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Outsourcing On The Rocks

August 4, 2011

The Economist has a thought-provoking article that questions the future of outsourcing. Based on a large reported fall in the value of new contracts (specifically in the US), it asks whether the surge to outsource is over, pointing out that it is proving ‘more hassle than it is worth’.

I do not believe that the basic economics of outsourcing are wrong; it is the capability of companies to manage outsourced relationships that lies at the core of disappointment. Far too many outsourcing initiatives are based purely on cost drivers and have not been accompanied by developing the skills and structures needed for their management. Outsourcing has increasingly been treated as a commodity decision, increasingly subject to the same damaging procurement procedures as many other acquisitions.

Driven by poor planning, wrongly focused negotiations and adversarial performance management techniques, many relationships have not flourished. Others were condemned to failure because they lacked adequate quality assessments and selected outsourcing partners based primarily on cost, rather than cultural and organizational fit. Often there has been a weakness in governance – both in definition and in allocated resources. Like so many other supply relationships, the buyer simply stands back and watches while their provider fails.

In the end, this is primarily the result of poor contracting and relationship capabilities. Contract negotiations focus on the wrong terms; third party advisers (who should themselves be subject to the rigor they apply to the outsource provider) create a contentious environment from which they then garner additional fees;  post-award performance and relationship management lacks the skills, focus or knowledge required for success.

Outsourcing requires the type of spohistication that is applied to the hiring and management of employees. Just because it is low cost does not mean that it can be ignored. ‘Out of sight, out of mind’ unfortunately rings very true of the way that many treat their provider.

The economic value of good outsourcing remains high. The economic cost of poor outsourcing is also high. As with so many other procurement activities, management must understand that transactional economics and commoditization destroy value. It is time to re-focus and to grasp the point that contracting must be more adept at structuring high performing relationships – and that resources must then be developed to manage those relationships. This i snot new news – but many organizations are still failing to get the message.

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