Michael F Corbett is the executive director of the International Association of Outsourcing Professionals. He traces the growth of business's big idea of the last ten years and outlines how it can continue to thrive over the next ten.
Today, we see organisations rethinking their global footprint and the role of outsourcing. Sorting out the complexities of what should be outsourced and from where should result in an ever-larger portfolio of new outsourcing relationships.
But, says Chris Disher, a vice president at global consultancy Booz Allen Hamilton: "For this to happen, outsourcing professionals and senior management need to step up their game and lead the discussion on outsourcing governance, policy setting, opportunity identification, execution and quality assurance."
"Underperforming outsourcing relationships will need to be restructured or moved, and new skills and capabilities within the sourcing organisation are going to be required."
A BRIEF HISTORY OF OUTSOURCING
Depending on which version you prefer, in 1928 John D Rockefeller or Bernard Baruch or Joseph Kennedy got out of the stock market because a shoeshine boy offered them a stock tip – the moral of the story being that when a market reaches that level of speculation it's time for the professionals to get out. Many of us probably wish we had heeded that advice ourselves in the late 1990s.
It's hard to find any industry or business idea hotter than outsourcing right now, so might outsourcing itself be in a bubble? And if so, could that bubble burst as well?
Of course, the basic idea of outsourcing is not new. Having another organisation do something that yours can't or won't do itself goes back as far as one cares to look.
Even the term outsourcing is not particularly new; it was first adopted in the 1960s and 1970s in manufacturing, and now influences almost every facet of the organisation.
Dun & Bradstreet estimates that outsourcing is now a $4tn a year business. According to industry experts, 25% of a typical executive's budget is outsourced – a figure projected to increase to 34% by the end of 2006.
The value organisations get from outsourcing has increased just as rapidly. Initially, outsourcing was all about costs – finding someone who could do the job better, faster, cheaper, or all of the above.
Then outsourcing became strategic, with the focus switching to the huge opportunity cost savings generated by businesses reinvesting their freed resources in higher value-producing activities.
Recently, the focus of outsourcing has expanded again; executives now want their outsourcing partners to do all of these things and become sources of innovation, helping them create new businesses and new ways of doing business.
WHY NOT OUTSOURCE EVERYTHING?
Outsourcing started in manufacturing, an area that is 70% to 80% outsourced, so why isn't the rest of the business world even more outsourced?
One reason is that it takes time for supplier markets to develop. After all, businesses have to outsource to someone, and until there is a robust, competitive market of world-class suppliers, that is difficult to do.
Atul Vashistha, CEO of neoIT, a leading offshore advisory and management firm, and co-author of the recently published book The Offshore Nation, advises taking a look at the history of GE's outsourcing operations, particularly in India, to understand how outsourced areas, skill sets and supplier capabilities have evolved.
Another reason outsourcing may not yet have reached its full potential is the natural resistance to change. Even if an executive knows that outsourcing makes sense in principle, there may be no compelling reason for doing it today.
It often takes outside forces – such as competition, shifting customer expectations and new technologies – to bring about significant internal change. Studies have found that businesses in industries with short product life cycles outsource 50% more than their counterparts in more stable industries.
GETTING IT RIGHT
There is more to it than these factors. One of the biggest may be that outsourcing is really hard work. "Many practitioners don't really appreciate the complexities until they're already in an outsourcing relationship," says Robert Kane, head of BPO services for Mercator Dubai, a leading supplier of IT solutions for the global aviation industry.
There's a real lack of consistency, according to David Barrett, a partner at the global law firm of Simmons & Simmons. "Occasionally, companies go into it with enormous overkill; more likely they fail to devote enough resources, money and particularly time to getting a workable deal," he says.
Companies often don't choose partners with any degree of science and structure, and fail to appreciate that business is dynamic and that the deal they negotiate today will probably be obsolete before pen is put to paper.
The other big factor may be that, as with any major undertaking, results simply can't be guaranteed. More than 30% of the respondents to a 2004 Booz Allen Hamilton survey reported being less than satisfied with their outsourcing results.
More than 20% of the attendees at the 2004 Outsourcing World Summit said that they were losing a quarter of the value of their outsourcing contracts due to poor working relationships between the companies. Simmons & Simmons reports that 90% of organisations experience some form of dispute with their outsourcing partners, many of which lead to litigation.
Some of the most common problems are missed targets, poor performance in relation to the agreed service levels and scope creep, with unexpected charges for things the customer originally thought had been priced into the deal.
RAISING THE BAR
So, the real questions are: can the level of investment needed to make outsourcing work be reduced, and can the outsourcing success rate be improved? There are a number of ways this can be done:
A recent survey conducted by the outsourcing information portal Firmbuilder.com found that the field still relies on on-the-job training as its top source of skills development.
In fact, 20% of the respondents said there was simply no outsourcing best-practice training available anywhere. Better training would put the knowledge about what does and doesn't work where it's needed – in the hands of the people directly involved in and managing outsourcing relationships.
Professional certification, based on industry-recognised standards, already exists in most fields – accounting, administration, customer service, engineering, marketing, meeting planning, project management and systems engineering are just a few examples.
Standards for outsourcing professionals, such as those being developed by the International Association of Outsourcing Professionals (IAOP) and the Outsourcing Standards Board (OSB), will bring improving skills to what is one of the most complex tasks in business today.
Standards for scope definition, financial analysis, contracting, pricing, negotiating, contract management and dispute resolution will all help professionals in this field to raise their game.
A FOCUS ON OUTCOMES
Legendary investor Warren Buffet recently said the best advice he had ever received was: "You're not right because others agree with you, you're right because you have your facts right."
However, most organisations' approach to outsourcing is determined more by opinion than fact. Very little work has been done to establish a benchmark for high-performance outcomes and to identify the processes that lead to superior results. Without the facts, the task of improving outsourcing's ROI will be difficult to achieve.
PUTTING PROVIDERS TO THE TEST
Providers have to raise the bar as well. It's no longer good enough to offer customers a better, faster, cheaper solution to what they are already doing.
If customers are going to outsource more, or just keep outsourcing the same number of services, service providers must work with them to keep developing and implementing new solutions above and beyond their expectations.
"The best relationships are those in which clients can communicate to us their strategic direction," says Mercator Dubai's Kane.
"This lets us know where we can add most value for the client and encourages us to look for innovations in those areas."
The bottom line is that service providers need to invest in R&D, just like any other industry, if they are to continue to out-perform their customers.
PUTTING TECHNOLOGY TO WORK
While multiple studies point to outsourcing failure rates of 30% or more, experts believe that the right software tools can help bring this down to 10%. Technology helps improve the flow of information and tightens management's control.
This in turn helps companies improve their outsourcing ROI in two ways: by avoiding waste from duplication of services and billing errors, and by reducing the management costs that tend to grow exponentially as outsourcing grows.
By using technology to link all of the company's people and processes, businesses will be able to build and manage a truly global corporate ecosystem.
GOVERNANCE AND MANAGEMENT
Outsourcing programmes require governance and ongoing management to ensure success. Governance ensures that the client and the supplier understand the what, the when and the how of outsourcing, along with the role each party plays.
Ongoing management ensures that ROI comes not only from labour arbitrage but also from improved productivity. neoIT data shows that best practice firms invest 5% to 8% of the contract value in governance and ongoing management.
This investment ensures that the value of cost, productivity, quality and speed are captured and realised now and in the future.
Every time an organisation outsources successfully, it lowers its costs, improves its balance sheet, reduces its business risks and expands its capabilities.
If outsourcing is to continue to grow over the next ten years the way it has over the past ten, organisations will need to produce better results with greater regularity and at lower cost. This will require a collaborative effort across the global community of outsourcing professionals.