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SmartAdvice: When To Proceed With Caution About Outsourcing

The Advisory Council suggests you consider new approaches to these initiatives: outsourcing, Web services, and renegotiating software licenses

Editor's Note: Welcome to SmartAdvice, a new weekly column by The Advisory Council, a Westport, Conn.-based business-technology advisory service. Each week the column will spotlight TAC's advice on two or three issues of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. We encourage you to write to TAC and request answers to pressing business-technology issues. They will not solicit you unless asked, and will respond to you here or directly via E-mail at

Topic A: How do I know if we're rushing too quickly to outsource? What signs indicate a project or function might not be an appropriate outsourcing candidate?

Our advice: Outsourcing has been fashionable in corporate circles for a number of years. Many managers report that they're under intense pressure to outsource everything from janitorial services to customer support. Yet more than 70% of all outsourcing contracts are either renegotiated or terminated prematurely. Clearly, outsourcing isn't the panacea portrayed by the press and outsourcing companies. However, if applied correctly, there's no doubt that it can be cost-effective. Just be careful that it matches with your business objectives and competencies before taking the plunge.

Ironically, the decision to outsource, particularly offshore, can ultimately be more costly to a business than keeping the functions in-house. When evaluating the costs, it's important to factor in loss of expertise and corporate knowledge, lack of flexibility, and other hidden factors that can tip the equation toward keeping it in-house. In addition, lost opportunities can result when an outsourced function goes off the in-house radar screen. The longer the term of the contract, the more likely that it will be more expensive than it needs to be. This may seem counterintuitive, but technology and business conditions are changing so rapidly that a contract that looked good three years ago may seem costly today. It's common for either or both parties to want to renegotiate or even renege on a partially completed contract because the economic environment has changed.

Signs that it's important to proceed with caution include:

  • Your company doesn't have previous experience working with outside vendors in a partner relationship;

  • Your company culture isn't conducive to working with outside partners;

  • Your company already has highly efficient integrated systems and processes in place;

  • The project or function has ill-defined objectives and unclear deliverables;

  • Service level agreements aren't crystal clear to all parties;

  • The process is part of your business's core competitive advantage, whether you know it or not. If so, a vendor will rarely deliver such a service better than you; and

  • You are unwilling to spend the time required to coordinate multiple outsourcing vendors. Companies tend to underestimate the effort it takes to coordinate all their vendors' services without accidental coverage gaps, fragmented services and vendor conflicts.

Never forget that outsourcing is a relationship where your strategic partner is a vendor who means to profit from a piece of your business. Walking the thin line between vendor and partner is difficult and fraught with pitfalls ranging from mismatched cultures and unequal terms to unenforceable service-level agreements.

Related Links

Outsourcing Institute

Portfolio Management

When making the decision to outsource, it's also important to remember that not everything is suitable for outsourcing, and your company needs to have the skills, culture, and processes in place to ensure a successful vendor relationship. Managing outsourcing takes a different set of skills than maintaining in-house functions. If your company's staff doesn't have the skills-"vendor relations, project management, negotiation, flexibility and people skills-"to work with an outsourced vendor, then you should either train them or seriously reconsider outsourcing.

On the other hand, if your firm lacks the functional know how, there's no question that taking advantage of the economies of scale and special expertise of an outside company can be a real benefit. The return on investment is less clear if your company already has good services in place. Outsourcing can be highly successful when you have identified an easily modularized, highly quantifiable, and definable task. The more preplanning prior to contract bidding, the more likely it is your project will be successful.

-- Beth Cohen

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