The document discusses the challenges of outsourcing in both public and private sectors, emphasizing the need for a strategic approach rather than quick, tactical fixes. It argues that organizations often rely on temporary solutions that fail to address underlying issues, leading to increased risks and long-term costs. To avoid these pitfalls, a well-planned sourcing strategy that accounts for future changes and incorporates expert advice is essential for effective outsourcing.

1. HAVE YOU OUTSOURCED BY STEALTH
OR BY DESIGN?
Roger Sparks, Partner ISG
www.isg-one.com

2. Over the past 20 years, large public and private sector This issue is even more evident when you consider
organizations have made significant use of third parties change. Every business faces the challenge of constant
to deliver their back-office support functions. For some, change, and over the past few years the uncertain
this has been a metaphorical ‘sticking plaster’ applied to economic climate and swiftly evolving technology have
solve a short-term tactical need. For others, it has been combined to accelerate this change and place an
an informed decision taken after the development of a increasing burden on organizations. Like any other
carefully thought-out strategy, designed to allow delivery model, outsourcing contracts need to provide
sufficient flexibility to remain relevant in the medium-to- sufficient flexibility to handle change. These contracts are
long term. So, where do you stand? Are you a tactical typically multi-year agreements and as such need to be
first-aid officer applying a quick fix to an immediate able to survive several periods of change in both demand
problem, 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 has
To answer this question, first think about how you have sufficient flexibility to cope with both tactical and
arrived at the service delivery framework and models strategic changes. However, as with tactical first-aid
you have in place today. What led you to the operating responses, most ‘sticking plaster’ solutions address the
models that exist in your organization? How complex are ‘here and now’ and do not consider future change. In the
they? Who carries the financial and the technical risks? sourcing world, it is absolutely necessary to spend time
And how many people or interactions are required to get modeling potential future scenarios and ensuring that
a problem resolved? the proposed solution is comprehensive and flexible
enough to meet those needs. If this is not done, the
Whatever your answers, the reality is that most usefulness of the solution will quickly diminish and it may
organizations 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 to
term business issues. either outsourcing or offshoring through a third party are
most likely to do so through a simple staff augmentation
Survival 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 FTE
compels us to grasp at a quick solution to resolve transaction, but end up being 10 times that large within a
problems rather than thinking through the long-term very short space of time. Then, two years after starting
consequences of the action. For example, a person may their journey, they see a mouse’s tail hanging, pull on it
think: ‘My organization is bleeding money. I must stop to check that it’s still a mouse, and an elephant lands on
this quickly in order to survive. Let’s outsource/offshore/ their heads. With this comes the realization that they
buy low-cost resources to fix the problem so I get kudos have a large volume of business in the hands of a service
instead 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 of
manpower. 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 the
capability gap for a series of development projects. Let’s service provider. In this topsy-turvy world, the client
offshore it’. cannot access the knowledge or end the relationship
These are tactical solutions to everyday business issues. because the client does not have the appropriate exit
They meet the need in the short term but, unless they strategies and termination assistance in place that would
are revisited frequently, they quickly stop being effective have come with a robust and properly planned managed
solutions 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 requirements
approach 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 strategy
placed their businesses at risk. They have applied a quick and operating models must be developed with
fix originally designed to heal a minor wound, but they business needs and strategy in mind, but a surprising
have 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 on
than the cause of the problem. If you then consider that good fortune for them to align. To succeed, the
most organizations will have several such relationships, strategy must reflect the business and operating
you can begin to see the scale of the problem caused by context, both currently and in the future. A clear
quick-fix sourcing solutions. understanding of how the business currently operates
and its future direction is a key requirement and will
So how do you avoid these common pitfalls when it
play a vital part in the identification of which services
comes to outsourcing? How do you take the more
are needed, by whom, and how and where these
considered, holistic approach while still recognizing the
services should be resourced. Senior executive
need for everyday tactical solutions? The simple answer
sponsorship and business buy-in should also be seen
is to develop a robust sourcing strategy that recognizes
as fundamental requirements to ensure that the
the need for change and can therefore accommodate
sourcing can be successful. This goal is typically more
responses to both strategic and tactical changes.
likely to be obtained by company-wide active
There 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 of
how you go about developing one. For now, I would like the team responsible for delivering the service.
to highlight some of the most important characteristics
of 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 by
These are just a few of the questions that need to be
the development of a strategy, outsourcing can be no
asked when designing a comprehensive sourcing
more than short-term, tactical first aid.
strategy, but they are the most fundamental. Business
leaders have to make many choices and decisions,
including ones that concern outsourcing and offshoring.
However, no decision in this domain should be made
without first developing a sourcing strategy that is
aligned to business needs and future direction. Having a
robust sourcing strategy is a key requirement if you are
to avoid the pitfalls and risks of ‘outsourcing by stealth’.
HAVE YOU OUTSOURCED BY STEALTH OR BY DESIGN? ■ ROGER SPARKS 4

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For further information, please contact Alex Kozlov, Director of Marketing, Americas, at alex.kozlov@isg-one.com
or +1 617 558 3377
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