Erik Van Slyke

Industry Week published a terrific article yesterday called Outsourcing Point/Counterpoint that captures the key challenges of the industry over the past decade.  It questions whether outsourcing should be the automatic solution it has become and offers strong suggestions for those considering its use.

In the US alone, the industry has grown to an estimated $500 billion and has become a standard option for organization service delivery strategy.  Especially now that world economies are beginning their slow path to recovery, organizations are renewing their intentions to explore outsourcing capability not only to manage costs, but to bring higher levels of quality and innovation.

Any organization considering outsourcing, however, should be aware of the following sobering statistics before signing on the dotted line.

• A study conducted by Dun & Bradstreet reported that 25 percent of all outsourcing “fails completely” and more than 50% of all outsourcing deals do not deliver “any substantive benefit at all.”
• As stated in the article, numerous surveys indicate that anywhere from 17% to 53% of customers have not realized business value / return on investment from offshore outsourcing. (CIO, 2008)
• 58% of organizations surveyed could not confirm that outsourcing had clearly improved financial performance. (KPMG, 2008)
• 90% of customer organizations didn’t accurately understand the opportunity costs of the selection process and 79% of such organizations couldn’t accurately identify the internal financial cost of the sourcing selection process. (KPMG, 2008)

Will we listen to the results of these outsourcing efforts and apply the lessons learned?

Or will well-intentioned, but single-minded executives continue to be so blinded by the promise of delivering heroic cost reductions that they fail to manage well-established outsourcing challenges such as business transformation, governance and change management?

For much of the past two decades, outsourcing was shaped by large companies negotiating complex, multi-party contracts as a last resort to affect a financial turnaround.  Cost reduction has been the primary, if not only, motivation for inking these deals and until recently, buyers thought of them as one-time events and not part of ongoing strategy.  As a result, organizations did little to develop the operating competence required to integrate and sustain the capability over the longer term.

This point was highlighted in a conversation I had recently with a vice president of technology for a global financial services firm.  “We have been so focused on taking out cost that we’ve lost sight of outsourcing as anything other than a short-term financial transaction.  It’s been a huge mistake not to focus on how it would impact our business.  The aftermath has created extraordinary pain that is difficult to measure financially because those of us who remain somehow find a way to pick up the pieces.”

This pain has led experienced buyers to realize that some degree of transformation is necessary in every outsourcing implementation.  In addition, if outsourcing is going to deliver higher levels of quality and innovation, broader transformation is essential.

Spread the word.  Let’s make sure in the coming decade we avoid repeating history and shift to a more comprehensive implementation model that more effectively manages the transition and transforms the infrastructure required to create outsourcing success.