Summary of Findings:
This survey was jointly conducted by IACCM (International Association of Contract & Commercial Managers) and Argea to measure outsourcing competence. A total of 95 international corporations provided their inputs to the survey. Survey results indicated that most respondents rely on organizational learning over time. While the majority does turn to external resources for help with structuring contracts, those resources often compound the problems due to poor contract setup and inadequate monitoring.
Further analysis showed that the approach used to managing these suppliers is traditional and confrontational which undermines collaboration - internally and externally. Those who are interested in maximizing the return from outsourcing need to fundamentally alter their traditional methods of negotiation, contracting and relationship management.
In addition, contract managers play a central role in setting an outsourcing project up for success (or failure). They are involved with all the key parties and stakeholders, and can ensure that the project is aligned with their company’s strategy and that the business requirements, relationships and governance are captured in the contract.
People issues are among the most important factors for the success or failure of outsourcing. Investing time and effort to learn best practices from peers in the contracting disciplines and from those who have outsourced similar functions will maximize the effectiveness of outsourcing. However, corporations also need to rethink the quality, training and motivations of the staff they deploy to design, implement and manage outsourcing projects. They need to carefully consider the role and contribution of external ‘experts’.
Ninety-five international corporations provided inputs to the IACCM survey and gave valuable insights on the current state of outsourcing. Survey analysis showed that more than 90 percent of the survey participants have experience with outsourcing, which is primarily in IT outsourcing and call centers, with a few companies having ventured into business process outsourcing (BPO). Furthermore, analysis showed that only 10 percent of the respondents ventured into outsourcing of their research and development activities. A majority of the issues reported were client-related, as opposed to the vendor-related.
Most respondents reported that the major driver for outsourcing was cost reduction. In itself, this is interesting, since executive surveys suggest that more strategic drivers are behind decisions to outsource than simple cost reduction – this may be a good reason why things go wrong. The survey showed that there is significant internal discord as well as mismatched goals within the outsourcing corporation. This results in confused negotiation which produces inappropriate terms and conditions in contracts that have wrongly focused targets and measurements.
Likewise, other drivers for outsourcing included reduction of variable costs and focusing on core assets and capabilities. Relatively few respondents believed that outsourcing was about things like time to market or maintaining competitiveness – even though these were the reasons stated by executives. In part, this may be due to the difficulty of measuring and monitoring these attributes.
The reported problems are highly consistent across the respondents and could be avoided if appropriate resources – as well as knowledge - were available. Outsourcing is a complex process - it raises not only the traditional issues of any major business negotiation, but also difficult emotional and loyalty issues that cloud judgment and confuse objectives. Outsourcing success demands a different, specialized approach.
Most companies try to handle outsourcing through their established business processes and resources. They build teams that apply the same approach to outsourcing as they would to any major purchasing relationship. Factors such as the timing of involvement, training of personnel, management and measurement systems to gauge success, are typically not considered. Consequently, business outcomes take their toll when teams run out of time, when key data is missed, when key gaps in skill or knowledge remain unfilled, and financial losses are incurred.
Survey responses support the above conclusions. They indicate that companies are not adequately prepared for this huge task and lack internal coordination at the inception of their outsourcing projects. Moreover, business strategies are neither well defined nor understood, so contract negotiators miss critical service level and/or contingency provisions in contracts. These contract components would be captured in the contracts with better cross-company communications. This is reflected in reported issues such as the lack of a strategic plan, poor project definition and projects that are over budget and behind schedule. The ability to manage contract complexities and collaborative relationships - which are essential for successful outsourcing - is a weakness that was observed in virtually all companies.
In the end, most outsourcing projects deliver significant benefits. Moreover, research confirms that many targets are missed and that, overall, performance could be have been dramatically better if a different and more imaginative approach had been used.
The Big Three:
The three biggest issues that respondents were grappling with in setting up the outsourcing projects were:
- Lack of a sourcing plan
- Poorly defined projects
- Lack of skilled resources to execute outsourcing projects
1. Sourcing Plan
While respondents were aware there was a need for a Sourcing Plan that was aligned with the strategic direction of the company, few companies had such plans. Contract managers - having marching orders to outsource a project and faced with time pressure to execute the assignment - did not feel that they are in a position to question the business motivation for outsourcing.
2. Poorly Defined Projects
Similarly, in the survey participants did not affirm any strong need to gather clear requirements for the project. Often, key metrics went missing. For example, there was no readily available benchmark data to measure goals or to ensure objectives were met. Without a compelling business case and a clear definition of business needs and requirements, a company could easily select the wrong vendor (i.e. a small provider instead of a large vendor that could scale up for higher volumes) or select the wrong outsourcing solution (i.e. offshore vs. onshore, captive vs. third-party, short-term contract vs. long-term contract, etc.).
3. Lack of Skilled Resources
The lack of skilled resources was a common problem. Seventy five percent of the respondents mentioned that they did not have the expertise for effective outsourcing and were willing to go outside to get advice and skills to ‘just get it done’. Consequently, they were faced with two different issues.
The first issue relates to consultants who - by definition - are there for short periods of time with specialized skills. The second issue is about finding suitable implementation personnel. The problem of finding suitable implementation personnel for outsourcing has been prevalent because the number of skilled and experienced people in this space has failed to keep pace with the growth in outsourcing.
There are many traditional approaches to address the shortage of skilled implementation personnel. One approach is to use temporary personnel with outsourcing experience. When using this approach, it is necessary to understand precisely what skills and knowledge sets are needed and to align these with available sets. In many situations, companies selected the wrong people internally – and then compounded the problem by recruiting the wrong external experts.
While jobs in program management are probably best kept in-house, many of the tasks such as day-to-day project management, setting up a change management plan and "on-theground" vendor audits can be accomplished with short-term personnel. This will allow the company staff to focus on the important tasks. Moreover, if a company is only in the early stages of using outsourcing as a tool to drive business performance, they may not want to invest in full-time personnel until the company has made a commitment to outsourcing and has a better understanding of long-term resource needs.
Many surveys show that more than half of all outsourcing projects fail to meet expectations within two years. This statistic suggests that many of the ‘traditional’ methods are oriented toward failure – not success. For example, in projects that involve a large number of experienced vendors - indicating a relatively mature outsourcing client - the RFI/RFP/RFQ ‘dance’ is long, costly and usually leads to contentious relationships.
For such projects, a clear understanding of the business requirements would shorten the list of capable vendors to a maximum of three to five. In short, by replacing a traditional bidding and negotiating process with a collaborative partnership with the service provider would have yielded a better result. Besides, this could have been accomplished with a skilled and experienced partner who has deep expertise in the process that is outsourced, paired with a set of best practices that can be leveraged to the client’s advantage. Equally important, a collaborative partner will be committed to offering services that evolve with a client’s business needs.
Dispersion of Outsourcing Expertise:
Forty percent of those surveyed had consolidated key resources into a centralized outsourcing group, with a further 15 percent now moving toward such a model. Respondents clearly saw centralization as an improvement, though many were concerned that even centralized groups manage individual deals and relationships as 'islands', with limited sharing of knowledge and experience. Again, implementing a systematic process that draws in relevant internal and external talent during the structuring of outsourcing projects would effectively fill skill-gaps, leading to greater success.
Many respondents reported that the early obstacles of poorly defined projects, lack of clear strategy and poorly drafted contracts were being overcome through organizational learning and experience. However, many respondents felt that the rate and extent of such improvement was not satisfactory. While several respondents used outside legal, contract, and outsourcing advice successfully, most companies still relied on the successful use of internal expertise.
Tight contract definition can help in defining and managing service provider relationships. The most critical aspects of the contract highlighted in the survey were service level definition, monitoring, and performance management with corresponding remedies and penalties. Additionally, the survey indicated that successful outsourcing arrangements leveraged performance bonuses with great success.
The contracting process is critical to success in outsourcing deals. Evidence suggests that there is frequently poor integration and misalignment between contracting and business personnel - both on the buy-side and sell-side of outsourcing contracts.
Although there is fair amount of generic template material available to write contracts, the contract manager plays a very central role in setting it up the relationship for success - or failure. Contract managers speak to all the key parties to ensure that the project is aligned with the strategy and the requirements of the firm, and that the business requirements, relationships and governance are captured in this ‘live’ document.
There is a set of vendor issues that did not surface among this client-side respondent population. This issue set includes the capability of vendors, structuring of contracts from the vendor’s perspective and vendor management processes.
Use of External Resources:
Fifty seven percent of respondents used external skilled resources to assist with the contract. Yet, the contract-related concerns of this group - versus those that did not use external resources- did not seem to diminish. Indeed, in some areas of outsourcing, their post-award concerns actually increased.
Furthermore, there is some evidence that external resources bring excessive focus on containing risk consequences, as opposed to setting a framework for mutual wins by client and vendor alike. For example, external advisors who advocate contentious negotiation may succeed in driving down prices and 'winning' on certain terms, but do they really assist in shaping a successful deal that delivers on their client's goals? In particular, many external experts are driven by the need for short-term, highly visible 'wins', rather than longer-term, superior results through collaborative approaches and ‘win-win’ deal arrangements.
Managing & Monitoring Vendors:
The survey accentuates the critical importance of skilled post-award contract management. Managing and monitoring performance is a headache for most of the participants. Management issues seem to fall into three categories:
- Successful companies focus on setting and maintaining the right service level agreements (SLAs) and relationship goals, with skilled resources ensuring proactive management. These companies report relatively low levels of dispute.
Clever use of ’progressive SLAs‘ that demand increasing performance over time have shown excellent results. In addition, a regular review of mutual business goals and examination/realignment of relationships allows changing business conditions to be managed proactively. This, however, requires a level of engagement that most companies have not reached. More dialogue, exchange and resources allocated to relationship management are vitally important for ongoing success. It is a fundamental shift in outsourcing management - from a traditional "stick" approach to a more collaborative "carrot and stick" approach.
- Mid-performing companies have designated - not necessarily dedicated - resources for monitoring service levels, though this is primarily concentrated on performance reporting and reactive handling of claims. Dispute levels are high, relationships are contentious and extensive time is spent on handling claims.
- Poorly performing companies do not have dedicated contract management resources. They typically view such roles as part of various jobs. Often, these roles are not even defined. Performance monitoring is limited and disputes are rare. However, such disputes, when they do arise, assume major proportions and typically involve executive management.
These points, once again to the planning process. While SLAs are a part of most contracts, companies that have experienced success in outsourcing put considerable thought into structuring SLAs. For example, an SLA might provide that, if the vendor is new to a designated process, the SLA should reflect reduced effort required by the vendor over time. Initially, a vendor might require one hour for a particular task at the beginning of the contract, but only thirty-five minutes at the end of twelve months. Similarly, the SLA should include a requirement to use labor-saving technology to reduce task time, thereby reducing costs.
Additionally, there should be agreement between the company and the vendor on future performance improvement goals for defined future periods (i.e. 3 percent improvement in every quarter). These goals and agreements take time to construct, but good planning ensures that a client gets real business value from outsourcing that is easy to monitor and manage.
Coordination Across Multiple Suppliers:
Eighty three percent of the respondents were from companies with revenues over $1.3 billion. In this group, 89 percent saw the need for coordination among suppliers as a significant issue. While outsourcing usually begins with single project, the indispensable need for coordination comes when there are multiple outsourcing suppliers. The survey results point to the advancement of the respondent companies along the outsourcing maturity curve.
While many of the respondent companies have done well with outsourcing projects, the skills required for acquiring and managing multiple suppliers are very different. An example of such multiple supplier management and integration might include vendors executing processes in a specific function such as HR that are coordinated with those across outsourced functions for an entire company, such as HR and F&A.
Need for education:
Thirty three percent of the respondents wanted to better understand the full range of outsourcing options to include offshore/nearshore/onshore delivery options, as well as captive centers. In addition, more information was requested about due diligence on outsourced service providers, establishing SLAs and metrics, performance monitoring for outsourcing (with and without tools), termination of outsourcing contracts and managing the implications of termination.
In summary, the survey indicated that outsourcing poses several challenges to a company that requires a careful assessment of business strategy and its linkage to every stage of its execution. These stages demand a clear understanding of the business requirements, creation of expert teams, contract composition with the right SLA mix and informed vendor selection. Finally, transferring the process to a vendor with the right mix of project management skills is imperative. When these stages are properly executed, the benefits to the organization can be huge.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.