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 / Autumn 2006 / Issue 44(originally published by Booz & Company)


How to Be an Outsourcing Virtuoso

Aside from its operational and cost virtues, executing swiftly and deliberately sends an unmistakable message of resolve. “The biggest risk of all is indecision,” says Duke Energy’s Mr. Mullinax. “Know what your strategy is as a corporation, align with it, know that you’re accountable for delivering it, and then make some decisions and move forward.”

2. Understand why you’re doing it and articulate the reasons clearly. It is far easier to get people to mobilize behind a potentially controversial initiative if the business reasons for doing so are clear. Some executives can spin a great story at first, but can’t get others to follow through because the executives don’t seem to believe it themselves, or they contradict it with halfhearted, “flip-flopping” decisions. The decision to outsource must have a compelling business rationale. Management must have an acute grasp of what the company is trying to achieve — cost reductions? optimized processes? better service levels? more for less? innovation? — and keep these priorities in mind as it evaluates options.

Equally critical, the outsourcing decision should be based on a business case that is built on hard analysis. Without a granular understanding of the underlying costs, both tangible and intangible, of each process, a precise grasp of the potential benefits is nearly impossible. No one will really know what constitutes success, and such uncertainty can lead to evaporation of senior and line management support. At TXU, “we worked hard to establish our baseline operating costs with real accuracy,” says Mr. Hillstrand. “Our finance folks had to assemble, disassemble, slice, dice, understand overheads and allocations and all of the components of cost associated with a large component of the business. Then they had to articulate it crisply, in a way that could be consumed by the third-party providers. Getting that baseline straight was a very intense and important effort.”

3. Be partners, not just customers. Many companies try to manage service providers not as partners but as virtual lackeys, negotiating them down to prices that are unsustainable over the long term, holding them to encyclopedic contracts with impractical service-level and reporting commitments, and micromanaging the process of service delivery beyond the point of usefulness. This approach is fundamentally misaligned with both the basic objectives of an outsourcing arrangement and the realities of the new, more complex outsourcing world. When relationships between the parties focus primarily on the transaction, with each side seeking the better deal, the result is often antagonism; even when the relationship remains amicable, it is not conducive to long-term success.

By contrast, executives who have gotten the greatest benefit from their broad outsourcing arrangements have built relationships of mutual trust with their vendors. “You have significantly less control than you would have with people reporting directly to you and salary management control, performance reviews, and other tools at your disposal,” says Mr. Passerini of P&G. “This new model is more challenging, and more demanding to manage, but it is significantly better for our business.”

Outsourcing customers place an extraordinary amount of knowledge — and faith — in the hands of service providers. They entrust vendors with critical business processes, sensitive data, proprietary business knowledge, and even basic control over implementation and ongoing quality. “If you’re going to outsource a service, you must turn its delivery over to the supplier rather than use them as a body shop; you have to focus only on putting the proper processes in place to monitor how they’re delivering,” says Ray Mohundro, former CIO of Innovene.

Enlightened companies have figured out how to strike the right balance between rigor and flexibility, so that they don’t micromanage but also don’t “turn over the keys” to the outsourcer. They rely on such mechanisms as governance structures with clearly defined decision rights — agreed on in advance by both parties — from the executive level all the way down to the day-to-day users of the service. In addition, service-level agreements, performance dashboards (which deliver live data from the suppliers), formal business reviews, and rewards and penalties for meeting or falling short of service levels all help to minimize surprises. These companies rigorously manage to outcomes (the “what”), not to inputs (the “how”). That frees up the providers to bring invaluable new thinking into the process. “We didn’t tell the companies where to move people and how they were required to meet our needs in various places throughout the world,” says Mr. Szygenda of GM. “They had to come up with innovative ideas, and they were able to do that. Not having that requirement internal to GM let us move unbelievably fast.”

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  1. Amy Bernstein, editor, Outsourcing Thought Leaders: Managing Business without Borders (strategy+business Books 2006): In-depth interviews with the customer and provider executives quoted in this article. Click here.
  2. Anne Chung, Tim Jackson, and Tim Laseter, “Why Outsourcing Is In,” s+b, Third Quarter 2002: Strategic operations outsourcing encompasses core activities, such as manufacturing or logistics, that could substantially affect a business if not performed well. Click here.
  3. Thomas L. Friedman, The World Is Flat: A Brief History of the Twenty-First Century (Farrar, Straus and Giroux, updated 2006): The clarion call of globalism — how lower trade barriers, reduced political resistance, and technological advances have transformed business across the world.
  4. Alex Kandybin, Martin Kihn, and Cesare R. Mainardi, “Reinventing Scale: How to Escape the Size Trap,” s+b, Second Quarter 2002: Outsourcing can be a useful tool in applying the concept of scale differently across different parts of a business to unleash real power and unlock hidden value. Click here.
  5. Bill Lakenan, Darren Boyd, and Ed Frey; “Why Cisco Fell: Outsourcing and Its Perils,” s+b, Third Quarter 2001: Warning signs from the last wave. Click here.
  6. Tim Laseter, “When Offshoring Isn’t a Sure Thing,” s+b, Fall 2004: How transportation costs, labor intensity versus capital intensity, and market responsiveness play into decisions about offshoring. Click here.
  7. For more business thought leadership, sign up for s+b’s RSS feeds. Click here.
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