Month: March 2009

Why Outsourcing often does not deliver value

Why are the benefits of outsourcing only rarely achieved

In a recent Dun & Bradstreet report they noted that “25 percent of all outsourcing fails” completely and over 50% of all outsource deals do not deliver any substantive benefit at all. Outsourcing failures are often the result of companies rushing into transactions with unrealistic or unsubstantiated expectations of cost savings and performance improvements that cannot be met because the client does not communicate its requirements in a clear way either internally or to the potential vendors. The outsourcing of many business processes besides IT also has the same less-than-stellar results – call centre problems are almost a
cause célèbre. Some people believe you need hundreds of pages of detailed specifications as complex as War and Peace to make outsourcing work at all tying up the whole thing in a tight contract that covers every possibility – clearly not a practical proposition.

The main causes of failure in an outsource in my view are :

  • The buyer’s unclear expectations up front as to its objectives – poorly defined goals and requirements and a lack of outsourcing contract management capability are two of the top reasons for IT outsourcing failures.
  • The parties’ interests maybe aligned up front but become misaligned as the buyer’s business environment or needs change over time (as they will inevitably)
  • The provider’s poor performance against service level agreements – which in some cases is dramatic.
  • The parties do not consider each other’s interests to ensure their relationship is mutually beneficial – the naturally conflicting objectives and the need for vendors to make money are often not really internalised by clients.
  • Poor governance structure for managing the ongoing relationship – in some cases this is left just to account management.
  • Poor cultural fit compatibility of the parties – asymmetric sizes between client and vendor as well.
  • Poor communication; the parties do not proactively share necessary information with each other – the relationship deteriorates rapidly when information is hidden

In another recent work I have been involved with there have been several instances of buyers and outsourcers in direct conflict and not inclined to acknowledge their own influence on outsourcing failures. The blame game starting early on in the relationship. Hidden costs, high staff turnover and poor cross-cultural communications are also some of the key causes of offshore outsourcing failures. Another big source of outsourcing failures is the way that outsourcing vendors tend to “sell high,” pitching their projects to the CEO rather than to the IT staff and managers who really know how to run the business – this enrolment of ‘C’ level managers is often the source of great difficulty when the real discussions take place. They have bought into a process based on high level aphorism that have little practical value on the street corner.

If you choose to look at global outsourcing as an opportunity, as numerous companies do, you may quickly realize that making it work requires a carefully planned and orchestrated approach. I suggest, though, that the current failure rate of performance improvement in outsourcing is only tolerated because the full extent of failure is disguised; few organizations or individuals are willing to admit the extent of failure on a major outsource contract. Failing at this game can have career damaging consequences.

See more at Bizface in the Outsourcing forum

Will outsourcing be a victim of the credit crunch

Outsourcing and the Credit crunch – will reality prevail?

So we are told that IT heads are keeping the faith in outsourcing (survey computer week) despite the sight of bedraggled refinery workers picketing outside factory gates carrying placards with ‘British Jobs for British Workers’. A slight whiff of fear is evident in the Outsource market as the implications of what these workers were saying quickly sunk in. What they were complaining about was not just about jobs being given to others but the way it was being done – using labour arbitrage – i.e. cheap labour in a situation not too dissimilar to the ‘globalisation’ of the IT services market. This is where executives scour the world to save a few cents on labour cost and when the advantage is gone move onto the next cheap site of well disciplined labour. Globalisation in this context meaning the ability to transfer work without hindrance to the area that is at that moment the cheapest – then moving on. Surfing the world to where there exists a compliant government to ensure the unions do not get out of hand and rock the economic boat and get in the way of more profit.

I think it is interesting that already attention is starting to switch from India as a supplier of commodity services for example to countries such as the Ukraine. This trend partially as a result of increased labour cost in India where top level graduates are not putting up with low wages in call centres for handling routine service calls from the UK. Wage inflation, currency movement, and intense competition for the low end commodity services is driving out the advantage they once had. What they will find is that the train moves on – just as it did in the manufacturing industry some years back – their initiatives to attempt to move away from commodity is a sign of this.

Keeping faith with globalisation in outsourcing or off-shoring means carrying on the illusion of creating better organisations and delivering illusionary savings by shipping work to low cost areas – deskilling the local workforce and removing opportunities for entrants in the IT professions. The refinery workers are reflecting this and they are waking up to what the notion of globalisation really means – it is not abstract but has real consequences – particularly in periods of economic stress. They are resisting and although we may disagree with some of the xenophobia – they are shouting out that they are stakeholders in our society every bit as important as managers and executives who assume so much control over their lives and livelihoods.