Outsourcing is a common business strategy for most medium-to large-scale organizations. Each organization has its reasons and drivers for conducting outsourcing programs such as internal resources or skills shortages, cost savings, realignment with core business, scalability, management bandwidth, and many more. Whatever the reason, it usually becomes a critical part of how an organization operates.
With that in mind, when leaders decide to outsource to a third-party vendor, it’s important for them to be aware that it is not a quick fix to a business problem that can be set on cruise and left without control, engagement, and oversight.
Here, we outline tips to help management oversee an outsourcing agreement effectively and get the best value out of the arrangement.
When an organization enters into a large-scale outsourcing agreement and has a multi-vendor ecosystem, it should set up a dedicated Partner Management function within the company to actively handle its vendors. It is important to identify and assign resources in the organization that know the terms and conditions of the contract. This function should be responsible for managing the vendor's contracts, governance, performance management, and finance. This helps to support the business in realizing the most value from its vendors, managing any complaints or vendor issues, while also allowing the rest of the organization to focus on its day-to-day deliverables.
The golden rule when it comes to outsourcing is that the risk always remains with the customer organization. If a third-party vendor fails in its duties or obligations and the customer organization's clients are impacted, it is the customer organization that will receive the negative press and impact to its reputation. Take for example a European bank who outsourced the management of its ATMs to a third party. When the ATMs stopped working for 24 hours due to the ineffectiveness of the outsourced party, the frustration of the customers was not aimed at the outsourced party, but that of the bank.
Through the Partner Management function, a rigorous vendor risk framework should be in place to manage risk to the customer organization and have an adequate action plan to address issues.
When an organization moves from a fully in-house model to an outsourced provider, there can be a merger of cultures that impact both companies and their management teams. Taking note of the phrase “culture eats strategy,” the cultural impact of outsourcing should not be underestimated.
Management can take a number of steps in order to ensure that the two organizations can be a cultural fit and set up initiatives to help the two organizations work with each other effectively and respectfully. For example, if engaging with an outsourced organization in an offshore region, you should take note of their public holidays that may be different from yours locally (e.g., Diwali in India and Ramadan in Islamic countries) so that you understand their yearly work schedule.
Important advice for management of the original organization is to acknowledge how you treat outside vendors when it comes to assigning day-to-day tasks. A good outsource relationship would treat vendors with a “one team” mentality and not create a “controller/controlled” relationship. Similarly, the outsourcing vendor should also demonstrate cultural values that are not solely driven by the bottom line and work with its client to be become a strong partnership and support their business goals. Doing so will help to mitigate turnover and prevent the loss of valuable and trained resources.
Knowledge management should be a key consideration for an organization when beginning an outsourcing agreement. A serious error that they make is that they lose critical knowledge from within the organization and give it to an outside vendor, causing multiple negative impacts such as the loss of significant domain and system backup knowledge, which can be very difficult to develop again internally. Also, when reviewing invoices from an outsourced vendor, it is important to have the resources that can effectively review and challenge the work that has been done.
All as-is processes should be adequately documented and stored by the customer organization. When conducting a knowledge transfer, a clear plan should be created by the outsourcing vendor and signed off by the customer organization. The outsourcing contract should also have well-defined clauses for key personnel on the account, protocols around knowledge management, and what levels and roles should be retained by the customer organization.
Outsourcing is a promising business solution to operational issues affecting organizations. However, senior management cannot outsource to a third party and neglect to provide oversight and engagement. It is important to remember that you cannot outsource an organization's problems and risks. Continuous management of vendors is required in order to obtain the greatest value.