For organizations of nearly any size the financial implications of outsourcing are significant. Likewise, business value continues to be ‘Top of Mind’ for executives responsible for getting the most out of their IT resources and outsourced relationships. Yet many outsourcing relationships have failed, or are failing, because they do not achieve the value that was expected at the time of contract signature.
So, why does the concept of ‘value realization’ remain so elusive to organizations developing and executing sourcing strategies today?
Confusing Cost and Value
Central to answering the question is understanding that ‘Value’, as a concept, is largely external to any business function, and defined by the owners of the business or those in leadership positions responsible for its realization.
While business value is consistently ranked among the top 10 reasons for outsourcing by executives charged with creating and delivering results for shareholders, operational and technical measures continue to dominate most outsourcing contract performance measurement systems.
‘Cost’ on the other hand is largely internal to any business function and viewed to be controllable by those responsible for its management. Business owners and executive leadership define parameters and thresholds within which cost must be controlled and managed.
Understanding that the concepts of value and cost are different is fundamental to the success of any sourcing strategy. If the business case for outsourcing does not create a broader view of value, business owners and executive leadership will drive the basis for any decision to ‘cost’ every time.
Three Keys to Success
If businesses routinely confuse the concepts of value and cost in defining how to measure the success of an outsourcing relationship how do you avoid making that fundamental mistake?
First, you must
Know the Value of different sourcing alternatives in order to justify a decision for the business to move from in-house options to shared service or outsourced solutions. In knowing the real value of sourcing, you drive the dialogue beyond simple cost reduction and define outsourcing benefits in terms of organizational impact and business performance.
You must determine both the ‘hard’ and ‘soft’ benefits that accrue to the business, moving beyond pure technology leverage or labor arbitrage.
Knowing what the top challenges are facing customers and service providers in outsourcing relationships frames the question of value in a number of different ways. In addition to reducing costs; managing change, creating shareholder value and accelerated transformation are areas where value might be found according to research Alsbridge conducted in 2007.
Second, you must
Quantify the Value of different sourcing alternatives in order to frame the desired solution, relationship and contractual agreement. Baseline cost analyses for each of several sourcing options are essential to building a strong business case and clearly quantifying value as part of the strategy development and decision making process.
Quantifying the value of outsourcing is about answering three simple but extremely important questions:
- How much value will be realized with each sourcing alternative?
- How soon will the value be realized for each alternative? and,
- How certain are you that the value will be realized?
Companies routinely answer the first two questions but often spend little to no time addressing the degree of certainty around realizing value. Quantifying how much value and how soon it will be realized is of little benefit to the business if you don’t also have an idea of how sure you can be that it will be realized.
Experience tells us this happens for two reasons, the first is that it is difficult to quantify relative certainty and future probabilities in terms that owners of the business or executive stakeholders understand and accept. The second is that certainty of value often has as much to do with actions the client organization must take including things like Rapid Transformation and Change Management, moving from the current state to the future state than it does on statistical probabilities.
Finally, you must Sell the Value of sourcing alternatives to the business’ owners and stakeholders. Until the value you have quantified is actually realized, it is only potential value to the business. It is no longer enough to justify a decision to outsource based on a simple projection of positive cash impact on the business over time. You must convince the owners of the business and executive leadership team that the organization is capable of converting ‘potential value’ into ‘certain value’ and prevent value leakage over time.
Organizations do not yet realize the importance of ‘Transformation’ or ‘Change Management’ activities to their ability to realize the potential value in an outsourcing decision. How quickly and how well a company remakes itself to effect needed change within the organization often determines both how soon and how certain the value that has been identified can be realized.
What is not widely understood is that potential value can begin to ‘leak’ out of the organization almost immediately after an agreement is signed.
Alsbridge research indicates that between 40% and 70% of outsourcing value may be lost due to unsustainable contract terms and poor relationship management on the part of the client organization.
The better prepared an organization is to govern the new provider; manage the operational challenges and manage complex service level agreements the more certain potential value becomes.
For that reason it is essential that you sell not only the decision to outsource based on quantified value but also on investing in rapid transformation and organizational change management to significantly increase the certainty of value realized.
In summary, cost and value as concepts need to be treated differently when building business cases in support of an outsourcing decision. Successful navigation of the decision making process requires that an organization broaden the concept of value beyond pure cost reduction to include other dynamics that identify additional hard and soft benefits that will accrue to the organization. As organizations approach the identification of value associated with outsourcing, they need to answer three fundamental questions that define the certainty of value in addition to how much and how soon it will be realized by the organization. Finally, it is important for organizations to consider that increasing certainty of value realized, more often than not, depends on the readiness of an organization to make the change from managing its business in the current state to operating in a newly outsourced solution environment.
If your organization has already or is thinking about entering into an outsourcing deal, please visit our website for more detailed information on the subject, sign up for an Alsbridge webinar or call the main office to schedule an appointment or to speak with a knowledgeable consultant for your industry.
enquiryUSA@alsbridge.com
