Beyond Cost Reduction, What Are Buyers Getting from Outsourcing?

Ann All
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Outsourcing Fundamentals

Eleven tips on completing a successful outsourcing project.

While cost reduction has long been the key objective for companies pursuing outsourcing initiatives, in more recent years companies have been seeking process improvement and other more strategic benefits from their outsourcing engagements. Unfortunately surveys routinely find they are largely not attaining these desired benefits.


According to InformationWeek's 2011 Outsourcing Survey, published in April, companies' use of external service providers is growing in all of the surveyed categories despite respondents' dissatisfaction with the quality of the services. In a commentary about the survey, Yeoman Technology Group President Michael Healey pointed to a lack of attention and executive involvement in managing outsourcing relationships as a key reason for dissatisfaction.


Some similar findings are contained in Horses for Sources' State of Outsourcing 2011 study, which it conducted with the London School of Economics Outsourcing Unit. Sadly, I missed the blog post about the survey when it was first published in late May. But I suspect it's as relevant now as it was then.


Respondents were asked how effective their outsourcing initiatives had been at achieving seven key business benefits. A whopping 95 percent said initiatives were "somewhat" or "very" effective at reducing operating costs. In contrast, nearly a third of respondents reported their initiatives were not effective in gaining access to new business process acumen or access to new technology. Thirty-five percent of respondents said initiatives failed to yield new and creative ways of achieving business value (innovation).


In his analysis, Horses for Sources founder Phil Fersht points out that outsourcing clients should plan and budget for these areas up front and include them in contracts instead of trying to add them after immediate operational goals have been met. I'd add that clients should look for these capabilities in their vendors instead of focusing solely on costs.


If these goals are not addressed at the outset of outsourcing initiatives, it'll likely be tough to get the budget for them later, writes Fersht:

... Turning around to the board after two/three years to request budget for "innovation" is going to be a lot harder than if it was embedded into the initial agreement with some contractual provisions to cater for future innovation needs. Once the ink on the outsourcing contract has started to dry, corporate leadership has likely already turned attention to other priorities.

I cited some good advice on including process improvement in outsourcing contracts in a post from 2009. Dev Mukherjee, senior vice president and president of toys and seasonal items at Sears Holdings Corp., suggested companies should create a list of five business problems they'd like to solve and then talk about them honestly with service providers. Everest Research Institute VP Katrina Menzigian encouraged companies to negotiate for a phased approach, one in which vendors are given more flexibility if initial cost goals are met. Another idea from Menzigian: Reward vendors when they use technologies to streamline their own processes and pass along the savings to you.


I also liked an approach then being used by NASA, in which it offered fixed-price contracts for stable, utility-based services and a more flexible cost-incentive model that rewarded vendor initiative for more transformational efforts.

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Add Comment      Leave a comment on this blog post
Oct 4, 2012 10:34 AM Cost reductions Cost reductions  says:
Reducing cost continues to be a primary priority for organizations that outsource their business processes. The difficulty comes, however, when buyers expect their providers to run the business exactly as they have, but at a lower cost. Reply

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