Outsourcing: Beyond cost savings

OUTSOURCING has been a successful instrument to achieve cost savings, but emerging developments across industries have triggered a growing emphasis on creation of value as well as cost reduction in outsourcing relationships.

Organisations must be sure that outsourcing arrangements reflect all contributions to the health of their businesses. Businesses which continue to consider outsourcing through the lens of cost reduction alone face missing a range of other benefits which could yield further contributions.

Outsourcing is a well-established route for businesses to transfer operations to an external party, but once the last ounce of cost saving has been extracted, what next?

A relatively recent development is the extent to which areas previously considered core are commonly featuring in outsourcing deals. Some traditionally retained capabilities in government, for instance, such as welfare claims assessments, have been outsourced to commercial organisations on behalf of the UK Department for Work and Pensions, in a trend which is likely to continue.

The transfer of core functions is not limited to government either. In the UK telecommunications sector, BT Wholesale is an established provider of telecommunications products to competitors of its own sibling BT Retail, largely through UK regulatory conditions, and the model is often replicated in other industries. Some leading technology firms may, for instance, outsource product design and development to third parties (including competitors) in mutually beneficial relationships.

Outsourcing operations in mission critical areas is not without its risks. Much comment has been made on the suitability of outsourcing capabilities, such as in the area of public services, where the nuances and sensitivities of delivery may not always be fully appreciated by the partner. We have observed cases where a partner may occasionally fail to “get it”, and unwittingly risk a critical area of operations with potentially serious implications. Recovering lost ground in such cases proves to be a costly and complex exercise with far reaching impact.

This being the case, organisations looking to outsource should be sure equal importance is assigned to benefits other than cost savings.

Balance cost savings with added value
The anticipated benefits of an outsourcing relationship should address all likely outcomes. Cost is naturally one factor, but what about the agility of the outsourcing partner in responding to market conditions, or to make available a new platform or process capability which you can consume with minimum fuss and impact? Properly documented, validated and recorded, a clearer balanced picture will emerge of the overall value of the relationship. Consider using structured Benefits Management techniques to formalise recording target outcomes. These can help to articulate the resulting competitive advantages from outsourcing.

Lead your organisation
FDs should lead the organisation in valuing benefits appropriately. Avoid the common approach of scrutinising the bottom line to the exclusion of other assessments. While few will be guilty of ‘knowing the cost of everything and the value of nothing‘, we nevertheless recommend that the message is reinforced to the wider organisation that the business case has to reflect strategic objectives as well as pure cost drivers. Business cases should place equal merit on strategic alignment as well as the numbers. And don’t discount the impact poor or indifferent service has on the customer experience; in many industries, such as telecommunications, utilities and financial services, customers will easily move to competitors.

Recognise outsourcing as a relationship
‘Transactional outsourcing‘ has been replaced with closer engagement between organisations and outsourcing partners, based on mutual understanding of each other. Providers need to understand their clients’ businesses almost as well as the clients, and clients need to recognise the broader capabilities the partner can bring to the table. Beware stifling any synergies which might otherwise emerge through viewing the services as commodities to be purchased at lowest cost. Some of the best relationships we have seen foster genuinely collaborative environments where it is difficult to tell who is from the business and who from the partner.

Know your outsourcing partner
Make sure that you know who you are about to strike up a partnership with, their own capabilities and how they do business. If you know you are looking at a comparatively inexperienced organisation, for instance, be sure you understand the balance of risk and potential reward. If hungry for your business, the provider may be more flexible to your needs, so this needs to be factored into any assessment. Or if partnering with an established player, test how responsive they could be to your needs. It could be that a safer pair of hands may not be agile enough.

Allow your partner the space to innovate
If organisational relationships are working, your partner will feel comfortable to propose new solutions to tackle what are ‘joint’ business problems, and the chances of realising unanticipated benefits grow. Innovation is key to successful enterprises, and they recognise a healthy dependency on partners to foster that innovation.
In the quest for competitive advantage, innovation and market share, outsourcing approached in the right way has much to offer organisations, and being clear on what organisations are looking for from outsourcing arrangements, and how these are gauged, is key.

Shan Ali is a manager at Moorhouse