The Outsourcing Enterprise

Why should hard-pressed CEOs devote attention to the outsourcing of it-enabled services? because a substantial, and rapidly rising, amount of most large organizations’ cost base is already with outsourcing service providers. because getting large-scale outsourcing wrong can seriously damage the business. because, from now, outsourcing is part of any future strategy. in our experience, the announcement of a large-scale outsourcing deal regularly has a positive effect on share price. that said, the opposite can occur if the market perceives outsourcing to be an inadequate measure, or details subsequently emerge leading to a price correction. more positively, the evidence from our LSE outsourcing unit research shows clearly that outsourcing — properly planned, resourced, and managed — can deliver significant competitive advantage to companies and organizations in all sectors. but only when the CEO plays a key role — taking crucial strategic decisions, creating vital capabilities, putting in place integrated management processes, and applying effective monitoring and evaluating mechanisms. let us look at these issues in more detail. the outsourcing unit’s research points to five main reasons why outsourcing must now move up the CEO agenda.¹

In trying to identify what makes for success in outsourcing, practitioners invariably highlight ‘relationships’ — but the study of how such successful relationships could be developed is quite recent, and relatively neglected.¹ Successful relationships don‘t just happen. In this chapter we show that overall strategic business intention must determine the nature of the relationship and the contract. A detailed design is essential to build effective relationships throughout the life of the deal. This determines the key underlying drivers of behavior, and whether power-based or trust-based relations emerge. Positive intervention by top management is vital to make the ‘chemistry’ work. We also point to the criticality of establishing targets. Thus a relationship values charter sets a benchmark for behavior, while regular health checks and contract card monitoring to assess the success of the relationship are crucial throughout. In practice, including relationships into a key metrics scorecard, covering also strategy, finance, and service is a significant move, signaling that an organization is willing not just to speak about how relationships are important, but monitor whether the parties enact the right behaviors to leverage those relationships.

The evidence we have accumulated shows clearly: organizations that have the CEO and a multidisciplinary team involved in sourcing strategy and configuration make more effective decisions. The CEO ensures the identification of clear business needs and objectives, and the availability of in-house IT sourcing capabilities and resources. As we demonstrated in Chapter 1, the CEO brings brain and influence, but also responsibility to key risk areas, because getting sourcing strategy and selection of supplier(s) wrong can hit share price, disable business strategy, as well as being very costly operationally. Our first chapter focused on the CEO role and strategic advantage, the second on the power of relationships. In this chapter we focus on the supplier selection process, and acquiring the right supplier people and competencies.

As Chapter 3 showed, outsourcing offers opportunities to acquire new capabilities from outside the organization. These capabilities can be used to reduce the cost and improve service levels, provide access to new skills, improve capital management and, indeed, offer a range of other often strategic, benefits. In this respect, one fundamental client question has guided this book: how to leverage the growing, increasingly globalizing, ITO/ BPO services markets to achieve business advantage? This chapter deals with the most critical, all too often neglected, leveraging and risk mitigating practice, namely retaining key internal capabilities that underpin the business’s future capacity to exploit business and IT services. There is an uncomfortable reality here ‘ our research indicates that few organizations, even those that have outsourced for several years, have in place such capabilities. As consequent problems mount, organizations then have to play ‘catch-up’, often on a large scale. As one practitioner (IT executive, international bank) put it: ‘The problem is putting the genie back into the bottle. It’s really, really hard work.’ Five years into another large-scale deal, a business manager reflected on the source of the mixed outcomes they were getting: ‘It was all owned by and driven through the outsourcer — almost a black magic relationship. They were seen as the experts and holders of the knowledge. And the interesting thing is they were seen as the only people that had the knowledge as well.’

Our research has been tracking the evolution of the outsourcing market since its modern beginnings in 1989 with the seminal Eastman Kodak deal in the US. Our four previous chapters provide the foundational lessons and practices that make for effective sourcing strategy and delivery. This chapter asks: what next?

Successful outsourcing arrangements cannot be guaranteed by virtue of having a signed contract alone. The contract is a necessary but insufficient governance tool for outsourcing. That said, however, poorly constructed contracts, based on faulty cost service analyses, and containing ambiguities, loopholes, and incomplete terms, can seriously damage outsourcing health.

There are many different ways in which internal service provision (known as in-house sourcing or ‘insourcing’) and market provision of services (outsourcing) operate. Depending on the degree of outsourcing performed in an organization, outsourcing can entail a profound change in strategic and operational mechanisms. As earlier chapters established, especially Chapter 4, the use of outsourcing does not imply less effort in managing IT, only a different emphasis. Outsourcing changes, or should change, the emphasis from managing day-to-day operations to a focus on specifications of service delivery and from staff management to planning, evaluating, and relationship management.

Organizations that are veterans at outsourcing know that the success of an outsourcing deal is dependent on many factors. They know it is not just the cost, but also the quality of the service that matters. They also know it’s more than just getting what you pay for; it’s whether the relationship between the client and the provider is rewarding or dysfunctional. Furthermore, they know that outsourcing is not an end goal in itself; rather it is a way to achieve any number of strategic goals. How does one identify and track the myriad of outcomes sought from an outsourcing deal? Organizations are now recognizing the value of applying a balanced scorecard approach to outsourcing arrangements called the contract scorecard.

It is inevitable that an outsourcing contract will end — either by reaching the natural end of its term, the end of the specified extension periods, or through early termination. The end of the contract, in whatever manner, represents the completion of the lifecycle of the current outsourcing initiative and the start of the next generation.

As this book has made clear, outsourcing is concerned with leveraging the distinctive and evolving capabilities provided by the external services market to achieve business advantage. This concept of outsourcing as a strategic sourcing tool applies in a downturn, and in recessionary times, as much as in periods of economic growth. This is an important point because during the 2007–10 global economic downturn, many organizations found themselves, initially at least, at a loss as to what to do. Many then decided to pass their pain on to incumbent or new suppliers. One lesson is that clients need to learn much better on how to shape and use outsourcing arrangements to ride business cycles, and deal with economic crises. Another lesson is that they should do this in ways that enable the parties to be prepared to take advantage of any economic upturn that then materializes.