Thoughts on outsourcing

by | Feb 3, 2021

Bill is studying computer science at university.

Bill has a brilliant idea for a revolutionary personal computer that will change the way people work and play.

Bill drops out and starts his own business with his buddy Paul.

The idea works, orders stream in and Bill struggles to keep up with demand.

Bill is really good at coming up with innovative ideas and persuading others to accept them. He’s also good at nurturing and driving the idea to successful realization.

But Bill is not good at a lot of things; a lot of things irritate him and he avoids them at all costs. But that costs Bill a lot.

In the early hours of the morning Bill sometimes finds time to issue manual invoices but doesn’t always track who has or hasn’t been invoiced. There just isn’t time to chase debtors for payment. Soon the bank account runs dry and Bill and Paul need to borrow from their trust fund to keep things afloat.

Bill knows nothing about taxes. You can imagine what trouble this gets them into.

Keeping track of parts and finished goods also becomes a nightmare leading to delivery failure and customer dissatisfaction.

Bill realizes he has a problem so he starts studying leadership and how leading organisations grow. There’s a saying – but I can’t find who first said it – that goes something like this; “great leaders surround themselves with great people” or “smart leaders surround themselves with smarter people”.

The best leaders recognize what they are really good at and leverage those skills, focusing on what they do best and then surround themselves with people who are smarter and more experienced in areas of their own personal gaps.
When Bill learnt and applied these truths to his business, the business stabilized, became sustainable and ready to grow into a multi-billion dollar business.

When your GP tells you you have cancer, he refers you to an oncologist. Why? Because oncologists are specialists in treating cancer. Cancer poses too great a risk to your life to be managed by a generalist.

Like leaders in organisations, leading organisations need to determine what they are really good at and leverage that to optimize the value they add to their customers and then collaborate/align and surround themselves with other organisations who are leaders in their own right in the areas they have competency gaps.

This was initially termed strategic outsourcing but in the last few decades has been tweaked to include transformational and then disruptive outsourcing.

Through transformational outsourcing organisations look to their outsourced service providers to partake in challenging and driving change and innovation within the business in order to keep up with technological advances and gain or maintain their competitive edge. Disruptive outsourcing goes further by enabling organisations to reimagine and transform their business; mostly through technology.

Since 2008 Deloitte has published a biannual Global Outsourcing Survey. Key trends from the surveys include:

    • In 2008: cost reduction is the primary factor motivating most outsourcing decisions.
    • In 2012: a noticeable market shift towards insourcing in response to changes in political sentiment, wage deflation and higher labour supply following the global financial crisis.
    • In 2014: sentiment shifted back to focus on optimizing vendor relationships and improving operational flexibility. A key takeaway was the importance of a collaborative relationship between the business and its outsourced service providers. The survey also signalled the growing significance of cloud computing, ‘big data’, mobility and business process as a service (BPAS)
    • In 2016: Cost, enabling the business to focus on core functions, and solving capacity issues are primary drivers to outsource. Leading practice organizations use outsourcing to drive transformational change. The use of third-party advisors has increased significantly to add value during strategic assessment, business case development, RFP / vendor selection, and negotiation and contracting.
    • In 2018: While cost optimization is still a critically important criterion for outsourcing, it is no longer at the top of the list (nor even in the top five), since disruptive outsourcing, when executed well, can deliver competitive advantage by transforming the way organizations operate, and making them more agile, efficient, and effective.
    • In 2020: cost reduction is the main reason to outsource. The uncertainty created by COVID-19 has instilled caution, as everyone in the industry adjusts to the disruption caused by the pandemic.

 

Whilst I understand this reversion as it repeats the pervasive reaction to the GFC; those businesses that return to the pre-COVID strategic/transformative/ disruptive outsourcing trajectory sooner will outpace those who remain stuck like deer in the headlights.

For me, one of the concerning findings from the 2020 survey has been what appears to be a pervasive desire for shorter contracts. While I agree that contracts should include flexibility to adjust to change and disruption, and consequences for non-performance, wanting shorter contracts indicates a level of diminishing trust and commitment to strategic partnership. Hyper-focusing on a “Get Out” clause is not going to contribute towards the intended outcomes.

In reviewing studies on the successes and failures of outsourcing initiatives I am struck by the parallels between human resource management and outsourcing vendor management. How similar are the responses to the question: what do you wish you had done better?

Too many business identify a human resource capacity constraint or a new skill set requirement and simply hire without:

    • defining the role competency requirements in line with the organisation’s strategic objectives,
    • developing performance measurement metrics and reporting requirements,
    • evaluating candidates for alignment of values,
    • vetting for criminal/credit records and checking references

Sadly the number of cases at the CCMA and labour courts answers this question.

Similarly within the outsourcing space businesses commonly respond be saying:

    • We wish we had spent more time on vendor evaluation and selection.
    • We wish we’d defined service levels that aligned better with the company’s business goals.
    • We should have assessed whether the service provider’s values aligned with our own.

 

When you decide to outsource strategically, to enable transformation or to disrupt your industry it could be helpful to view it as making an executive hire. To obtain maximum benefit you need to bring this person into the boardroom; into your strategy war room. This requires:

    • mutual trust,
    • a mutual commitment to each other’s growth and development,
    • a clear documented understanding of each other’s roles and responsibilities,
    • thorough performance measurement criteria and reporting thereon,
    • measures to address under-performance and equally important,
    • measures to incentivize and identify outperformance

 

This will require change within the business where executives will not only require human resource management skills internally but also vendor relationship management skills. Based on research in this area businesses will be making a big mistake if they think these vendor relationship management skills are an inherent competency. Many outsourcing initiatives have failed because of this assumption.

The 2020 Global Outsourcing Survey found that nearly half of respondents experienced challenges with change management (46%) while over 25% reported challenges with job reassignments, retaining process design, retaining job changes, and process / service management. It is therefore understandable that, as previously stated, over 50% of participants found that third-party advisors added value during strategic assessment, business case development, RFP / vendor selection, and negotiation and contracting.

There is so much more to consider when pursuing outsourced solutions to the sustainability, growth and significance of your business. In this increasingly competitive world it is a given requirement. Finance and Accounting (F&A) services outsourcing in particular is expected to increase in growth significantly over the next few years.

But to be successful requires an informed, disciplined and rigorous approach with full commitment and involvement by top management.

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