To stay competitive in the business world, corporations have for years relied on outsourcing, sometimes referred to as labor arbitrage. While outsourcing has been around for ages, the ways companies are leveraging outsourcing are changing. According to a survey conducted by Deloitte, cost optimization is still a key driver of outsourcing but is no longer the biggest consideration. Today, organizations are applying more strategic approaches to outsourcing to achieve their business transformation initiatives that go well beyond trimming the bottom line.
This past year, I hosted a few discussions on strategic and disruptive approaches to outsourcing, aka “The Reincarnation of Outsourcing,” at the International Association of Outsourcing Professionals World Summit. Along with more strategic thinking about outsourcing business strategies, we’re seeing a deeper dive into the nuts and bolts of the outsourcing business model — the same model that has been in place for 30-plus years and is incredibly ripe for a reboot.
Let’s explore this well-worn business model. With few exceptions, organizations contract with outsourcers for a fixed-price multiyear contract, which is generally based on time and material, with an additional 30% for contingencies.
It’s a business model that favors the outsourcing service provider and relies heavily on presupposition. The reality is the majority of outsourcing contracts are simply guestimates on the part of the service provider based on the theoretical as opposed to the actual. The guestimate always errs on the high side because the service provider would rather overshoot the mark than incur a shortfall. As a result, many companies are overpaying for outsourcing, yet how much and where is difficult, if not impossible, to pinpoint.
This lack of operational visibility in outsourcing is akin to two semi-tractor trailers driving toward one another in a blinding snowstorm and continue to move forward to the point of intersection. Suffice to say, the opportunities for a less-than-optimal outcome abound.
Until this visibility issue is solved, I would argue that the outsourcing equation will continue to be very one-sided. In order to change the outsourcing business model so it’s a win-win for both parties, I believe both parties must have visibility into how work is happening. After all, outsourcing work activities shouldn’t mean abdicating all accountability for how that work happens.
In our work with Fortune 1000 companies, our analytics experts have identified three factors that can transform and optimize outsourcing arrangements to deliver greater value. All of these, it should be noted, revolve around transparency, which fosters relationship building, trust and accountability.
Leverage A Co-Management Approach
Organizations have typically performed outsourcing governance in silos — often with teams that are understaffed, undertrained and lack the tools to collaborate effectively. This fragmented approach results in value leakage, as individuals aren’t motivated to lock arms to support the greater purpose.
From my experience, your organization must focus on building a strong relationship and aligning strategies, goals and objectives through collaboration, mutual respect and continuous communication. Co-management creates a relationship in which both parties have a vested interest in the direction and success of the program with transparency at both strategic and operational levels.
You should consider the following when building out a co-management structure:
• Tier management structure with peer-to-peer alignment.
• Clearly define decision-making and authority rights and ensure both the organization and the outsourcing partner have a mutual understanding.
• Secure executive commitment and sponsorship.
Choose The Right Technology Platform
You should enlist a sophisticated, proven technical tool that automates the outsourcing governance function and meets the following requirements:
• Ensures accurate and automated data is captured to provide operational visibility.
• Captures accurate data to create benchmarks, SLAs and metrics.
• Ensures real-time visibility into activities to predict outcomes/deliverables.
• Links captured data back to current metrics and SLAs.
• Frees up governance team resources to focus on other value-added activities.
• Supports a fair and data-driven approach to spur team performance and productivity.
• Ensures responsiveness and accountability to drive continuous improvements.
Choose The Right People
I believe savvy executive guidance with the right skillset and appropriate authority must be in place. A common misstep is simply assigning outsource management to the individuals who previously handled the program in-house. This is a mistake because the outsourcing model is distinctly different from an in-house service model.
Outsourcing governance requires experienced, senior-level executives who can develop and maintain relationships with all stakeholders. The level of management should be high enough to have influence and authority to ensure strategy and operations align at all levels and specifically between the two organizations.
In my opinion, focusing on these progressive management approaches can transform outsourcing governance via newfound improvement in collaboration and engagement, visibility, transparency and productivity.
By Bradley Killinger
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