108 Best Practices to Build Sustainable Strategic Outsourcing Partnerships

By Dr. Raghu Korrapati

This book is the essence of author’s 30 years of business management experience with highly successful multinational companies, coupled with distilled knowledge of his close interactions with great industry leaders. The book comprehensively covers - developing a solid outsourcing strategy, deciding what to outsource, negotiating a good deal, keeping the engagement on track, ensuring access to the vendors’ best resources, or even terminating a deal in a way that does not harm you. The book helps everyone whether you are from a firm that is looking to outsource or a vendor who seeks to establish his company as first choice partner for clients, to gain the advantage you are looking for in the fiercely competitive marketplace of today. The book is not just a guide to people who want to benefit from outsourcing. It is a comprehensive account of what all vendors must do if their goal is to establish trust, grow the engagement, and be known as a trusted partner. And 108 required knowledge and skill areas so that one can develop an action plan to build a sustainable partnership for competitive advantage.

• Language: English
• Publisher: Diamond Books
• Release date: Oct 27, 2020
• ISBN: 9789385975899

Book preview

Book

SECTION 1

STRATEGY

1. Develop outsourcing roadmap

If you have specific and significant goals for your outsourcing engagement, you need a map to make sure you arrive at the intended destination.

- Stephanie Overby

Most information technology leaders enter into outsourcing relationships with a reasonable understanding of where they’d like their IT services provider to take them—some point in the future where the state of IT has been improved by saving money, increasing efficiency, or implementing new enterprise systems.

The problem with that strategy is that it’s akin to heading off on a road trip to a great new destination without a map or directions.

Outsourcing clients need to specify not only where they are going — we want a cost reduction of 20 percent over five years, for example—but also how they’re going to get there. One way to do that is to create a transformation roadmap: a definitive plan specifying how the vendor will provide those contractually obligated improvements. A transformation roadmap should consist of a set of projects prioritized by their importance as well as the timing of their implementation.

Each transitional project in the overall transformation should include a specific set of information. For example, if the overall transformation roadmap calls for overhauling an organization’s help desk, one transitional project might be changing the password-reset process, which would look something like this:

Description/Objective

A brief description of the project (The introduction of automated password-reset tool)

Scope

Intended scope of the project (An IT Help Desk)

Investment

A non-binding estimate of what the anticipated investment will be and who is responsible for making the investment (Projected implementation cost of password-reset system is $300,000. Cost will be shared by client and provider.)

Benefit/Savings

Anticipated benefit of implementing project—typically expressed in terms of ROI or productivity (Implementation of the password-reset tool will reduce password calls to the Help Desk by 50 percent annually. At 50,000 password-reset calls annually and $20 per call, anticipated annual cost savings is $625,000. ROI achieved in approximately six months.)

User Impact

Anticipated impact to the end-user community (Average hold times at Help Desk today are 45 seconds. Users will benefit by being able to reset their passwords at their convenience with no hold time, with a corresponding increase in customer satisfaction.)

Dependencies

Any dependencies that might affect the project (In order for the client to achieve a higher ROI, the client must accept the provider’s existing password platform. The client’s corporate security must also approve the vendor’s password reset platform, policy and procedures.)

Timeframe/Approach

Projected implementation timeframe and any specifics related to project approach (The project will take 90 days and will start in the first quarter of 2016. Standard provider project methodology will be followed.)

Then, each project can be categorized into one of three project types:

Category A: Client/provider has sufficient information to start the project, create the project plan, define investment requirements and estimate savings.

Category B: Client and provider believe the project could have a positive effect but lack sufficient information to create project plan, investment requirements or savings estimate.

Category C: The idea, vision or innovation are anticipated to be beneficial but will need to be jointly evaluated in the long term.

While some projects, particularly those that fall into the last category, may not be completely defined, the information included as part of the transformation roadmap should be descriptive enough to allow client and provider team members to effectively evaluate and prioritize them on business needs and the available budget dollars.

The first year of a transformation roadmap may even be incorporated into the initial contract, along with language that commits both parties to an annual review of the roadmap and funding mechanisms for revising it. If not enough information is available to include a first year plan in the signed papers, outsourcing customers should include language that stipulates a methodology for and obligation to create a transformation roadmap in the first year of the deal.

The roadmap is mutually beneficial. It takes the vague notion of continual improvement and puts it into concrete terms. Additionally, it helps set expectations on both sides for what changes are coming and when they’re expected to occur.

The only danger is getting too deep into the details in the early stages of every project. If that happens, both the client and the vendor waste valuable time arguing about the people, processes and tools of each and every project rather than the benefit of that project to the overall company business strategy. Both parties have to learn to walk the fine line between too much detail on each project and too little—with the right amount being just enough information for each party to make a strategic decision based on the merits of the individual project, and its ultimate benefit to the business.

2. Plan for the long-term before taking short-term actions

Of all the stages in the outsourcing life cycle, the initial strategic planning stage is among the most important.

-Anonymous

Outsourcing projects – large and small – are not generally planned with detail and underpinned by long-term strategies.

In order to achieve a solid, realistic outsourcing strategy, an organisation must be able to analyse every aspect of its business, which is often a difficult task as it may require numerous areas of the business to work together, possibly for the first time.

The strategy setting process will ultimately change the roles of both management and employees alike, and will also come under great scrutiny. Therefore, it is vital to ensure that all stakeholders – employees, clients, customers and suppliers – are included in the prerequisite due diligence process, which will set the components of the outsourcing and is vital for the development of the strategy.

Determining the objectives

Organizations which have a clear vision of their strategic and tactical objectives prior to entering an outsourcing agreement have a much better chance of ensuring that their outsourcing suppliers are able to meet those objectives. They will also have the ability to clearly communicate those objectives to the service provider and to use them as a contractual basis of their relationship. They can also use the objectives as a management tool, so that both parties know the criteria set to keep the agreement on track.

Assessing the risks

An important element of setting a strategy is assessing the potential risks to all parties involved. Each outsourcing procurer has its own set of objectives, however each comes with its own set of risks – either specific to their organization or market – the following are common problem areas:

Failure to obtain commitment to the customer’s vision or culture from the service provider;

The distraction of having to manage the relationship with the service provider – an organization with its own goals and a different culture;

A perceived loss of control and a feeling of over-dependence on service providers – which can be particularly acute where there is a single, large service provider and few retained staff;

A feeling on the part of retained management staff that they have less influence on the development of strategy and policy and on the part of retained technical staff that they have become less skilled in their specialist field; and,

Unanticipated expenditure – services that were assumed to be included in the service provider’s package appear as extras in its invoices and/or promised cost.

Considering alternatives

The initial review of objectives and risks should also include the consideration of alternatives to outsourcing. Some organizations looking to outsource give their existing in-house departments the opportunity to put forward a competing bid, while others conclude that the benefits available from outsourcing could be obtained more economically by changes in internal processes, for example increased standardization. Even when it is decided that outsourcing is a viable solution, there may be steps that the customer could take prior to the procurement process that would put it in a better negotiating position.

Testing the market

Having determined the objectives required from outsourcing, it is prudent to test whether those objectives are achievable in the marketplace. To do this, organizations either use consultants to tell them what is available or approach suppliers directly - or a combination of the two. The direct approach generally gives the customer an opportunity to test assumptions as well as refine objectives. Market feedback is particularly important in view of an organization’s increased willingness to consider ‘off-the-shelf’ outsourcing solutions, sometimes called COTS (commercial off-the-shelf) solutions.

Planning internal change

Inevitably, any outsourcing will force some degree of internal change, therefore the outsourcing strategy has to be comprehensive in its detail as to how these internal changes will be implemented, and also what the implications will be. The degree of change can be modest or very significant. For example, where a group whose members have each run their own bespoke HR processes decides that all HR will be sourced from a single service provider, each company will have to amend its processes to conform to those of the service provider.

Outsourcing transactions that involve this degree of change are often referred to as transformational, and one of the key lessons of transformational outsourcings is that internal change within the customer requires as much, or more, planning and effort as negotiation with the service provider. Several studies of projects in the public and private sectors have shown the danger of trying to implement an ambitious new IT system when the users who are to operate that system are not organized in the way that was assumed by its designers. A key element in any planning is an assessment of the degree of change required and the resources required to manage that change.

Understanding the starting point

Any organization looking to outsource an internal function needs to understand that function fully before it can even consider the outsourcing of it.

At the very least, this means having a clear idea of the extent and capabilities of the internal function, the services that it supplies, the standards to which those services are supplied, the resources, including the staff, assets and contracts, it uses to produce the service and its running costs. Assembling this information can often be one of the most difficult tasks in an outsourcing project, particularly where the internal function is widely distributed across the customer organization.

Planning the procurement

The procurement phase also contains time-consuming tasks, such as service definition and contract negotiation. These tend to impose a heavy workload on the procurement team and are often difficult to reconcile with business as usual. Therefore one further strategic consideration is to determine the way in which the procurement will be managed, establish the balance of internal and external resources and set a budget and project plan.

3. Consider the intangible benefits of outsourcing

Inflexibility caused by an excessive cost reduction focus can result in business disruption.

-Anonymous

Clients need to look beyond cost savings to some of the subsidiary benefits of outsourcing. Outsourcing factory IT functions such as help desk and desktop support enables CIOs and technology experts to focus on innovation and competitive differentiation, rather than on keeping the lights on for utility IT functions. Contracting with an external service provider can give customers access to expertise, tools, methodologies, and disciplines that they wouldn’t have access to otherwise. Outsourcing, through the use of structured contracts with clear metrics and performance incentives, can help surface the real cost of IT service and support—costs that are often hidden in shadow support and under-the-desk servers and applications.

There are many reasons for firms to consider external services. Firms considering outsourcing are more likely to achieve success when their search process clearly outlines their expectations with regard to technical, financial, and procedural issues. The goals and objectives, critical success factors, and discovery processes that precede the search process are the input; a successful relationship governed by an SLA-driven, mutually beneficial contract is the outcome. Although it may be obvious that a checklist of benefits and expectations for the relationship is a key element of the selection process, IT executives also need to look at more intangible attributes such as passion and balance.

In the realm of passion, some of the factors that clients seek to discover are whether the potential partner:

Has a passion for excellence, rather than just satisfaction

Has a strong commitment to the relationship’s success

Takes ownership of the work

Brings brainstorming and creativity to the table

Goes above and beyond contractual expectations

A vendor should have balance, which can mean the following attributes:

Seeking a level of give and take

Seeking a happy medium in disputes or challenges

Facilitating compromise

Implementing joint ownership of issues and a win-win approach to solutions

Any IT professional with experience in outsourced project work would agree that these characteristics, although a bit challenging to articulate and uncover, go a long way toward ensuring that inevitable challenges and misunderstandings will be resolved in an atmosphere of collegiality.

4. Plan carefully - be as specific as possible

Deciding to outsource an IT project is a strategic decision for a company and it’s important to not rush headlong into a project without proper planning.

-Nick Rossiter

Companies looking to outsource some IT functions should plan carefully ahead of time, considering a broad range of issues, to help ensure these projects will be successful. Start by analyzing the total costs of the project. Don’t look just at the difference in labor costs. Be sure to factor in additional costs for conducting due diligence, communications, oversight, international travel and training. Since outsourcing costs will not be constant during the life of a project, companies should consider the costs for different stages of the project. Since initial costs are generally highest during an outsourcing project, your company may not realize significant cost savings until one or two years after the start of the project.

It’s also important to be realistic about the level of productivity that outsourcing providers can offer. Some companies assume that the productivity of an outsourcing partner will match that of internal IT staff: this isn’t always the case. In particular, be prepared for lowered productivity during the initial phase of an outsourcing project.

Throughout the life of the outsourcing project, productivity levels may be affected by staff turnover at the outsourcing provider. In these cases, new staff may have to be trained to fully understand the applications they are working with.

Another key factor to consider is whether your company’s senior management has bought into the outsourcing project. Support from top executives is instrumental in keeping an outsourcing project on track. Effective communication between your company and your outsourcing provider are also important to the success of an outsourcing project.

All communication between your company and the outsourcing provider should be documented and made as clear as possible to avoid misunderstandings. This is particularly important when conveying the technical requirements and business objectives of an outsourcing project. If companies fail to communicate these goals clearly, problems that may arise include lower productivity and increased errors in the project.

Another issue to consider when choosing an outsourcing service provider is culture, which differs from country to country and between companies. Be sure to consider which cultural issues may affect the working relationship between your company and your outsourcing provider. Seek advice from consultants and consider cultural training when necessary to ensure a smooth working relationship with your partner. In addition, sending internal IT staff overseas to work with the outsourcing provider may help to minimize the risk of cultural issues affecting the success of the outsourcing project.

Rushing into an outsourcing project before you have fully considered all of the factors associated with these kinds of projects can result in additional costs or poor results. Be sure your company is ready to outsource before taking the plunge. Make sure that internal staff understand the reasons for outsourcing and are supportive of the project. Carefully consider all of the risks and determine how much risk your company is willing to accept. Once you have done this, look for ways to mitigate risks.

Companies should also assess the maturity of their own IT operations before outsourcing, according to Gartner. Some factors to consider are standardized methodologies, project management skills and service-level agreements, among others. Any weakness in these areas may result in lower productivity and a less-than-desirable result. When considering an outsourcing project, companies are well advised to take their time, considering a range of different geographies and service providers. India is the best-known outsourcing center and has a large number of experienced outsourcing service providers. But there are other choices, such as China or The Philippines, which have a smaller number of experienced outsourcing providers to choose from.

When you’ve settled on a partner, you should consider starting off with a smaller IT project that is not mission-critical before moving on to larger and more important projects. This will allow you and your outsourcing partner to develop a strong working relationship and will minimize the risk of problems.

5. Assess outsourcing readiness

Assess the business processes and associated technical IT support from strategic and tactical, operational, and financial viewpoints.

- Anonymous

An Outsourcing Readiness Assessment helps determine the receptiveness of an organization towards outsourcing, as well as the feasibility of the application or process being outsourced. Therefore, it is essential that this assessment be conducted, whether you are considering outsourcing a specific business process or a technical aspect of IT development and support.

Outsourcing initiatives can encompass a broad scope of activities. They range from tactical short-term projects oriented towards achieving cost savings to strategic long-term objectives directed towards establishing permanent revenue and profit enhancement derived from the introduction of a global perspective. Each individual initiative has to be analyzed and evaluated on its own merits. For example, how prudent is it to outsource all technical knowledge and support for a critical core business application? The answer to that question may largely depend on the nature of the business and not necessarily the technology being outsourced. If the marketplace is fluid, dynamic, and subject to rapid change, then outsourcing all technical knowledge is not appropriate, as the ability to introduce change is materially restricted.

Outsourcing Readiness Assessment is a disciplined approach designed to assist in the analysis and evaluation of the feasibility and desirability of outsourcing business processes and/or associated IT support services. In almost all instances, the assessment consists of a review of the business process itself and the technology that supports it. Some of the questions raised and answered during a typical assessment are:

Strategic & Tactical – Are the outsourcing objectives consistent with and do they correlate with the long-term strategic and short-term tactical plans of the company?

Operational – At a more granular level, what exact functionality is going to be outsourced and how will it interrelate and integrate with the remaining resident functionality? How will this work?

Financial – What are the cost benefits to be derived?

Risk Assessment – What are the quantified risks associated with the contemplated outsourcing initiative and are they incorporated into the service level agreement?

A simple checklist below may help you determine your organization’s outsourcing-readiness:

Defined Need. Have you clearly identified the process that needs to be outsourced?

Cost & Benefits. Have you identified the financial cost to the company if you were to keep this process in-house?

Budget. Have you determined a source from which financial resources will be used to implement this campaign?

Documentation. Have you documented the process step-by-step so that it can be easily replicated?

Benchmarking. Have you developed a baseline expectation of performance based on real results?

Designated Success Manager. Will there be a specific point of contact within your organization responsible for making this campaign a success?

Timeframe. Do you have a clear timeframe for the project to be completed?

If you have answered no to any of the checklist items above, take some time to clearly evaluate your readiness.

6. Pick the right projects to outsource

Don’t outsource something just because you don’t want to do it.

- Jim Lanzalotto

Companies generally outsource in one of two ways: they outsource a single component of their daily operations, or they establish outsourcing as a strategic part of their business. Apple, as an example of the latter, relies on outsourcing to fulfil its operations model. Apple designs its products internally, and then its contractors operate a complex supply and manufacturing chain on its behalf. In contrast, outsourcing the printing of advertising fliers for your company is simply outsourcing a portion of your daily operations.

Before choosing which tasks you can farm out, take a hard look at your business and determine your strengths and values. Small businesses must identify their core competencies and capabilities and focus their own R&D, talent management and resources on being the best in their industry at these, says Marc Resnick, Ph.D., a small business consultant and director of the Institute for Technology Innovation at Florida International University. Outsourcing any aspect of these tasks would be a big mistake because they would cease to offer anything that their own customers couldn’t get elsewhere. So a small business that focuses on product design should not outsource anything related to developing its internal design talent or its design activities. But it should investigate all opportunities for outsourcing tangential processes like payroll services, IT and so on.

The tasks that you choose to outsource may vary depending on your industry. In general, there are two broad types of tasks that lend themselves particularly well to outsourcing:

Tasks that are critical to your operations, but not a vital component of your strategy.

Pretend, for a moment, that your company manufactures organic fruit snacks. While you need to deliver your product to grocery stores and other outlets, how you choose to do so is unlikely to impact the