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Outsourcing 101 - A Primer Part Three: Approaches and Recommendations

Written By: A.B. Maynard
Published On: January 19 2004

Summary

When a company contracts work from another company, it is typically called outsourcing. Outsourced work is usually performed locally (onshore outsourcing), in other countries in roughly the same time zone (nearshore outsourcing,) in countries that are many time zones away (offshore outsourcing), or some combination of the above. Literally any activity that is performed by a company can be, and probably has been, outsourced.

A company contracts with an outsourcing provider to perform a defined scope of work, and the outsourcing provider charges the company a fee. The fee can take many forms: by the transaction, by labor hour, cost per unit, cost per project, or annual cost.

Companies choose to outsource for many reasons. It is common for companies to embark on an outsourcing effort in order to lower costs, improve service, obtain expert skills, improve processes, or improve focus on core activities.

Nevertheless, outsourcing is not right for every company. A company may be too small to effectively outsource. The company's culture may not appropriate for outsourcing or there may be customer reasons that limit or prevent the company's ability to outsource. Some government agencies do not allow their contractors to outsource anything to an offshore location or management leadership may not be prepared to manage an outsourcing relationship.

Although there are many potential outsourcing categorizations, the outsourcing market is often segmented into four broad categories:

  • Application software
  • I.T. infrastructure
  • Business process outsourcing (BPO)
  • Manufacturing

This is Part Three of a three-part note.

Part One discussed the history of outsourcing, described outsourcing pros and cons, and introduced offshoring concepts.

Part Two defined and described common types of outsourcing.

This part will recap outsourcing approaches and categories, and offer recommendations for firms looking to outsource and recommendations for outsourcing providers.

Recommendations for Companies Looking to Outsource Some of Their Operations

Companies that are interested in outsourcing some or many of their operations need to take a strategic look at their company and their operations. Selecting a process to outsource, selecting the right provider for your company, and establishing the new business processes required to support the relationship, are not casual efforts. In fact, they are significant undertakings that deserve senior management attention and devotion to ensure that your company does not embark upon a failed effort.

Companies must balance the potential benefits of outsourcing with the potential pitfalls, and develop programs that manage the risks and achieve the intended rewards.

It is quite easy to jump into an outsource relationship, only to learn that you have selected the wrong partner, your internal processes are inadequate or your employees are unprepared to support and manage the relationships with your outsource provider. Companies must make sure they undertake a focused change management process that educates all of the company's employees to the rationale behind the decision, the approach, and strategy going forward.

Unlike software that has features and functions that can be readily reviewed and compared, services (such as outsourcing) are much harder to evaluate and compare. When selecting outsourcing providers, companies should identify and prioritize the criteria that are most important to them. Each company's needs are unique, and no one provider is right for all companies. Additionally, no one provider is necessarily the best choice to outsource all of the various processes of a company.

Companies should define which performance criteria are important to them. These criteria become the basis for service level agreements (SLAs) in the contract.

Get help from an experienced consultant. The consultant can help you create a list of suitable providers, select a provider, and construct a solid contract with effective SLAs.

Start with a pilot. Outsourcing is not an all or nothing proposition. It is important to learn about your chosen provider, and about your own company. Both entities need to be open to learning and accepting different ways of communicating and doing business.

Recommendations for Outsourcing Providers

Outsourcing providers need to ensure that they deliver strong value and excellent service to their customers. The provider is providing a service, which means if the customer is dissatisfied, the customer can skip the service and do it themselves (barring contractual obligations). Outsourcing providers must invest in implementing the right processes, and not just providing cheap labor.

Smaller providers should consider specializing in a given vertical or set of vertical markets, as well as specialize in a given area within outsourcing. Once the provider builds its reputation in that vertical or area, it can then begin to expand into nearby verticals and outsource areas.

Larger providers should look for ways to leverage complementary strengths between their business units so as to provide one stop shopping and a synergistic benefit for their customers. Ideally, providers should ensure that customers receive added value when obtaining more than one type of service from a given provider.

There are literally thousands of outsourcing providers in the world today, and more are being launched everyday. Providers need to establish a solid reputation and brand, and should have very focused marketing efforts targeted at their core target market.

Unlike software that has features and functions that can be readily reviewed and compared, services (such as outsourcing) are much harder to evaluate and compare. Providers need to find ways to differentiate themselves from their competitors. Outsourced services that are not differentiated might be purchased as a commodity, with the provider selection based solely on price instead of value.

There are maybe a dozen larger players with outsourcing revenue greater $200 million (USD). Most of these providers are well known by the Fortune 500, but this group needs to differentiate their services for each type of project that their customers may wish to purchase.

There are hundreds of providers that have less than 500 employees, or do less than $50 million (USD) per year in revenue. Most of these providers are known only by their customers and current prospects. These providers need to focus on differentiation and gaining visibility in a crowded market.

This concludes Part Three of a three-part note.

Part One discussed the history of outsourcing, described outsourcing pros and cons, and introduced offshoring concepts.

Part Two defined and described four major outsourcing categories.

Part Three recapped outsourcing approaches and categories, and described recommendations.

About the Author

A.B. Maynard has over twenty years of technology, industry, management consulting and application software experience. He is an experienced executive with leadership experience in the software industry, Big 4 Consulting and Fortune 1000 industrial companies where he gained extensive experience in outsourcing, I.T. Services, and enterprise software solutions. In addition to the previous responsibilities and directing client outsourcing sites, he has managed offshore outsourcing provider selection, implementation and program management projects.

A.B. serves as the Outsourcing Specialist for Technology Evaluation Centers, and is President of Agilocity Consulting, a firm dedicated to helping companies improve their agility and velocity through technology, outsourcing and offshoring. A.B. can be reached at ab.maynard@agilocityconsulting.com

 
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