As with any revolutionary business practice, outsourcing too seems to have emerged as the panacea for CEO priorities across industries – do anything faster, better, and cheaper. Briefly described, outsourcing is the process of transferring any kind of work to another part of the world where it can be executed with the same level of quality at a much cheaper price and possibly much faster.
Since the vendor and the client are bound by a detailed legal contract, it should be very simple and easy right? Unfortunately no! Many organizations have seen the pitfalls of outsourcing very closely and learnt their lessons the hard way.
Though the process of outsourcing has matured over the years, organizations must review some inherent disadvantages carefully before plunging headlong into an outsourcing deal. This article attempts to review some of these pitfalls.
Think, think, think and then think some more
Many organizations see the short-term benefits of outsourcing such as costs savings without fully realizing its side effects that can haunt them over a much longer period.
Many companies fail to do any due diligence on the kind of work that is planned on being outsourced. Is the work fit for being outsourced? What will be the advantages? Will the strategic advantage of keeping this work within the company outweigh the cost advantage of it being outsourced? Will outsourcing this work help me do better with our core competencies?
These are just some of the questions organizations need to ask themselves before putting out any kind of RFI (request for information). Many an outsourcing deal has failed due to lack of proper thinking and planning.
A friend in need is not necessarily a friend indeed
Ever since outsourcing became popular, varieties of vendors have emerged offering an array of services. This makes vendor selection particularly important. Some vendors tend to woo deals purely on low pricing terms while others offer premium services at no cost to the client.
Though vendors customize their selling techniques based on the deal, clients must do their homework on the vendors, their strengths and weaknesses and their track record. Nothing kills an outsourcing deal faster than lack of vendor competency – both technical and management competency.
Clients must also look for vendors with whom they have a good cultural fit to avoid any misunderstandings and enhance communication. After all, there are real people on both sides of the deal who will be working with each other for a sizeable period.
A penny saved, is a penny earned
Cost is no longer the sole benefit driving outsourcing. CXOs need to act as soothsayers and see the long-term aspects of outsourcing particular work. Would outsourcing get them a better competitive advantage? Would it help them move any faster than the market? Can projected savings be lost in additional costs over time? This leads to the next question of hidden costs and vendor holdups.
The devil is in the detail
Many companies do not anticipate the hidden costs of outsourcing. Studies have shown that companies typically spend an additional 10 percent of the deal cost in setting up the deal and managing it over the long term.
These costs can go up over time depending on the vendor and its management style. Costs for activities such as knowledge transfer, security, travel etc are often not accounted accurately. This may mean that the original deal may end up costing more than its projected savings thus defeating its business objective.
Clients must also think of dealing with ‘Catch-22’ situations. In several long-term deals, vendors may want to renegotiate billing rates due to various economic factors and business objectives of the vendor. Depending on what stage the outsourcing deal is in, this may mean bad news as it puts the client in an untenable position. Pulling out may prove to be very expensive and staying in the deal may defeat its purpose.
Knowledge is power
In the early days of outsourcing several companies were vary of outsourcing manufacturing of parts to vendors in countries such as China and Taiwan. Their biggest concern was that lack of security might cause blueprints of parts and proprietary technology to fall in their rivals hands. This would mean a direct hit to their competitive advantage. Not to mention the results of such affecting their bottom-line and infringing their intellectual property rights (IPR).
Though over time both the customer and the vendor have learned to manage issues regarding IPR and have put in safeguards to minimize infringements, this is still a bone of contention with several customers especially in the highly competitive innovative technology products market. Many companies have also setup their own facilities to have better over manufacturing processes and protect their IPRs.
Geopolitical factors and regulation changes
Though government changes are foreseeable and hence its effects on the business controllable, this is still a challenge that many companies fail to account for.
Popular countries for outsourcing such as India have unstable political structures. In countries such as China, the government still has a strong control over businesses operating on its soil. Taiwan almost went to war with China. Philippines and Thailand are located in regions where probability of natural calamities is high. These geopolitical factors can have a lasting impact on customers and their business continuity.
Financial reporting and other government regulations (e.g. Sarbanes Oxley and HIPAA in the United States) may also change from time to time and may require vendors to be compliant within a certain period. This means additional costs for setting up the appropriate infrastructure and business processes.
At the end of the day, clients must realize that outsourcing is a business practice that works wonderfully well, only when it is structured the right way and managed professionally. A deal is a good deal when both parties involved have met their goals and objectives without either having to lose anything.
Chillibreeze's disclaimer: This is a contributed article and was published on Chillibreeze in April, 2010. The views and opinions expressed in this article are those of the author(s) and do not reflect the views of Chillibreeze as a company. Chillibreeze has a strict anti-plagiarism policy. Please contact us to report any copyright issues related to this article. The relevance of the facts and figures cited (if any) could change after a period of time.
