Outsourcing is practice in business where jobs, job functions or services are given to a third party. It is often seen as a method of cost reduction, but it can also improves efficiency and even effectiveness.
Outsourcing relations can fail when a business treats them as a quick or tactical solution rather than a long-term and strategic solution. Considering outsourcing solutions should be well thought out, systematic and carefully documented. The ideal approach includes planning, analysis, design, implementation, operations, and a contingency exit strategy.
Phases of Outsourcing Process
Phase 1: Planning Strategy
The traditional method of outsourcing features decisions made to reduce costs. The modern approach features strategy and concern for competency and ability. Goals, objectives and senior management support are key.
A ‘strategies and goals document’ should be iterated here, wherein the company’s intentions and strategic reasoning for outsourcing are explained. It should include:
- Which processes are to be outsourced
- The objectives for outsourcing
- The relationship between the outsourcing and general corporate strategy
- The relationship between the outsourced process and the company’s core competencies
- The strategic rationale behind the company’s choice to form an outsourcing relationship
- The scope of coverage
- Critical risks involved
- The (expected) duration of the relationship
There must be sessions of strategy in order to create this document, and they should focus on what are core and non-core processes. A value proposition formulated by the resulting document will clearly shows the benefits expected for customers due to the outsourcing set-up.
Phase 2: Analysis
This phase is focused on the creation and delivery of an RFP (request for proposal), evaluating proposals and outsourcing providers, and determining the required service levels.
Prior to the creation of an RFP, the company should create a list of around 10 outsourcing companies that would be most in-line with the organization.
The RFP should have a very full picture of all business functions to be outsourced.
A good RFP must contain:
- Statement of Purpose
- Background Information
- Scope of Work
- Term of Contract
- Outcome and Performance Standards
- Payments, Incentives and Penalties
- General Contractual Conditions
- Special Contractual Conditions
- Agency Contacts and RFP Schedule
- Evaluation and Award Process
Phase 3: Design
The outsourcing contract must reflect the terms of agreement, the scope of the project, confidentiality, service level agreements, change management, pricing, and a termination plan. Service level agreements, or SLAs, are performance incentives and penalties which allow the outsourcing provider to be a partner to the organization, be able to be held accountable for their work, and evaluate the merit they provide. SLAs should consist of objectives, definitions, methods, duration (or period), and action.
Phase 4: Implementation
Implementation is the phase in which services begin to move from within the organization to the outsourcing organization. It includes:
- the assignment of a specific manager
- the fulfilment of a requirements study
- the establishment of a project timeline (that includes milestones and sign offs)
- report customization
- the design, development and configuration of the system to be used
- testing of the above system
- finally, the process of ‘going live’, where the project is ready to be undertaken.
Phase 5: Operations
The key to the success of the project is that the organization maintains responsibility for the business’ activity. The relationship between the organization and outsourcer must be communicative, understanding, and strong in its multiplicities. The outsourcing provider should designate an account manager who will be on-site at the organization. The organization should also have a point of contact, perhaps a project manager, who is fully briefed on the terms and cost-drivers of the agreement. They make a team who create and sustain communication and ultimately, success.
The outsourcer must also be aware of the organization’s key driving issues.
Phase 6: Measuring Success
Results should be objective, quantitative and comparable. One of the biggest quantifiers of success is financial benefit. Another is improving competency in the form of efficiency, effectiveness, and customer satisfaction.
Balanced scorecards can measure success in categories such as cost, service, and quality. Certain attributes are defined through a buyer-provider process with the exact metrics depending on the goals and service in question. It is a powerful technique as it is a fully integrated strategic management system, can measure performance across an organization, and can set goals.
Key principles to remember:
- the scorecard must be created with the outsourcer
- it must balance long and short-term goals
- only what is to be managed should be measured
- outsourcers mustn’t be blamed for what they cannot control
- the more measurement tools used the better
- scorecards must not only collect but communicate information on a recurring basis
Balance scorecards should accomplish:
- a customer-defined performance management system that is agreed upon by both parties that is usable at recurring intervals that benefits excellent service and discourages inadequate service.
- an established set of metrics to measure performance by and to make changes during services.
- history by which possible future renewal of the outsourcing relationship may be decided.
The exit strategy should aim to ensure no gaps in the business processes’ performance, as well as a smooth passage to another outsourcer or back into the organization. The right approach to outsourcing can greatly enhance an organization’s performance, if the decision to outsource is the fruit of a carefully decided long-term strategic plan.