Outsourcing for advantage: Who's managing who?
Companies around the globe are taking fresh looks at their business models and evaluating the effectiveness of certain practices that have become the standard and accepted way of efficiently doing business. A business process that has recently come under debate is that of outsourcing. The question more and more organisations are asking themselves is: does outsourcing have more benefits to offer than staying insourced?
For most organisations, changing to an outsourced supplier is a major step. Think about why you want to do it in the first place. In particular, think about whether the circumstances driving your current thinking could change in the future. What might make sense today could suddenly seem less attractive if certain environmental factors e.g. exchange rates, commodity prices, etc, were to also change. Consider your options carefully. Outsourcing is a big step that cannot always easily be undone.
Outsourcing can be risky
What often makes outsourcing painful and sometimes risky, is the fact that you transfer ownership of one of your business processes to an external supplier. When you outsource, you don’t instruct the supplier how to perform the task. Rather, you focus on communicating to the supplier what results you want to ‘buy’ from them. You then leave the process of accomplishing those results to the supplier. Sometimes, this leads to undesirable outcomes. Picture the situation where you’re a mine operatorwho outsources certain transport functions to a contractor whose safety practices are less than sound. If injuries occur on site as a result, it’s still the accountability of the mine operator – you! Outsourcing becomes less risky when your chosen supplier has similar business values to you. Business values are something worth asking your potential outsource suppliers about – and you should always ask for references so you can judge for yourself.
Most businesses outsource simply because there are strong economic reasons for doing so – lower total costs, improved service quality, reduced capital drain or improvement operational flexibility, etc. And yet, how many times have you heard a company complain, having pursued an outsourced solution, that the expected economic benefits didn’t live up to expectations?
Think carefully about the terms you negotiate into the contract you form with an outsource supplier. Get external, expert advice if possible. Extra forethought going in will mean less heartache later on. Vagueness of lack of specificity just opens up “wriggle room” for your supplier to either under-perform without penalty or to charge extra for things you assumed were part of the deal. It’s often hard to adjust terms midway through a contract period, so the time to focus on this is right up front. Now!
Penalties for poor performance are another thing to think about. Because most companies, using their own employees and business processes, don’t have penalty clauses, it’s easy to overlook these when formulating a contract with an outsourced supplier. However, when you’re paying a supplier for a specific result (i.e. outsourcing) you’re allowed to build in penalty clauses so that if your outsource supplier doesn’t deliver…it’s they, and not you, who will lose out.
Outsource suppliers are sometimes better at managing you than you are at managing them
Something else that often goes wrong in outsourcing is when you make the mistake of thinking you no longer need to manage anything. The outsource supplier is going to do that for you, right? Wrong! Just like you’d do with your own department heads, your need to set up regular management reviews with your outsource supplier. Make sure they clearly understand this requirement from the start – define the KPI’s you’d like to review, how frequently you’d like to review them, and set clear guidelines for what will represent good, bad and mediocre KPI performance.
Failing to actively monitor and manage the performance of your outsource suppliers is a one great way to make them wealthy even while your own profitability might not be as rosy. Be sure of this one fact: your outsource suppliers are crucially aware of how your actions positively or negatively impact their own profitability. It’s only common sense – being an outsourced supplier is at the core of their business model. Having outsourced suppliers is anything but core for you!
Speaking of ‘core’ – it helps to understand what is core and what isn’t
There are certain business functions that should not be outsourced. An organisation must know and completely understand what its core and critical functions are as these must be held within the body of the business and managed from within. These critical competencies are often less tangible items, like technical knowledge, design capability, quality control, market understanding, communication etc. Often, these are the ‘crown jewels’ of the company, and should not be outsourced.
Outsourcing can be an effective way to improve costs, performance and results in non-core areas of your operation. However, outsourcing can go wrong if the reason you’re outsourcing is because you don’t understand the activity or how to manage it to start with – i.e. before it’s outsourced. If this is the case, chances are you will have even less understanding and control of the results once the activity is outsourced.
So who’s accountable for outsourced performance? At the end of the day…it’s still you!
It’s always advisable to seek the assistance of experts in this field to help you with structuring roles, KPI’s, review processes and standard procedures. Specialists can also project-manage, coach, performance manage and train the staff who will be handling contractors from your side. At the end of the day, outsourcing can be a useful vehicle for reducing unit costs and improving performance in non-core areas of your operation. But there’s no point beating around the bush – whether using outsourced suppliers or not, you always remain accountable for your own performance. That accountability can never be outsourced!
