BFM2013_2_07_Strategy and outsourcing

The first issue is the difference in timescale: while outsourcing is considered mainly an operational issue, strategy definition usually is considered an exercise that delivers longer-term results and impacts.

The resources released through outsourcing could benefit from the increased focus on core business processes.

But outsourcing should satisfy business needs, not be a task in itself.

Business strategy definition and appraisal should also identify a framework to define guidelines about what can or cannot be outsourced by your organization.

Once defined, it must be routinely reviewed and revised, to ensure that service contracts are tailored to your business- and not the other way around.

Our experience is that the lack of understanding of the strategic impacts of outsourcing could seriously impair the conversion of your carefully planned strategic initiatives into operational realities.

Assuming that your outsourcing supplier understands the costs involved in outsourcing, you could end with an economically efficient outsourcing contract that doubles as a straitjacket for your business development.

The results of any negotiation are strictly related to the understanding of the assumptions of the negotiating parties, and a successful long-term outsourcing contract requires a degree of empathy and willingness of both parties to see beyond the short-term cost/revenue ratio.

Also, avoid contracts that have a “dumping” upfront, to keep the price lower and win the contract, as this is usually followed by a “spiking up” of the cost once the customer is acquired.

As an example, consider your product and service portfolio, and call centre and account management requirements: did you know five years ago the level, type, and quantity of services required?

The suggested solution is quite simple: partition your knowledge of the activities to be outsourced into levels of linkage to your own strategic guidelines, and add into the framework of the outsourcing contract specific SLAs, i.e. targets linked to the flexibility required to cope with the unforeseeable.

A simple device to obtain an outsourcing contract that closely matches your strategic requirements is to “layer” your outsourcing agreement, separating the SLAs according to the level of knowledge available and the degrees of freedom required.

If your history of internal management of the activities shows that planning assumptions constantly conflict with reality, then probably using just your own planning assumptions to enter into an outsourcing contract is not the wisest choice.

As previously described, we assume that an outsourcing contract is built around the outputs to be produced and inputs, or the processes to be carried out; we do not consider outsourcing the transfer of internal resources (people, software, assets) to a supplier that then delivers the same services using them- this is facilities management.

Anyway, most outsourcing contracts start as hybrids, where the supplier takes over resources from the customer, using the value of these resources toward part of cost agreed for the contract; these resources are eventually phased out or absorbed by the supplier.

If you require a continuous facilities management for part of the activities that you want to outsource, then ensure that the contract clearly separates outsourcing from facilities management.

We saw too many contracts called “outsourcing” that were actually facilities management in disguise: and usually in the end this is a lose-lose situation (hint: look at communication channels- if everybody talks with everybody, it is doubtful that that is really an outsourcing).

Finally, you should clearly include inside the outsourcing contract the “skills mix” required to service the contract, e.g. the level of skills that both parties should have inside their own organization to ensure that that the long-term management of the contract is feasible, at least for key resources (people acting as communication channels on contractual issues, managers, subject matter experts on continuous availability, etc.).

Formally: no SLA without a matching OLA (Operational Level Agreement), stating what your resources should to do provide: inputs, processes outputs.

Also the rules for monitoring, audits, inspections should be written within the annexes.

Whenever you outsource the execution of a process or the production of outputs, you should remember that you are still responsible of the long-term viability of the processes involved.

While it is tempting to remove all the resources that used to take care of the same process within your own organization, you should control your cost-cutting instincts, and consider if you can dispose of internal knowledge by replacing it with external knowledge.

As hinted above, if your company is entering a new business, and you find a supplier that is able to provide everything to allow you to take care only of the day-by-day activities with minimal additional resources, then you probably can avoid the investment, and use the services provided by the external supplier.

The same applies if you are, say, transferring your IT department to an external company, but not necessarily if you transfer just part of your IT systems or sales processes.

Making your DBAs, Systems Managers, and credit managers redundant is the best way to lose control of critical parts of your market presence or ability to make your processes and systems evolve.

As discussed above, usually customers roll out outsourcing progressively.

But is there a suggested “speed of outsourcing”?

Beside this “how fast you should outsource”, we will discuss also internal and external outsourcing: sometimes, the first step toward outsourcing your services is… to delegate the execution within your organization.

Reason? E.g. to be able to really identify the scope of the activities that you would like to outsource.