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The Death Of Outsourcing

February 17, 2010

Many contracts and sourcing experts have struggled with the idea that ‘outsourcing’ is somehow distinct and unique. It simply appeared to be a variant on other complex or complicated trading relationships.

And indeed, as the years have passed, this judgment seems more and more correct. Outsourced relationships have intoduced some distinctive contract terms and  demanded re-thinking of ways that relationships are managed, but as our world transitions to a networked and service-based economy, it is time to eliminate the myth that outsourcing requires fundamentally different approaches.

In the beginning, it was helpful to service providers to come up with a unique name and represent outsourcing as a transformational experience. Clients bought into this idea for several reasons: for executives, it suggested radical action to streamline their business; it also ensured internal focus on relationships that frequently involved significant organizational change.  External consultants were enthusiastic drivers of ‘outsourcing as an innovative idea’ because they were able to suggest that success depended on specific expertise that they alone possessed.

So for a variety of reasons and motivations, business bought in to the myth that outsourcing required separate skills and reosurces. But today, it is increasingly obvious that outsourcing is simply another ‘make or buy’ decision. Business relationships run across a spectrum of complexity and the way we contract and manage them must reflect the extent and duration of that complexity.  Segmentation into relationship types is helpful, but only if the distinctions between them are meaningful. Outsourcing is not meaningful; it actually confuses the picture and creates internal rivalries and unnecessary fear.

As we move to the next phase of services provision – for example, cloud computing – it is time to recognize that businesses must build an integrated contracting and relationship management capability that spans the portfolio of external partnerships that they need to compete in the market. They will need to manage this portfolio of relationships in ways that enable increased commercial agility – the flexibility to respond to fast-changing and unpredictable market conditions and risks.

Outsourcing has had its day.

  1. I had to re-read this piece several times to make sure that I wasn’t misreading it. There is no question that from a contracting perspective, outsourcing agreements are simply one form of complex services contracts, some more complex than others. However, the real differentiation of outsourcing is in the area of change management, where outsourcing can often be analogous to M&A activity in its impact on work practices, processes, company culture and capabilities acquisition.

  2. Bob Magee permalink

    I agree with Bill. Outsourcing is different and needs to be recognised as such particulary the first time it is done when it can involve the wholesale transfer of assets and people as well as the development new processes and organisatinal cahanges. The distinction from other make or buy decisions is the degree – the critical impact on the organisation, the cost the complexity and the difficulty of changing the decision once implemented. I do accept however that second or third generation outsourcing of the same acttivies does become more straightforward.

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