By Blake Hanna
Outsourcing as a strategic business tool has been around for well over a
decade—long enough for a certain folklore to grow along with the facts. In
fact, most experienced executive have a favorite anecdote about outsourcing
deals that have failed. Yet few will deny that the benefits of outsourcing
continue to outweigh the resistance to it. Indeed, savvy companies rely on
outsourcing to save money, improve quality, increase productivity and expand
the flexibility of their operations. But, as companies expect outsourcing
service providers to deliver consistently higher levels of performance, the
question is: Can outsourcing truly deliver on its promise?
Judging by a new survey of practices among 565 experienced outsourcing
executives in a variety of industries in Europe, North America and
Asia Pacific, the answer is unequivocally yes. The research, conducted by
Accenture and the Economist Intelligence Unit, found that companies with many
years’ experience in outsourcing know how to manage outsourcing arrangements to
achieve well-defined business outcomes and achieve a high level of satisfaction
with their outsourcing arrangements.
Why Outsource?
Accepted wisdom would have us believe that cost savings is the key reason
companies turn to outsourcing. Unquestionably, cost savings will almost always
be a primary driver behind decisions to outsource. In fact, two out of three
(67 percent) of survey respondents said they look for increased profitability
from their outsourcing arrangements. Yet, if the experience of these survey
respondents has any bearing on the matter, an outsourcing arrangement that
focuses exclusively on savings risks leaving business benefits of considerable
value on the table.
For example, six out of ten respondents reported that outsourcing helps
their companies perform better. In fact, outsourcing veterans seek a wide
spectrum of “big picture” business outcomes, including improved profitability
(cited by 64 percent of respondents), improved management focus (39 percent),
enhanced speed to market (37 percent) and increased revenue (33 percent).
According to respondents, the longer a company engages in outsourcing, the
better it becomes at managing it. The survey found a direct correlation between
experience and satisfaction, with those executives having most experience
(i.e., seven or more years) reporting the highest levels of satisfaction, most
improved management of outsourcing and, not surprisingly, increased
performance. Unexpectedly, the study also found that satisfaction with
outsourcing does not peak in the first year, when cost savings are a primary
focus, but increases over time, as does performance.
Making Outsourcing Work
The survey found that experienced outsourcers use a sophisticated
approach to manage their complex outsourcing arrangements. The following seven
“best practices” cut to the heart of successful management, clarifying
precisely what is to be accomplished and how:
- Incorporate broad business outcomes as a
performance measure from the outset of the
arrangement
Three-fourths (74percent) of experienced outsourcing
executives rely on “big picture” results to track performance. Reflecting the
cost-conscious mind-set, increased profitability tops the list (cited by 64
percent of respondents). But other results are important, including improved
management focus (39 percent), speed to market (37 percent) and increased
revenue, customer loyalty and market share (cited by 33 percent, 25 percent and
23 percent, respectively). Significantly, six out of 10 experienced outsourcers
introduce business outcomes measures early in the relationship (i.e., less than
a year after contract signing), and, by the third year, virtually all
respondents rely on outcomes to calculate performance.
- Be clear about your
objectives
Survey respondents concentrate on three
objectives—cost reduction (67 percent), improved processes (48 percent) and
focus on the core business (35 percent). Among respondents who rank these three
objectives at the top of their lists, 70 percent say that their companies
succeed in achieving them.
- Hire a partner, not just a
provider
Veteran outsourcers know that hiring an outsourcing
service provider is not just a matter of the lowest price quoted or the highest
savings promise offered. In fact, lower costs alone are no guarantee of
success, and survey respondents reported that they seek a number of advantages
from prospective outsourcing partners, including expertise (86 percent),
flexibility (81 percent), industry knowledge (75 percent), and ability to earn
trust (74 percent), as well as low cost (78 percent).
- Manage the relationship as a partnership, not as a
company-vendor contract
While contracts are clearly critical for
aligning expectations and interdependent responsibilities at the outset of an
outsourcing arrangement, over time, performance measures and relationships
become more important to a smooth-running partnership than does the contract.
Respondents rank the contract above performance measures and relationships (31
percent, 24 percent and 17 percent, respectively) during the first year of an
agreement. By the third year, respondents report that performance measures
become of greatest importance (35 percent), followed by relationships (26
percent) and, last, the contract (16 percent).
- Use shared risk/reward arrangements as incentives
for higher performance outsourcing
More than half of
experienced outsource executives (59 percent) rely on risk/reward arrangements
to spur performance, aligning outsourcing results to corporate objectives. In
fact, 53 percent employ this approach as an incentive for continual performance
improvement, while 44 percent use it as a spur to the service provider to make
greater investment upfront. In some cases, these incentives are intended to
elicit performance beyond contractually mandated agreements. In other
situations, incentives are used as inducements to take on especially
challenging corporate chores, such as operating in a groundbreaking endeavor or
in a precarious financial environment.
- Assign a dedicated executive to manage the
outsourcing relationship
Outsourcing is intrinsic to meeting
corporate objectives and, as such, requires oversight by professional
outsourcing executives. More than two-thirds of companies surveyed (69 percent)
report that they have assigned a dedicated executive to managing each
outsourcing relationship.
- Use strong, active governance to manage the
outsourcing relationship for maximum performance
Respondents
report that it is not enough to sign up and hand off projects. Instead,
effective outsourcing arrangements require active involvement. To this end,
almost three fourths of experienced outsourcers (74 percent) use
moderate-to-extensive governance techniques, while more than 90 percent use
some form of governance.
Borrow Best Practices From the Masters
Clearly, every outsourcing arrangement is a complex, long-term business
relationship. But companies just getting started with outsourcing do not need
to wait years to achieve high performance and high satisfaction. Similarly,
companies already outsourcing should compare their current approach to
outsourcing against these best practices. In either case, these sophisticated
outsourcing practices can help any company achieve high-performance outsourcing
and high levels of satisfaction with the returns they achieve on their
outsourcing arrangements.
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