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Lessons Learned about Global Outsourcing

Outsourcing sounds great in theory, but often falls short in execution. An expert looks at what goes wrong and some reasons why.

Sunday, October 1, 2006
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Outsourcing was supposed to be simple, right? Just send part of your operations to someone else to deal with and sit back and enjoy your new, streamlined, ever-more-profitable organization. Unfortunately, the reality is much more complicated especially when considering how outsourcing affects human resources. A lot more complicated.

If you're a human resource leader who isn't quite sure how to handle the problems that are a result of outsourcing, take comfort in knowing you aren't alone. Consider the statistics from industry analysts Gartner Group and Forrester Research:

* Today, only 19 percent of U.S. businesses have an outsourcing strategy. However, the percentage skyrockets to 95 percent if only Fortune 1000 companies are considered.

* Outsourcing grew 30 percent a year between 1995 and 2003. Worldwide business-process-outsourcing services -- which include finance and accounting activities like accounts payable and accounts receivable -- are expected to grow from $110 billion in 2002 to $173 billion in 2007, an annual 9.5 percent growth rate.

* By 2008, the outsourcing market is expected to amount to more than $500 billion, of which nearly $380 billion will be information-technology outsourcing, with the balance being BPO. This is up from $335 billion in 2005.

Outsourcing continues to experience double-digit growth, but does that growth truly indicate something positive going on in our business culture? And, more importantly, does it indicate something positive for our employees?

Firms considering outsourcing face more and more concerns from their employees about what it means to them, while people "outsourced" feel more and more concerned about what to do. Why? Because, 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 to provide more "value" and "service" rather than simply reducing costs.

It's easy to underestimate the 'Bull's Eye' Effect. Lots of stuff needs to get done to outsource a business process. This "stuff" ranges from simple things (moving equipment) to hard things (consolidating computer applications) to really difficult things (moving and retraining people).

What's more, it all has to come together just right to create "the perfect storm." Or as Trevor Davis, the chief implementation officer of one of the world's largest business-processing utilities, puts it, "It's like hitting the bull's eye with parallel darts thrown with both hands."

And if that's not troublesome enough, if one thing goes wrong, it has a cascading effect on other things. If you don't get people trained, then customer-service calls don't get made. If the calls don't get made, the service level goes down. If the service level goes down, the client's customers defect. And so on, and so on, and so on

The upshot here is simple: Arguably, "the" most important challenge around effective outsourcing is to know "what impacts what, when, where, how and how much." Business activities are inherently interconnected -- passing through different departments and parts of an organization, each with their own set of metrics and behaviors, expectations and ways of getting things done.

Yet, customers don't care about organizational silos. They don't care about finger-pointing, internal politics and "that's-not-my-job" mentality that far too often exists. All of the tacit knowledge that is available to actually meet customer needs are precisely those things that remain invisible and thus a potential risk to outsourcing activities.

What are the lessons learned about the challenges of outsourcing, and what do they mean for the people in your organization?

If it looks too good to be real . . . it probably is.

Statistics show that, given the way outsourcing is executed today, the results produced are anything but satisfying. At least 50 percent of outsourcing deals "fail" (don't return the results promised to clients) and 80 percent don't produce any savings at all, according to Gartner.

Forrester Research recently reported that more than 25 percent of North American clients are dissatisfied with their outsourcer's ability to hit cost and service-level-agreement targets, while 69 percent of European clients reported failure to meet expectations for innovation.

The key reason? There is no commonly recognized language of client value.

Focusing on cost has been king -- with all of the benchmarks, metrics and training to support this focus. Yet, clients are requiring as much focus on delivering value. Unfortunately, there is no agreed-upon definition of what constitutes "value" and consequently, there does not nor, at this point, can there be a set of benchmarks or consistent metrics -- or even consistent training for workers.

Yet, think about it: What is value -- except the continual and everyday interaction with a customer that is often as "intangible" -- in terms of creating the "customer experience", attitude and so on -- as it is "tangible" in terms of paying a check, solving a customer's question or whatever.

For the company whose employees' jobs are being outsourced, there is tremendous value ? tacit knowledge, "organizational wisdom" (or whatever term you prefer) that needs to be identified, extracted and used -- to meet changing customer demands. Yet, ironically, this is precisely what the majority of outsourcing contracts do not include.

There is a fundamental semantic disconnect between current outsourcing practices and the emerging premise that encourages enhancing value to customers of the outsourcing client. 

The result? Frustration, irritation and a sense of impotence regarding lack of understanding and insight into why the sales promises of outsourcing aren't meeting up with its delivery realities.

 

Too many outsourcing deals suffer "death by change order."

This "death" is a slow and painful one for both the outsourcing firm and their client. The frustrating thing is that "death" could easily be avoided if the outsourcing firm would research their client before drawing up the contract.

Knowing the client's processes means knowing what promises they should and shouldn't make. Some firms will underquote on purpose, just to get the business, without knowing whether they will be able to meet the client's needs. Then, when they get further into the contract, they say in essence: "Circumstances have changed and we're going to need more money."

Naturally, clients aren't happy about it, but because they have so much invested in the outsourcer they have little choice but to pony up. When change orders occur several times over the course of the relationship, irreparable damage may occur. Companies lose profits, yes, but they also lose faith in their outsourcing firm ... and what is supposed to be a fruitful partnership goes sour and possibly even comes to a bitter end.

The prevalent "core vs. context" approach -- outsourcing what's not important to let us focus on what is important -- is becoming outdated.

The "core vs. context" argument states that companies should focus on what is "core" to them -- things that directly impact shareholder value or that the customer cares about -- and outsource everything else. Examples of "core" things would be R&D -- or any type of new product or service innovation -- and "context" things would be customer service (call centers) or accounts payable and accounts receivable.

This distinction may have worked in the past, but today? We don't think so.

Underlying the "outsource context" chant has been that you had to know only that the service was being provided to you and your customers, but not necessarily how it was being done; after all, if customer-service calls were meeting their targets in terms of number of calls taken and number of complaints resolved, then all is good, right?

Wrong. Dell Computer had to take back or "insource" its outsourced customer-service centers because of the huge number of customer complaints they were receiving about it -- and the drop-off in number of additional sales that usually accompanied customer-service calls.

And, on the "core" side, Procter & Gamble, one the world's leading companies known for its innovative product designs, has now "outsourced" or more appropriately "co-sourced" its product-innovation process -- for a simple reason. Procter & Gamble has 1,500 "product designers" -- those people who come up with new product ideas that consumers globally clamor for and retailers sell to us all -- but the world has 15,000 of them.

So, P&G, realizing 15,000 people developing product ideas would far out-innovate/out-create product ideas than could 1,500, created a co-sourced innovation model with product designers around the world -- harnessing the brainpower of people well outside their organizational walls.

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Recognizing that such new models of innovation and strategic value are occurring, quickly and all over the place, forces all of us to reconsider the role, impact and type of outsourcing relationship that makes sense -- and that far too often is ill- or not-at-all considered because of the tired old outsourcing model underlying and offered by most service providers.

What you don't know will bite you.

When you decided to outsource your business processes and applications, you hoped it would allow you to focus on other things. Unfortunately, you didn't count on the many "invisible" factors -- and activities -- that outsourcers don't, indeed can't, know about when they're taking over your processes. For instance:

* The "exceptions" that have to be handled by, let's say, "Betty" and "Michael," because the computer application can't understand them: a signature is illegible, or the check bounced and has to be tracked down or the oil-heating cost doesn't match what the invoice said it should, so it has to be reconciled for this particular customer that Betty and Michael have dealt with before;

* The "work-arounds" added or new features that were never documented but are now part of the computer application; or

* The "we've-always-done-it-this-way-because-it-works-better" activities that only Betty and Michael know about because they've been here for 20 years.

It's these "invisible" things that keep the processes and applications running. And being invisible, these work-arounds -- both manual and automated -- are hard (and nearly impossible) to identify when the outsourcing firm takes them. Companies discover these unseen factors after it's too late -- after customers complain, after frustration has exploded on both sides, after the outsourcing partnership is damaged.

Outsourcing providers build in a lack of transparency.

Some outsourcers try to hide their overall margins and give themselves more flexibility to be profitable over the life of the contract. As the pressures and number of competitors increase, outsourcers are worried about being commoditized.

So, what do they do? 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. Since different services have different costs -- and different margins -- the outsourcer can use (or just say he used) the ones that benefit him the most. After all, when you have lots of people in your business (from the outsourcing firm) or they say they have lots of people elsewhere doing your business activities, how do you know what they are doing -- and how much they charge? Can you know what you don't see?

The bottom line: Getting visibility into what's really going on means knowing how everyone and everything in your company is connected. When you make a change, you must be aware of what impact that change will have throughout the organization.

Yet, too often, the knowledge of "what connects with what" -- from business process through technology infrastructure -- is cloudy, if not shrouded in deepest darkness. There are far too many potential pitfalls and risks as well as real jewels and innovation opportunities for you to not have this type of visibility.

After all, the outsourcing game is no longer just about reducing costs; it's also about creating value. It's no longer an "either-or" game. In fact, one of the most compelling and exciting opportunities around global outsourcing is precisely that new business models and forms, collaborations and delivery options exist that can be, and need to be, understood to ensure that you're outsourcing what you should, when you should and with a full understanding of how you should.

Ralph Welborn, along with Viince Kasten, are authors of Get It Done! A Blueprint for Business Execution (Wiley, 2006). They have nearly 40 years of combined experience focused on business transformation, performance analysis, collaborative strategies, business and IT partnership, systems integration and management, and solution deployment. Welborn and Kasten also co-authored The Jericho Principle: How Companies Use Strategic Collaboration to Find New Sources of Value (Wiley, 2003) as well as a number of articles on different business and technology topics. 

Welborn is managing partner of the Unisys Global Transformation team and is responsible for thought leadership, business transformation, and the roll-out of Unisys 3D-Visible Enterprise and 3D Blueprinting capabilities with key clients. Kasten is managing partner of the North America Business Transformation team that oversees global development and deployment of business transformation capabilities enabled by Unisys 3D Blueprinting.

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