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You’ve heard the hype for years: stick with your critical expertise and outsource the rest – it relieves headaches and improves the profit picture.The complexity of today’s management systems and the technical demands placed on an organization (including its IT department) are leading many companies down the path of business process outsourcing.
My experience tells me that it isn’t all that simple. Before you outsource any of your current internal functions, make sure you understand some of the most common problems associated with outsourcing, especially with technology efforts. Achieving success is no simple matter. Not only is it important to know when to outsource, but you also need to know how to use outsourcing to full advantage.
Here are ten questions that you should ask before deciding to outsource:
1. Will outsourcing improve performance? Successful outsourcing translates into service that is better than it would have been if kept internal. Before turning to outsourcing, it’s important to ask how and why it will drive improvements – quantify everything, and compare the numbers.
2. How can you understand and control costs? It’s essential to understand the cost structure of every component of outsourcing, particularly if the entire package of products and services is bundled into a single fee. Omitting this leaves the door open to receiving invoices that resemble your phone bill—indecipherable and unpredictable.
3. Does the outsourcing effort match your business needs? If outsourcing can create a strategic advantage, then it’s worth pursuing. If it’s merely intended to deal with temporary tactical problems–such as a reluctance to invest in an upgrade to a core system while revenues are down–then it’s doomed to failure.
4. Should you develop experts in managing vendor relationships? Yes, this is a critical element of a successful outsourcing effort. Remaining executives and managers must learn and use sensible metrics to ensure that the company is managing its initiatives and relationships well, and meeting business goals. Without them in place, the outsourced function is in peril.
5. Are your financial projections accurate? You’re only going to decide whether to outsource if it makes financial as well as strategic sense. Take a critical look at the numbers, particularly those generated by a vendor and try to spot assumptions, over-simplifications or just plain suspicious figures.
6. Who will manage the financial and performance aspects of the project? Without people, processes and technology to measure and manage the outsourcing initiative, you can find yourself overspending and underachieving. Factoring the management tasks and costs of the effort into the initial proposal can reduce the odds of problems occurring later on.
7. Are adequate protections in place for when business conditions change? Management guru Bill Deming said it best: “Two basic rules of life are: 1) Change is inevitable; 2) Everybody resists change.” Make sure the contract protects your organization as much as it protects the outsourcing provider. Your business may look quite different three to five years from now.
8. What are the cultural ramifications of outsourcing? How will managers and employees react to the outsourcing? Will they view the new system as a positive or a negative? How can such reactions affect the success of the initiative? Is it possible that critical talent will walk out if they see the outsourcing as a career threat? The best way to avoid these consequences is transparency: involve as many employees as you can early in the planning stages when they understand the business case for outsourcing, they will most likely accept it.
9. How can outsourcing affect the organization in an acquisition, merger or sale of a peripheral business? Any structural change to the organization can create new challenges and alter the dynamics of the business. It’s wise to understand such implications up front.
10. Is there an escape strategy? If the outsourcing provider fails to live up to expectations–even with a solid servicelevel agreement in place–or if the vendor is acquired by another firm that you have previously rejected–there must be a way to make a change without enduring a crippling disruption. Before you sign the agreement, have a “Plan B” written and understood by your key managers