BFM2013_2_09_Strategic outsourcing

“Strategic outsourcing” requires a clear understanding and knowledge of both the outsourced activities and the outsourcing relationship.

What is the difference with other outsourcing activities?

Outsourcing is not just a variable cost: usually, to ensure profitability and economic viability for both parties, it is a multi-year agreement with a “phase-in” and a potential “phase-out”.

If you therefore consider the outsourcing costs as an overhead within a specific profit centre, it becomes easier to manage both its own viability, and to identify how to cost and manage any change (e.g. who should pay for what within your organization, and on according to which algorithm the costs should be allocated and spread between various organizational units).

Any change on the outsourcing arrangement has to be clearly related to company strategy and linked to the organizational structure of the company, also to avoid that the outsourcing supplier builds a parallel, unsupervised structure, maybe even with “custom” cross-functional communication channels within your own company.

This process requires that both the customer and the supplier accept to be actively involved in managing the relationship.

While the customer should keep the connection to the internal organization and structure, the supplier should assess with the customer the impact of any change, and maybe even help to identify how the associated costs should be partitioned within various parts of your organization.

A strategic outsourcing partnership will eventually result in a proactive management of both the content and scope of the outsourcing contract from all the parties involved.

Managing the relationship requires identifying a way to assess the quality of the services delivered by the outsourcing company, and usually this is done by adopting one or more SLAs (Service Level Agreements), as well as a communication strategy focused on measuring trends in customer satisfaction.

In our experience, most outsourcing contracts lack the structure to actually allow a quantitative monitoring: parameters, timescales, agreements to deliver continuous process improvement.

Again, a preliminary extensive activity should be carried out by both the supplier and the customer to identify the parameters and phase-in the outsourcing contract, ensuring that no knowledge is lost in the process.

Introducing strategic outsourcing requires a frank assessment of the current status of the activities to be outsourced, with a sensible planning to ensure their proper management.

A typical sign of an outsourcing contract that has not been thought through and documented properly is the constant change of the resources in charge, both on the customer’s and the supplier’s side, and the number of meetings required at every change.

Our suggestion is to be realistic: if your outsourcing supplier gives you unbelievable short timescales, look for checks and balances to show progress.

If they are mostly qualitative (or qualitative disguised as quantitative), then probably the supplier is investing on the relationship, looking forward to long-term gains, or simply does not understand the contract.

In both cases, you are increasing your operational risk: until when the supplier will sustain an unworkable agreement?

Therefore, introducing strategic outsourcing requires that you first understand and explain your own strategy to your own people (at least those that will select and/or manage the relationship with the outsourcing supplier), and then shortlist suppliers that fit the profile, before negotiating with them, aiming for a long-term proactive relationship.

Planning and structuring the outsourcing contract and the relationship with the suppliers is only part of the picture: strategic outsourcing requires also a more structured approach to costing an outsourcing contract.