So, what is outsourcing? And has it always been the same? How does it change? Why does it change? What is the point of outsourcing?
No doubt you have very clear views on the answers to all these questions, garnered and developed over a number of years of working within the sourcing sphere whether as a user, buyer or advisor or a combination of all of these roles. What we hope to do over the course of this article, and our survey (which you can complete here), is to understand on a broader scale the current state of the outsourcing market, the challenges facing it now and how it is likely to develop over the near future. We hope this will enable us to develop one of the first cross-sector and cross-participant analyses of the state of the outsourcing market so that we can be better prepared to engage in outsourcing now and in the future.
Outsourcing, offshoring, nearshoring, strategic sourcing – whatever name is applied to it – is a variation on broadly the same theme – it is of course getting someone else to do for you what you could have done yourself, and continue to need to have delivered to you or for you. As early as 1982, US management consultant Tom Peters recommended to US businesses that they should “do what you do best, and outsource the rest” as the primary salvation of US business profitability, and numerous companies have followed that advice in the following thirty years.
What is being outsourced becomes more complex and specialised with every month. As customers look increasingly to outsource functions and services that are closer than ever to their core business (and even to what they do best), they do so creating new issues. Yet, whatever the nature of the outsourcing, the same four core issues continue to recur and challenge organisations looking to outsource services and functions.
Recurring Themes
Letting the service provider do what it needs to do vs. retaining control
At the heart of any outsourcing is the fact that the customer is handing over delivery responsibility to the service provider, and is doing so in such a way that it wants the service provider to bring to bear its existing processes, ideas, policies, structures to deliver efficiency improvements and cost reduction. But at the same time, the customer invariably has clear ideas of what it wants and even how it wants it, especially in regulated businesses such as financial services.
This apparent inherent tension is arguably the single most important philosophical issue in outsourcing, since failing to properly appreciate the risk associated with getting the balance wrong will inevitably drive up the price, and not result in appropriate transfer of responsibility to the service provider – so damaging the delivery of the required business case and business benefits.
One potential answer is the increased prevalence of “co-sourcing”, using a closer operational relationship between the customer and the service provider, with joint teams, jointly produced deliverables and continuous prescribed skills transfer. This though throws up a further set of issues particularly around “finger-pointing”, apportionment of liability, service levels and reverse service levels, and IP ownership that need to be properly thought through and catered for in the outsourcing agreement.
Alignment of business objectives to service provider incentives
Everyone knows that it’s all about “risk vs. return”, and that this is usually interpreted to mean that the service provider’s liability cap needs to have some bearing on (a proportion of) its revenue under the contract. But this in itself leads to an adversarial approach to putting the outsourcing arrangement together, resulting in inputs and outputs rather than a deal that is tied to the customer’s business.
Gradually – but certainly more consistently – deals are moving to an outcomes-based approach with the outcomes linked to the customer’s actual needs (for example, regulatory compliance or increased profitability), together with a more open-minded approach to sharing the upside more obviously with the service provider, via bonuses tied to the delivery of business benefit.
The path of no return – avoiding losing know-how and IP lock-in
When you outsource, you invariably align yourself (to a greater or lesser degree depending on how you approach the philosophical point raised above) to the service provider’s processes and are likely to make staff redundant, whilst relying on a retained layer to manage rather than absorb the service provider’s delivery.
Before long, the customer has lost the in-house skills to provide the services, but then begins to lose the skills to re-build the function should it want to. Likewise, unless the contract is appropriately drafted, the services become modelled on a proprietary methodology of the service provider and is so reliant on the service provider’s IP that continuing use of these at the end of the term becomes impossible. So the customer is left with a choice: renew, or choose another service provider knowing that they will need to align the services to a new service delivery model, essentially “reinventing the wheel” at the customer’s cost. Desirable as it might be, insourcing is no longer a practical option because it would be prohibitively expensive to rebuild an internal function.
So, achieving appropriate protection for the service provider’s proprietary IP as against strategic flexibility for the customer should remain a core sensitivity for all customers.
“Total cost of ownership” certainty vs. long-term flexibility
Most people identify “cost reduction” in one form or another as the single-most important reason for outsourcing. Cost reduction is inherently tied to a business case, which of course needs to factor in not just the service provider’s charges, but also the cost of delivering the customer obligations, the continued management of the service provider and – although often missed – the cost of effecting organisational change to align the customer organisation to the outsourced service delivery.
When putting the deal together, then, the parties both need to be clear about what is being bought at what price, and what is and is not covered within the charges. This is all very obvious, of course, and it’s not just about getting the scope and the pricing schedules right. It is also making sure that robust change-control procedures are in place, predictable pricing models are set out, responsibility for costs of compliance with polices and changes in law and costs associated with exit – such as TUPE and wind-down costs – are properly catered for.
An Ever-Changing Constant?
Calling something an ever-changing constant is undoubtedly oxymoronic, but it does seem to us to neatly describe approaches to outsourcing. Conceptually, outsourcing has not changed – it is still getting someone to do something you would otherwise do yourself – and the same core issues continue to recur, whatever the deal, as we hope we highlighted earlier in this article.
But now, more than ever, we operate in an exciting environment (even if it is not without its challenges!). Customers seem to be more mature in their approaches to outsourcing, looking towards outcome-based models and different sourcing approaches, such as co-sourcing.
Functions that are “higher up the value chain” are being outsourced, causing a re-examination and re-consideration of key issues across the entire contract from what the service descriptions should say, all the way to how responsibility, risk, and liability should be apportioned.
Service providers seem to want to develop new offerings to set themselves apart in respect of these new outsourcings.
All the time, these play out against a weak economic environment, and an increasing raft of regulatory compliance requirements.
We have consciously said that these seem to be the trends because these are our perceptions. We really want you to complete our survey to help to develop an analysis of the current outsourcing market.
Over the next months we will report back on our survey findings, and provide an insight to the real state of the outsourcing market now and its likely future shape.
