After taking NOA’s (National Outsourcing Association) Outsourcing Lifecycle Assessment, we realized that while we already have optimized outsourcing processes, many outsourcing buyers do not. In fact, it may be a huge hurdle for them, especially if a company has no prior outsourcing experience. Below are some critical pitfalls to avoid.
What is outsourcing and how is it changing?
In the past, outsourcing was seen strictly as a cost saving endeavor, and earned a bad reputation when it was incapable to provide the projected cost savings. Slowly, outsourcing buyers learned that while it provides immediate cost savings, outsourcing can also provide business value. In recent years the major reasons for outsourcing have also started to include reasons such as organizational flexibility and access to specialized talent (1). Other research has further found that outsourcing is used to support the company’s plans for growth (2). To be able to achieve these goals, it is crucial to have a solid understanding of what will be expected of your organization and what to avoid.
Outsourcing traps to avoid
The NOA Lifecycle correctly concetrates on assessing four major parts of the outsourcing relationship: relationship management, strategy & leadership, relationship engagement, and transition & change. Their tool, which is free and can be accessed here, is a great way to measure your current outsourcing processes. (Our score on the right is mostly blue, which reflects that majority of these processes have been optimized.)
While we have established these processes already and even came up with a business model that helps prevent a lot of outsourcing risks, we still encounter companies struggling to implement successful outsourcing initiatives. If you plan on using strategic outsourcing in your business, beware of the following traps that can bring your costs up:
- No executive strategyThere must be a strategy that everyone is familiar with. (3) Otherwise, you’re risking that your project won’t be properly aligned with the company’s goals. There may also be certain unacknowledged constraints or different expectations on how to avoid and manage risks. When there is no clear blueprint for the role of outsourcing, it will be hard to work effectively with a third party and may cause problems and increased costs down the line.
- Unreliable teams No matter how great your strategy, if the team is unreliable or unqualified, your project is less likely to achieve your objectives. This goes back to choosing your provider and your outsourcing model. Choose a provider that gives you flexibility in choosing your team. Look for providers that can supply qualified engineers and guarantee that these engineers will stay on your project (especially once they’ve been trained). Cultural proximity is always helpful as well.
- Poor relationship management Once the project is started, it should not be left to one party to complete. Outsourcing works especially when both parties cooperate (hence: partnership) (1) (3). Not only should there be a transition and change management, but the relationship should be monitored throughout the project. This means that both teams need to develop effective communication strategies and develop tracking tools. And use them every day.
- Vague contracts Service Level Agreements (SLAs) are written to establish what is expected of both sides, such as quality expectations). If the contracts are vague (or there is no SLA), they are less likely to be effective. Writing metric-based SLAs vs. SLAs that use abstract terms provide a more objective assessment of whether the goals were achieved. However, avoid making them overly complicated, since overly detailed contracts are less likely to be renewed. That may be because it is important to leave room for learning opportunities especially in long-term contracts (1).
Benefits of outsourcing?
While this may sound like a lot more work, remember that companies that do make outsourcing work can experience up to 40-60% reduction in operational costs, and often huge gains in productivity and performance. Tools like the NOA’s Assessment tool are a great way to understand what your outsourcing processes should look like.
(1) Manning, Stephan, Arie Y. Lewin, Marc Schuerch. 2011. The Stability of Offshore Outsourcing Relationships: The Role of Relation Specificity and Client Control.
(2) International Association of Outsourcing Professionals. 2013. State of the Industry Report.
(3) National Outsourcing Association. 2012. NOA Outsourcing Life Cycle.