The outsourcing solutions – conclusions

For certain key non-core functions such as IT and finance there are, in theory, considerable competitive advantages to be obtained from their transfer to external specialists. However, many organizations have found, to their considerable cost, that outsourcing is fraught with difficulties.

Experienced observers of outsourcing arrangements will have little trouble accepting the following as factual.

  1. It is possible to work with just one provider on a sole sourcing deal and yet obtain a contract that provides for an improved service at a reduced cost to the client. However, there is also a good chance that the arrangement will fail to meet the client’s needs.

  2. The process of working with a number of providers in the early pre-contract stages by creating a competition, will probably give the client a better understanding of the options available and so increase the chance of further improving both service and savings. Nevertheless, there is still a good chance of failure.

  3. With a conventional contract the provider is not motivated to make further improvements and savings above those stipulated in the contract. If continuous improvements are made the benefits will be weighted in the provider’s favour.

  4. The process of motivating the service provider by agreeing to some form of partnership arrangement has much to recommend it from the viewpoint of both parties. The additional rewards obtained by the provider will depend on its ability to improve the service further than the minimum stipulated in the contract – therefore it is not necessarily an additional cost to the client. It has to be accepted though, that even this type of arrangement sometimes fails to provide satisfaction for the client.

  5. Failure of outsourcing partnership deals are most likely to occur because the service providers are either incapable of meeting the standards required, or more likely because they take on too much work and so water down their effectiveness. This raises doubts as to whether any deal between client and outsourcing service provider can ever be considered a true partnership.

  6. If the basic reason why partnership outsourcing arrangements fail is because the provider spends too much time with other clients who are all looking for their share of scarce resources, then it follows that the problem would not exist if the provider had no other clients.


Separate joint venture companies set up by client and service provider would appear to get around the problem of resources being spread too thinly. There are many such joint ventures operating in this way. Typically, they are formed on the basis of the client having some special position in the marketplace and the provider creating software solutions to exploit that position. On this basis, the client’s IT department and other related areas will probably be transferred to the new company, together with other services such as marketing. The service provider may also transfer marketing skills alongside software specialists, etc. Therefore most of these joint ventures depend on getting the marketing right equally as much as on the quality of the new systems development. Almost all these arrangements build in the possibility of the new company acting as an outsourcing service provider for other clients in due course. But clearly, the marketing element of this type of joint venture is always going to make comparison with conventional outsourcing arrangements very difficult.

Conventional outsourcing is subject to a range of problems, most of which boil down to the question of getting the desired share of the skills available. The outsourcing service provider might be a Mecca for the very best technical skills, but if your organization is just the latest of hundreds or thousands of clients, how can you ensure the very best service? Creating a value added, risk/reward sharing partnership will help in this respect but how effective will this be if the last half dozen or so deals entered into by the service provider were done on a risk/reward sharing basis?

  • Taking advantage of the service provider’s own shared service centre may be beneficial to some if the client is using the same systems as the provider. For others it may be beneficial to involve the provider in some way in the client’s own shared service centre.

  • For most client organizations, however, the best solution to the problem of getting the required share of skills and attention would be to own some of the service provider’s equity. For the client to obtain the desired benefits, the specialist service provider must be motivated to make continuous improvements to the service during the life of the contract. Recent experience has demonstrated that by far and away the best way for the client to achieve this is to take some measure of equity in the provider to ensure that it is always going to be a favoured customer.

for most client organizations, however, the best solution to the problem of getting the required share of skills and attention would be to own some of the service provider’s equity


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