More on Lost Outsourcing Opportunities

Ann All

I wrote a quickie blog two weeks ago when Deloitte dropped a new report on outsourcing. While companies are largely realizing their expectations of saving money through outsourcing, says the report, they are struggling to attain broader business benefits.


According to its author, "unrealized potential and lost opportunities to use outsourcing as an opportunity to innovate" are themes that show up repeatedly throughout the report.


This isn't exactly a stunning revelation. Almost half of the respondents to a late 2007 survey reported dissatisfaction with the level of innovation provided by their offshore outsourcing providers. But it's always interesting to try to drill down and uncover some of the reasons behind the angst.


So I contacted Deloitte for an interview. Not surprisingly, Hobart Harris, senior lead in Deloitte's Outsourcing Advisory Services, told me that much of the problem arises from an emphasis on short-term savings over long-term process improvement. And some companies just don't have an accurate view of their internal processes, a shortcoming that should become apparent -- yet often doesn't -- during development of a business case for outsourcing.


Harris used the example of an unnamed manufacturing company that needed to correct some assumptions it made about remaining staff after outsourcing some of the IT functions associated with its software development. Says Harris:

(The company) failed to realize that their plant's software systems were supported by both IT and Manufacturing Engineering personnel. They then outsourced only the IT personnel but did not right-size the remaining Engineering personnel. This had the potential to create havoc, in the sense that too many FTEs may have remained in some cases. This also would have led to having unsupportable SLAs in areas where the responsibilities remained shared. In this case, who is responsible for the SLA -- the outsourced personnel or the retained Engineering personnel? In this example, the business case did not accurately reflect the true costs post-outsourcing since it did not envision the remodeled retained organization, nor did the total organization necessarily contain all of the people needed.

Deloitte's report also highlights the common practice of companies asking mid-level managers to create RFPs and evaluate potential service providers after senior managers define the overall outsourcing strategy. This is ineffective for a number of reasons. Such managers often favor incumbent suppliers, and they may ask for unreasonable scope changes because of concern over possible job losses.


Not to mention, they may simply lack the appropriate expertise. Says Harris:

... many middle managers feel that they understand how to buy outsourcing since they buy so many other things. However, outsourcing is a different animal and requires more direct experience. The middle managers, although skilled technically and experienced buyers of other things, may not be fully ready to support these highly complex transactions.

Harris also touched upon the current popularity of the multi-sourcing strategy, noting that the rationale of playing multiple vendors against each other in hopes of winning pricing concessions and maintaining high service levels may not always work as planned. Many companies do not take into account the difficulty of shifting work from one provider to another, which is typically a task as long and involved as setting up the original contract, says Harris.


If I do say so myself, the interview is interesting reading. You can see it here: Taking Outsourcing Beyond Cost Control


Add Comment      Leave a comment on this blog post
Mar 6, 2008 1:35 AM Mike Slavin, TPI Mike Slavin, TPI  says:
A firms competitive advantage is a function of technological innovation, which comes at frequent and high cost increases. But without a clear direction, I find that many lose sight of long-term goals as they succumb to the temptation of taking shortcuts. Focusing on cost-cutting transactional elements of a contract misses the IT outsourcing target by a mile. And thats a source of frustration. Instead, companies should incorporate contract mechanisms which incent and reward providers. As a result, every stone gets turned to uncover those hidden gems. Innovation rarely falls short, and firms get leading-edge technologies which help them create a competitive advantage as Ive discussed on www.Consider the Reply

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