Outsourcing is Dead! Long Live Outsourcing!

Outsourcing is changing with the times. Here’s how to get more from your agreements.

Apparently outsourcing is dead. Again.

It’s certainly a catchy headline—but is it true? I have a different viewpoint. Outsourcing is alive and well and is changing with the times – just like other transformational capabilities. Choices in the outsourcing market abound, ranging from traditional staff augmentation to co-sourcing to managed services, and to anything as-a-service.

Outsourcing is and will continue to be a fundamental component of our global economy and aligns nicely with corporate desires to focus on core and strategic responsibilities while allowing other entities, with deeper skills and higher levels of scale, to assist with their operations.

And, similar to the functions that outsourcing enables, outsourcing processes must innovate and align to new realities.

So, what are some of these new realities?

The new reality

First, in an age of constantly changing legislation, each country impacted by an outsourcing opportunity needs to thoroughly review existing, proposed and recently enacted legislation to ensure compliance and optimal use of onshore and offshore resources.

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Next, consider your past and contemplate the changes you’d like to see in future outsourcing. If acceptance is the first step to recovery, then see if there is anything you need to accept and move beyond.

A good starting list includes:

• Traditional outsourcing services, the backbone of the outsourcing industry, are commodity-based. There is minimal difference in what is provided for these core services. True differences, those that offer enhanced value, are found in how the services are delivered. Of those, the biggest differentiators should be cost and quality.
• Customizing a deal to help it align to “unique” processes tends to add cost and time and reduce quality.
• For all of the dollars spent on getting the perfect custom agreement, service providers end up performing the services in the manner they are accustomed, and the clients generally accept the services as provided even if they don’t match the agreement.
• For all of the focus placed on the value of the relationship, it isn’t very satisfying to have a great relationship with sub-par service.
• It isn’t all the “other guy’s” fault.

Aspirations for the future of outsourcing agreements

Accepting and learning from past outsourcing experience and recognizing mistakes will open your mind to new approaches that will deliver higher value. Future outsourcing will include less customization and more off-the-shelf services. This will drive lower costs, faster transitions and higher quality.

Here some aspirational qualities for future outsourcing agreements:

• Defining what needs to be done should be distinct from how it will be done. Core services are well understood and should not require material differentiation between client requirements and service provider offerings. This has been a stated objective for a long time, but inordinate amounts of time are still spent redefining “what” needs to be done. Clients need to be less interested in being different and service providers need to have and enforce standard delivery approaches.
• Focus on differentiation at the service-provision layer. Recognizing that service differentiation should not be achieved at the service definition layer, next-generation sourcing agreements will focus on service provider differentiation at the service provision layer, i.e., “how” the service will be delivered. Additionally, service providers will be able to differentiate themselves with value-add services and industry-packaged solutions. However, it must be clear that this is not customization of core services; rather, it is defining how the core services will be provided and additions to the core services which can offer additional value. While the capabilities will differ for each service provider, next-generation sourcing agreements will use standard definitions and a common format to ease review and normalization of the proposed solutions.
• Recognize that standardized services return higher value in the long-term than customized services. Customization of core services results in higher cost, lower quality, increased timelines, higher degrees of lock in, and, importantly, reduce the ability to innovate over time. While there may be some short term financial gains, in the long run, customized services do not offer the highest return.
• Develop a pragmatic approach to customization. Even though strict adherence to standardized services is preferred, a pragmatic approach is required. There are some differences between client requirements and service provider capabilities. Realizing these unique requirements and establishing an exception process for customization is beneficial to all parties and allows for the proper alignment of control and outcome responsibility. Customization of services will fall into three categories:
  • Compliance with and use of standard model without customization
  • Configuration of the standard model (changes to who does what)
  • Customization of the standard model (changes to what gets done) 
• Operational benefits: A standardized model improves transition and steady state operations. Service provision of a standard offering allows service providers to achieve higher quality levels at reduced costs and allows for standardized approaches to transition, transformation, service integration and governance. This approach won’t automatically ensure improvements to delivery and high levels of customer satisfaction but they certainly should provide an overall improvement to the operation and the opportunity for ongoing innovation.

Establishing future outsourcing agreements with these characteristics will be a key driver of value for those that choose to take advantage of the new approach.

Outsourcing is alive and well

While still a very large market, use of traditional outsourcing (large-scale labor arbitrage) is declining. It’s being enhanced and replaced by higher value forms of outsourcing, notably solution oriented as-a-service outsourcing.

Future outsourcing should enforce standardization where services are largely commoditized. This will improve the delivery of core services and provide time and resources to focus on higher-value and innovative solutions from service providers.

Keep in mind that there is no single approach to outsourcing that can serve all situations. You should develop a hybrid solution that aligns your expectations for delivery with the outsourcing approach. Each approach can coexist, each can be strategic, and each can add significant value from a cost and service perspective.

To realize the full potential of outsourcing and true value differentiation, standardize and simplify as much as possible and focus on service provision (how), not service definition (what).

Getting the focus in the right place will drive value and innovation.