Outsourcing Dilemma, The: The Search for Competitiveness

Description

Outsourcing of some business functions pre-dates the technological revolution of the latter part of the 20th century. Nevertheless, 99 percent of outsourcing would not be logical or necessary if it were not for the constantly changing and improving technology.

Despite the circumstances, most organizations are left with no alternative but to keep trying to improve their systems. They then have two basic alternatives. They can either do it in-house by buying the necessary equipment, software, and external help, or they can externalize the function completely by taking one of the outsourcing routes.

Research undertaken into project failure rates at the beginning of 2000 has provided the author with a unique insight into the real level of success obtained from choosing either internal or external solutions to the competitive problem.

The Outsourcing Dilemma presents the arguments for and against outsourcing and suggests ways in which the enormous problems of maintaining competitiveness might be approached.

The book examines:

• the changing times that have brought about the need to be competitive in all functions
• the various internal solutions to the problem of maintaining competitiveness
• the advantages and disadvantages of the external solution of outsourcing
• the extent to which outsourcing is being practiced and the functions being outsourced
• the growing range of alternatives to full outsourcing
• a range of factors that potential clients should know about outsourcing providers
• factors to consider when choosing an outsourcing service provider
• alternative options toward achieving lasting competitiveness

The Outsourcing Dilemma includes controversial case studies highlighting the advantages and potential pitfalls of outsourcing, and a revolutionary long-term competitiveness option - "Business Satellites" - that does not require short-term dramatic change, expense, and disruption.

Competitive advantage is a choice. Who are you going to entrust it to?

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Your Major Internal Projects Fail, Outsourcing Fails  What Next?

Table of Contents

Introduction.


1. Changing times in commerce.


2. How can an organization become and stay competitive?


3. The outsourcing alternative.


4. Reasons for outsourcing the various business functions.


5. Variations on the outsourcing theme.


6. Points to be aware of when choosing a service provider.


7. The process of choosing a service provider.


8. Potential drivers of outsourcing.


9. Risks and concerns for both parties.


10. What does all this mean?


11. An alternative way of approaching the competitiveness problem.


Appendix A: Starting the outsourcing process.


Appendix B: Before contemplating the outsourcing transition.


Appendix C: The essential elements of the contract.


Appendix D: The rights of transferred staff.


Index.

Preface

Introduction

Both the title of this book The Outsourcing Dilemma and the sub-title The Search for Competitiveness deal with the most frequently asked question in business today: 'How can we become competitive and remain competitive over all our business processes?' My conclusion is that outsourcing is probably the answer, but it is likely to be a different type of outsourcing from what is generally practised today.

Outsourcing is not something that can be considered in isolation. It has become a major factor in commerce because the dramatic advances in technology over the last few decades have created an almost intolerable situation for everybody involved in management. Managers in all organizations must now seek to achieve maximum competitiveness in performing all business processes. In order to do this, they must constantly evaluate the technology on offer and try to achieve performance improvements with what is usually a less than adequate internal skills base. Quite frequently, the need to bring about the desired change is both sudden and dictated by an external organization, for example, when supermarket chains began to demand that their suppliers utilized Electronic Data Interchange (EDI) systems. In these circumstances, the use of full-time external specialists through outsourcing has become an important solution to the problem of maintaining competitiveness.

However, outsourcing is just one possible solution to the competitiveness problem and any reasonable evaluation of the subject must logically compare it to other options that are being used or could be developed to enhance a competitive position. Most of these options have considerable merit even if they are not always equally applicable to all types and sizes of organization. However, whatever their merits and demerits, the truth is that all these theoretical solutions fail far too often in practice. I suggest, though, that the current failure rate of performance improvement projects is only tolerated because the full extent of failure is disguised; few organizations or individuals are willing to admit the extent of failure on a major project.

The vast majority of attempts to become more competitive can be divided into two parts: the internal solutions, which involve some type of performance improvement project, and the various external outsourcing options. All further references to internal projects in this book are to major projects that involve organizations in costly attempts to improve performance.

The results of a high technology project failure can be very damaging. The general public is constantly being reminded of the risks involved with high technology projects because they suffer as a result. In the UK, for example, the Department of Social Security has had a succession of computer disasters going back over many years, affecting many thousands of people and in 1999 50,000 people had their holiday plans disrupted when the Passport Agency's new project ran into trouble. Why is the consequence of failure not normally given adequate consideration prior to approving major projects? This is a particularly vexing question when one considers the number of research reports that have been published in recent times giving clues to senior managers regarding the potential for failure.

The main reason is, of course, that major projects are normally conceived to correct a current problem that is seen to be damaging the organization's competitive position and is likely to get worse. Consequently the senior management believe that the problem has to be corrected as soon as possible because the responsibility is clearly theirs. In such circumstances there is a certain amount of logic in the argument that goes: 'As the core problem had not been anticipated earlier we have no alternative but to carry out this project, so let's not dwell on the risk of failure, let's make sure it is a success'.

In a great many projects the senior management have a vested interest in not making the targets too difficult or the parameters for success too precise, because this will increase the chance of being seen to fail. Most senior managers will from time to time be faced with choosing between a project that is likely to provide the maximum benefit for the organization but will take a number of years before worthwhile results are seen, and another project that may be more expensive but will provide quicker results. As the tenure of office of senior managers gets shorter and shorter, it is only natural that managers increasingly look for short-term glory even though this may not be in the best interests of the organization. Centaur Application Software Services, the Aylesbury-based firm of management consultants, experienced this at first hand in 1995 when they carried out a series of direct selling calls on UK Finance Directors, warning of potential Y2K difficulties and offering a service to correct the problem. The consultancy was surprised by the number of FDs who openly made comments such as 'Five years is a long time off and it is likely to be someone else's problem then'.

A further indication of the declining tenure of office for senior managers came to light in late 1999 when the market research company TSS was asked to check certain marketing databases. Over a three month period earlier that year TSS called 600 of the 2000 largest organizations in the UK and established amongst other things, the name of the Finance Director. In one month late in the year they called all these organizations back again and found that during the six to nine month intervening period, just over 10 per cent of the organizations had obtained new Finance Directors.

Whatever the reasons, the risk of failure with major projects never seems to exercise the corporate mind to the extent it should. Only for a brief period did this subject get anywhere near the attention that it deserves. That was a few years ago when the American CSC Index for 1994 reported on a survey of 600 organizations and claimed that as many as 67 per cent of these companies reported zero or only marginally improved results from their business process re-engineering (BPR) projects. Even then, the concern was that BPR projects (which had previously been considered almost foolproof) could fail and not the fact that more projects had failed than had succeeded.

If, despite the natural internal desire to disguise failure, published reports can suggest that up to two thirds of projects fail - what must the true failure rate be?

We may never get an accurate reading for the number of project failures. Certainly, no amount of market research will settle this question. Apart from the problem of not being fully aware of the parameters and targets that are set for all the projects carried out, there is the question of how you measure success or failure when so few people are willing to admit the full extent of failure. All that the researchers who study these projects can normally claim is that failure rates are bound to be much worse than admitted.

At this point I must define what I mean by failure. These days any internal project begun with the objective of improving performance will be very likely to require considerable expenditure on new technology and external advice whilst also incurring the often difficult to quantify expense caused by disruption of normal activity. However, the real cost of such projects does not end there. A project to implement a new finance system, for example, can only be contemplated by most organizations once every five to seven years. Whatever the targets set, the logical minimum requirement from the project will be to put the service in question on a competitive basis immediately following the implementation and at the very least provide some hope for further improvements until a replacement project is put into action in the future. My definition of failure is reached by asking: 'Did the project achieve the minimum competitive requirements and was it still providing a competitive solution two years after implementation?' If it did not it is a failure and it remains a failure even if it was finished on time and to budget. It is a failure because the opportunity has been lost and it will be some time before the problem can be corrected. Conversely, I would rate the venture a potential success if it achieved the desired competitive performance levels but cost and time deadlines were narrowly missed.

My definition of a failed outsourcing project is also based on meeting the minimum competitiveness criteria. It used to be easy to spot the extreme outsourcing failures as these usually ended up in a courtroom, but many outsourcing contracts now contain provisions for dealing with disputes and therefore avoid the need to go to court. These special provisions will often stipulate the penalties the service provider must pay if the service fails to meet a certain standard. The trouble is that only on rare occasions will the outsourcing service provider have agreed to a minimum level of service that equates to competitiveness for the client.

In most outsourcing arrangements the service provider agrees a cost that is lower than the client is currently incurring but accepts a service target in excess of what the client is achieving. Having got such a deal, most client's eventually accept that the minimum service level should be set close to the client's own performance level, even though this may be far from competitive.

Given these circumstances, the service provider's staff will often convince themselves that they are doing a good job even though their performance only moves between the minimum service level and the targets set. Many outsourcing agreements go on like this year by year, with the service never quite falling to a level likely to cause a breach of the contract, but with the client nonetheless dissatisfied. But claims that more than a third of outsourcing contracts are never renewed, despite the cost of taking the service back or transferring it to another provider, give some clue about latent client dissatisfaction. As with internal projects, the real cost relates to the missed opportunity which cannot normally be corrected until the end of the contract.

An organization worried about its ability to bring about a performance improvement internally might well compare the limited experience and success it has previously enjoyed in this respect with the outsourcing specialist that carries out such projects on a frequent basis. From this point, it is a natural step to look for a service provider that can demonstrate success in the relevant area. However, this does not always guarantee a long and happy relationship. For example, CSL, the outsourcing division of Deloitte & Touche, had been very beneficial to the London Borough of Croydon when taking over its housing benefits system. Success in this area with this client led to CSL getting similar work for other local authorities. But in March 2000 the Chief Executive of CSL apologized for housing benefit disasters his organization were involved with at Sheffield City Council and a local authority in Somerset. There have also been problems between the London Borough of Islington and its housing benefits administration provider, ITNet. It would appear that at least part of the problem in this area of housing benefits has been repeated changes to the system by the government. However, many of the local authorities that kept this service in house have coped far better with these changes.

If both the internal and external options frequently fail, what can be done to resolve the performance improvement problem? Chief executives might be tempted to consider one of the alternative internal solutions that they have not yet tried. There are a number of alternative solutions in the form of management theories, with each new one appearing more radical than the previous one. Almost all make good sense and can be adopted completely if the circumstances are right. For example, 'Get rid of middle management'. It is certainly possible to find instances where organizations have benefited enormously from removing almost all middle management. Against that, many others now believe that even the modest reductions they made in middle management numbers has worsened rather than improved overall performance. This does not prove that it's right or wrong to get rid of middle managers - just that it may not be the ideal solution in all organizations at all times. Even where it does work, what do you do for an encore when you are asked to make further reductions to costs?

The call to 'Empower all employees to act like Chief Executive Officers' has also been widely promoted. Examples detailing success, however, largely concentrate on the benefits of letting widespread local service agents make most of their own decisions. It is difficult to see too many organizations introducing this concept completely in the average factory or in government offices and even more difficult to imagine how it would work. Perhaps the most radical of these proposed solutions can be found in the call to 'Forget change, it's time for revolution'. Again, the revolutionary or 'start again' approach to restructuring business functions has been responsible for some successes, but in the real world not every organization believes it can find a suitable time to begin a revolution.

Internal performance improvement projects are normally very expensive, time and resource consuming and prone to failure. Likewise outsourcing projects are also normally very expensive, time and resource consuming and prone to failure. The radical solutions will work for some, but most organizations would not even consider taking such steps on the grounds that their use would be inappropriate 'at this moment in time'.

Given these problems, it is necessary to ask: 'Is there a performance improvement answer "for the rest of us"?' Is there some way that the average organization can become competitive in its non-core functions, thereby improving overall competitiveness? Could we find an answer for the majority of organizations that goes further than the aims of the in-house, external and radical solutions discussed, i.e. one that enables the organization to remain competitive long after the change has been adopted? Web-enabling developments do offer some prospect for improvements in this area, but in addition, I believe that there is one simple solution that could be utilized by a significant number of organizations and it is explained in the last chapter of this book.

Back to the structure of the book. I have abbreviated the history of the subject matter and avoided detailed case histories because they tend to suggest that everything relating to the project concerned was a lasting success and this is not always the case.

The aim of this book is to present the arguments as fairly as possible and to suggest ways in which the monumental problem of maintaining competitiveness might be approached. In order to make the story flow, the main body of the book is confined to issues that need to be considered before taking a decision to outsource and most of the more technical 'how-to' outsource considerations are relegated to appendices.

Chapter 1 - deals with the changing times that have brought about the need to be competitive in all the functions and processes undertaken by organizations.

Chapter 2 - starts by asking the question 'How can you become competitive?' and then runs through the various internal solutions to the problem and questions the likelihood of success from pursuing these options.

Chapter 3 - introduces outsourcing, the external solution and probes the advantages and disadvantages of this option.

Chapter 4 - examines the extent to which outsourcing is currently being practised and the functions being outsourced.

Chapter 5 - looks at the growing range of alternatives to full outsourcing, including the various types of Shared Service Centres and the potential for ASP developments.

Chapter 6 - lists a range of factors that potential clients should know about outsourcing service providers and makes suggestions as to how to avoid some of the resulting problem areas.

Chapter 7 - outlines a number of factors to consider when choosing an outsourcing service provider.

Chapter 8 - details the potential benefits from outsourcing.

Chapter 9 - describes the real risks and concerns for both parties.

Chapter 10 - summarizes the alternative options towards achieving lasting competitiveness.

Chapter 11 - introduces 'Business Satellites', a long-term competitiveness option that does not require short-term dramatic change, expense and disruption. A number of theoretical Business Satellite ideas are developed to further illustrate how the concept might work.

Appendix A - a step-by-step procedure illustrating the various dos and don'ts for those client organizations interested in a conventional outsourcing arrangement.

Appendix B - actions necessary before the outsourcing transition gets underway.

Appendix C - a list of factors that should go into a conventional outsourcing contract.

Appendix D - the legal problem of transferring staff to an outsourcing service provider.

The relatively recent creation of the internet makes all current attempts at forecasting the commercial future hazardous, if not meaningless, because the potential for change cannot yet be fully understood. It is possible for example, that the current problems associated with major internal projects and outsourcing could be eased considerably by Web-enabling developments. At the time of writing there is great uncertainty about the potential for the application service provider (ASP) concept, which, in theory, would help to reduce software and other IT costs dramatically and make some types of outsourcing a more simple and acceptable concept. I am aware of some sizeable organizations that see the potential for Web-enabled software as an excuse to postpone projects until the situation becomes clearer. They may turn out to be right to delay, but the problem is not only the cost and availability of the technology but also finding enough suitably qualified people to deal with the technology, and that problem is not going to go away in the short or medium term.

If forecasting is difficult, it is probably also correct to say that no one is really qualified to successfully analyze what is currently happening in the world of commerce. It is all happening and changing too quickly for that to be possible. Nevertheless, I am certain of two facts: the first is that there is no one solution that is suitable for all types and sizes of organizations; and the second is that given the failure rate of current performance improvement projects, some long-term alternatives have to be found.

For what it is worth, my own involvement in the world of commerce began many years ago with a succession of roles in sales, market research, advertising and brand management. This experience eventually gained me a position as UK head of an American toiletries company. This was followed by a period of four years with a major management consultancy in the UK. I then spent four years based in the USA. During the last three of these years I was President of an American Food Company.

Since my return to the UK I have worked as an independent consultant largely to indulge my own and my family's desire to live on the south coast of England. During this period I also set up a marketing research company and have had a continuous involvement in this area. Some of my direct consultancy work has been via major consultancies and some has been done on an independent basis. Consequently, my 'clients' have ranged from the very large to the very small. Most of this consultancy work has been in areas related to marketing, business systems and in outsourcing. In recent years I have made a specialty of helping outsourcing service providers to find and get into new markets.

Amongst my successes I can claim technology research work that was used as the basis for futuristic television programmes around the world and a marketing award for helping small consultancy clients increase their sales. Amongst my failures are two attempts to set up manufacturing companies utilizing new technologies.

The title of this book The Outsourcing Dilemma deals with the most frequently asked question in business today: 'How can we become competitive and remain competitive over all our business processes?' My conclusion is that outsourcing is probably the answer but it is likely to be a different type of outsourcing than is generally practised today.

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