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Have You Outsourced by Stealth or by Design?

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Outsourcing can and does work well when done by design, via a strategy that will ensure the optimal blend of internal and external resources and capabilities. This strategy must include the …

Outsourcing can and does work well when done by design, via a strategy that will ensure the optimal blend of internal and external resources and capabilities. This strategy must include the appropriate governance structures to effectively manage the client demand and services provided by third parties. When done well, outsourcing can recognize and embrace the need for change. Without the analysis and forethought driven by the development of a strategy, outsourcing can be no more than short-term, tactical first aid.

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  • 1. HAVE YOU OUTSOURCED BY STEALTHOR BY DESIGN?Roger Sparks, Partner ISGwww.isg-one.com
  • 2. Over the past 20 years, large public and private sector This issue is even more evident when you considerorganizations have made significant use of third parties change. Every business faces the challenge of constantto deliver their back-office support functions. For some, change, and over the past few years the uncertainthis has been a metaphorical ‘sticking plaster’ applied to economic climate and swiftly evolving technology havesolve a short-term tactical need. For others, it has been combined to accelerate this change and place anan informed decision taken after the development of a increasing burden on organizations. Like any othercarefully thought-out strategy, designed to allow delivery model, outsourcing contracts need to providesufficient flexibility to remain relevant in the medium-to- sufficient flexibility to handle change. These contracts arelong term. So, where do you stand? Are you a tactical typically multi-year agreements and as such need to befirst-aid officer applying a quick fix to an immediate able to survive several periods of change in both demandproblem, or are you a strategic surgeon carefully and strategic direction.executing a complex operation with enduring results? Therefore, it is essential to ensure that your contract hasTo answer this question, first think about how you have sufficient flexibility to cope with both tactical andarrived at the service delivery framework and models strategic changes. However, as with tactical first-aidyou have in place today. What led you to the operating responses, most ‘sticking plaster’ solutions address themodels that exist in your organization? How complex are ‘here and now’ and do not consider future change. In thethey? Who carries the financial and the technical risks? sourcing world, it is absolutely necessary to spend timeAnd how many people or interactions are required to get modeling potential future scenarios and ensuring thata problem resolved? the proposed solution is comprehensive and flexible enough to meet those needs. If this is not done, theWhatever your answers, the reality is that most usefulness of the solution will quickly diminish and it mayorganizations today rely on delivery of a substantial part become detrimental to the business.of their operations through a third party. At some point,most have applied sourcing ‘bandages’ to solve short- Furthermore, companies that take the tactical route toterm business issues. either outsourcing or offshoring through a third party are most likely to do so through a simple staff augmentationSurvival is a fundamental part of human nature and is approach, buying additional capability on a time-and-carried with us into our business life. Often this instinct materials basis. This might start with a 25-50 FTEcompels us to grasp at a quick solution to resolve transaction, but end up being 10 times that large within aproblems rather than thinking through the long-term very short space of time. Then, two years after startingconsequences of the action. For example, a person may their journey, they see a mouse’s tail hanging, pull on itthink: ‘My organization is bleeding money. I must stop to check that it’s still a mouse, and an elephant lands onthis quickly in order to survive. Let’s outsource/offshore/ their heads. With this comes the realization that theybuy low-cost resources to fix the problem so I get kudos have a large volume of business in the hands of a serviceinstead of kicks’. Another example of using a sourcing provider, yet they have only a simple staff augmentation‘bandage’ is to fulfill a temporary need for additional agreement that leaves them exposed to a whole raft ofmanpower. Many organizations start their outsourcing issues. Both financial and delivery risks sit with the client,journey with the cry, ‘I need 100 FTEs to fulfill a yet the technical and process knowledge sits with thecapability gap for a series of development projects. Let’s service provider. In this topsy-turvy world, the clientoffshore it’. cannot access the knowledge or end the relationshipThese are tactical solutions to everyday business issues. because the client does not have the appropriate exitThey meet the need in the short term but, unless they strategies and termination assistance in place that wouldare revisited frequently, they quickly stop being effective have come with a robust and properly planned managedsolutions and end up costing your business far more in services agreement.the medium-to-long term.HAVE YOU OUTSOURCED BY STEALTH OR BY DESIGN? ■ ROGER SPARKS 2
  • 3. Such organizations have taken the first aid officer’s  Does your sourcing strategy reflect the requirementsapproach to outsourcing, allowing it to happen of the business?incrementally by stealth and, in doing so, they have It may be seem obvious that the sourcing strategyplaced their businesses at risk. They have applied a quick and operating models must be developed withfix originally designed to heal a minor wound, but they business needs and strategy in mind, but a surprisinghave ended up with multiple referred complaints number of organizations will develop their business,because the solution addressed the symptoms rather IT and sourcing strategies in a vacuum and rely onthan the cause of the problem. If you then consider that good fortune for them to align. To succeed, themost organizations will have several such relationships, strategy must reflect the business and operatingyou can begin to see the scale of the problem caused by context, both currently and in the future. A clearquick-fix sourcing solutions. understanding of how the business currently operates and its future direction is a key requirement and willSo how do you avoid these common pitfalls when it play a vital part in the identification of which servicescomes to outsourcing? How do you take the more are needed, by whom, and how and where theseconsidered, holistic approach while still recognizing the services should be resourced. Senior executiveneed for everyday tactical solutions? The simple answer sponsorship and business buy-in should also be seenis to develop a robust sourcing strategy that recognizes as fundamental requirements to ensure that thethe need for change and can therefore accommodate sourcing can be successful. This goal is typically moreresponses to both strategic and tactical changes. likely to be obtained by company-wide activeThere are a variety of white papers on the subject of participation in the development of the strategy,what constitutes a best-practice sourcing strategy and rather than simply leaving the process in the hands ofhow you go about developing one. For now, I would like the team responsible for delivering the service.to highlight some of the most important characteristicsof a well-thought-out sourcing strategy:  Does your sourcing strategy reflect the fact that change is inevitable? Did you seek expert advice in the development of The need to develop models and strategies that your strategy? consider change is driven by a simple tenet: we As noted in the introduction, outsourcing has been develop plans and strategies expected to last several with us for more than 20 years, and a raft of market years and the only thing we can be certain of is that data and expert insight exists through firms like ours. change will occur during the intended life of the This is not a self-serving advertisement for ISG. In our strategy, plans and models that we implement. personal lives, we do not hesitate to take expert Building in the flexibility needed to cope with change advice from medical professionals or independent is therefore fundamental to ensure the longevity of financial advisors in order to help us make informed sourcing and operating models, and it must be taken decisions to safeguard our future. The business world into account as the strategy is developed and should be no different. subsequently implemented. With the benefit of an The best strategy is an informed one that makes use overarching strategy, that change can be of data, information, and insight provided by sourcing accommodated in the negotiated agreements to experts with the broadest, deepest possible data set include both strategic and tactical changes such as: and market understanding. This market view does not ‒ Inclusion of Significant Events provisions to take typically reside within internal departments, which account of potential future acquisitions and will be aware of what their own organization has divestments as well as the addition of other done but will have a limited sense of broader market geographies and business units not included in trends. An external advisor will have a wealth of the original scope. experience on how others have used different ‒ A pricing mechanism that contains minimum or sourcing models to best effect, and how to apply no commitments and provides for volume-driven these appropriately to another organization. payments on the basis of both tactics (small incremental changes) and strategy (large changes driven by a single event).HAVE YOU OUTSOURCED BY STEALTH OR BY DESIGN? ■ ROGER SPARKS 3
  • 4. ‒ The client’s ability to add, change or delete Outsourcing can and does work well when done by service levels without the need for negotiation to design, via a strategy that will ensure the optimal blend recognise that what is critical today but may not of internal and external resources and capabilities. This be so critical tomorrow. strategy must include the appropriate governance ‒ The ability to terminate the agreement in whole structures to effectively manage the client demand and or in part for circumstances other than breach services provided by third parties. When done well, (e.g., Change of Control and Convenience). outsourcing can recognize and embrace the need for change. Without the analysis and forethought driven byThese are just a few of the questions that need to be the development of a strategy, outsourcing can be noasked when designing a comprehensive sourcing more than short-term, tactical first aid.strategy, but they are the most fundamental. Businessleaders have to make many choices and decisions,including ones that concern outsourcing and offshoring.However, no decision in this domain should be madewithout first developing a sourcing strategy that isaligned to business needs and future direction. Having arobust sourcing strategy is a key requirement if you areto avoid the pitfalls and risks of ‘outsourcing by stealth’.HAVE YOU OUTSOURCED BY STEALTH OR BY DESIGN? ■ ROGER SPARKS 4
  • 5. LOOKING FOR A STRATEGIC PARTNER?For further information, please contact Alex Kozlov, Director of Marketing, Americas, at alex.kozlov@isg-one.comor +1 617 558 3377Information Services Group (ISG) (NASDAQ: III) is a leading technology insights, market intelligence and advisory servicescompany, serving more than 500 clients around the world to help them achieve operational excellence. ISG supports private andpublic sector organizations to transform and optimize their operational environments through research, benchmarking, consultingand managed services, with a focus on information technology, business process transformation, program management servicesand enterprise resource planning. Clients look to ISG for unique insights and innovative solutions for leveraging technology, thedeepest data source in the industry, and more than five decades of experience of global leadership in information and advisoryservices. Based in Stamford, Conn., the company has more than 800 employees and operates in 21 countries. For additionalinformation, visit www.isg-one.com. 021113 © Copyright 2013 Information Services Group – All Rights Reserved