The key to a successful outsourcing initiative is knowing the what, when, and how.
Outsourcing has matured over the years. Today, organizations big and small use outsourcing — in one form or another—to save costs, increase competitive advantage, and accelerate growth.
Currently there is “a dramatic and rapid increase in the market for digitally-fueled deals — service offerings powered by new technology, new business models, new pricing, automation-driven labor arbitrage, more cloud, and more service as software.”But outsourcing is not just about saving money — it “is about doing things quicker, getting into the market faster than competitors, having maximum flexibility with your workforce, and gaining access to high-quality employees you otherwise could not afford.”
For those old and new to the process, the key to a successful outsourcing engagement is knowing the what, when, and how.
Back to the Basics
Managers looking to or already using outsourcing need a well-planned and executed procurement and relationship management structure; one that understands the basic concept of outsourcing:
Outsourcing is the business practice of hiring a party outside a company to perform services and create goods that traditionally were performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure. As such, it can affect a wide range of jobs, ranging from customer support to manufacturing to the back office.
Faced with the ongoing challenges to manage diverse teams, track progress, and achieve projected goals, often combined with budget struggles and limited resources, managers turn to outsourcing to alleviate some of the pressure. As a key team player in the outsourcing process, each contract management professional should know how to enhance the process and even steer it at times. The following are several tips for successfully managing the what, when, and how of the outsourcing process.
The What and When of Outsourcing
Knowing what to outsource drives the when to outsource. Clearly defining the what helps determine whether outsourcing is viable and helps deal with resistance within your organization. Using the following consideration factors, contract management professionals can help the executive team make educated when decisions.
Deciding What Gets Outsourced — Goes beyond simply considering the distinction between an organization’s core activities (i.e., “strategic tasks that improve customer value and [drive] profits”) and non-core activities (i.e., “day-to-day routine tasks that add little value and are not a profit center”).A more productive view is to determine the what based on whether activities contribute to your “competitive advantage” and whether activities “can be performed well internally.”Ask:
- Are you stretching internal resources to their max in order to complete projects?
- Are staff members taking on responsibilities that do not fall under their job descriptions?
Cost Savings — Cost savings should not be the sole reason for outsourcing, but a desired outcome. Many organizations make the mistake of only focusing on the cost basis for outsourcing without examining the process itself. The ultimate benefit of outsourcing should be measured in business terms. Ask:
- How does this process benefit your organization?
- Will the end-result be invariably cost-efficient?
Best of the Best — Your organization started for a reason: either because of a stellar product or service. Keeping your organization focused on this strength frees you to seek out those professionals that are the best in their fields to supplement your business. Outsourcing gives you the opportunity to use the best in the business.
Flexibility — Outsourcing does require a certain flexibility and openness to new processes. Make sure your organization can handle outsourcing. Small companies tend to have the agility to adapt to new processes and are typically great candidates for outsourcing. If you work for a larger company, make sure the management structure is set up to handle outsourcing from the top down. Evaluate your organization’s communication structure, workload delegation, and staff participation.
The How: Steps Toward Success
Do not just jump right into contract negotiations! You are skipping an important step: process development. This is really the first stage of the how in outsourcing. By establishing an outsourcing policy early, there are fewer questions and opportunities for unnecessary extras down the line. For example, a strong overall outsourcing policy allows for your organization to maintain consistency on personnel issues and contract structure, as well as to ensure compliance with federal, state, and local laws. All of these items make the contract management process much easier down the line.
As a contract management professional, you may believe this stage is not a place where you have much to contribute. On the contrary, it is vital that you step in and help build the outsourcing policy. Many items here determine negotiation and, subsequently, play a large part in the resulting contract management. Voicing your opinions and recommendations in the early process development stage will make your job much easier in the long run. A few important things to consider when developing the outsourcing policy include:
- Principles and criteria to be applied when identifying outsourcing candidates,
- The process for evaluating outsourcing alternatives,
- Procedures for implementation, and
- Analysis of options to attain the optimal balance among savings, quality, and employee interests.
Importance of Human Relations
Technology enables companies to efficiently and successfully outsource key business functions; however, a different strategy has to be implemented when it comes to the human relations aspects of an outsourcing venture. Essentially, you are bringing in an outside vendor who needs to know your corporate/organizational culture, processes, and motivations.
Way back when, in more traditional business models, managers built camaraderie, established trust, and communicated goals face-to-face. However, today, with managing more and more consultants outside the office, managers wonder, “How do I effectively manage the outsourcing process?” This is another major part of the how in outsourcing. Organizations are only as good as their people, despite having the latest technology, the most efficient information systems, and the “leanest and meanest” organizational structure. For an organization to be truly successful, it must align its most valuable asset — human capital — with organizational goals.
The traditional way in which your organization has monitored staff has to change. Outsourced service providers are not always located on the premises. This creates some new challenges for reviewing performance. Bringing together internal staff with an outside team can cause tension because of apprehension of the unknown. Keeping everyone apprised of the project status will greatly increase chances of a successful project. Following these tips will keep your organization on the right path in working with “outside” service providers:
Focus on Results — Forget about trying to monitor how and when team members get the work done. Keep focused on the deliverables; that is what ultimately counts.
Build Trust — Use technology to build relationships, but encourage face-to-face meetings whenever possible. Managers must rely on trust far more than on control in an outsourcing relationship.
Clearly Define Expectations — Establish guidelines for outsourcing partners. Define acceptable communication lines in sync with current technology. Clearly set response times and response lists to reflect project needs.
Show Team Members the Bigger Picture — Giving individuals a sense of how their tasks fit into the whole project goes a long way toward building a sense of cohesion and teamwork. Conversely, make sure you are keeping internal staffers in the loop as well. This avoids animosity and keeps the teamwork flowing.
A better understanding of the strengths of your selected service provider will go a long way toward the success of your project (e.g., providers that are familiar with outsourcing are more sensitive to common issues). Use those strengths to your advantage!
And Now the Contract
Outsourcing managers “need to constantly review the challenges facing their organizations and ensure that their contracts reflect these realities.”One of the key challenges is to build into the contract “effective” benchmarks.
A good contract not only reflects what you are outsourcing — i.e., the scope, the when/timeline, your policy, and human relations norms — but also must include clear benchmark rules. Effective benchmarks serve as a “mechanism to gauge the competitiveness and quality of service delivery.”They help “determine if services are aligned with market standards for price and quality, define adjustments that can and should be made, and identify additional opportunities for improvement or innovation.”
Benchmark terms “must be clear, specific, actionable, and realistic.” There are several keys to success and pitfalls to avoid:
Challenge a provider who insists on excluding a certain benchmark partner from consideration. That could indicate a past case of being “caught with their hand in the cookie jar.” All of the major players in the contract benchmarking market have well-established and defendable methodologies. Often the issue is finding the benchmark partner who best fits the client’s scope, scale and complexity.
Insisting on a specific “percentile” outcome may in fact not be reasonable based on the scope, scale and complexity of the deal. Do not let the partner dictate the process used to execute a benchmark, as this is not their core competency.
Since the deal’s original intent often gets lost with time, changing business pressures and current operational or strategic needs, early documentation must be preserved for consideration in future benchmarks. Regardless of the alignment of the agreement, determine what will be benchmarked: the contract, the services being requested by the client, or the services being delivered by the service provider.
Use the benchmark results to define clear, actionable and time-boxed activity. Resist attempts to soften the next steps by inserting “best effort” language, as that can effectively leave you with no clear way forward.
Do not put the onus on improvement solely on the service provider. Rather, identify potential actions for the client organization as well. For example, are client processes inefficient and cumbersome, and can they be rationalized to allow the service provider to leverage economies of scale? Are the client’s reporting requirements unnecessarily cumbersome and can they be streamlined?
Just a Starting Point
The contract is only a starting point. Solid procurement and relationship management are absolutely imperative to achieving the full benefits of an outsourcing partnership. All too often, as the process of establishing an outsourcing arrangement seems complete, companies think that letting the arrangement run by itself will warrant a successful outcome. Wrong! Managing the outsourcing relationship throughout the contract’s life cycle is just as important to see the results you want from your project.
As a natural extension of the procurement process, the contract management professional can ensure that effective relationship management takes place by continually monitoring both parties. Also, referring back to a solid outsourcing policy will help clear up any questions or gray areas (remember to get in on the process development early!). The following are key components that should be addressed:
- Set up a steering committee,
- Monitor performance and measure processes, and
- Identify problems and employ resolution mechanisms.
Similar to developing the human relations aspect of the relationship, close, constant communication is also a fundamental part of the ongoing management relationship. Much of this can be handled in the day-to-day interactions of front-line managers from both organizations, but the relationship management plan should also set up regularly scheduled formal reviews at all levels.
Contract managers: You already have the tools to achieve great outsourcing! In fact, the outsourcing process may be more inherent to the contract management professional than many others within a company. You are aware of the importance of well-thought processes, a strong contract, and constant relationship management. Simply apply what you already know. Outsourcing opens new doors for the contract management professional that with careful planning and management will produce great results for your organization. CM
Founder, Innova Communications Inc.
*This article is an updated version of an article originally published in the January 2003 issue of Contract Management Magazine.
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John Lytle, “Benchmarking Clauses in Outsourcing Agreements: Keys to Success,” Meyer Brown (2012), available at https://www.mayerbrown.com/en/perspectives-events/publications/2012/12/benchmarking-clauses-in-outsourcing-agreements-key.
The Outsourcing Institute, “Life After Outsourcing,” The Outsourcing Institute’s Buyer’s Guide: 24.