A new study from Deloitte reports that enterprises entering into outsourcing arrangements are focusing too heavily on reducing costs through labor arbitrage alone, resulting in high levels of disappointment and conflict even though most companies are realizing significant cost savings.
The Deloitte Consulting study, Why Settle for Less, found that 83% of companies surveyed had achieved an ROI of over 25% on their outsourcing projects. However, 49% of the executives surveyed said they would have defined serviced levels that aligned better with their companies’ business goals if they could start their outsourcing projects over, and only 34% of respondents reported that they had gained important benefits from their service providers’ innovative ideas or transformation of their operations.
In addition, by a 3-to-1 margin, the outsourcing service providers polled felt that their client companies did not have a solid outsourcing plan, lacked the operational data needed to make sound decisions and did not understand how the to-be organization would really work. Such contradictory findings could be the result of a failure to properly define the goals of the outsourcing projects as being more than saving money.
“Outsourcing is working financially for a majority of companies in this survey, however, executives’ propensity to lead with cost reduction and labor arbitrage without emphasizing the need for overall optimization stymies their companies’ chances to realize the full benefits of outsourcing,” said Peter Lowes, a principal with Deloitte Consulting LLP and the leader of its Outsourcing Advisory Services group, in a statement. “The themes of unrealized potential and lost opportunities to use outsourcing as an opportunity to innovate echo throughout this report.”
Lowes noted that these lost opportunities may also be the result of the companies’ setting their outsourcing goals too low. He said companies may have initially perceived outsourcing primarily as a tactic to reduce costs as opposed to a means to fundamentally transform their operations and drive dramatic improvements in efficiency, productivity and reliability. Lowes said that while there is no single right way to use outsourcing for each company, companies should examine the following aspects of an outsourcing deal to see if they need to correct their course even in mid-stream:
Did you clearly define the strategy? Companies need to ask themselves if they are outsourcing the right things for the right reasons. Transferring a dysfunctional operation to a vendor in hopes of saving costs through economies of scale or arbitrage can be a case of “your mess for less.”
Do we have a solid foundation? Companies need to ask if they have defined and quantified what they expect from outsourcing. The creation of a business case and the establishment of effective service level agreements (SLAs) should not be given short shrift; but in practice this is too common.
Vendor selection now means something different. Companies need to select the right service provider, one that is capable of delivering strategic process improvements as well as cost reductions. When things do not go well in outsourcing, most companies automatically scrutinize the service provider, but do not recognize that their decision to select a vendor on cost alone may be the actual root cause of their problems.
Before striking the deal companies need to ask if their contracting process is mutual and flexible. Contract negotiation is a pivotal point in the outsourcing process. After the deal is signed, are you getting what you paid for? It can be tempting to think the signing of the outsourcing contract is the culmination of the outsourcing process. But in reality, effective performance management, especially the insistence that service providers actively search for, develop and implement strategic improvements, is the crowning component of an effective outsourcing initiative.
The survey included more than 300 senior executives at mid-size and large companies. The executives came from the