Top 10 Challenges of Outsourcing

10 Apr, 2006 By: Kenneth Wong

New book examines pitfalls and offers advice to business managers

Outsourcing has become the new gold rush, especially for manufacturers, but it's not uncommon for pioneers in this unsettled business frontier to shoot themselves in the foot or dig themselves into a hole too deep to escape.

Ralph Welborn, a business advisor and author, says, "At its core, the outsourcing industry rests upon an old business model based on inflexibility and cost reduction that doesn't account either for the predictable patterns of technology adoption or for the demands customers face for providing more 'value' and 'service' rather than simply reducing costs for their customers."

Get It Done! A Blueprint for Business Execution (Wiley, 2006, $29.95), by Welborn and Vince Kasten, looks at the "execution gap" -- the difference between what needs to get done and what actually does get done once work leaves a client's organizational walls. The authors identify 10 lessons they've learned about the challenges and difficulties of global outsourcing.

1. If it looks too good to be real, it probably is.
Too frequently, outsourcers try to lock clients into long-term deals based on contract terms and pricing that will be out of date six months later. The inevitable results are frustration, irritation and a lack of understanding and insight into why the sales promises of outsourcing aren't meeting up with its delivery realities.

2. Too many outsourcing deals suffer "death by change order."
Service providers may under-quote on purpose, just to get the business. Then, when they get further into the contract, they may demand more money, citing change of circumstances. When such change orders occur several times over the course of the relationship, irreparable damage may occur.

3. The prevalent "core vs. context" approach -- that is, outsourcing what's not important to let us focus on what is important -- is becoming outdated.
Dell Computer was prompted to regain control of its outsourced customer service centers because of the customer complaints received and the drop in additional sales usually generated by service calls. Procter & Gamble has now outsourced -- or, more appropriately, cosourced -- its product innovation process to harness the brainpower of people well outside its organizational walls.

4. The contractual crunch and win-lose contracts have unintended consequences.
Outsourcing has become more difficult to support because the processes are leaner than before, leading to the "I've-gotta-win-and-you've-gotta-lose" approach to contract negotiation. In the short term, one party wins and the other loses, but in the long term, everybody loses, because of the animosity, frustration and bad-mouthing that stem from such a partnership.

5. What you don't know will bite you.
There are many factors service providers don't, or can't, foresee. For instance, some critical workarounds developed over the years to keep a client's operations running smoothly may not have been properly documented or formally integrated into the client's core technological framework. These invisibles -- both manual and automated -- are nearly impossible to identify. Companies often discover them afterward, when customers complain, when frustration arises on both sides, when the partnership has been damaged.

6. Outsourcing providers build in a lack of transparency -- the "black box" of costs and margins.
Some may try to hide their overall margins to give themselves more profitability over the life of the contract. They provide a vast range of consulting services, application development, solution deployment and project management, all grounded by lots of change orders, into the complex contract. Because different services have different costs and different margins, a provider can use -- or claim to have used -- the ones that offer the most benefit. A client often has few means to oversee what the service provider is doing and how much it charges.

7. It's easy to underestimate the bull's-eye effect. Lots of stuff has to get done to outsource a business process.
This stuff ranges from simple things (moving equipment) to difficult things (consolidating computer applications) to really difficult things (moving and retraining people). More importantly, it all has to come together just right to hit the target. If one thing goes wrong, it can have a cascading effect on other things.

8. Companies are starting to reject long-term contracts.
Unfortunately, the smaller, shorter-term contracts have their own problems for the client company. Dealing with more providers inevitably stretches a company's valuable -- and already scarce -- management time.

9. Outsourcing firms are suffering from the Botox Effect.
Botox takes out wrinkles but inhibits normal facial expressions. Around year three to five, outsourcing service providers are supposed to have eliminated many of the easy processes and added simple automation. But the technology refresh maybe is a lot more expensive than they thought. And they're confronting so many operational challenges and cost pressures just to keep going -- or keep the smile on -- that they can't afford to do the planned investments for the technology refresh.

10. All customers want is a flexible, innovative partner, but they usually get the opposite.
Customers want a flexible outsourcing partner who will introduce innovation into their processes, help them manage both costs and service and use relevant and emerging technologies. They also want someone who understands their specific requirements and their business. Unfortunately, outsourcing service providers tend to fall short in flexible infrastructure, understanding the client's business and innovation.

Welborn and Kasten assure readers that the future isn't that grim. After all, the outsourcing game is no longer just about reducing costs; it's also about creating value. It is, in fact, one of the most compelling and exciting opportunities. To ensure that you're outsourcing what you should, when you should, with a full understanding of how you should, you can consider the six tips outlined in their book:

1. Conduct workshops to illuminate the invisible.
The undetectable exceptions, the workarounds and the embedded business logic in applications that culminated over time must be identified up front. Conduct experiential workshops to understand the experience of all those involved -- people, processes, assets and technology.

2. Work to bridge everyone involved in your outsourcing effort.
Marketing people, management people, operations people, IT people and outsourcing people can all be in the same meeting, yet come out thinking they agreed to do entirely different things. You need what the authors call "a common DNA of execution" to let everyone align themselves in the pursuit of the same goal.

3. Don't get suckered in by one-size-fits-all contracts.
Be sure your business objectives fit the appropriate collaborative outsourcing relationship you enter into. It's critical to acknowledge there's more to outsourcing than driving down costs and recognize that potential innovations and opportunities will come from the embedded knowledge and insight of some of the outsourced processes. Both are important considerations for defining the outsourcing relationship.

4. Do the complex juggle between managing costs and increasing value. Force your outsourcing provider to explicitly say how it performs this juggling act.
In the past, outsourcing was all about lowering your costs. Today, it's just as much about delivering value. A first key step is knowing you have to wrestle with the tension between having your provider support both cost and value.

5. Put "service" back in the term "outsourcing service provider."
The expected but unpleasant appearance of expensive change orders -- a contractual device that allows outsourcing providers to renegotiate in midstream -- has ruined more than one business relationship. Bring up this sticky subject early in the negotiating process. Interrogate the service provider. Ask them to describe, in detail, how the processes work.

6. Never stop pursuing flexibility and visibility in your outsourcer relationships.
First and most obviously, don't do business with a provider who says, "Hey, give me your business processes to manage and you'll never have to think about it!" Such lack of transparency is based on an outmoded business model and denial of competitive reality. Markets change. So do customer needs, technologies and prices. The ideal partner thoroughly understands your business processes, both the visible and invisible parts of them; seeks to understand the changing customer needs in your marketplace and innovate in response to them; and works with you to figure out how to take advantage of emerging technologies and standards to help your business.