Outsourcing: An Inconvenient Truth

The decision to outsource or offshore a process is often taken with short-term cost savings in mind, which could later prove damaging to the pursuit of long-term goals. Kirkman Company’s Erik van der Meulen and Guido Braam tell Jim Banks how strategic sourcing could provide the answer.

There is undoubtedly potential to cut costs or convert fixed costs to variable costs through outsourcing. Whether or not short-term cost cutting is the right course of action for a given process, however, remains a confusing question, particularly as the number of failed deals grows.

Outsourcing decisions are often made hastily, without an understanding of how they will affect the company’s strategy beyond the next financial quarter.

Erik van der Meulen, managing partner at Kirkman Company in the Netherlands, believes: ‘Offshoring and outsourcing are fashionable, but companies often ignore in-house development. The goal should be sustainable development of a business.’

STRATEGIC SOURCING

Kirkman Company is an independent management consultancy that focuses on strategic sourcing, enabling clients to assess the many sourcing options at their disposal to find the right blend to carry them forward. Outsourcing is among these options, but so are the development of in-house capability, shared service centres, joint ventures and M&A.

Strategic sourcing helps organisations choose when to make, buy or ally.

Guido Braam, Kirkman Company’s domain manager for HR, says: 'Lessons have been learnt from the IT world, where surprising decisions were often made. Outsourcing is an inconvenient truth in that it is often not proposed by the board and may take longer to prepare than you expect. We help companies ask the right questions.'

For Kirkman, companies with a broader palette to work from can be more creative in finding the right long-term solutions.

STAYING IN CONTROL

The recent negative publicity around outsourcing has certainly raised doubts in boardrooms, but many companies have not yet started to ask the right questions.

Van der Meulen explains: 'Large organisations have uncertainties about outsourcing, and service providers use this to develop strategic relationships. These uncertainties can have negative effects, so we help to remove them by identifying the risks and benefits of each option and use that as a measure to help our clients stay in control of their sourcing decisions.'

Both van der Meulen and Braam believe that the most important step companies can take is to start examining sourcing decisions at an earlier stage, giving them more time to assess the available options. Furthermore, they should focus on strategic rather than opportunistic goals.

CHOICE, CHANGE AND CONTROL

Kirkman's approach has three phases: choice, change and control. Choice involves evaluating all potential sourcing options to find the right combination, change requires careful planning to realise the preferred strategy and finally, control establishes the right governance model to ensure that the intended benefits are gained throughout the life of a sourcing project.

The steady approach such a model demands could ensure that a company is aware of all of the risks, opportunities, pitfalls and migration costs, and that it understands how mature its processes and its potential partners are.

At all stages it is important that a company is honest and open with itself and its partner about where its strengths and weaknesses lie.

Van der Meulen says: 'Companies must be open, or the calculation of the benefits will not be accurate.'

Achieving this requires the close involvement of the CEO and other senior executives from the very start to ensure that sourcing decisions are aligned with corporate strategy and have a solid platform. Failure to drive sourcing projects effectively or communicate with partners will only store up problems for the future.

Strategic sourcing could be the key to sustainable business, but it requires openness, honesty and the willingness to look beyond ad hoc outsourcing.