsourcing has gotten a lot of press recently due to the Government looking into various ways to cut the national deficit, it’s hardly a new phenomenon. More than a century ago, industrialisation gave rise to specialisation and the practice of companies working for each other. The trend abated briefly when Alfred Sloan developed the famed vertically integrated organisation of General Motors, but by the 1950s, competitive pressures had again driven companies to send work beyond their walls.”
“Today, given the economic times we live in and relentless demand by customers for getting more for less, it’s certain that work will increasingly be outsourced to partners around the corner and around the world. As various studies and decades of actual experience have shown, the value added through outsourcing not only benefits the outsourcing provider and customer, but the economy as a whole. Global sourcing is not a zero-sum game. However, as smart a business move as outsourcing usually is, effectively managing the workflow is tricky, since a company’s knowledge accompanies its work–often to another shore. Executives need to avoid common pitfalls to ensure that their outsourcing relationships deliver maximum value. I call them the seven deadly sins of outsourcing relationships.”
The seven deadly sins of outsourcing relationships and how to avoid them, according to Ferenc Szelenyi
1. Launching an outsourcing relationship without understanding the core competencies versus the work that can most effectively be outsourced.
“A key benefit of outsourcing is that it enables a company to focus on the work that is core to its value proposition. Obviously, it is vital to know exactly what that is. That might sound elementary, but the truth is that many companies have only a superficial knowledge of how they truly create value for their customers. If you’re a pharmaceutical company, is your success based on the quality of your research, on your sales and distribution network, on your unique manufacturing capabilities, or on something different altogether? Don’t be surprised if you find yourself considering outsourcing one of your operational strengths. Although you may be good at something tactically, it still may not be core, and someone else may do it better and at a lower cost.”
2. Underestimating the importance of process standardisation
“Every company begins with the belief that the work it is outsourcing is unique and must be managed uniquely. The company expects its outsourcing service provider to maintain the complexity rather than to simplify and standardise the work processes. Processes and people are moved to the provider in their existing state and are independently managed next to countless similar processes of other companies. Consequently, the cost and service benefits of standardization and simplification are lost.”
3. Not driving for true transparency with your outsourcing partner
“Certain kinds of work involve fairly stable processes, like order fulfillment. But others change over time. Companies may have new application needs in an IT outsourcing relationship or new transactional protocols in a business process outsourcing relationship. In such cases, full transparency between the client company and its service provider is a must.”
“Managed well, an outsourcing relationship will affect how each partner works as it learns from the other. Work should move seamlessly across corporate boundaries, with breakdowns quickly identified and fixed. This happens only when operational transparency is hard-wired into the relationship from the outset. Client’s needs evolve.”
4. Casting an outsourcing relationship in Stone
“No business stands still today. The breakneck pace of change demands flexibility on the part of companies and their service providers. But outsourcing agreements, too often focused solely on cost control, can lock in behaviors that inhibit the nimbleness a client company needs to maintain true operational excellence over time.
A relentless focus on costs will continue to be part of doing business for the foreseeable future, but the scope of outsourcing agreements should be subject to change as the client’s needs evolve. At the same time, a provider has to have minimum commitments to be able to invest in the work of its customers.’
5. Being too one-sided in your view of the relationship
“The most successful outsourcing relationships–those that lead to long- term value creation for both parties. It is critical to never lose sight of the fact that the relationship is a bilateral one. Just as the client company seeks to save money, reduce risk, and/or enhance the quality of its operations, the service provider seeks to earn a profit, build on its service capabilities, and leverage its growing expertise for the future.
Fortunately, these goals are complementary. An insurance company, for example, can not only gain efficiency and quality by allowing a partner to take on much of its back-office policy administration functions, but the added work volume may enable the service provider to accelerate release of the next advancement in the intellectual property it has brought to the relationship–a win-win scenario.”
6. Not building in sufficient mechanisms to resolve issues
“Outsourcing relationships, like all business relationships, are about people and personalities–and the marriage will inevitably hit a rough patch. This may stem from a management mistake by the client company, a service delivery hiccup by the provider, or some combination of both. Savvy partners, however, anticipate these episodes at the outset and build in mechanisms to guide their behavior when dealing with these issues.
These may include ad hoc councils, defined escalation ladders to take issues up the management rungs, or creative guidelines for issue resolution. But notice the emphasis on “guidelines,” not “laws.” While it’s smart to plan issue resolution approaches early on, they should not be cast in stone, lest they themselves become issues. More important than the specific mechanism is the mutual commitment to resolve issues quickly and amicably.”
7. Tending the trust based relationship carefully over time
“Don’t think of your outsourced service provider as a “vendor.” A vendor sells widgets; an outsourced service provider brings you knowledge and skills. Or it may be your knowledge and skills that you transfer and invest in the service provider to take advantage of their superior execution. No matter the specifics of the relationship, it demands a high degree of trust as well as a willingness to look continuously at the work with fresh eyes.
Many business alliances fail either because the parties don’t share the same business values or because there isn’t enough in the deal for everyone. When outsourcing relationships work, however, they can deliver value beyond expectations. An organisation should ask some hard questions of their service provider before consummating the deal: How does it treat its people? Its customers? What does it believe about service quality, innovation, and ethics? And how does it handle the inevitable bumps in the road?”
“Then structure a relationship where all parties enjoy financial benefits, growth opp ortunities, and the chance to contribute meaningfully. In business alliances, it’s important to keep good partners strong. With that common ethic, trust will grow as the partnership flourishes.
If executed properly, outsourcing is a win-win situation. The organisation receives the benefits of best practices expertise and the service provider earns new business opportunities. Taking the time to implement the tactics discussed will make outsourcing relationships more successful by mutually increasing understanding, transparency, flexibility, communication and trust.”