The Six Worst Mistakes in Evaluating Outsourcing

Most companies evaluate the potential business advantages of outsourcing entire processes to third-party providers with the aim of reducing general and administrative costs and benefiting from added process rigor and new technology upgrades.

However, many companies have failed to get past the first phase - the sourcing evaluation phase - simply because they made fundamental errors approaching the issue. Companies that fail to develop a strong business case for outsourcing can reach insurmountable and costly problems if they move into a vendor selection process without having conducted significant prior due diligence.

Companies have the opportunity between each phase to terminate the process, but the toughest challenge is to get the initial evaluation phase right in order to proceed.

The following issues are the most common mistakes many companies have made when evaluating an outsourcing business case.

POOR COMMUNICATION TO KEY STAFF

If a company is going to explore outsourcing business or IT processes, it needs to evaluate how it is going to gather the information needed for decision making. If it is going to bring in a consultant/advisor to develop a business case, then the advisor will need to talk with key staff to access data, conduct interviews and evaluate the overall plan.

The instant staff find out consultants are on site discussing outsourcing, panic will spread, with the rumour mill, staff turnover and politicking all kicking in. You must identify the staff members that are vital to making the business case and be open with them from the start about what is being evaluated.

Be open about plans and seek their feedback. If they are kept in the dark, they may assume the worse, particularly in an economic slowdown. You have to explain their jobs are not on the line if you want their support. You need their support because resistance from staff can destroy the process.

For example, a major financial services firm recently investigated moving some of its finance processes to a third-party provider, but failed to communicate with several middle managers that it was merely exploring opportunities for cost optimisation. As a result, several key managers left the firm in the space of a few weeks, even though the company had not even completed an initial evaluation.

FAILING TO WEED OUT THE DISSENTERS

Many outsourcing evaluations ended up being no-gos because some key people were not on board with the process. If a function leader is highly resistant to outsourcing, they may attempt to derail the process at every possible opportunity, and it will most likely fail. If you try and transition a function where no one is supportive, you will be in serious trouble from the start.

Constructive criticism and healthy discussion of the issues are important, but some people will be against any change. Have open and honest talks with key staff about outsourcing. Many may not understand much about it. Having a group workshop, perhaps with an independent expert present, will be very helpful in educating staff.

Once you know who will be of assistance and who will always be resistant, you can make whatever decision is needed to get over the hurdle. You may find your company simply does not have people who will allow this to happen. So why not save everyone’s time and money and call a halt to the proceedings?

For example, a company was recently very keen to move its application development processes over to an outsourcing provider. The manager in charge of this area was vehemently against the potential move and constantly lobbied against the process, attending vendor presentations and voicing serious criticism against outsourcing, despite not having much evidence to validate his concerns.

The advisor and CIO made several attempts to educate the manager about the dynamics and business benefits of moving to an outsourced model, but the manager continued to voice dissent against the process. As a result, some suppliers withdrew from the shortlist because they did not want to get involved in a negative outsourcing situation, leaving the firm with a limited choice of suppliers and a worrying situation on how to set up an effective governance structure post-transaction.

NOT INVOLVING HR FROM THE GET-GO

Outsourcing is all about people, job roles, staff reductions, knowledge transfer, training and change management, which sounds like a job for human resources (HR).

Too many companies get excited about the economic benefits, but fail to devote enough time and resources for the human issues involved in outsourcing. This involves acquiring or retaining important talent, avoiding the lose of critical knowledge, facilitating cultural integration (especially where offshore staff are involved) and ensuring legal SAS-70 and SARBOX compliance.

NOT INVOLVING IT IN BUSINESS PROCESS OUTSOURCING ASSESSMENTS

Business process outsourcing (BPO) always involves a varying extent of process redesign and standardisation. There are always critical issues with data security and privacy that need addressing.

Any changes you need to make will need to be supported by your existing technology platform and IT staff.

This doesn’t mean you have to engage in a major IT evaluation from the beginning, but having a firm understanding early on of the IT issues and opportunities a BPO engagement will create can save many headaches later on.

Some companies are now exploring BPO as a result of all the work they have done rolling out new ERP software. When you need to invest so much money in redesigning process and retraining staff, wouldn’t this pose the ideal time to look at outsourcing some of it?

Some companies are also engaging in multi-sourcing. They outsource business processes like HR and finance to separate service providers, while transitioning application management and development services to alternative IT service providers. There was very little discussion between the business process leaders and the IT leaders, with the IT and business process plans treated as entirely separate.

NOT SEEKING PEER ADVICE

Best practices are formed through the experiences of firms innovating and trying out new ways of doing things. In reality, that means they will tell you where they went wrong, giving advice on how they got it right and how they would do something differently on a second time around. Outsourcing is no exception. In fact, it is a shining example of how to learn from others’ mistakes.

Seek out peers in other companies that have gone through the outsourcing process. There are several peer forums you can attend to have these discussions.

NOT USING A GOOD ADVISOR

You will likely need an advisor to help facilitate the various stages of the outsourcing process, especially if you do not have internal executives that have deep experience in outsourcing evaluation. Beware of any advisor that fails to tell you any of the points above.

You must make sure you use one that is going to do more than merely facilitate a transaction and can talk from experience about how to avoid making these types of mistakes. Get the advisor to tell you how they can help you work through these issues. Ask them to share examples of client work and research that highlight best practices for outsourcing evaluation.

Third-party advisors play a role in nearly all significant outsourcing transactions today.

ONLY THE START OF THE JOURNEY

Remember, the potential pitfalls mentioned above are only the start of the outsourcing process. Once you get to the point of developing a business case, the issues become a lot more tactical until a transaction is reached, and then a whole new set of problems open up.

Outsourcing can offer firms cost savings and the opportunity to add rigor and standardisation to processes. However, if you don’t go about evaluating it correctly, you may never get the chance to find out.