CHAPTER 3
Outsourcing: The New Challenge

The growing subject of outsourcing entices executives with the promise of phenomenal cost savings and scares directors—and everyone else—with the prospect of job loss. In the news, the debate about whether outsourcing is an appropriate option continues. But from the boardroom, there is no debate; the only remaining question is how much will be outsourced and when.

Outsourcing Past and Present

The outsourcing market has matured over the last decade, during which the primary driver was the promise of extraordinary cost savings. The market today has many anecdotal stories of expectations falling far short of targets, however. The reality is that clients need additional resources to manage the relationship with the service provider, and some of the cost savings are lost. Clients of outsourcing have matured, and they now know these realities. The cost savings still exist and are still enticing, but realistic expectations are now in place.

For companies, the decision is a sourcing decision about what is appropriate to keep in-house and what could/should be outsourced. If companies do outsource, the location needs to be decided. Assuming your company is U.S.-based, choices of location include on-site (your company location), on-shore (U.S.), near-shore (Mexico, Canada), or off-shore (India, China). The service providers are also experiencing changes. Many of them have experienced the India market as having too much competition for the limited number of workers. What once seemed like a country with an unlimited amount of technically competent, English-speaking potential employees has become a place with high turnover and ever-increasing pay rates.

One manager of a company that employs 100 workers in India said his company could project when turnover rates spike. The day after the company hands out raises to its employees, a spike of resignations occurs. What’s happening is this: the employee waits for the raise and then walks over to the company across the street, where he or she is hired for pay that’s higher than the new raised pay rate. But not providing raises would worsen the turnover rate.

Many large service providers now search the globe for the next country that will provide the competitive resources to offer greater value. Beyond India and China, countries like Canada, Mexico, the Philippines, and Poland are being looked at and rated on multiple measures to see how they fit into the global mix. Some of the criteria are:

•   English-speaking

•   Infrastructure

•   Employee hourly rates

•   Technical skills

Companies are now looking at reasons other than just cost savings for outsourcing. But don’t be misled; these companies still want cost savings. The other reasons for outsourcing are:

•   Obtaining scarce skilled people

•   Augmenting needed skills

•   Scaling for faster business growth

•   Providing capabilities for competitive advantage

•   Transforming their business

The best approach any company can take is to develop a corporate sourcing strategy instead of addressing the issue tactically on a case-by-case basis. The sourcing strategy should be in alignment with the overall corporate strategy and should not be developed in isolation. The sourcing strategy typically will be designed to increase shareholder value. Any misalignment with the overall corporate strategy will cause problems when implemented.

In the 1990s, companies wanted to address their non-core competencies. But it is difficult to clearly specify which competencies are core and which are not, and there could be non-core competencies that should be retained internally due to cost advantage.

Another difference from the past is that companies are going beyond having just one service provider perform all functions. At first glance, it would seem advantageous to have a single point of contact to address all problems, making everyone’s lives easier. Executives liked the concept of “one throat to choke” if there were problems. But now these companies are looking at using multiple service providers, including internal resources, to create a competitive advantage.

The multisourcing approach does add complexity, and clients have to increase their time commitment to manage multiple service providers. However, this approach creates dynamics that they can leverage, such as creating internal competition for pricing and tapping into the best subject matter experts for a given need.

Outsource a Problem

At the beginning of this chapter, we covered reasons for outsourcing, but we did not include getting rid of problems as one of the valid reasons. This benefit can be highly tempting. “We can’t seem to manage the maintenance problems, and it is costing us a lot of money. Let’s give it to a service provider.” This sounds legitimate and logical. Even the service providers advocate this approach, citing their vast abilities, experience, and successes. So why not?

There are two reasons not to outsource problems. The first is that it will be more difficult for the service provider to smoothly transition maintenance to its control. If the current maintenance team can’t deliver effective service to the customer, it most likely will not be able to effectively articulate all the tasks it performs, let alone clearly document them. Without clear process documents and successful knowledge transfer, the service provider will miss service deliveries. This will challenge the service provider to the point where it may not be able to deliver even the current undesired state of maintenance.

But the biggest impact is on the cost to the client. You, the client, will not have full understanding of the service provider’s pricing model (Figure 3-1 illustrates this). You will negotiate with service providers to obtain the best value from outsourcing. The service provider will commit to providing improvements, lower prices, and other good things to take over the service as is. But the savings it presents may be a reflection of using lower rates from offshored sourcing. After the provider transitions to operations, it may begin to generate further savings by resolving the problems you were having. But how much will those savings be, and who will receive the savings? You may be paying year after year for a problem that was resolved at the beginning of the outsourcing contract. You will never really know.

But what are the alternatives? The following suggests a two-step process. The first step is to resolve the problem. This book is designed to provide you with the information necessary to resolve maintenance problems and improve your processes. It doesn’t matter whether you use your own resources or contract to a third party. Treat this improvement effort as a project, because that is what it actually is. You should set clear requirements and objectives, including a realistic due date. When the improvement project is complete, you will be able to gather data on the results and any cost savings.

The second step is to outsource maintenance. You will know exactly what it would cost you to keep maintenance in-house, so it will be clear what additional financial benefit you will receive from outsourcing.

Figure 3-1 Outsourcing Improvement

The advantage to this approach is that the client retains all the benefits of performance improvements. The approach also gives you greater insight into what a service provider is really offering and at what cost, which will increase your negotiating power.

Remember that service providers are good business people. When the contract is signed, the provider will meet the minimum requirements of the contract at the lowest cost achievable. Even with a strong relationship with the service provider, to think that the provider will deliver beyond minimum requirements is unrealistic.

So Why Is Outsourcing Included in This Book?

Use this book to PREPARE for outsourcing: Applying this book’s techniques can help prepare for an effective outsourcing arrangement. The previous section of this book covered the two-part approach to outsourcing. First, drive down costs internally by using this book. Then, after you have your new internal cost data, you can proceed with engaging service providers to outsource. Your organization will be guaranteed to keep the cost savings from the first step and will thus have a clear view into what additional savings the outsourced service provider really is offering.

Use this book to PREVENT outsourcing: On the flip side of outsourcing, directors and managers can drive down the cost using this book to prevent outsourcing. The lower the internal cost is driven down, the harder it is for the service provider to show significant savings from outsourcing. Offshoring (outsourcing to countries such as India and China) can offer very low rates on workers, but there is an extra management layer that the client needs to implement for managing the relationship. This extra layer can eat into the savings, so it is possible to show that in-house resources are cost-competitive. This is especially true if your corporation requires you to use service providers located in the United States or North America.

Undoing Outsourcing

As outsourcing has grown, so has the number of companies that have brought outsourced services back in-house. To be thorough on the subject of outsourcing from a maintenance perspective, we have to consider the reverse direction—taking back the services from a service provider and having in-house employees perform them.

There are many issues to address when taking over from a service provider, but two are key:

•   Staffing. Hiring back personnel who are currently working for the service provider will be governed by the contract the client established with the service provider. Perhaps your company negotiated good terms for rehiring staff and terminating the contract, but however it’s done, the appropriate number of skilled people to perform the work will have to be hired, either from the service provider or from other sources.

•   Knowledge. There is no excuse for a company to lose all the knowledge it had in performing the work or not obtaining the new knowledge generated as the service provider improves the processing. It is true that the client company will not have the employees to shadow the service provider, so all the knowledge will not be contained in employees’ heads. But the knowledge must be effectively documented and accessible as a source for employees to start from when necessary.

When a function or business process is outsourced, the client must put a process in place to ensure that any process changes implemented by the service provider are documented and that the client obtains current copies of this documentation at least annually. This process is vital to preventing loss of control over the client’s future. Without knowing the current processes, the client would have a difficult time switching to a different service provider or bringing it back in-house using its own employees.

The material in this book provides management with high-level focus areas it needs to address when functions or business processes are outsourced. Best practices in outsourcing dictate that the client focus on outcomes, not on how the service provider accomplishes the tasks. No one wants to limit the service provider’s ability to creatively apply best practices. But the client must have some knowledge about how the service provider delivers its service—not to control the process but to understand the process. This understanding will place the client in a much better position to take over the functions or business processes if the decision is ever made to terminate the outsourcing arrangement.