Ten deadly mistakes of outsourcing and how to avoid them

Outsourcing is back on the top management agenda. It has taken on renewed urgency as many companies struggle to restructure their operational costs and refocus their critical resources to survive a brutal economic climate. Practically every part of the business — from customer facing activities

like sales and service to back office processing and support services — are under intense scrutiny for potential farming out to third-party providers.

But for many corporations, the payback from outsourcing has been elusive. While numerous studies show increasing growth in the market for outsourcing services they also show significant disappointment with the benefits delivered from outsourcing relationships. For example, a recent survey of senior executives by Gartner Group found that half of the respondents believed their outsourcing relationships had not delivered the value they anticipated.

Why is the track record of results from outsourcing so mixed? Our research over the past eight years with more than 150 corporations that have pursued major outsourcing initiatives suggests that this disconnect between expectations and results is largely rooted in a set of all-too-common, but deadly mistakes that companies routinely make before their outsourcing relationships even begin. Few companies take the decision to outsource lightly. But many discover, to their ultimate frustration, that hidden traps and difficult-to-maneuver pitfalls await them throughout the entire process. Failing to avoid or neutralize these obstacles can lead to disappointing results and even disastrous consequences. Some present dangers that are not obvious and leave managers wondering what hit them. Others are seemingly clear-cut, yet executives fail to avoid them despite their best efforts. Below we list the ten deadly mistakes that companies make in the outsourcing process and suggest steps that organizations can take to avert them.

Deadly Mistake One: Jumping the Gun

Too often, executives commit prematurely to outsourcing — they jump to the conclusion that outsourcing is the solution without fully understanding the problem. They make an emotional decision that is motivated by dissatisfaction with the internal group responsible for the process under evaluation. Rather than confront and correct the real causes of poor performance, managers instead look to outsourcing as a quick fix. This mistake is often made when support areas such as IT or HR are viewed as inefficient, not customer focused and delivering services of poor quality. Outsourcing is seen as a way to get rid of the culprits responsible for the problem and therefore the problem itself. But this is wishful thinking; companies employing this approach are often disappointed with the inevitable results of decisions made based on emotion rather than careful rational analysis. Indeed, after such thoughtful consideration, outsourcing will often be the best option but the odds of success will be far greater because the problem is better understood and all other possible solutions have been properly vetted.

Or they pursue a major outsourcing initiative based on assumptions about the outsourcing value proposition or the maturity of vendor capabilities and offerings that are theoretical and untested. Procter and Gamble’s recent failed attempts to outsource its shared services organization suggest that they misread the readiness of the market to handle a multiple process deal and may have “pulled the trigger” too early in moving to negotiate with a provider to take over their back office and administrative operations. After a year-long evaluation of potential providers, a single finalist (EDS) was chosen. After several weeks, the finalist withdrew from the bidding, indicating that the “risk profile was too high”. P&G then invited the runner-up company (ACS) to enter into negotiations. After two months, this provider also withdrew, saying “”the financial, operational and cultural risks were too high.” EDS was then invited back for a second try at negotiating a deal. After two months, this round of talks ended after P&G walked out. By this time these failed efforts cost all sides hundreds of thousands, if not millions of dollars to pursue.

Once the outsourcing bandwagon gets up a head of steam, it can be very difficult to stop. Managers and staff who have invested a great deal of time and expense frequently become emotionally committed to the idea and will find it difficult to give it up in the end, even in the face of strong evidence that outsourcing is not the best way to achieve their objectives. In the case of P&G, after its failure to find a single vendor to take over its shared service unit, the company announced that it would pursue outsourcing different pieces of the group to different vendors. Indeed, it recently signed a long-term deal with a vendor to acquire and manage the IT infrastructure component of the unit. If it continues to unwind its shared service unit by signing individual deals with different vendors, this piecemeal approach would add significant cost and complexity to the tasks of coordinating services and managing the providers, and could turn the entire situation into an outsourcing nightmare.

Deadly Mistake Two: Focusing Too Much on Process and Not Enough on Outcomes

Some companies rely too heavily on methodology in making outsourcing decisions. They believe that a successful outcome can be assured by executing a thorough and rigorous evaluation process and engaging in a comprehensive and meticulous assessment and selection exercise that often takes months to complete. Every imaginable detail about the potential providers is collected and often-complex scoring systems are developed and used to guide the decision-making. Endless presentations and pitches are made to senior business executives who ultimately make the decision regarding which outsourcing vendor to select.

Despite the seeming rigor of these kinds of exercises, companies frequently overlook or fail to validate critical information about the vendor or act on assumptions about vendors that turn out to be wrong. We have had many executives tell us how surprised they were to learn after the fact that vendor service quality, process execution, business domain expertise and ability to keep pace with new technology were not what they thought or expected. “This is their core business after all – we expected them to be damned good at it”, was an oft-heard lament. These experiences suggest that taking a methodological approach to vendor assessment and selection is a necessary but not entirely sufficient precondition to outsourcing success.

At the heart of this mistake is the disconnection of the strategic intent for outsourcing from the actual process of evaluating and selecting a provider. Somehow, the ultimate goals get lost in the nitty-gritty details of evaluation or in the excitement of the deal process. This happens most often when the motivations for outsourcing go beyond simple cost reduction. Methodological evaluation processes work great when hard data is available and tangible measures of goals and performance can be specified, but how do you measure or evaluate a vendor’s ability to innovate or the degree to which they will be responsive to impossible to predict changes in your business or in their industry?

Divining answers to these tough questions requires more creative and nuanced methods than cookbook type approaches to evaluation. Companies may need to employ non-traditional methods to keep the vendor evaluation process focused on the outcomes they seek. For example, one state agency employed a process of requiring vendors to devise solutions to the operational problems they were experiencing rather than respond to a conventional RFP. The agency worked closely with all the bidders to provide them with the necessary information from which to devise proposed solutions. It then selected the best overall solution to its problems and began negotiations with the provider regarding the contract for services.

Tony DiRomualdo is with Next Generation Consulting.

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