In this second part of a three-part series, analysts will address the tradeoffs and tradeoffs of outsourcing to answer the frequently asked question, “What are the pros and cons of outsourcing and shared services?”
In the first part of the series, it was emphasized that the company must evaluate the rationale for a new sourcing strategy and take a “one size fits all” approach to meet its unique needs.
Considerations should include:
- Scope
- functions
- Vendor/Model Preference
- financial drivers
Three delivery models to consider:
- Outsourcing
- captive shared services
- Build, Operate and Transfer (BOT) Shared Services
Advantages of outsourcing cited in the first part:
- process
- Greater standardization
- High degree of process maturity.
- Ease and speed of acceleration and/or deceleration
- More efficient staffing
- Performance
- greater responsibility
- performance department
- performance measurements
- take advantage of the experience
- Access to world-class innovation
- Cross functional integration
- cost
- Accelerate saving
- Cost structure transformation
- assistive technology
- Profit Realization – Now and Later
Outsourcing can be a strong business case for many companies. Unique organizational attributes and business objectives may point to a different strategic approach such as “one size fits all.”
The disadvantages and trade-offs of outsourcing:
Area: Process
Cons: Control what outsourcing brings: Less direct control of the daily process
Cons: New management skills needed What outsourcing brings: Management’s focus shifts from managing the process to managing the relationship through a new governance structure. This is often a ‘hit’ place and takes much more time than expected to manage the relationship at all levels and ensure smooth communication between layers, from operational to tactical to strategic and vice versa.
Cons: Need for new management skills. What brings outsourcing: The skills required to manage an external provider are very different from those of managing an internal resource. Many organizations underestimate the resources required to successfully manage an outsourcing relationship and do not seek external advice on development.
Cons: long term commitment What brings outsourcing: The long-term nature of outsourcing contracts means you’re locked in for a long time, preventing unforeseen “better” solutions later. . The requirements for the “change” in the business and future improvements in the delivery process should be clarified, negotiated and agreed in advance with the supplier.
Cons: hard to get out What brings outsourcing: It can be difficult to get out of outsourcing contracts (penalties etc.), and the transition at the end of the contract to outsourcing or another service provider may not be easy.
Area: Performance
Cons: impediments to change What brings outsourcing: The time to fix poor performance can take weeks or months instead of hours or days, as the vendor often has “time to fix” performance issues that may be beyond the patience of the end user.
Cons: Decrease in internal talent pool What brings outsourcing: The ability to nurture and grow leadership talent from within diminishes as leadership roles in certain functions are outsourced.
Cons: loss of intellectual property What brings outsourcing: Risk of losing all internal capacity and “tribal knowledge” in the process. Understanding the provider’s institutional knowledge, internal relationships and company culture can take time.
Cons: Loss of connection between departments. What brings outsourcing: Increased perception of “loss of control” as multiple functions exit the organization and transfers between departments will be “lost”.
Zone: Cost
Cons: “Cost Sliding” What brings outsourcing: Risk of unforeseen additional costs for ad-hoc projects and activities, if the contract does not have a clear definition of what services are in scope and how “new” services would be managed/priced.
Cons: Penalties for volume changes What brings outsourcing: Increased cost/transaction (eg, M&A) to decrease transactional volumes: Again during contracting, volume change bands must be agreed upon and the customer must understand the volume break-even point for the provider.
Cons: Redundancy costs What brings outsourcing: Sometimes there can be redundancy of technology costs between the company and the service provider, which could increase overall technology support costs.
Cons: inflated retained organization What brings outsourcing: The retained organization needs to change to get the benefits. It requires retraining (as noted above) and monitoring to ensure the new way of operating is implemented and lived.
Using the “one size fits all” approach based on a proven sourcing methodology will lead the company to a well built business case. The goal is to facilitate a true partnership model based on equality where both parties understand the requirements, responsibilities and benefits that will accrue to both organizations throughout the engagement.