How to Avoid Outsourcing - When everyone around you thinks it’s a good idea
By Chris Pattacini with Adam Strichman
ProBenchmark
Summary
We commonly see outsourcing initiatives begun as a “top down” mandate from corporate executives. When this happens, it usually is the result of a “credibility crisis” between the CIO (as an example) and the rest of the “C-level” suite. Ironically, this crisis stems from failing to properly investigate outsourcing in the first place. When top level executives ask for an outsourcing evaluation, the CIO and IT organization usually already have a credibility crisis, as this may never have been explored and put to bed earlier. As a result, CIOs in this situation find they are “defending themselves” and the end up overseeing the wholesale outsourcing of their service delivery. Whether this ultimately is beneficial for the organization or not, CIOs may find themselves in a position which can be difficult to recover from.
All top level executives, most notably CIOs, should regularly and proactively evaluate outsourcing alternatives and communicate results to the rest of the business. This should be done despite any pre-existing beliefs about the advantages or disadvantages of outsourcing. In this way, IT executives are in a position to discourage outsourcing when it carries no financial or strategic advantage, and these periodic assessments of the IT organization can identify gaps in market competitiveness. This proactive stance can mean the difference between a credible response based on knowledge and detail, or a “credibility” crisis for the executive.
The Source of Outsourcing Ideas
The most common trigger for outsourcing is potential cost savings. Vendors play into this dynamic by regularly promoting cost reductions along with service level improvements and mysterious “economies of scale.” These statements are often generalizations based on untested assumptions about the client’s environment, leaving executives to determine whether the assumptions apply to their organization’s specific business circumstances. This dynamic is evident in IT Outsourcing every day.
Unfortunately vendors don’t often make these claims directly to a CIO or others in the IT organization; instead, they are made to business executives, including CEOs, CFOs, and often board members. While intelligent and capable, these executives may not understand the nuances of information technology and therefore place undue credibility in the vendor’s claims. This often places the CIO in the position of either proving the claims wrong or succumbing to pressure to outsource.
CIOs face a complex dilemma during this credibility crisis. In some companies, the ITO lacks credibility as a partner in solving business problems; in others, it is viewed as an obstacle to achieving business goals. In these organizations, vendor’s claims of cost savings augment the view that the CIO and the ITO are not credible and further justify the desire to outsource.
ITO is just one common example, but this problem is commonplace to all areas of potential outsourcing, including finance, HR, and other BPO aspects ranging from retail support to manufacturing.
To prevent this crisis, service delivery executives must proactively and objectively evaluate outsourcing options without a mandate from senior business executives. The evaluation must not be biased or defensive but be a sincere effort to make “buy vs. build” decisions about each technology silo or service area. Proactively evaluating outsourcing helps ensure that appropriate sourcing decisions are made and increase credibility.
The Devil is in the Details
In some cases outsourcing does reduce costs or improve service delivery. However, in other cases, such as when IT has already made improvements to remain competitive (e.g., streamlined operations, consolidated infrastructure, and standardized services) savings from outsourcing will be hard to come by. Uninformed vendor claims of “20% savings” are based on the presumption that basic improvement initiatives have not been undertaken and that “low-hanging fruit” is available for the vendor to leverage. Without a thorough understanding of the actual situation, any claim of cost savings is merely sales rhetoric.
In addition to understanding all of the financial details, executives need to consider the economics of outsourcing. The evaluation should include costs related to procuring and negotiating an agreement (anywhere from 2% to 8% of the total contract value) as well as added ongoing governance and administration costs (typically 3% to 5% of the annual contract value).
Uncovering and understanding these dynamics is not trivial, but without the need to provide supporting detail, outsourcing vendors can make blanket statements about cost savings with impunity. Executives must be careful to compare “apples to apples” down to the smallest detail of assets, inventories, and service levels to avoid comparison errors. If after a detailed review the promised cost savings appear achievable, then they probably are.
In addition, companies need to evaluate the risks associated with internal delivery against those of outsourcing. Contracting with a third-party to provide core services inevitably introduces risk around flexibility, responsiveness, and adaptability. While outsourcing providers may claim the benefits of added flexibility, outsourcing relationships themselves can impede the speed of change, as changes in the contract’s scope, service levels and other elements often require negotiation and acceptance by both parties before they can be adopted.
To conclude, executives must actively conduct “build vs. buy” evaluations for their services that consider the tradeoffs among cost, benefits and risks, so that outsourcing can be analyzed as a strategic option. Organizations that ignore this approach will not only make shortsighted decisions with regard to outsourcing, but will also lose opportunities to make improvements to service delivery and risk having C-Level executives mandate an outsourcing initiative, which often leads to full scale outsourcing and the ultimate demise of the head of the organization (e.g. the CIO).
About the authors
Chris Pattacini and Adam Strichman may be contacted at chris.patticini@probenchmark.com and adam.strichman@probenchmark.com.
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