A survey of veteran outsourcing executives in six industries reveals
a set of best practices—all based on an unusually sophisticated
blend of management skills used to create the kind of partnerships
that deliver high performance.
By Adam Johnson and John D. Rollins Outlook Journal, October 2004
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  Outsourcing as a strategic business tool has been around for well over a decade, long enough for a certain folklore to grow up alongside the facts. It is the facts, however, that tell the more compelling story. According to recent Accenture research, companies that are experienced outsourcers use an unusually sophisticated blend of management skills to create the kind of outsourcing partnerships that deliver high performance.
Precisely which tools are required
to build a high-performance outsourcing arrangement? How can a business acquire these skills and get the most from outsourcing without making the difficult, trial-and-error climb up the learning curve? It was with these questions in mind that Accenture, in partnership with the Economist Intelligence Unit, conducted a global cross-industry survey of experienced outsourcers in January and February of 2004.
 We went directly to the source:
experienced outsourcers, who would know better than most how to manage these critical partnerships successfully. For the purposes of our research, we defined an “experienced outsourcer” as an executive working in a company that had a minimum of two years of outsourcing experience with a business-critical function. The survey was a blind study conducted without reference to Accenture as the sponsor. Respondents were recruited from the Economist Intelligence Unit’s global database and guaranteed absolute confidentiality.
A total of 565 responses were received from executives with deep outsourcing experience. Nearly 40 percent of the respondents had seven or more years of outsourcing experience; 61 percent had between two and seven years. Fifty-eight percent of the respondents were C-suite level or functional-level executives. Seventy-eight percent work in companies with revenues greater than $500 million.
Industries represented included automotive, transportation and travel services, retail, consumer goods and services, industrial equipment, and health and life sciences (pharmaceuticals and health plans). The survey focused primarily on North America, Europe and the Asia Pacific region but also included comparatively small percentages of respondents from countries outside these areas.
To supplement these statistical findings, Accenture hosted two daylong Executive Discussion Forums in Frankfurt (in April 2004) and Chicago (May 2004), in which senior executives from a diverse group of companies shared their thoughts on a broad range of issues related to outsourcing.
Not Fade Away
The survey and the forums together provided a wealth of insight. Veteran outsourcers focus on three top objectives: reducing costs, improving processes and enhancing the ability to focus on their core business. To meet these objectives, they take a sophisticated approach to managing outsourcing arrangements for maximum business results.
At times, their best practices go against conventional wisdom. For example, traditional outsourcing arrangements base performance measurement on service-level agreements. But veteran outsourcers build broad business outcomes into their performance measurements from the very beginning, even though cost reductions and service-level agreements always remain a high priority.
As a consequence, the vast majority of these experienced outsourcers
get better, broader business benefits from their partnerships and, according to our research, are highly satisfied with the results. And though
it has been alleged that outsourcing starts with a bang and ends with
a whimper, the experience of these veteran practitioners demonstrates that when outsourcing is done well, benefits and satisfaction actually increase rather than fade over time.
This, perhaps, only stands to reason: Companies get better at things when they have time to refine their techniques. More surprising was the finding that experienced outsourcers agree that outsourcing helps their companies perform better over the life of these agreements, and in overwhelming numbers they report high levels of satisfaction with their outsourcing experience. Performance and satisfaction, moreover, tend to increase over the long term.
Veteran outsourcers define what they want at the outset and employ a sophisticated approach to managing their complex outsourcing arrangements. Almost three-quarters of experienced outsourcers (74 percent) use broad business outcomes to measure and manage performance.
A significant majority of companies that rely on business outcomes do so from day one; virtually all have introduced them by the third year of an outsourcing arrangement. These outcomes invariably include reduced costs and improved profitability, but also go beyond these considerations to embrace factors that influence profitability, such as speed to market or growth in market share.
Adaptability Built In
Companies in the survey have a variety of requirements for their outsourcing partners, including process expertise, industry knowledge, flexibility and trust, in addition to attractive pricing. Discussions at the Accenture Executive Discussion Forums in the United States and Germany revealed that many companies look for continuous cost reduction, which implies continuous process improvement.
As one experienced outsourcer at a global consumer goods manufacturer put it, “When I tell my superiors that our benchmarks showed that we are in the top 20 percent in our industry, they just tell me, ‘Good job. Now take your benchmarks and go back to your desk and do better next year.’ ”
While most companies are looking for up-front cost savings in an outsourcing arrangement, what they really expect is continuously declining costs. This simply cannot be achieved by doing today’s processes the way they have always been done. Inevitably, companies are driven to look beyond lower-cost resources toward deeper process improvements and even business transformation.
Because most outsourcing arrangements run for several years, constant adaptation to changing business conditions is essential, on the part of both the outsourcing company and the
service provider. This built-in ability
to adapt to change means that the majority of outsourcing contracts need to be renegotiated before the end of the contract, a fact of outsourcing life that suggests it is wise to accept and plan for the change in advance. In fact, our survey respondents agree that three years into the outsourcing arrangement, performance measures and the quality of the outsourcing relationship have become more important than the contract as the primary management tools.
A majority of experienced practitioners (59 percent) use risk/reward incentives to encourage extraordinary performance or higher levels of risk on the part of their outsourcing partners. Respondents reported using incentives to spur a range of actions on the part of the service provider, from making greater capital investments to the assumption of potentially riskier operational challenges.
Finally, governance is more sophisticated in a seasoned outsourcing partnership; 74 percent of the companies surveyed exercise moderate to extensive reliance on governance. More than two-thirds (69 percent) have an executive dedicated to the management of the outsourcing relationship.
Best Practices
From these overall findings, we have identified seven best practices shared by experienced outsourcing companies that have learned to govern outsourcing arrangements for maximum performance. Here is how they do it.
 1. Build in broad business outcomes early and often.
The conventional view is that outsourcing is all about cost reduction. This research confirms that while savings are a significant driver, experienced outsourcers take a much broader view of the benefits to be gained. These companies put together outsourcing arrangements that explicitly link their business objectives and business outcome targets. Seventy-four percent report that their companies measure and manage outsourcing performance by looking at a broad range of business outcomes.
Increased profitability tops the list, reflecting the cost-conscious mindset, but significant numbers of survey respondents also cited other desirable business outcomes. Equally significant, 60 percent of experienced outsourcers build these business outcomes into the arrangement from
the beginning, and by the third year, virtually 100 percent of respondents are relying on outcomes. Real-world experiences help put the price issue
in its proper context.
 2. Hire a partner, not just a provider.
Veteran outsourcers demand a lot from their partners, price being only part of the equation, along with expertise, flexibility and a spectrum of other assets. The senior executives participating in the Accenture Executive Discussion Forums generally acknowledged that “soft” considerations like reputation, cultural fit and creativity are often more important and more difficult to get right than the “hard” issues of pricing and contractual terms.
3. It’s more than a contract, it’s a
business relationship.
Contracts are clearly critical for aligning expectations and interdependent responsibilities at the outset of an
outsourcing arrangement. Experienced outsourcers suggest that over time,
the contract gives way to performance measurements and the relationship between the outsourcer and the service partner as key success factors.
 Discussions with American and European executives suggest that when it comes to searching for, evaluating and selecting an outsourcing service provider, most companies follow a fairly traditional process: initial research, a formal request for information and then a request for proposal, culminating with negotiations, due diligence and the determination of contractual or commercial arrangements.
An emerging insight from many participants at the Accenture Executive Discussion Forums, however, is that selecting an outsourcing partner should not be a standard procurement exercise. As one executive put it, “I am buying into a journey and
a route. I do not know exactly how
I am going to get there, but I am confident that I will reach the destination because of the cultural fit” between his company and the outsourcing service provider he chooses.
 4. Leverage gain-sharing.
Nearly 6 out of 10 respondents working at experienced outsourcing companies report that they use risk/reward incentives to spur the performance of their service partners. 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.
 5. Use active governance.
Experienced outsourcers understand that it is not enough to sign an agreement and hand off responsibility; effective outsourcing arrangements require active involvement. Almost three-quarters of respondents say their companies rely on moderate or extensive governance procedures. More than 90 percent use some form of governance.
Many US and European executives agree that governing the outsourcing arrangement and managing the relationship between the outsourcing company and the service provider
are among the most important,
yet most sensitive, issues to be addressed. In the words of one executive: “Governance must work at the very top level all the way down to the operational level. Is everyone talking to everyone at every level?”
 Open communication is obviously critical; less apparent are the formal governance structures required for success. These could be quarterly meetings of a review board composed of a range of executives from both the client and provider, or weekly conference calls or regular meetings with those executives responsible for overseeing the outsourcing arrangement.
6. Assign a dedicated executive.
Outsourcing is a full-time business proposition requiring focused attention at the management level. Sixty-nine percent of respondents report that their companies have assigned a dedicated executive the task of supervising their outsourcing arrangement. The decision to outsource is only
the beginning of the journey. Most arrangements are multiyear deals running to 5, 7 or even 10 years, so the success of the relationship between outsourcing company and service provider depends on the care and nurturing of the arrangement over time.  A coordinated approach to human resources issues is particularly important. Defining new and revised roles in the retained organization,
as well as those positions being outsourced, is of paramount concern
to all employees. Communications strategy becomes a principal task
of the executive leading the outsourcing initiative.
 7. Focus relentlessly on primary objectives.
When asked to rank objectives for the outsourcing arrangement two years into the deal, respondents recited a lengthy wish list. Three objectives stand out from all others: cost reduction, improved processes and focus on the core business. Of all those who rank these three at the top of the list, a remarkably high percentage report that their companies have been successful in achieving these objectives: 71 percent of those who tried were able to reduce costs; 65 percent improved processes and 75 percent focused on core business. For some companies, failure
is not an option. One participant at an Accenture Executive Discussion Forum noted that “when my largest competitor’s SG&A is at 15 percent and mine is at 24 percent, how am I going to compete? Outsourcing is the only way I am going to make my numbers.”
Every outsourcing arrangement is
a complex and long-term business relationship. But companies just getting started with outsourcing do not need to wait years to achieve high-performance outsourcing and high satisfaction. They just need to learn from the masters. And companies already outsourcing can improve their performance by comparing their current practices against the best practices revealed in this survey. For all companies, there are proven techniques for getting the most out of an outsourcing initiative.  About the Authors
Adam Johnson is the global lead for Business Process Outsourcing Growth
in the Accenture Products operating group, responsible for driving the growth and development of Accenture’s BPO business. He also works directly with clients in Europe to develop and implement outsourcing arrangements, focusing on finance and accounting, HR and procurement services. Mr. Johnson, who is based in London, has specialized in outsourcing for more than 10 years.
John D. Rollins is the global managing partner of the Accenture Strategy & Business Architecture—Products operating group. Based in Philadelphia,
he works with clients to set the direction for IT in business and competitive strategies such as outsourcing; he
also consults with organizations that undertake transformation initiatives, including outsourcing, in which IT
plays a critical role. Mr. Rollins has broad experience working with senior executive teams to help them create new business models and new organizations within companies. He has
coauthored two books, most recently Information Orientation: The Link to Business Performance (Oxford University Press, June 2002).
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