Read this if: You want to learn what makes the difference between effective and ineffective outsourcing
Gain: Outsourcing can help your company make a lot of savings and allow you to take advantage of the expertise of the outsourcer to do the none-core jobs while you concentrate better on your core business
Outsourcing is a wide-spread business practice that for some companies serves as a huge money-saver and contributes to their success whereas for other firms it fails to be productive or even brings big losses.
Here is an example of the significant value outsourcing can have for the development of an organization when done in the right moment in the right way:
How outsourcing saved Harrisburg, Pa. healthcare company
Harrisburg, Pa. healthcare company had a 40-year partnership with Blue Shield when their partner threatened to acquire them or become a fierce competitor of theirs. Harrisburg, Pa. was financially stronger but Blue Shield was a much bigger organization. They had to find a solution to compensate the huge difference in size. Outsourcing turned out to be the best decision they could have made in that critical moment. CEO James Mead explains:
“When somebody tells you, Tm terminating your agreement and you have six months to get ready to go and compete with me,’ and you have not done certain services, outsourcing is a great way to get up to speed fast enough. We had to obtain what we didn’t have in terms of claims processing and networks of hospitals and doctors. Another example is the area of disease management. In our business, being able to manage specific disease states is very important. Developing the expertise would have taken us years. But we’ve found that it’s much better to outsource, for example, diabetes management. We use a company that does it for us nationwide. All we do is provide the names and the data that can be mined in order to find where the problems are, and they do an excellent job for us on a nationwide basis managing this.
While I have to give our people most of the credit, over the last 18 months outsourcing was a very important part of keeping us competitive and bringing us to the point where we have the largest market share in the region where we do business. Will we in-source those functions over time? Some we probably will. But quite frankly, we are getting better service outsourcing some of them than we probably would have had we done it ourselves. We’re a company that went from practically doing everything in house a decade ago to taking a huge leap, just because we had to.”
If you want your company to benefit from outsourcing, you need to observe certain rules and take precaution in order to avoid problems. Take a look at the conclusions which the managers of St Michael’s Hospital, Grand&Toy, CCL Industries, WSIB and CIBC Mellon have drawn from their companies’ wide experience with outsourcing regarding the factors determining the effectiveness of this business practice.
The activities that are suitable for outsourcing
- Non-core functions and activities which are not value-added for the company can be outsourced to utilize the efficiencies of an expert provider. This gives the company an opportunity to concentrate its time and resources on its core competencies.
- Outsourcing IT security involves a high risk and many experts doubt whether the potential savings are worth taking the risk
Appropriate reasons to consider outsourcing
- Your staff doesn’t have the necessary skills to do certain activities ( which are not within the core competencies of the company) efficiently and training them or hiring highly skilled employees will cost more than outsourcing
- You want to be provided with scalability on demand so that you pay in accordance to your needs as they increase or decrease
- You are searching for an opportunity to achieve the business outcome at an acceptable risk, at a better price.
- Investing in the necessary machinery and equipment to do a process in-house will cost more than if it’s done by an outsourcer or it will be used for short periods of time monthly and during the rest of the time it will be redundant
The crucial attributes an outsourcer should possess
As Melodysta, the manager of Grand&Toy Company, says: “The last thing you want to do is try to repatriate something you’ve outsourced. I’ve been in that situation and it’s a heck of a lot of work; you’ve dismantled your infrastructure and now you’ve got to take it all back. The way you can mitigate that is by choosing your outsourcers very carefully. It’s crucial to do a lot of the upfront work in choosing them.”
Research the potential outsourcers and make sure they possess the following attributes:
- Financial viability
- Appropriate skill set of employees
- Lack of language barriers and ability to communicate effectively despite cultural differences. This is very important when outsourcing overseas.
Steve Martin, a consultant and partner at Pace Harmon, a company that is often called in to help fix outsourcing deals have gone bad, gives an example of outsourcing failure which a giant telecommunication company made. He explains what undermined the venture and led to a complete outsourcing disaster:
“The Indian provider simply didn’t understand the telecom business, so lost in the transition halfway across the globe was all the telecom’s inherent knowledge of the business applications – what it is supposed to do and why.
Because the Indian firm didn’t understand what it was coding, it took much longer to develop the applications. And they didn’t work well, resulting in even more time and effort to figure out where they went wrong and fix them. It got so bad that the telecom canceled the offshoring midway and brought the effort back home.”
- Commitment
- Expertise
- Experience
- Outsourcer’s cost structure allows them to be a low-cost provider in the long term
- References from previous partners. Diligently check them.
- Partnership attitude and openness
Polatajko, the manager of CIBC Mellon, points out that:”Outsourcing is not always about the price, it’s about working together, and at the end of the day it has to work for both of us. In any of my vendor relationships I always look at that partnership, because that’s what’s going to drive the service, the cost and the performance.”
Agreement and contractual considerations
- Both sides should agree on the service level that will be expected
- Problem resolution should be included in the contract – monetary compensation , problem escalation, terminating the contract procedures, repatriation clause
- Flexibility – if you are reorganized or if you acquire or divest some companies, there should be no penalties for that
- Using a contract specialist since he is supposed to take the time to understand the business and legal subtleties for both sides and draw up a functional and understandable contract quickly and efficiently. An additional benefit to using a specialist is that you can rely on their experience with such business deals to help you find out whether you are getting a fair deal.
Further strategies to mitigate the risks
- Creating a team-building plan to facilitate the collaboration and common work between the employees of both companies
- Following the transition-management plan that has been negotiated prior to the beginning of the project
- Constant monitoring of the outsourcer to make sure they are doing what they are supposed to do and proactively solve the problems that occur
- Co-managing the entire project with the new strategic partner
- Having frequent project-status meetings with the participation of senior members of both organizations
- Taking measurements in the middle of processes to make sure the end goal is going to be accomplished
Outsourcing can be highly beneficial for a company but according to Jim Tompkins, CEO of Tompkins Associates, it’s a business practice that should be continually reviewed. He advises that you periodically ask yourself these questions:
Is it still working for you? Does it still make business sense? Has anything in the market changed to warrant reworking the outsourcing contract – or even backsourcing the outsourced service?