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The Black Book of Outsourcing

John Wiley & Sons

Chapter One

Outsourcing is not a threat to this nation's economy-it is an opportunity to raise American paychecks, productivity, and prosperity. It's an opportunity we will squander if we let the alarmists stampede us into bone-headed solutions. -John Castellani, president of The Business Roundtable to the Detroit Press Club, February 24, 2004

The purpose of this book is to establish guidelines, offer insight, and provide inspiration, so that you will be able to realistically identify, analyze, and maximize outsourcing opportunities. You'll learn how to:

1. Evaluate your business processes.

2. Identify outsourcing opportunities in processes.

3. Select vendors/suppliers/partners.

4. Negotiate successful contracts with vendors.

5. Establish successful working relationships with vendors.

6. Manage a multiple vendor environment.

7. Turn around a failing outsourcing relationship, or, when necessary, replace vendors.

8. Govern vendor relationships on a day-to-day basis.

9. Implement and track service level agreements (SLAs).

10. Anticipate, and avoid when possible, outsourcing problems; solve problems when they do arise.

11. Ensure success.

Outsourcing Terminology

It would be impossible to achieve the objectives just described without first ensuring that everyone reading this book understands the terminology of outsourcing as it is used here (see Chapter 3 and the Glossary). Therefore, we'll begin with two definitions:

Outsourcing. The act of obtaining services from an external source.

Business process outsourcing (BPO). Outsourcing as referred to in the corporate environment. BPO occurs when an organization turns over the management of a particular business process (such as accounting or payroll) to a third party that specializes in that process. The underlying theory is that the BPO firm can complete the process more efficiently, leaving the original firm free to concentrate on its core competency.

Outsourcing is essentially a basic redefinition of the corporation around core competencies and long-term outside relationships. These core competencies and outside relationships are identified with two objectives in mind: (1) to bring in the greatest value to the end customer and, (2) to ensure the highest level of productivity for the corporation itself. A number of BPO functions are listed in Table 1.1 on pages 22 and 23.

The benefits of corporate outsourcing are numerous. The following list is not intended to be comprehensive, but to stimulate your enthusiasm for this process:

Increase sales opportunities.

Improve corporate image and public relations.

Prevent missed opportunities.

Reduce annual costs almost immediately.

Enable business to focus on core competencies.

Reduce or eliminate customer complaints.

Increase customer loyalty.

Lower costs on projects and events.

Beat competition.

Make time and resources available.

Levels of Outsourcing

There are three levels of outsourcings: tactical, strategic, and transformational.

Tactical Outsourcing

On the first level, tactical, the reasons for outsourcing are usually tied to specific problems being experienced by the firm. Often the firm is already in trouble and outsourcing is seen as a direct way to address problems. Typical examples of "trouble" are: the lack of financial resources to make capital investments, inadequate internal managerial competence, an absence of talent, or a desire to reduce headcount. Not surprisingly, tactical outsourcing often accompanies large-scale corporate restructuring. Thus, many tactical relationships are forged to:

Generate immediate cost savings.

Eliminate the need for future investments.

Realize a cash infusion from the sale of assets.

Relieve the burden of staffing.

The focus of tactical outsourcing is the contract, specifically, constructing the right contract and, subsequently, holding the vendor to the contract. Traditionally, the expertise for making these arrangements came from the purchasing department. However, there is an emerging expectation that every manager involved in the supply chain process understand and be accountable for the aspects of outsourcing that affect their area of charge. Establishing and maintaining tactical outsourcing relationships, specifically functional or comprehensively, is the responsibility of the entire organizational team. Frequently, the contract was simply a fee for services, with much of the value stemming from the discipline of spending dollars externally. When managers formed successful tactical relationships, the value of using outside providers was clear: better service for less investment of capital and management time.

Strategic Outsourcing

Over time, as businesses sought greater value from outsourcing relationships, the goals of these relationships changed. Executives realized that, rather than losing control over the outsourced function, they gained broader control over all of the functions in their area of responsibility, hence, were freer to direct their attention to the more strategic aspects of their jobs. Facilities managers, for example, could focus more on infrastructure issues, instead of worrying about staffing janitorial positions. Technology executives could hand over running of the data center to a service provider and turn their attention to serving the needs of internal customers. This logic remains compelling.

To meet the requirement of earning greater value from outsourcing, how it was used and where it was applied had to change. The scope of outsourcing relationships grew significantly, as did the service provider's involvement. By virtue of the increasing dollar value of the relationships, the integrated scope of services, and the length of the new relationships, outsourcing was no longer a tactical tool but a strategic tool. Most important, the managerial mind-set regarding the nature of these relationships matured, from one between buyer and supplier to one between business partners.

Strategic outsourcing relationships are about building long-term value. Instead of working with a large number of vendors to get the job done, in a strategic model, corporations work with a smaller number of best-in-class integrated service providers. These relationships thus evolve from vendor-supplier arrangements (which are often adversarial) to long-term partnerships between equals, with the emphasis on mutual benefit.

Transformational Outsourcing

Transformational outsourcing is third-generation outsourcing (Table 1.2). The first stage of outsourcing involved doing the work under the existing rules; the second stage used outsourcing as part of the process of redefining the corporation. This, the third stage, uses outsourcing for the purpose of redefining the business. To survive economically today, organizations must transform themselves and their markets in an ever more daunting challenge to redefine the business world before it redefines them. To that end, outsourcing has emerged as the single most powerful tool available to executives seeking this level of business change. Those who take advantage of transformational outsourcing recognize that the real power of this tool lies in the innovations that outside specialists bring to their customers' businesses. No longer are outsourcing service providers viewed only as tools for becoming more efficient or better focused; rather, they are seen as powerful forces for change-allies in the battle for market and mind share.

Phases of the Outsourcing Process

The phases illustrated in Figure 1.1 are part of any outsourcing process:

1. Strategy phase. You define the objectives and scope of the outsourcing concept and determine the feasibility of outsourcing before making the decision to proceed. Also, you plan the total effort in terms of time, budget, and necessary resources.

2. Scope phase. You establish baselines and specify the service levels required of vendors. You clarify relationships between the function(s) to be outsourced and those functions that remain in house, to include proper interfaces. You develop the request for proposal (RFP); collect and analyze responses from vendors; and, finally, choose a vendor.

3. Negotiation phase. Negotiations proceed with the chosen vendor until a contract is drawn up and, ultimately, signed by both parties.

4. Implementation phase. This phase marks the transition from in-house provision of services to outsourcing.

5. Management phase. Throughout this phase, you manage the outsourcing relationship with the vendor. It includes the negotiation and implementation of any changes in the outsourcing relationship seen as necessary to ensure a successful outcome.

6. Completion or termination phase. At the end of the contract period, you make the decision either to negotiate another contract with the same vendor or to terminate that relationship and align with a new vendor; and the cycle begins again. Alternatively, a decision is made to bring the function back inside the organization.

There will always be some aspects of the outsourcing arrangement that will be unpredictable and thus will evolve over the life of the contract. However, there are key deliverables and activities for a sound BPO relationship each step of the way. These include the prerequest for proposals phase and postcontract governance. Without these, you and your colleagues may find yourselves saying, "Outsourcing didn't work for us." To ensure you do not become one of the failure statistics, use the time wisely before you sign a contract, to integrate your own best practices into the terms of your outsourcing deal.

Remember, outsourcing providers are partners to whom you give significant managerial discretion as to how to deliver the service they offer; it is they who will manage the day-to-day delivery of that service. To generate the value you define, it is essential that these partnerships become long-term relationships. You want your partners to understand your business in depth, so that they can meet your requirements today and develop better ways to service your firm in the future. In sum, managing the outsourcing relationship is one of the most important tasks undertaken by executives today.

Monitoring the Evolving Outsourcing Environment

As the outsourcing environment evolves, not surprisingly, conflicting information surfaces as to how to make an effective decision about the process. This decision is complicated by the growth of the outsourcing market and the wide range of services now available. To evaluate their options accurately, companies must first be able to identify their reasons for outsourcing and then specify costs and benefits of the process. Managers must also be able to match their specific needs with both the correct service and the correct service supplier. Let's examine the possibilities:

Outsourcing versus supplier relationships. As previously defined, the term outsourcing applies to an activity formerly done by an organization internally. Outsourcing relationships replace or substitute the services of an external provider for current internal capabilities.

Outsourcing versus consulting. Many companies concurrently position themselves as offering both consulting and outsourcing services. Unfortunately, they don't clearly distinguish between the two, and in the process confound the situation. The difference would seem to be clear-cut: Consultants advise companies on how to do something; outsourcing providers "just do it." However, sometimes a consultant will also deliver a business service or product, hence acting like a provider; other times, an outsourcing provider will advise, hence acting like a consultant. Generally, the distinction is easy to make. Most professional services firms fall into one of three categories: consultants, providers, or some combination of the two.

Outsourcing versus out-tasking. Outsourcing relationships are high value-add, robust, and ongoing-that is, they are not a one-time only deal. In contrast, out-tasking refers to turning over a narrowly defined segment of business to another business, typically on an annual contract, or sometimes a shorter one. This usually involves continued direct or indirect management and decision making by the client of the out-tasking business. Out-tasking is an emerging concept. Out-tasking defines the boundaries necessary to explain to a workforce that it is being evaluated for possible outsourcing. With the uncertainty of today's business climate, facility managers are reluctant to discuss an outsourcing possibility until the benefits are certain. At that time, the concept of out-tasking seems to make the explanation easier and is restrictive enough to help employees understand the overall and final effects of out-tasking. For example, hiring an outsourcing vendor to set up your new human resources technology, a manufacturer to handle production when demand exceeds capacity, or an overnight delivery service to deliver urgent packages. As explained in the preceding discussion on phases, outsourcing relationships are high-level, contractual relationships for a fixed period of time, usually measured in years, and they are assumed to be continuous. Provider and user often work to define the service delivered; there is frequent interaction and communication between user and provider. The outsourcing service is customized to the needs of the user.

Outsourcing versus Worldwide Sourcing

Business officials leading a new coalition to combat efforts to prevent companies from moving some operations overseas know they have a public relations problem, and they are preparing to act. Although the tone of outsourcing is softening, outsourcing has become a dirty word. Corporate leaders are working hard to try to strike outsourcing from the lexicon.

Business coalitions are rallying around worldwide sourcing as a less provocative term for the movement of jobs around the globe. The change is part of a new strategy to try to impart the business community's view that preventing firms from relocating outside the country to reduce costs will restrict competitiveness and ultimately cost jobs.

Leaders of one business alliance, the Coalition for Economic Growth and American Jobs, have also lobbied officials at the White House, the Commerce Department, and the Office of the U.S. Trade Representative to brief them on the new message of worldwide sourcing.

Business Roundtable President John Castellani told Congress Daily the new outsourcing public relations campaign stemmed directly from the torrent of attacks on outsourcing in the Democratic campaign. "Our concern was that if we didn't respond, we ran the risk of having a reversal of those kinds of policies that promote economic growth and job creation," he said. Castellani and others in the coalition referred to their opponents as "isolationists."

Castellani said worldwide sourcing was a more appropriate term because outsourcing has for decades referred to efforts by companies to more efficiently manage their costs by contracting with other domestic producers. With worldwide sourcing, "you participate in worldwide markets, you do the things in those markets appropriate to products and services and do things in the United States that we're best at-design and innovation," Castellani said.

Governmental administration officials appear undecided on whether they will adopt the term worldwide sourcing instead of outsourcing. With the disastrous exception of Council of Economic Advisors Chairman Gregory Mankiw, Bush aides already studiously avoid using the term outsourcing.

(Continues...)

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Excerpted from The Black Book of Outsourcing by Douglas Brown Excerpted by permission.
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