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The Disadvantages and Trade Offs of Outsourcing

February 10, 2017

In this second part of a three part series, Analysts will address the disadvantages and trade offs to outsourcing to answer often asked question: “What are the pros and cons of outsourcing and shared services?”

In part one of the series, it was stressed that the company needs to assess the reasons for a new sourcing strategy and take a “one size fits one” approach to meet their unique needs.

Considerations should include:

  • Scope
  • Functions
  • Provider/model preference
  • Financial drivers

Three delivery models to consider:

  • Outsourcing
  • Captive shared services
  • Build, operate & transfer (BOT) shared services

Advantages of outsourcing cited in part one:

  • Process
    1. Greater standardization
    2. High degree of process maturity
    3. Ease and speed of ramp-up and/or ramp-down
    4. More efficient staffing
  • Performance
    1. Greater accountability
    2. Service performance
    3. Performance measurements
    4. Leverage experience
    5. Access to world-class innovation
    6. Cross functional integration
  • Cost
    1. Accelerates savings
    2. Cost structure transformation
    3. Supporting technology
    4. Benefits realization – now and later

Outsourcing can make for a strong business case for many companies. The unique attributes of the organization and business objectives may point to a different strategic approach as “one size fits one”.

The Disadvantages and Trade Offs of Outsourcing:

Area: Process

Con: Control What Does Outsourcing Bring: Less direct control of the day-to-day process

Con: Need for new management skills What Does Outsourcing Bring: Management attention shifts from managing the process to managing the relationship via a new Governance structure. This is usually a ‘hick-up’ spot, and consumes much more time than anticipated to manage the relationship on all levels and ensure smooth communication between the layers from operational through tactical to strategic and back.

Con: Need for new management skills What Does Outsourcing Bring: The skills required to manage an outsourcing provider are very different than managing an internal resource. Many organizations underestimate the resources needed to successfully manage an outsource relationship, and do not seek external advise in developing.

Con: Long-term commitment What Does Outsourcing Bring: The long-term nature of outsourcing contracts means you are locked in for a long time, precluding unforeseen “better” solutions later on. . The requirements for “change” in the business and future delivery process improvements need to be clarified, negotiated and agreed upfront with the provider.

Con: Hard to exit What Does Outsourcing Bring: Outsourcing contracts can be difficult to exit (penalties, etc.), and transitioning at the end of contract to in-sourcing or another service provider may not be easy.

Area: Performance

Con: Impediments to change What Does Outsourcing Bring: Time to fix poor performance may take weeks or months instead of hours or days as provider typically has a set “time to cure” performance issues which may be beyond the patience of the end user.

Con: Decrease in internal talent pool What Does Outsourcing Bring: The ability to foster and grow leadership talent from within decreases as leadership roles in certain functions are outsourced.

Con: Loss of intellectual property What Does Outsourcing Bring: Risk of losing all internal capability and “tribal knowledge” in the process. Provider’s uunderstanding of institutional knowledge, internal relationships, and the business culture can take time.

Con: Loss of connection between departments What Does Outsourcing Bring: Raised perception of “loss of control” as multiple functions exit the organization, and handoffs between departments get “fumbled.”

Area: Cost

Con: “Cost Creep” What Does Outsourcing Bring: Risk for unforeseen add-on costs for ad-hoc projects and activities, if contract does not have a clear definition of what services are in scope, and how “new” services would be managed/priced.

Con: Penalties for volume changes What Does Outsourcing Bring: Higher cost/transaction (e.g., F&A) for decreasing transactional volumes – again during contracting volume change bands need to be agreed, and client needs to understand the minimum volume profitability threshold for the provider

Con: Redundancy costs What Does Outsourcing Bring: Redundancy of technology costs can sometimes exist between the company and service provider, potentially raising the overall technology support costs.

Con: Inflated retained organization What Does Outsourcing Bring: The retained organization needs to change to realize the benefits. Requires re-skilling (as above) and monitoring to ensure the new way of operating is implemented and lived by.

Utilizing the “one size fits one” approach based on a proven sourcing methodology will lead the company to a well-constructed business case. The goal is to facilitate a true partnership model based upon equality with both parties understanding the requirements, responsibilities and benefits to be gained for both organizations throughout the engagement.

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