Orchestrating Outsourcing Success - Page 2

Oct 18, 2004

Binod Taterway


Business service/IT outsourcing is moving towards high-end, process outsourcing that involves multiple participants. Up until now, organizations have been outsourcing processes related to a single business function (payroll, help desk, etc.) that have been usually self-contained and these organizations have been able to manage their outsourced services/products because of clearly defined roles/responsibilities among all participants.

But, with process outsourcing going to more than one provider, organizations now need to wrestle with another layer of complexity that previously did not exist. This is called multi-sourcing; where organizations are increasingly mixing and matching various kinds of providers to obtain better services.

This approach mitigates the risks of outsourcing processes/data to only one provider -- a mistake that General Motors made with EDS in 1986 that has taken almost two decades to fix. Today, General Motors is moving aggressively towards multi-sourcing to foster innovation and agility by taking back the critical processes that were outside of their organization.

Outsourcing Discipline

But before an organization can be successful at multi-sourcing, they need a lot of discipline to become effective.

Globalization creates opportunities to become far more competitive if process outsourcing can be done effectively. Today, multi-national organizations are becoming brand organizations and they are even outsourcing manufacturing/production processes once considered core in an effort to become agile, real time enterprises (RTE).

Organizations in this transformational effort need to shed assets/capabilities and replace them with access to assets/capabilities -- essentially creating a virtual enterprise that is made-to-order instead of made-to-stock.

In made-to-order, process maturity is key because each product/service is uniquely produced. A real-time enterprise needs to become an orchestrator to deliver its branded products and services with worldwide links to the supply-chain, established and managed in real-time.

Being able to run an outsourced operation is a competency many organizations lack. In the services and IT industry, most organizations are outsourcing at a relationship level that Gartner calls the "utility" level. This usually consists of back-office functions that deliver business value to the organization in terms of revenue enhancement or cost savings.

To get the most value from outsourcing, organizations, according to Gartner, need to move up to "enhancement" and "frontier" relationships where their relationship with the service providers become highly complex, interdependent, and intertwined.

The benefits derived are enormous in terms of business value to the organizations that outsource at this level. By constantly shedding processes to providers, organizations essentially become brand organizations that can deliver business value utilizing a global pool of independent, but interconnected service providers.

Key Issues

Many outsourcing consultants focus on getting the best deal from their client's service providers. But the old thinking of getting the best "deal" (often price) seldom works over a long period of time.

Service providers need to become an integral part of the service supply-chain, to the point where they become extensions of an organization. Managing the relationship and aligning organizational goals for successful service delivery becomes more than just setting up the "deal."

The next generation of outsourcing will focus on IT process outsourcing. This embodies fine-grained outsourcing where pieces of business and IT functions are outsourced.

Consider, for example, application development utilizing multiple service providers. From requirements to rollout, you could outsource many steps of the processes (such as development, QA, and hosting) to different outsourced providers and retain the requirements, design, and user acceptance in-house.

In this complex multi-sourced environment, all parties that are brought-in to perform application development must operate in concert. Operating effectively in this example requires a high degree competency managing your providers and executing the integrated business processes.

Organizations need to focus on key challenges when they consider outsourcing:

Maturity: An honest assessment of whether your organization can effectively outsource a function/process. Many organizations rush to outsourcing without understanding the infrastructure needed to manage the outsourced providers.

A critical requirement to move to outsourcing is an organization's maturity in supporting service orientations -- an internal orientation of who provides services to whom. Most organizations still operate in functional silos that would create problems when it comes to managing outsource providers.

Benefits: What benefits are expected from outsourcing? Is there a lack of competency/capabilities in-house that an outsourced provider can supplement? Are there long-term benefits to the organization in terms of cost, quality, and access to resources?

Also has the organization made a strategic decision to outsource this function/process because such competencies do exist in outsourced providers? Having a business case sets the economic expectations of outsourcing.

Proof-of-Concept: Have you done a proof-of-concept in outsourcing before embarking on massive outsourcing deals? What is the impact on your organization from an asset, people, and cultural perspective? Could the organization survive and support outsourcing which is generally associated with the transfer of such assets and people?

Sponsorship: Has the top management bought into outsourcing from the organizational growth perspective? If you are outsourcing at the utility level, do you have sponsorship to move higher up to enhancement and frontier relationship?

Investment: Do you have support for the right investment to manage external service providers on a global scale?

Answering these questions is critical to any robust outsourcing strategy.

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