Comment: The double-edged sword of outsourcing

It started off with the low-hanging fruit. Now though, organisations are outsourcing increasingly complex processes to more, and often more far-flung specialists. It is so seductive to be drawn in by the promise of cost savings, access to advanced technology, and improved efficiency. But is it worth it?

The success of outsourcing hinges on the strength of the partnerships formed and, despite the many potential benefits, many outsourcing partnerships fail to meet expectations. The crux of the issue lies not in the outsourcing model itself, but in the execution of the partnerships.

The allure of outsourcing

Outsourcing offers a compelling value proposition. It allows companies to focus on their core competencies while delegating specialised tasks to experts. For instance, a manufacturing firm might outsource its logistics to a third-party provider, enabling it to concentrate on production and innovation.

In theory this project should lead to significant cost reductions. After all, outsourcing firms can leverage economies of scale, due to their size and lower labour costs because of global wages arbitrage. In addition, specialist outsourcing firms often possess advanced technologies and expertise, so they can perform tasks more efficiently and effectively.

However, the landscape is littered with outsourcing partnerships that have soured or failed outright. According to Dun & Bradstreets barometer of global outsourcing, 20-25 per cent of all outsourcing relationships fail within the first two years, and half of all projects within five years. The question arises: why do so many partnerships fail despite the promising benefits?

Communication breakdown

One of the primary reasons for outsourcing failures is poor communication. Effective communication is the lifeblood of any partnership. It ensures that both parties are aligned with each other's expectations, progress, and challenges. However, many organisations underestimate the complexity of communicating with an external entity, especially in light of holiday periods, different types of reporting structures, and when offshoring introduces cultural and time zone differences.

MORE FROM POLICY & BUSINESS

For example, Slack outsourced its initial app design and development to a Canadian design firm called MetaLab. This helped slack create a polished product which gained 15,000 users within two weeks of launch - since growing into a billion dollar company.

Misaligned goals

Another critical factor is misalignment of goals. Without crystal clarity, outsourcing projects can go downhill fast. It is easy to see why. While the client might be focused on cost savings, the outsourcing firm will prioritise profit maximisation. These divergent goals can lead to conflicts and unmet expectations. It's crucial for both parties to establish shared goals from the outset and ensure they are working towards the same objectives.

While commercial considerations are important, a more holistic approach is needed. Both organisations should prioritise the alignment of partnership goals with overall organisational objectives. The partner should demonstrate commitment to customer goals and provide regular reporting to truly establish themselves as a strategic partner.

Quality compromise or lack of flexibility?

A commitment to service quality is another key ingredient missing in many failed partnerships. While cost savings are a significant driver for outsourcing, they should not come at the expense of uptime, output, lack of defects, or speed of delivery. Both parties must work together to agree on joint goals and outcomes; the outsourcing firm should be committed to meeting, if not exceeding, these standards. The trick lies in being successful together.

Business environments are dynamic, and outsourcing partnerships need to be flexible and adaptable to changing circumstances. Rigid contracts and service level agreements (SLAs) can straitjacket the relationship, preventing it from evolving with the times. Partnerships that lack this flexibility can quickly become obsolete or unresponsive to the client's changing needs. Regular communication and service reviews help to establish, prioritise, pivot and realign where appropriate.

Building successful partnerships

Organisations should view outsourcing as a strategic tool rather than a mere cost-cutting measure. By focusing on building long-term, collaborative relationships with their outsourcing partners, organisations can unlock the full potential of outsourcing.

For instance, the successful outsourcing partnership between Coca-Cola and its bottling partners is built on open communication, aligned goals, a shared commitment to quality, and strong governance. This partnership has enabled Coca-Cola to achieve significant cost savings and operational efficiencies while maintaining high-quality standards.

While outsourcing offers numerous benefits, realising these benefits depends on the strength of the partnerships. Many outsourcing partnerships fail due to poor communication, misaligned goals, compromise on quality, lack of flexibility, and inadequate governance. By addressing these issues and investing in strong, strategic partnerships, organisations can significantly enhance the likelihood of outsourcing success.

By prioritising open communication, shared goals, quality, flexibility, and strong governance, organisations can increase the likelihood of successful outsourcing partnerships. It is essential to view outsourcing as a strategic tool rather than merely a cost-cutting measure and to invest in building long-term, collaborative relationships with outsourcing partners.

Anthony Pireddu, general manager at Axians