Six considerations to help avoid outsourcing disasters

Robert Morgan, director at Burnt-Oak Partners, has followed up his ten point guide to cutting costs in the public sector with a six point guide to avoiding the biggest outsourcing mistakes.

He goes beyond a top ten of reasons for outsourcing failures, and through his wisdom of many years in the industry, outlines six factors that if considered properly could help businesses avoid the worst mistakes.

Here is what Robert describes as the usual top ten reasons for project failures.

1 Cultural mismatch with the winning service provider
2 Setting of unsubstantiated and unrealistic success goals
3 Poor contract framing usually with inadequate or ill defined details
4 Inflexible clauses – contracts must reflect the realism of the clients marketplace and need for rapid change cycles
5 Limited or poor expectations – poor preparation and understanding of client needs and rationale for outsourcing
6 Outsourced for “cost savings” alone – often this fails to live up to expectations
7 Failure to use specialist advice in the tender, legal for the contract, HR on the transfer of staff, media for the announcement
8 No measures for success – will always lead to future conflict
9 Loss of client control due to poor project and contract management, governance and reporting
10 High staff attrition particularly of key personnel

But here are his six key factors that, if considered properly, can avoid the worst mistakes of outsourcing.

1 – Deal and strategy alignment

Client executives must understand where the deal fits within their declared strategy. The management and staff need to understand its purpose, scope, limitations and context. This is needed to avoid the worst of the emotional impact that the outsourcing decision brings with it, where staff will worry about their jobs and how the deal will affect them. They will ask: Will it extend into the back office? Is it going to be off-shored to India? Will it be transferred to the supplier? Who will be the supplier ? Above all else the executive needs to be visible and be seen to sponsor the move overtly and by implication be responsible for its success

2 – Specialist support

You would not engage in M&A activities without specialist subject matter experts in areas such as legal, regulatory, change management, funding, integration, etc, even if you were a seasoned acquirer. So why would you enter outsourcing without expertise in legal, HR issues, transition, process, governance, benefit collection, etc especially if you have not previously outsourced?

3 – Understanding of risk and its mitigation

These days risk relates to all stakeholders from staff, shareholders, regulators, clients, competitors to financiers. Have you understood how you will handle an exit from the contract however it occurs? This includes staff and knowledge transfer and retention, Intellectual Property ownership and rights, onshore offshore risks, suppliers financial stability, get out clauses for change of ownership, plus a mitigation strategy for each.

4 – Shared Value

Can the CEO articulate the underlying rationale and building blocks for incremental value, is it mutual (supplier and business), have you identified any hidden value the supplier might reap or benefit from, for example IP. Will the drive for cost reduction create a misalignment with the business needs, and most importantly will the two cultures merge and a hybrid delivery organisation be successful? This concept must follow into Value based negotiations where appropriate, and thus build a true win-win deal

5 – Are you ready for a new way of thinking?

Change plus uncertainty, equals pain. Can you see yourselves managing and motivating staff that are not yours, have you the governance and reporting skills required to achieve alignment and balance, will the business user come onboard quickly, how do you avoid winners and losers and what new metrics of performance will work? Again visible executive sponsorship is paramount

6 – Are you set up to realise the benefits?

Outsourcing always lays out the immediate cost, efficiency and effectiveness synergies to be collected. Fewer than 50% of deals deliver this because of the lack of preparation to do so. Really important issues are, who will be in the retained team (the best people not those left behind), clear cut responsibilities of the client and supplier, a hierarchy of measurement and service beyond KPI’s, clarity on timing and conditions for synergies to be collected, regular reporting on this, escalation where progress is slow or non-existent, and a clear understanding of the supplier staff’s bonus and incentive scheme.

According to Robert, “deals fail because of a lack of some or all of the above. Clarity of purpose, clear communications from the executive all the way down the organisation and consistency of message will help enormously to secure a long-term successful outsourcing deal for you.

Outsourcing never really ends – it merely goes through different phases. It will always remain a people to people service and people need solid leadership and simple consistent goals.”