OUTSOURCING describes contracting with an external service provider to perform specific functions or processes, including information technology outsourcing and business process outsourcing. While outsourcing is generally recognised as a strategy for achieving cost savings, few surveys to date have utilized a large enough sample of respondents to provide an accurate estimate of the actual amount of these savings. Deloitte has attempted to overcome this by surveying a group of 300 executives from different companies who are actually involved with outsourcing services worldwide. The findings, which Deloitte published in Why Settle for Less? Deloitte Consulting 2008 Outsourcing Report, were striking – a large percentage of companies utilizing outsourcing reached their financial objectives and averaged a return on investment (ROI) of more than 25 percent.
However, a much larger than expected level of company-outsourcer conflict was reported, and many of the companies expressed disappointment with the outsourcers’ overall ability to provide continuous process and technology improvements.
It appears as if companies that view outsourcing in a broader strategic context and implement it systematically with proper financial analyses, governance, and methodologies, can gain greater business value. This, potentially, could provide a competitive edge over those that take a more traditional procurement-oriented view.
Outsourcing not always has ‘a happy end’
The great majority of the respondents, or 70 percent, stated that they were “satisfied” or “very satisfied” with their arrangements. However, there were also some surprisingly negative findings in the data. Strikingly, 39 percent of the 300 respondents reported that they had terminated at least one outsourcing contract and transferred it to a different vendor in their careers; and of those who reported that they were “dissatisfied” or “very dissatisfied” with their largest contract, fully 50 percent had brought the function back in-house.
In addition, 61 percent reported that they had to advance problems to senior management in the contract’s first year, with 15 percent reporting five or more such steps and 53 percent saying the problems continued in the second year.
Clearly, outsourcing is working financially for most of the respondents, but relationships with their vendors have not been without problems, with escalating disputes being common and terminations and cancellations being real possibilities.
While 70 percent of the executives surveyed reported that they were either “satisfied” or “very satisfied” with their outsourcing deals, their responses in several other areas indicated that they felt that they could have been achieving more from their outsourcing arrangements. For example, only 34 percent of the executives reported that they had gained important benefits from innovative ideas or transformation of their operations and 35 percent of the executives wished that their companies had spent more time on vendor evaluation and selection.
Asked what they would do differently if they were able to start their outsourcing projects over, 49 percent of the executives surveyed said they would define service levels that aligned better with their companies’ business goals. The dissatisfied respondents noted problems such as underestimated scope, higher-than-expected costs, and poor quality communications, service, and reporting from their service providers.
The Deloitte survey included 31 service provider executives, who suggested that some companies may not be positioned to realize the full benefits of outsourcing. By a 3-to-1 margin, these service provider executives felt that their client companies were not prepared for outsourcing — that is, the companies didn’t have a solid plan, didn’t have the operational data needed to make sound outsourcing decisions, and/or didn’t understand how the future organisation would really work. In addition, many of these service provider executives noted that companies were often unable to dedicate enough time or adhere to the processes required.
The themes of unrealized potential and lost opportunities echoed throughout the survey results, and these may have been the underlying causes of the problem escalations and contract terminations that were reported. The surveyed companies recognised that they should be receiving more than just financial benefits from outsourcing and that they should be receiving them with less effort and conflict.
Aiming too low and short-cutting the process
These lost opportunities may possibly be the result of the surveyed companies setting their outsourcing goals too low. They may have initially perceived outsourcing primarily as a tactic to reduce costs as opposed to a means to fundamentally transform their operations and drive dramatic improvements in efficiency, productivity, and reliability. Then, only after having observed the results, did they recognize that they should have wanted more, with, as mentioned above, only 34 percent of survey respondents reporting that they had gained important benefits from innovative ideas or transformation of their operations.
Service provider executives surveyed agreed that most clients didn’t recognize the opportunity to use outsourcing as a catalyst to reengineer their operations and help achieve a wider range of business goals. Instead, most of these companies transferred their existing operations —“lift and shift”— to a service provider in the hopes of benefiting from specialization, economies of scale, and lower labour costs, especially in offshore outsourcing contracts.
Such cost-cutting strategies can limit executives’ views of the possibilities. They can be quickly duplicated by competitors and they often fail to take advantage of outsourcing’s potential to significantly change the way processes — and businesses — operate.
Even more fundamentally, companies typically fail to follow well-established, disciplined outsourcing procurement and management processes that support the organisation’s business goals.
By short-cutting these processes, they may achieve cost reductions but fail to take advantage of the opportunities that outsourcing provides to incorporate innovative new approaches that can fundamentally transform their operations. And in some cases, these shortcuts in the process can have more serious consequences by creating a cascading series of problems that ultimately doom the outsourcing project to failure.
Transformational outsourcing: Getting from here to there
Simply transferring dysfunctional functions to a service provider in the hopes of reducing costs through economies of scale or labour arbitrage can reduce or even eliminate opportunities to reap the significant benefits that outsourcing can provide.
The dynamics of the business are very likely going to change through outsourcing, so why not capitalize on all of the benefits? Accordingly, service providers should not be seen merely as sources of low-cost labour but as partners in innovation.
In an ever more competitive world, companies need to take full advantage of the tools at their disposal – and outsourcing is a significant one. Yet, by following a traditional cost-focused approach to outsourcing, most companies are underutilizing this key strategy, and missing opportunities for tremendous benefits.
But companies that view outsourcing in a broader strategic context and implement it systematically can gain a competitive edge over those that remain stuck in a traditional procurement mindset.