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Outsourcing services selection: all not as it should be

Outsourcing services selection: all not as it should be

As markets mature, so should the processes that underpin them. Maturity and experience should drive refined processes, increased transaction speeds and greater customer satisfaction. General market sentiment is that Outsourcing is failing to deliver on promises and expectations.

  • 20% outsourcing relationships fail within the first 2 years, and 50% within 5 years
  • Over 50% of benefits noted as ‘highly important’ had not been fully realised

Traditional Sourcing processes are too slow, too expensive and add too little value, with little or no accountability. Differentiation and innovation are required to evolve existing models or create new approaches by providing the correct tools and insights.

Outsourcing – an accepted business practice and Boardroom tool for increasing enterprise performance and driving shareholder value for more than 20 years – remains a callow market, rooted in adolescent naivety. Not only is all not as it should be, reluctance to embrace maturity, learn from mistakes and build on experience restricts market participants from delivering Sourcing as it can be.

Integral to any market is the demand and supply interface. The ability of a buyer to articulate demand based on identified needs and potential opportunities, and to leverage the market to supply the means to satisfying those needs is the key performance indicator for the health of the market. Outsourcing is no different.

What differentiates Outsourcing from other markets is that the processes & tools to articulate demand and to leverage supply are:

  • Derived from other markets: based on the procurement of products; indirect materials; or ‘point solutions’ and projects, and essentially they fail the ‘fit-for-purpose’ test
  • Resistant to maturity, shaped and delivered today as they were in the 1990s and displaying none of the characteristics of evolution and process improvement intrinsic to the good practice inherent in other areas of your business

In a healthy and performing market this scenario would be considered unacceptable, whether you demand services or make a living from the margins returned from supplying them.

Before considering how this can, and is being changed, let us consider briefly why this situation has developed. Put simply, there are three groups who must share culpability to a greater or lesser extent.

Firstly, the Demand-side: trying to solve strategic issues through the reliance on arcane tactical processes. The drivers for considering Outsourcing are, more often than not, rooted in the agenda and performance indicators of the Boardroom, yet the tools to address these issues are more usually employed for the procurement of stationery or raw materials (for which it is fair to read on a cost basis alone). Leaving ourselves exposed to accusations of triteness, this might well be described as using a tactical hammer to crack a strategic nut.

Where enterprises further inhibit their own processes is in the interface between the strategic and tactical elements of selection. Seldom are decision rights or the drivers for an initiative articulated, and even less frequently are they adopted as the measures of evaluation and success and communicated as such internally or externally. The result is the aforementioned cost-based procurement, effectively a (reverse) auction. Long and drawn-out, frustrating and costly for all (with the exception of the third of the culpability triumvirate – see below).

Finally, enterprises’ internal analysis of the identified need and the quantification of such in the form of a solid business case is often over looked. Due diligence comes much later from the Service Provider on the customer and the contract, but an internal rigorous approach to the understanding of needs and self-awareness is absent in the majority of selection cases. Where a business case is adopted, external data and advice is relied upon – normalisation and generalisation the name of the game here. Ultimately the decision is taken to proceed with a potential transaction without any certainty that there is a case for change.

Secondly, the Supply-side: who have systematically failed to push through Services procurement good practice into their target market. Although challenging in the extreme, this should not detract from the criticism. In the area of helping the market become an informed buyer and building trust and maturity, the Service Providers are no better placed today than twenty years ago.

The position of the Service Provider is further undermined by historic contract performance. High-profile failures affect the whole of supply, fairly or unfairly, and traditional processes for the selection of a partner are inherently confrontational and suspicious from the outset. As negotiations develop and a Provider is selected this situation does not improve, yet both parties expect and demand a positive and supportive relationship to be established from day one of the contract, ill-effected by months of contradictory practices. In being fair to Service Providers, however, we feel it important to note that the negotiations and confrontational elements to signing a contract are very often driven by third parties who are unaccountable to the outcomes and uninvested beyond the traditional transaction.

Thirdly, the Advisory community: traditionally whose fees and profits are directly linked to the length of time a process takes and whose failure to increase speed to transaction over 2 decades should be indictment enough.

This varies of course on a case-by-case basis, and we are by no means saying that every transaction is the result of a failed process. Moreover, failings in the transaction do not necessarily indicate a failure in the resultant relationship. What we are saying, however, is that the likelihood of resultant success and a positive relationship is threatened by the very process adopted to establish the relationship – which is not only contrary, it is logic at its most impenetrable.

Before you get the urge to reconsider your Sourcing activities, or reopen the Strategy development activity (probably called something along the lines of One Enterprise, or similar) that ate up so much management effort and support budget, please read the following. The market is changing – emerging from protracted adolescence, if you will.

Traditional Selection vs Brokerage

Innovative approaches to the selection of services partners are currently being pioneered in the Nordic market, wherein the supply and demand operate in an entirely more collaborative manner, supported by a specialist trusted Broker, with the intent on establishing a real case for change and getting to a joint future faster and at less implied cost – both relating to the process and the cost of the Sourced service itself.

“This is how it’s always been done” is no longer acceptable. Maturity means not only coming of age physically in terms of size and scale, but implies development and learning from experience. As pressures on the ‘bottom-line’ squeeze activities on the demand-side, and similar sentiments drive the imperative for more efficient conversion of opportunities and ‘top-line’ growth amongst the supply-side community, it is clear that we are witnessing a convergence of necessities. The time has come for greater leveraging of the broader market as a whole. Outsourcing implies innovation and change and this should begin long before a contract is signed.

As the market matures we are finally seeing Outsourcing as it should be.

By Peter Skarendahl & Paul Bailey

Posted in Outsourcing Comments: one

 

One Response to Outsourcing services selection: all not as it should be

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