The Outsourcing Diet
It occured to me just last week that corporations treat outsourcing the way people treat these fad diets - they hear about it, bundle in without sufficiently investigating, get some results, give up....and then it all starts to go back to being pear-shaped.
What I want to do in this article is talk about why and what you should outsource, topics which aren’t often covered, and then provide some pointers on the process (I originally started working on an article on ways to screw up the outsourcing process, but it turns out my web server isn’t big enough).
What should you outsource?
If you deconstruct a corporation, any corporation, it contains some elements which are clearly valuable – they produce the products, generate the profits, make the margins – and a lot of elements which consume cost but add nothing to the profits.
These support functions developed because they were are necessary part of doing business and because there was nowhere to buy them from. It’s been a long time since car companies felt the need to own steel mills and rubber plantations, but the ghost of this lazy vertical thinking still haunts us today.
You would expect me to be a Big Fan of outsourcing as a way of disposing (or at least, reducing the cost) of these value-destroying elements, and of course I am.
The value added by all assets, whether intellectual or physical, passes through four distinct stages. We cover this in more detail in a later article.
This cycle applies to ideas as well as to IT systems, machines, offices and factories. Firstly, one of the players in an industry decides the asset (whatever it is) will provide competitive differentiation. If they are proved right, everyone else scrambles to catch up and the items/ideas become core to the efficient functioning of the industry. Later still, they become utilities – vital to business operations but providing little differentiation – and finally they are retained as a necessary ‘part of doing business’ but their services are immediately replaceable by a number of other options – lowest cost provision is the driver.
It is items in these last two categories (utilities and commodities) that are ripe for outsourcing. Utility items, such as most IT, most processes and a lot of real estate, can be outsourced easily: the key benefit being improvement of services and the key concern being minimisation of risk. With Commodity items, such as office space and the rest of the IT, the principal benefit is the reduction of cost. Items which are strategic to your business, or which provide competitive differentiation, should of course never be outsourced, as the potential risks outweigh the potential benefits.
This analysis therefore also leads us to an understanding of the factors which should be uppermost in our minds when approaching outsourcing – continuity of supply, improvement of service quality, and reductions in cost.
Minimise the Risks
Just because part of your business is ripe for outsourcing, it doesn’t (usually) mean it’s unnecessary. Failure, therefore, has serious consequences. It can lead to increased costs, inability to serve the customer, reduced agility and inability to innovate: in short, it can scupper all of the things that outsourcing was designed to enable. So what can be done to recognize and minimize the risk of failure?
Here’s the Theopraxis six-point diet plan!Firstly, get your act together. Never, ever, outsource a mess. There is often a temptation to outsource the broken bits of your business, so that someone else can clear up the mess that your poor management has caused. This is never a good idea: either the repair work fails and you end up paying more to keep the same problems, or it succeeds and the other party reaps the rewards. If there is a particular problem with your business, fire him…and try not to promote the next problem.
Know your processes. This is a variant on number one: it’s definitely worth going through the old-fashioned step of mapping your current processes and the information flows between each step. Why the 1980’s process thinking? Knowing the process will not only reduce the supplier’s price (as you’ve shown you are a serious, switched-on kind of client) but it will also help you draw better boundaries and develop less complex hand-offs.
Find someone you want to wake up with. Any outsourcing salesman will tell you that the relationship is like a marriage, although they fail to point out that it often ends in a hideously messy divorce. The analogy is valid, as it is likely that the relationship will last for years and requires clear alignment of objectives of the two parties. If those objectives are misaligned or the relationship is not nurtured, the results can be very unhappy. In particular, make sure that you meet, and like, the people you will be dealing with in the coming years, and beware of bait-and-switch tactics during the transaction; if you meet a number of Partners or Directors from the service provider at the sales meeting, do not be surprised if you never hear from those individuals once the contract is signed.
Lines in the sand. Often, clients go in to negotiations with a huge shopping list of conditions about assets, people, processes etc. Restrict that list of non-negotiable points! There will genuinely be some items where you cannot compromise (assets that must be retained, minimum service standards, etc), but question your proprietary instincts. Do you really need to keep IT development? Must you retain invoice processing? Are you insisting on an engineered financial deal? What flexibility do you need to build in for future innovation? And do you really mean ‘no redundancies’ for the transferred workforce? Any restrictions on the supplier’s ability to manage the transferred business efficiently, or any options that you build into the contract, increase the costs to you. However, failure to introduce the right constraints will produce a deal that you will find hard to live with in the long term.
Measure the right things. It is also vitally important to be clear about the things that you wish to measure, as a good set of key performance indicators will not only reflect your management priorities but also form the basis of payment to the supplier. Defining a small (less than 10) set of highly relevant KPIs will increase your chances of success considerably. This definition will include an outline of the measurement systems and performance improvement processes, and should be undertaken before you sign the contract
Take the time to write a good contract. I heard of a CEO who, at a board meeting, announced that he had decided to outsource operations to a well-known supplier, They “seemed like decent chaps” and this proposed strategy was to try it for a year and then jointly develop a contract. If you ever come across someone like this, kindly apply medication and then call a grown-up. Always take time to write a contract which clearly lays down the required quality standard and pricing structures, which recognizes your partner’s strategic needs and long-term intentions, and incentivises good behaviours by both parties. The dispute management process and escalation procedures should also be considered, as should termination and reversion issues. Consideration should also be given to tax implications during the deal creation phase. It may take some months to prepare and negotiate a contract, even if it is merely (hah!) up for review. Also consider the use of advisors, because although it may be your first time at the outsourcing game it certainly isn’t your suppliers.