| Business owners must treat outsourcing as a strategic move and not as an opportunity to offload “no-one-wants-to-do” activities in the organization. Carefully plan your outsourcing needs to avoid future repercussion on your business performance.
Outsourcing is not equivalent to transferring of responsibilities to another party. You, as the business and process owner, owns the entire value chain. Always manage all your outsourcing entities and business as though they are internal resources. This article discusses on the total cost of outsourcing and what it takes to manage a outsourcing relationship effectively.
Cost of Outsourcing
When we discuss outsourcing, the countries that come to our mind immediately are China and India. With the rise of income in these countries and the recent political unrests, outsourcing cost has gone up considerably which makes hiring full time staffs or finding vendors from within our own countries looks more attractive than before. I have observed a few cases of outsourcing nightmare where hiring organizations failed to understand the full cost of outsourcing until they are overwhelmed by unbudgeted cost incurred throughout the contractual period.
So, what are the cost components of outsourcing? To list a few:
1) Direct contract cost
2) Indirect administrative cost
3) Indirect management cost
4) Cost of business disruption due to various risks triggers associated to Outsourcing (Outsourcing Risks will be discussed in the next article)
The cost of outsourcing may look attractive on the onset but the overheads can be phenomenal especially if you do not manage the outsourcing vendors as though they are internal resources. Mismanagement is one sure way to expand the cost of outsourcing.
As a business decision maker, you must be in control over your budget and the partners you work with. Do not underestimate the cost of outsourcing. You need to list down all the activities that are required to achieve your objectives. Look at the cost of outsourcing vs cost of hiring a team to perform the same set of tasks in-house. However, cost alone should not be the only consideration when making a decision to outsource. There are other factors to consider which I will discuss in another article.
Outsourcing Relationship and Communication
Communication is one of the biggest problem you will face when outsourcing. The other is the lack of control even though you have the process in placed to manage the vendors.
Do not trust the sales or accounts manager when they agree to do everything that you have requested. Very often, the sales people will over commit what their internal team can really provide. Always do your research in the market by interviewing a few vendors to find out what they can realistically offer. Get into the detail of how work will be done and most importantly, how a secured and reliable communication platform can be established between the partners and yourself.
It gets more challenging when you have to manage multiple outsourcing partners who are hired for the purpose of achieving a common goal. A shared platform of knowledge, process and technology must be in place to achieve maximum productivity without sacrificing security and flexibility.
Nurture a trust partnership with your outsourcing vendor and enforcing the terms on contracts should only be done at the last resort. There is no need for us to pull out the contracts to get things done if we (as the owner of the entire business process) spend more effort building up the relationship. Micromanaging your partners has the same impact as micromanaging your internal team. It will incur additional management cost and lead to productivity loss. A typical reaction of a disgruntled partner, like an employee, is that he/she will not report to you a problem and make the necessary recommendations to fix the problem until it gets out of proportion. A motivated partner will help you identify wastage and inefficiencies, and contribute savings directly to your bottom-line.
Trust your partners to deliver as promised. Manage and align expectations as though they are your internal staff. Build a team around your partners and internal team where everyone shares the risks and profit.
Moving forward
In general, to have a good outsourcing outcome, the following list of to-do will come in handy:
- Form the team that includes both internal staff and external vendors
- Empower the team to operate within the operation framework established
- Encourage active communication
- Set up metrics and monitor the performance of the team
- Set up a common and agreeable operation framework with all partners
- Set up weekly review of operational objectives and issues
- Review yearly contract to refresh the terms base on pass year experience (upon mutual agreement)
Tell us about your outsourcing experience.
Other must read articles
- Increase customer satisfaction with good incident report
- Respect Deadlines
- Stakeholders are critical to your success
- Focusing on Cost
- Email – Ineffective communication tool
- Adding value in your organization
Hi,
Excellent article on the key issues around outsourcing. I agree with your points here. I also like to emphasize the nurturing the trust partnership point – something that seems to be missing so often in outsourced relationships. In my experience to date, many vendors are not ready for it even though they profess to want one. It may be that I take it one step further in that the trust partnership point requires long-term commitment, solid two-way support and engagement, complementary expertise, and a willingness to take risk on the part of the customer.
To that end, the weekly operational meetings is a key starting point for a successful outsourcing experience. It provides a platform for knowledge transfer, proactive issue management, trust and relationship development. Also, a positive environment and work team cooperation is promoted through systematic and structured meetings. However, not every vendor is able to do this and those need to managed for what they are – commodity service providers. Harder to find the right partner so it’s like “dating” – you need to go out a lot and meeting people to know who is the “right one”
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Anyways, I really enjoy your blog and writings – will put it on my blogroll.
Cheers,
Hi
If we treat suppliers as slave, we are not going to get too far. A team environment must be created. As managers, we will need to ensure every team members’ interests are taken care of. Furthermore, “milking” the supplier dry is not a good idea – you wouldn’t want to be left hanging in the air when your supplier goes bust.
Thank you for adding my blog to your list.
I like your article. A strong governance model with clearly defined metrics and regular communication among the teams is essential. Providers want to do what is expected of them and to foster a deep relationship with their clients. Strong client relationships are essential to future business development opportunities. In my experience, breakdowns in the relationship occur initially because of poor communication or miscommunication. If not rectified quickly, these communication gaps can unravel even a strong relationship. Your focus on regular communications across teams provides a forum for sharing information and to resolve miscues quickly.
Ron
Ron
Thank you for sharing with us your experience. Communication is key to any form of business engagement. Very often, you will hear managers claiming that they are too busy to talk or hold regular meetings with stakeholders. Either they did not regard the outsourcing partners as stakeholders or they do not see communication as an important management tool.
Setting up metrics is not an easy affair. To get a good set of metrics, we need to understand every detail of an outsourcing package and the end result that we want to achieve.
More on that in my other articles.
Cheers!
Hi,
Thanks for an insightful article.
The process of outsourcing could be accomplish smoothly. However, the other transition particularly building relationship could prove to be full of obstacles. Technical people accustomed to running an internal IT operation may not necessarily make the leap to managing an outsourcing relationship.
Some of the technical experts may have difficulty understanding their job had changed. Instead of operating and maintaining the technical operation, they may not be sufficiently equipped with relevant skills to mediate when confrontations between users and vendors get out of hand.
Many companies underestimate the importance of contract management or more appropriately, relationship management.
Michael.
Most importantly, companies must realize that outsourcing does not make their process related problems go away.. Before we outsource, always review the the entire business processes and establish an understanding of the value chain.
A question we should ask ourselves…What is our business? If you do not know how to answer that in the simplest form, then its back to the drawing board. There is no reason why a company should outsource any part of its organization if it cannot answer this simple question.
Next, as what you have raised, the people in the organization must come to term that their role has changed from technical hands-on to supervisory. Integration is key to outsourcing success. What used to work in silo mode does not apply in an outsourcing scenario.
Lastly, always have a good exit strategy. I had a big problem the last time when I tried to get rid of an incumbent outsourcing vendor.