Don't Outsource Your Common Sense
22 September 2007 Linda Cohen
Companies that rushed to outsource before doing their research have found it is a little more complex than first thought. But, as Linda Cohen of Gartner Research tells Jim Banks, it really is as simple as thinking things through first.
While the market puts a high value on outsourcing and business leaders and analysts praise its ability to improve processes and cut costs, numerous companies have found the opposite to be true.
The reason for this is simple: far too many corporations are failing to do their research. They are not learning from the experiences of others and they are not considering their own motivations well enough.
According to Linda Cohen, managing vice-president and chief of research at Gartner Research, outsourcing has become a compulsive act, used as a short-term tool for solving a specific problem. But experience and research is starting to reveal the best practices in sourcing management.
DON’T FOLLOW THE CROWD
The first mistake CEOs make is failing to consider why they are outsourcing, viewing it as an end in itself rather than a means to an end. Cohen remarks: "Some CEOs may have heard about what outsourcing can do from the hype or by looking at competitors or even listening to someone they sat next to on a plane. They think it sounds good, say 'I need some of that' and go and tell their HR executive or the CIO to outsource HR or IT, and quickly." But the short-termism evident in today’s business world may simply be stacking up problems for the future.
Cohen says: "CEOs outsource a function that costs too much or because they don't have the right competencies. It is a tactical approach, so it is not enduring. They sign deals of three, five or seven years and then find that the problem they have outsourced has changed, but that the vendor and the processes have not.
"Part of the problem is that companies are constantly chasing the quarter-to-quarter albatross of earnings and profitability. Signing an outsourcing deal immediately puts up the stock price, showing that the market values outsourcing. That encourages ad hoc outsourcing. Vendors, too, need one big deal each quarter, so they can sometimes underprice deals or do too little due diligence."
The number of vendor relationships any company has tends to grow steadily so unless a business takes the right approach to finding outsourcing deals and a coordinated process for managing all such relationships, problems will multiply.
Cohen believes that companies urgently need to change the way outsourcing decisions are made. And the first thing they have to understand is exactly why they are outsourcing in the first place. She explains: "There are three reasons to outsource, and cost improvement is one. The others are operational improvement and/or to force a dramatic change to the business model. The CFO wants to reduce costs, the CIO is looking to improve processes and the CEO hopes to transform the business.
"To achieve all of them would require three different solutions from three different vendors, so companies must align their sourcing strategies with their business goals and identify how to reach those goals with a blend of internal and external sources."
It may be unfashionable to invest capital in improving in-house capability, but it can be a wise alternative to compulsive outsourcing, especially if it is closely coordinated with external vendor relationships.
Companies also need a better idea of what they will be getting in each deal and how it will affect the business as a whole. Again, this requires a thorough sourcing strategy as the starting point, followed by a detailed business case, which lays the foundation for finding the right vendor and the right terms.
Such a clearly defined process will enable better management of a more complex network of outsourcing relationships.
There is certainly no going back. The multi-sourced world is here to stay and more complex deals, such as the current trend towards blended sourcing, which incorporates a more intricate mix of in-house, external and offshore service provision, demand that businesses develop sourcing management strategies. For this they need new governance processes, better demand management discipline to benefit from economies of scale and new competence in strategic vendor management, beginning with the recognition that long-term contracts are very important to the supply chain.
GO BACK TO BASICS
As companies engage more vendors each year, the problem is becoming more complex, and CEOs are realising that a good strategy is key to successful outsourcing. Cohen remarks: "They have come out of denial and have a more enlightened approach. Outsourcing management is the number one thing that they need to know about."
She believes that companies have to go back to basics. In order to ensure that a relationship is set up to deliver on the anticipated benefits and has sufficient flexibility to keep that performance in line with the broader business strategy, they have to:
- Identify the motivation behind a deal
- Find potential vendors
- Develop enduring terms and conditions, pricing and metrics
With better deals in place, the next step of developing the competencies and discipline for successful sourcing management becomes easier.
SEE THE BIGGER PICTURE
Put simply, improving vendor management requires companies to develop universally understood maxims that connect sourcing decisions to business expectations. By laying down some rules of the road, understood by all stakeholders, a company can define a clear path that must be followed before any outsourcing deal is undertaken.
Cohen adds: "If someone wants to break a rule then at least they know that they are doing it and can develop a business case that explains why they should break it."
There is also a trend towards appointing a team to oversee vendor relationships, which goes a long way towards stemming the compulsion to outsource just for the sake of it. It encourages outsourcing deals that deliver more value in the initial stages and, more importantly, over the entire life of the service agreement.
Viewing sourcing relationships collectively, which helps companies determine their combined value, is a growing business imperative that, if backed with sufficient will and resources, could turn negatives into positives and enable outsourcing to deliver on its full potential.
Cohen adds: "Tactical sourcing with no strategy in place are a serious problem. CEOs must accept that they need to invest in people, processes and competencies. Some organisations are already starting to develop the discipline they need and are investing in strategic vendor management. There is light at the end of the tunnel."
No doubt there will be more headaches along the way as companies move gradually towards a healthier approach to sourcing, but there are simple steps that companies can take to improving their sourcing strategy, and those steps start with the CEO.