Managing an Outsourcing Initiative-1
Originally published: December 2010
Phase 1 – Planning
Brief History of Outsourcing
For most of the 20th century, a successful firm was defined by its ability to own, manage and directly control all of its assets and processes. In the 1950s and 1960s, in order to protect profits, companies began to look for ways to broaden their base and take advantage of economies of scale. This resulted in the emergence of diversification as a popular strategy.
As competition became more global in the 1970’s and 1980’s, organizations found that diversification had actually bloated their management structures. Consequently, they had lost their flexibility. To counter this undesirable development, many large companies began to consider outsourcing. Shifting focus to their core processes, they handed off non-critical (non-core) procedures, to be managed by third parties.
It wasn't until the early 1990s, however, that outsourcing really caught on. Companies, now focusing on cost-saving measures to increase revenues, realized the value of handing-off functions necessary, but not directly related, to their core businesses. The trend toward using outsourcing as part of an effective business strategy continues to the present.
Traditionally, headcount and cost reductions were the primary drivers of outsourcing initiatives. Today, however, outsourcing is a more strategic decision, focusing on core competencies. Some common reasons for outsourcing in the 21st century include:
- Improving company focus
- Gaining access to world-class capabilities
- Freeing internal resources – cash and personnel – for other purposes, for instance R&D
- Requiring specific expertise for functions that are either time-consuming or are currently out of control
- Sharing risks and costs with a partner
A multi-step approach, including Planning, Analysis, Design, Implementation and Operations phases –along with a contingency exit strategy – is required to achieve a successful outsourcing implementation. In this first installment of a 5-part presentation, we'll look at Phase #1: Planning.
Deciding What to Outsource
- Goals and objectives for outsourcing, along with their relationship to overall corporate strategy
- Processes to be outsourced and why these processes have been selected for outsourcing
- Critical risks involved in the outsourcing initiative
- Expected duration of the outsourcing initiative
Defining Goals and Objectives
An understanding of the company’s objectives provides insight into the type of relationship your company is seeking and how the outsourcing initiative should be managed.
Typically, organizations can expect to realize the following benefits from an effective strategic outsourcing initiative:
- Improved focus, as the outside “experts” take on necessary but non-core responsibilities
- Increased customer satisfaction
- Reallocation of internal resources to core activities
- Access to world-class capabilities, systems and services, without the need to build them from the bottom up
- Staffing flexibility, whereby staffing levels are “in sync” with immediate needs.
- Reduced operating costs, resulting in increased capital funds availability for things like research and development, market analysis. etc.
- Reduced risk. Markets, competition, government regulations, financial conditions and technologies all change extremely quickly. Outsourcing is a vehicle that enables the organization to share these risks with the outsourcing provider.
- Improved cost, quality, service and cycle times.
Selecting the Processes to be Outsourced
The definition of a non-core competency is: “any process that does not generate income or help your organization increase its market share.” To help identify internal business functions that are non-core, ask:
- Does this process create or provide a unique competitive advantage for the organization?
- Is the process contributing directly to business growth or expansion?
- If your organization were a start-up, would you build this capability internally?
- Would other companies hire you to perform this process?
Typical Outsourcing Strategy Risks
Some of the risks involved at this stage include:
- Outsourcing undesirable functions rather than ones that provide the greatest competitive advantage
- Not clearly defining goals and objectives before starting the outsourcing project
- Not establishing an effective internal baseline against which providers are measured
- Inadequate business-case development for the outsourcing decision
- Making a decision to outsource without complete information on internal costs and processes
- Not considering the impact of outsourcing on other functions
- Ignoring areas of risk such as environmental and regulatory factors
- Failure to understand human relations and employment law requirements for an outsourcing initiative
- Announcing outsourcing before sufficient details have been finalized, creating morale issues with internal staff
- Lack of risk analysis and risk assessment planning
Duration of the Outsourcing Project
An outsourcing initiative could be used to handle a one-time influx of new credit accounts from a merger or acquisition. Or, you could outsource handling of a specific subset of your customers, perhaps the smaller accounts that you never have time to contact.
Understanding the outsourcing initiative in terms of your company objectives will help you make key decisions. It will help you determine whether your approach should be to hand-off total responsibility for a non-core function, or to use outsourcing as a strategy to efficiently manage (perhaps seasonally) short-term increases of new accounts.