Outsourcing can be a strategic way to leverage a company. The business might need new skills, or to expand. Instead of doing all the work yourself, you can get someone else to do it for you. How you do this, however, makes the difference between getting that leverage, and making an expensive mistake with no cheap or easy way out.
One of many signs that all is not well, is when a vendor says it needs to change everything once the outsourcing deal is signed, even though it promised heaven and earth in the Request for Proposal (RFP) beforehand. A South African company that decides to go global or to expand into the rest of Africa without its own competency in managing outsourcing is another bad move.
Worse, a company may try to get rid of a problem by outsourcing it. "That's the first mistake you can make. Fix the problem, then outsource. Else you get that problem back amplified, because it is now part of the service you buy back," says Daniel Nel, CEO of Nebula, a consultancy focusing on return on technology investments.
Any outsourcing deal puts the customer company at financial, operational, reputational and auditing risk, says Nel.
Fix the problem, then outsource. Else you get that problem back amplified.
Daniel Nel, CEO of Nebula
A deal that looks good now can turn too expensive later, with too low profitability. Or it could be so good for the customer that the provider goes out of business. On the operational side, the service may suffer from so much downtime that the customer cannot trade anymore.
A brand can take a knock when the queue in a retail store gets longer and longer because the point-of-sale (POS) devices don't process cards. Or a product with a brand's logo on it may have been badly manufactured in another country. Often, a much-hyped outsourced loyalty programme is not tested properly, and promises made about prizes and points not fulfilled.
Finally, there is a distinct move towards big companies having their outsourcing contracts audited according to the American SAS 70 or ISAE 3402 standards, to prove compliance with outsourcing legislation, and the King III code.
In 1990, business schools worldwide finally recognised outsourcing as a proper business strategy. Because it is a relatively new concept, few companies have a formalised outsourcing strategy supporting their business strategy, says Nel. "To be successful, the board must endorse outsourcing as part of the company business strategy."
On typical deals, the client spends between 4% and 8% of the total contract value in preparation beforehand.
Daniel Nel, CEO of Nebula
Also, the strategy needs to recognise different outsourcing models for different services. Gardening and cleaning services are managed with completely different outsourcing models to those for IT and telecoms infrastructure, for example. The company must have a 'tested recipe', or methodology, for its outsourcing projects, continues Nel.
"This covers the upfront feasibility study - how you select vendors, how you contract, or transition from one vendor to another, or terminate a contract. That recipe must be repeatable."
The second outsourcing success factor is balance. Clients look for efficiency, extracting value, stimulating competition, price negotiation and defining control. The service provider looks for profitability, customer retention, economies of scale, sales growth - and control. Both parties would like to have more control.
If the client has more control, he has the flexibility and leverage to 'unplug' the provider more easily and terminate a contract early, if needed. But a service provider would prefer it to be more difficult to unplug services.
"To create balance, there must be competencies at both the client and the service provider level," says Nel. "This is where the 'retained organisation' comes in. When you outsource, the profile of the organisation that stays behind to manage the outsourcing changes completely. This is an area clients often don't work out upfront."
A third success factor is sufficient outsourcing management skills inside the client company. This need is often underestimated, argues Nel. Managing a telecommunications outsourcing contract is far more complex than one for security, for instance. A cleaning service can be terminated and replaced in 30 days, while the transition from one telco provider to another can take several months. The client needs competency to manage all the different outsourcing models used for the company.
"You need a team of independent specialists or partners that can help you do this. Firstly, they can guide and mentor. Secondly, they can transfer skills, making sure you have the right ones in place when the deal is done. They can help with attaining compliance within the outsourcing deal."
Finally, outsourcing success depends on the time, effort and money the client puts into doing his homework upfront. "On typical deals, the client spends between 4% and 8% of the total contract value in preparation beforehand, which then has to be calculated back into the business case," cautions Nel.
"And the timeline to do an outsourcing deal varies between six and 18 months, depending on the complexity. The contract terms tend to vary between three and five years."
Preparation before signing a deal determines whether the client gets what he wants from outsourcing - or at least gets a practical way out - without financial, operational, reputational or compliance havoc. "This is your insurance premium," says Nel. "This is how you make sure, if it does not work, that you can move out."
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