Unlearn Outsourcing 101: Back to Basics

Joe Hogan

You know you’re getting old when you realize you’ve spent more than 25 years in the same profession. I’ve been fortunate to have both longevity and fun as I’ve created and managed outsourcing relationships for enterprises and governments worldwide. The most fun is meeting and helping people who want to use outsourcing as an innovative way to solve problems and create value for their businesses.

Almost invariably, these relationships start with the same question: "Can you do what I can do for less?" I take a deep breath and reply, "If all you want is someone to do exactly the same thing you do for less, don’t outsource. You should be able to do it yourself and save us both a lot of pain."

This illustrates a key point: Most outsourcing relationships built solely on the price equation fail to deliver on that narrow expectation. Outsourcing is not about cost savings; it’s about cost savings over time – the time needed to build a relationship with the provider, streamline processes and innovate. In fact, roughly 70% of outsourcing agreements fail because they don’t take into account the long term. Those who enter them with false expectations become disillusioned and give up.

The good news is that outsourcing relationships — when properly planned, executed and measured — not only reduce costs, but also build value and drive business success. At the end of an outsourcing agreement, would you call it successful if you’d saved money but operations failed to meet current market and business requirements? I would say no, and I’ve had many clients who would agree.

Many botched partnerships can be traced back to miscommunication at the negotiating table. Executives on both sides first need to move their focus from the bottom line to creating an outsourcing agreement that benefits each party. Before drafting an outsourcing pact, both sides should ask themselves these questions: Where do I want to be three to five years from now? What resources and capabilities do I need, and how do I attain them? How do I measure the success of these efforts and keep the lines of communication open with my clients and my partner?

The outsourcing provider must answer these questions by establishing itself as an indispensable trustee of innovation, one that continuously improves your company’s processes, applications, infrastructure, governance and accountability. This is the only way to maintain a healthy and valuable relationship. Your company, therefore, should have a network of partners that can spring into action whenever you require services beyond one outsourcer’s proven capabilities.

But how do you, as part of an organization seeking outsourcing solutions, gauge these elusive factors? In my role at Unisys, I have demonstrated to clients tools that make measuring the impact of change over time an objective and disciplined exercise. The availability of these new methods calls for us to rethink — even unlearn — outmoded attitudes about outsourcing. Whatever outsourcing consultant you choose, look for it to provide these services:

  • Integrated business and systems modeling: Your consultant should be able to create for you a framework that shows all the links between business processes and infrastructure underlying your outsourcing partnership. Only by identifying these links can you simulate the impact of business decisions on the outsourcing relationship.

    I recall a bank that signed an outsourcing contract for check processing. Accustomed to dealing with paper checks, the bank didn’t anticipate the expense of transitioning to electronic payment processing. When the switch occurred, the bank had to pay more. If it had used integrated business and IT modeling, it could have predicted and avoided the added cost and improved its outsourcing ROI.
  • An accountability system: In the multisourcing engagements increasingly common today, this kind of software-based tool shows the reporting structure among the client and its outsourcers and subcontractors. It provides a de facto governance process for their interactions and accelerates resolution if issues arise.

  • Comprehensive measurement: Seek systems that quantify the advantages that both your company and the outsourcer derive beyond those contractually defined. The city of Minneapolis, for example, measures the success of its relationship not only by response time to service requests, but also by determining what outsourcing solutions help the city’s Business Information Services organization innovate to more effectively serve city agencies and citizens.

These tools can go a long way toward alleviating the fear of losing control that grips so many CIOs and other executives when they turn over mission-critical functions to a third party. Properly structured and managed, an outsourcing agreement should essentially pay for itself while achieving its designated milestones and yielding added business value. If done right by both parties, outsourcing lets you create a relationship with your provider that you’ll never want to walk away from.

Joe Hogan is vice president for strategic outsourcing programs at Unisys.

Copyright © 2007 IDG Communications, Inc.

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