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Avoiding the common pitfalls of outsourcing
An integrated approach to effective outsourcing initiatives
Many companies have fallen short of achieving the demonstrated benefits of an outsourcing relationship by failing to integrate transitional and human capital elements. Taking a balanced and integrated approach to outsourcing by bringing together the elements of contracting, transition, and vendor management, with the operating model, retained organization, and organizational change management, can significantly increase the odds of your initiative’s success and long-term viability.
The common failure points
Effective outsourcing initiatives can become a significant competitive advantage. Nearly half of the respondents to Deloitte’s 2014 Global Outsourcing and Insourcing survey have ended up terminating an outsourcing contract early. Failures in outsourcing initiatives can be attributed to issues in many areas. These can include the initial outsourcing strategy, the implementation/transition effort, the ability for the contract to affect or incentivize the client’s and provider’s strategic intent, the ability of the retained organization to mature into a managed services model, or a combination of these areas.
A common theme among failure points is “tunnel vision.” We have found that tunnel vision typically occurs when organizations overly emphasize only one or two dimensions (e.g., contracting, transition, or vendor management) of an outsourcing arrangement. Organizations neglect to balance their focus of integrating the contractual and transition elements with the broader view of the new operating model that results from outsourcing or insourcing, the development and enablement of the retained organization, and the execution of organizational change management.
Common failure points include:
- Disconnects between provider sales and implementation teams
- Differences in desired transition outcomes between providers and clients
- Failure to establish retained organizational readiness for transition of process to provider(s)
- Lack of focus on communications and relationship management resulting in many escalations to senior management
- No clear plan for the retained organization to obtain the maximum financial benefit from the relationship
- Service challenges in the first 90 days of operations, which undermine executive management and employee confidence and put stakeholder jobs at risk
- Underinvestment in overarching service governance and the vendor management function, and the failure to factor those costs into the business case
- Lack of preparation to conduct special reporting during the transition to help the business and provider(s) understand performance and progress towards steady state operations and business objectives
The results of these issues can include schedule delays, cost overruns, service shortfalls, compliance failures, and an adverse employee experience. These failures significantly impact the business, put stress on the deal, and can drive the termination of outsourcing arrangements.
From narrow and siloed to balanced and integrated
Through our experiences helping large and small clients effectively transition to managed services operations, we’ve identified a balanced and integrated transition approach that can help overcome the common pitfalls of outsourcing efforts. This approach combines the focus of resources on contractual and transition elements with the human capital elements of the operating model, retained organization, and organizational change management (OCM).
In an integrated approach each of the key outsourcing elements should interact with the other components throughout the outsourcing transition, rather than a narrow or siloed focus around contracting and execution elements (as is typical).
Key interaction points between dimensions of typical outsourcing effort
Outsourcing approach considerations
- Develop a business case that measurably defines what your company desires to achieve through an outsourcing relationship (e.g., cost savings, service quality improvements, resource reallocations)
- Dedicate a transition project management team to oversee the integrated project plan and align dependencies and interconnections across each of the outsourcing elements
- Define a future state operating model that clearly delineates processes that will be retained versus outsourced to drive the company’s strategic priorities/differentiators
- Design the retained organizational model, roles, and processes to support the future state operating model (e.g., management of the provider relations for all retained processes/services)
- Focus ongoing provider management governance on driving business value objective rather than purely issue resolution
Download the PDF to explore more on increasing the effectiveness of outsourcing engagements through balancing focus on contractual elements with human capital and organizational elements.