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


How to Be an Outsourcing Virtuoso

An outcomes-based approach takes much of the administrative burden off the shoulders of the customer, and providers are often better equipped to deal with those burdens. “As it turns out, the market does a better job configuring itself than we would have,” says Mr. Hillstrand. “When the market configures itself to your scope, the configurer owns the seams and that’s desirable.” For example, when Capgemini subcontracted certain facets of its TXU work, the provider did a much better job, in Mr. Hillstrand’s view, of shaping the subcontracts than TXU would have.

4. Embrace complexity and learn to manage it. Outsourcing was once a fairly simple affair: Pick from a fairly limited menu of options (IT applications and infrastructure, payroll, accounts payable or receivable, benefits administration, basic customer support), frame up some RFPs, send them off to a few big vendors, negotiate a 10-year deal, and get through a predictable, often painful transition period.

No longer. Complexity has crept in on every front: the number of vendors, the number of countries from which they can deliver services, delivery models (onshore, nearshore, or offshore), and the sheer scope of offerings have all expanded considerably over the last few years. So has the variety of commercial and contractual models (Will risks and gains be shared? If so, to what extent? Will it be a bundled deal with a single vendor or a best-of-breed partnership with a network of multiple vendors?). In addition, the industry thinking is evolving, calling into question many so-called best practices, such as signing long-term deals, building offshore captives, and sourcing multiple functions or processes with a single vendor to maximize leverage. These apparent complexities and increasing degrees of freedom have added to the overall confusion, and erected an intimidating barrier to entry for companies that have little experience with outsourcing.

But this complexity can work to the customer’s advantage; it translates into greater choice, and thus greater customer empowerment and better results in the long term. Although the emerging best-of-breed model implied by the larger field of choices may mean more up-front work prior to the deal, and more management complexity afterward, it will almost always result in an outsourcing arrangement that is well adapted to the needs and characteristics of individual customers. And industry leaders are harnessing this complexity to their advantage.

GM, for example, announced in February that it would split its $15 billion contract for information technology services among a number of providers — EDS, HP, IBM, Capgemini, Covisint, and Wipro — to encourage competition, to decrease risk exposure, to increase competition, to take advantage of offshore pure plays for discrete activities, and to challenge providers to address the automaker’s needs. GM also slashed the contract term from 10 years to five years to shield itself from long-term financial risk, improve management of outsourcing deals, and ensure more accountability from outsourcers.

To manage multiple sourcing contracts without spiking budgets and creating suffocating bureaucracy, companies are becoming more adept at managing the multiple delivery models, pricing structures, and business metrics contained within multiple vendor relationships. They are installing centralized vendor management functions with talented personnel who are skilled at overseeing strategic vendor relationships, monitoring vendor performance, ensuring compliance with service-level agreements, and keeping vendors abreast of evolving company strategies and priorities.

5. Be a visionary. As outsourcing becomes increasingly strategic, so too must the role of the business leaders who control IT and business process outsourcing. The new generation of outsourcing leaders is always thinking beyond the boundaries of their own function and, in some cases, even beyond the boundaries of existing market capabilities. They wear two hats: that of the functional leader who is accountable for excellence in service delivery; and that of the senior enterprise leader who sees how this vibrant new market of innovative services can solve the broader business’s most pressing challenges.

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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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