Outsourcing Problems and Solutions'

Outsourcing Problems and Pitfalls

Despite of all the benefits that outsourcing can bring to a firm, the process is not free of problems. Experts have pointed out to some of the problems and pitfalls of outsourcing. Here are some of the key common problems with outsourcing (Hornback, White):

Supplier management is costly and lacks standardization.

Poor communication of requirements Supplier discontinues supporting products or won’t commit for long-term. Can’t find suitable supplier. Needlessly higher costs due to overuse of customization Lack buying power to get best products and/or pricing

Outsourcing may also be unwise in situations where: staff costs are a low percentage of overall costs; insufficient assessment of vendor bids and failure to contract in sufficient detail have created; and measurement systems have proven inadequate in monitoring vendor performance and service-level agreements.

A basic recommendation for those considering outsourcing: Never outsource a mess.

Optimize it first. This balancing of benefits and problems has produced other powerful lessons for those considering outsourcing. The clearest message is probably that outsourced network services require more (quantity) and better (quality) internal management than internal network services.

Don't outsource the company's control mechanism, since that likely means losing control.

But for all these potential pitfalls, net managers are still likely to outsource network services at record levels. Outsourcing used to be viewed as departmental suicide, and telecommunications managers avoided it like the plague. The last 25 years have shown, however, that self-inflicted outsourcing is often a route to promotion. This happens because managing outsourced services is a more difficult and strategic job. Proper management of outsourcing requires expertise not only in networking, but also in judging other practitioners of the same skills. In essence, network managers become driving instructors, not just drivers.

Will outsourcing still be around in 25 years? The fact that there are now associations for network outsourcing suggests it has reached levels of respectability and maturity that will ensure its survival. This will probably be true as long as networking remains outside the core business of a sufficient number of customers. Outsourcing, therefore, is probably here to stay-and to grow.

Managing a long-term outsourcing relationship is no easy task. Experience shows that the following are common contributing factors to imperfect outsourcing relationships (The Outsource

Institute):

1) Pricing and service levels are established at the start of the contract and usually contain no

meaningful mechanism for continuous improvement.

2) Differences in buyer and supplier cultures often cause misunderstanding and distrust. Even if

the cultures are compatible, the two parties still have fundamentally different goals and

objectives that are frequently difficult to harmonize.

3) All outsourcing contracts are based on key assumptions regarding technologies, business

conditions, personnel, and other relevant issues. As soon as the contract is signed, these

assumptions begin to change. However detailed the contract or favorable the terms, most

contracts cannot anticipate the changes in an evolving environment. This phenomenon tends to

ensure that one, if not both of the parties will become disenchanted with the relationship.

Longer term contracts that lack flexibility tend to increase the likelihood of dissatisfaction. 4) Once the contract is in force, there is a great temptation for both parties to sub-optimize the

relationship and attempt to better their lot at the expense of the other. The inflexible nature of

the contract usually favors the supplier.

5) Buyers frequently underestimate the time and attention required to manage an outsourcing

relationship, or worse, they hand over management responsibility to the vendor. The outsourcer

begins to operate in a priority vacuum, and service levels tend to deteriorate because the

outsourcer's agenda is not in sync with the buyer's business objectives.

6) Lack of management oversight is usually the result of two factors: 6a) The team that negotiated

the contract often does not stay engaged in contract management. A new team that may or may

not understand the contract's intentions are given responsibility for managing the relationship.

6b) Employees that understood the pre-outsourced environment have been transferred to the

outsourcer's team. This disruption in continuity can have significant adverse effects on the

outsourcing relationship.

Signs of Problems

Finance, Legal or Vendors Dominating the Purchasing Process (The Outsourcing Institute)

The Most striking differences here are in the significantly higher level of involvement reported for finance, legal and vendors in unsuccessful cases.

This supports the premise that outsourcing is, after all, a strategic business decision which must be made by the business’s managers. Finance and legal have to play a critical role in supporting these managers, but the survey results suggest that these issues should not come to dominate the discussions. If they do, the risk is that the real business objectives may get lost in the details of the financial and legal terms of the relationship between the customer and the vendor should flow from the business relationship--not the other way around. The survey suggests that a reversal in this relationship--regardless of the cause-- is an early warning sign of problems down the road.

Similarly, the relationship between the customer and the vendor must be a true partnership. The survey results suggest that too high a level of involvement on the part of vendors in the actual decision process is another warning sign. At the Institute, we most often see this in cases where the selection of vendors was made too soon or, in the most extreme case, the vendor-of-choice was a given at the start of the process. This can cause the relationship to become uneven and vendor- driven. Once again, outsourcing works best when the business’s manager: 1) drive the process based on clear, well understood measurable objectives; 2) follow a disciplined purchasing process; and 3) carefully build toward a win-win relationship with the ultimate vendor or vendors.

Warning Sign #2: Vendors not Pre-Qualified Based on References, Reputation or Existing

Relationships

The second warning sign seen when comparing successful and unsuccessful outsourcing projects is the relative importance placed on the various factors used to determine which vendors receive the

Our Figures show the lower importance placed on references, reputation, and existing relationships in unsuccessful projects is striking. This adds support to the growing emphasis on pre-qualifying outsourcing vendors based on their total capabilities. And, on doing this before the

RFP is distributed.

Purchasing experts, like Louis J. DeRose, president, DeRose and Associates, Inc., advise not to outsource on the basis of subjective or personal preferences or strictly on the basis of the lowest competitive bid. In selecting outsourcing providers, some of the important things to consider are the potential partner’s: technical expertise; knowledge and understanding of your company’s business and process needs; management capabilities; physical facilities and human resources; financial strength, both in the balance sheet and cash flow; and compatibility with the customer’s technical , strategic and legal interests and objectives, or what some might call cultural fit. As for choosing outsourcing providers on the basis of low competitive bids, any advantage is illusory. Price is only one element of total cost. Whatever is gained by low price can be more that offset by excess costs in operation and performance.

Warning Sign #3: Short-Term Benefits Dominate as Decision Factors

The final warning sign is an over emphasis on short-term benefits as the reasons for outsourcing.

Our Figures show the importance, from one (low) to ten (high), placed on various reasons for outsourcing and the extent these expectations were realized for the unsuccessful projects. This can be compared to other Figures which showed the same results for all the companies in the survey.

For these unsuccessful cases, cash infusion through asset transfer and resolution of short-term resource constraints or backlogs were significantly more important factors in the outsourcing decision. And, the outcomes even exceeded expectations-although only slightly. Where the results came up short, however, were in lower operating expenses, access to better or expanded skills, and improved company focus on core business. Based on these responses and the overall experience of the Institute, we believe that the problem comes about when the strategic reasons for outsourcing are overshadowed by the need to address a short-term business issue. This does not, of course, mean that outsourcing cannot be used as a tool to solve short-term problems, it just suggests that there may be trade-offs in these situations and that the longer-term return can get compromised. The Brave New World of Outsourcing

By A new day is dawning for outsourcing as the practice moves beyond cost containment and into position as a tool for corporate strategy. Today companies across the world are taking a hard look at their operations and at least considering outsourcing some of their functions. Some are even taking the giant leap of outsourcing a portion of what has been considered their core competency work.

The executives who have outsourced part of their business processes are reporting success. As

Price Waterhouse's Joe Vales tells us in the BPO Solutions column, a survey done by Yankelovich

Partners for Price Waterhouse indicates that top executives at corporations around the world are satisfied with their BPO activities to date. Moreover, many of them are looking for new areas to outsource.

As staggering as the possibilities for strategic outsourcing may be, everyone involved in the industry -- both vendors and customers -- must be aware of the realities involved in turning those possibilities into success stories. Outsourced functions do not operate in a vacuum. Companies who are considering outsourcing should look at the impact on the entire corporate operation and, with their vendors, take steps to ensure that processes interface smoothly.

We've made the point in this publication before, and I'll make it here again --companies cannot assume that outsourced functions require less management. While fewer management people may be required, those who are on the management team must have the keenly honed skills necessary to interact effectively with the vendor management team. This truth becomes especially important if outsourcing is expected to move beyond simple cost containment to a position of corporate strategy. **Also essential is the involvement of senior level management. When outsourcing becomes a strategic tool, the relationship becomes a partnership where the outsourcer is functioning in the customer's stead in ways that can affect the entire company. Having senior executives committed to the process and actively involved can forestall problems and enable swift resolution when difficulties do arise.

One of the ways in which problems can be forestalled is for the customer to do a thorough internal analysis before moving into outsourcing. The decision makers should be very clear on what it is they want outsourced, why they have chosen that particular function, how the outsourcing of that function will impact other facets of their operation, and what results they expect from the outsourcing of that function. Then that information must be clearly communicated to the vendor, along with the customer's expectations of levels of service to be provided. Vendors cannot meet expectations if they don't know they exist.

The times ahead will be exciting ones. Technology and increasing comfort with business process outsourcing are enabling companies to reshape their perations in innovative ways. New alliances and new ways of partnering are creating increasingly complex relationships. The customers and vendors that will prosper in this brave new world will be those that establish trust-based environments where flexibility and clear dialogue are key to the relationship.

The New Realities of Outsourcing

By Peter Bendor-Samuel

The old rigid, cost-based, IT-only outsourcing relationships are being dumped by the wayside in favor of new relationships that go further and in more directions than ever imagined in the past. The impetus for this reshaping of the industry is a move among businesses to identify and focus on their core skills. Everything else is "game for outsourcing," according to MCI Systemhouse's Lenny

Darnell.

Almost every supplier we interviewed talked about business practice or value-based -- outsourcing as the shape of outsourcing's future. Mary Ellen McKee of Andersen Consulting said clients are looking to outsourcing to gain competitive advantage, transform their workforce and reach new levels of performance.

As businesses reach for those goals, the structure of relationships also will change. The "strategic value" that has been bandied about in industry discussions for years has finally come into its own -- and that, said Perot System's Jim Champy means that pure outsourced big deals will decrease, as customers look for partnerships and other less traditional outsourcing arrangements.

With the increased recognition of the benefits of outsourcing as a business strategy, partnership, he said, has become more than just "a fancy phrase." Flexibility and speed in delivering business solutions are just two of the reasons Jarrow cited for companies moving away from vendor relationships and into partnerships.

As the marketplace shifts, customers also are more open to selective outsourcing, a change that has created new opportunities for niche vendors to team together in delivering specific services to specific customers. "We're going to see more contracts that are structured on the basis of finding the best of breed in particular areas," said Digital Equipment Corporation's Wendell Jones.

Spinning out of that situation will be an explosion of new vendors, creating an increasingly competitive landscape and presenting new challenges for the traditional big players. Dean Davison of Meta Group said one of the greatest impacts of new technology and the infusion of new vendors will be a proliferation of outsourcing into almost every IT organization by the year 2000. The practicing will become an industry standard, according to Barry Weigler of the Sourcing Interest

Group. "Today," he said, "if a manager doesn't look at all the ways of obtaining resources to do the best job for the company, he's not doing his job right."

The new opportunities opening in outsourcing are myriad. Darnell pointed to the entire area of human resources, from benefits to payroll and compensation to cash management. Michael Corbett of Corbett and Associates cited the pharmaceutical industry as one where more than half of the research is conducted on a contract basis and about 15 percent of manufacturing is performed under outsourcing agreements.

Then there is networking, which AT&T Solutions' Rick Roscitt said is "poised to take off like a rocket ship. Banks, he said, are leading the way in that field.

And the field of e-business is still in its infancy, according to Doug Elix of IBM Global Services.

He predicted that by the year 2000, over 50 percent of everything that is spent externally on IT services will be expended around e-business activities.

Despite the rosy future that gains in technology and new opportunities are expected to deliver, most of the vendors cited a common challenge -- the lack of skilled people to deliver services to their customers. Jeff Rich of ACS said the problem will only worsen in the next few years, as the number of new computer science graduates fails to keep pace with burgeoning demands for service.

To meet that challenge, outsourcers are going to have to be creative in the way they utilize and manage their skilled people, he said.

This, then, appears to be our industry's immediate future: unprecedented growth, fueled by technology gains and a new recognition of the strategic value of outsourcing...a reshaping of relationships to allow for more creative delivery of services...and the sticky but not insurmountable challenge of attracting, keeping and managing the skilled people to keep the outsourcing industry moving forward.

A New Way of Doing Business By Peter Bendor-Samuel A couple of years ago, e-commerce was just knocking at the door of the IT marketplace. Today, companies have shoved that door open and are walking through to discover new opportunities and new ways of doing business more profitably and more efficiently. If the industry prophets are to be believed, those companies will be joined by many others as customer demand drives e-commerce from an option to a necessity for success. What does that mean to companies that are just now considering e-commerce or who have taken the first steps with a web page and e-mail? It means that you should view this as the opportunity it is, but you should also do your homework and make good, solid business-based decisions as you move into the electronic arena. Outsourcing is expected to play a major role in e-commerce. Stan Lepeak, an analyst with Meta Group, predicts that virtually all organizations will be outsourcing some component of e-commerce. Many organizations will outsource the entire operation. What you, as a company, need to decide is what part of your e- commerce operation is suitable for outsourcing and what part, if any, you want to save. Then you face another set of questions. What vendors have skills that meet your needs? Do you want to use one full service vendor or multiple vendors? If you go the multiple vendor route, do you want to manage the relationships or outsource the management? Consider those questions carefully, because the answers can determine whether or not your e-commerce experience is a success.

A New Way of Doing Business (cont.) Business practices is a hot topic in outsourcing these days, and it is relevant in the discussion of e-commerce. Businesses need to be aware that business practices will change, and part of that change will be dictated by the demands of e-commerce. This evolution of the industry presents an excellent opportunity to take a new look at those practices. This new way of doing business may not only change, but improve the traditional practices. Apart from selling directly to customers, e-commerce also offers the opportunity for firms to transact business with one another more efficiently and economically. The internet technology is enabling companies for whom EDI had been out of reach to take advantages of the benefits of trading electronically. Those smaller players now have the opportunity, through e-commerce, to participate in the global marketplace. They can, through creativity and harnessing the power of the internet, move far beyond their potential of just a few years past. Overall, the picture for e-commerce is rosy, although companies may stumble a bit in the beginning. The key to success in e-commerce, as in any other business relationship, is know your vendor well. And communicate, communicate, communicate. As a note of caution, remember that typically it is unwise to to outsource any process or service that is undefined. E-commerce is in its infancy and just coalescing into the kind of definition and structure that can support an outsourcing contrct. Companies rushing to outsourcing should be wary of outsourcing any area where they cannot define the services and measure the performance of the relationship. Finally, remember the truth that transcends every business relationship. In order for a relationship to be successful, all parties involved must win. Contracts must be structured with enough flexibility and mutual respect to accomodate the dictates of a constantly changing environment. To look at the future of e-commerce and the role outsourcing is expected to play is to understand the excitement in a sky's-the-limit environment. E-commerce and outsourcing are natural partners in exploring the promise of tomorrow. Peter Bendor-Samuel is president of Everest Software and publisher of InfoServer.

Outsourcing Relationships: Why Are They Difficult to Manage? In outsourcing relationships, some information you are never told until it's too late! Managing a long-term outsourcing relationship is no easy task. Over the years, Everest has worked with clients to pin-point the root causes of dysfunctional or unsatisfactory outsourcing relationships. Experience shows that the following are common contributing factors to imperfect outsourcing relationships: * Pricing and service levels are established at the start of the contract and usually contain no meaningful mechanism for continuous improvement. * Differences in buyer and supplier cultures often cause misunderstanding and distrust. Even if the cultures are compatible, the two parties still have fundamentally different goals and objectives that are frequently difficult to harmonize. * All outsourcing contracts are based on key assumptions regarding technologies, business conditions, personnel, and other relevant issues. As soon as the contract is signed, these assumptions begin to change. However detailed the contract or favorable the terms, most contracts cannot anticipate the changes in an evolving environment. This phenomenon tends to ensure that one, if not both of the parties will become disenchanted with the relationship. Longer term contracts that lack flexibility tend to increase the likelihood of dissatisfaction. * Once the contract is in force, there is a great temptation for both parties to suboptimize the relationship and attempt to better their lot at the expense of the other. The inflexible nature of the contract usually favors the supplier. * Buyers frequently underestimate the time and attention required to manage an outsourcing relationship, or worse, they hand over management responsibility to the vendor. The outsourcer begins to operate in a priority vacuum, and service levels tend to deteriorate because the outsourcer's agenda is not in sync with the buyer's business objectives. * Lack of management oversight is usually the result of two factors: * The team that negotiated the contract often does not stay engaged in contract management. A new team that may or may not understand the contract's intentions are given responsibility for managing the relationship. * Employees that understood the pre-outsourced environment have been transferred to the outsourcer's team. This disruption in continuity can have significant adverse effects on the outsourcing relationship.

Redefining Outsourcing: The Value Model A White Paper by Peter Bendor-Samuel, President, Everest Software Corp. Overview The dilemma for the outsourcing customer is, "How do I turn my outsourcing relationship into an ongoing asset? How do I make it a source of value that drives ongoing benefit to the company and the value chain?" To answer these questions, we must first reflect on how the outsourcing industry has changed over the years, and then examine the old versus the new outsourcing model.

Most outsourcing relationships created over the first 20-30 years of the outsourcing industry were by companies that were in financial trouble; often referred to as "an ox in a ditch," and that were not doing a good job in the areas they outsourced.

These old structured relationships tended to favor the outsourcer and were based on a win/lose model. The company was distressed and required a significant investment by the outsourcer. The outsourcer then used that leverage to insist on long contracts with high returns, which were inherently inflexible. The result? The outsourcer wins and the company loses.

Over the last 10 years however, the trend has changed. Healthy and profitable companies are beginning to view outsourcing as an essential part of their business strategy. They are looking for outsourcers to deliver key components of data processing, supply-chain management, warehousing, logistics, HR, accounting, and other vital components of their business. By divesting themselves of these non-core activities, companies are realizing they can focus their energy on areas where they have the competitive advantage, differentiate themselves from their competitors, and take advantage of the cost-savings from the outsourced functions.

While the reasons for outsourcing have changed, the structure of most outsourcing contracts has unfortunately not. However, this paper exposes a new structure based on a win/win model where the company comes to the outsourcer as an equal partner. The outsourcer is a key component of the company's delivery structure, and they must evolve to meet the company's needs. So rather than getting the company out of a difficult situation, the outsourcer is an integral part of an ongoing business strategy. The result? Outsourcers must add value, and customers and outsourcers must develop a more equal relationship.

Redefining Outsourcing: The Value Model A White Paper by Peter Bendor-Samuel, President, Everest Software Corp. The Old Outsourcing Model In the old outsourcing model, contracts are usually put together in haste. The outsourcer takes over a distressed situation in which service levels can not easily be agreed upon. Consequently, very few meaningful service levels are defined. The outsourcer provides limited information to the customer in terms of its cost for providing services, and any inquires made by the customer are given the cold shoulder. The result is a poorly understood relationship in which both parties blame each other for increasing levels of nonperformance. These relationships historically result in a win/lose adversarial type of relationship where both parties seek to win at the loss of the other - the customer seeks to reduce the outsourcer's profits, and the outsourcer seeks to maximize its profit structure in opposition with the customer.

These contracts tend to be commodity in nature and focus on a single element of a process such as the data center. Once the pricing is determined, normally at the start of the contract, it does not change to adjust for the cost of living adjustment (COLA). For example, a company outsources its data processing department in which it is spending $20 million/year, and the outsourcer agrees to do the same functions for less - $15 million/year. However, costs rise with inflation and increased usage. Over the next 3 or 4 years, it creeps back to $20 million or more because there are no requirements for continuous improvement in pricing. The pricing is usually transaction oriented (per transaction), and the transactions are stated in technical terms that are difficult to relate back to the business. These contracts tend to be long term - between 5 and 10 years - and have significant early termination costs. Redefining Outsourcing: The Value Model A White Paper by Peter Bendor-Samuel, President, Everest Software Corp. The New Outsourcing Model In the New Outsourcing Model, the customer looks at the outsourcer as a long- term asset that is a source of ongoing value to the company. As an asset, time and resources are dedicated to managing the relationship and maximizing its value. The customer's resources are held accountable for extracting value from the outsourcing relationship. The intent is to keep the relationship for as long as it brings value - understanding that over time new parties and new alliances may need to be formed as technology and organizations change. Therefore, customers strive for long-term relationships and align the outsourcers motivation by developing appropriate incentives and penalties. They invest in tools that can objectively measure outsourcer performance and contribution as well as foster communication. There is an interdependency between the two organizations - change in one affects the other. Therefore both parties must understand the cost drivers of the two infrastructures and coordinate changes so as not to drive additional costs into the process. Customer and outsourcer must behave as an integrated supply chain rather than win/lose adversaries.

Redefining Outsourcing: The Value Model A White Paper by Peter Bendor-Samuel, President, Everest Software Corp. The Value Model -- Everest Management Framework In today's world of ever-increasing competition, it is no longer feasible for an outsourcer to provide a fixed price over multiple years that does not anticipate learning curves, improvements, and changes in technology. These costs need to be transmitted through the supply chain so as to provide lower costs to the customer. Other principles underpinning this value model are: * Results are measured on an objective basis * The outsourcer is rewarded for providing value in proportion to the value that it creates * The outsourcer's interests are kept aligned with those of the customer * The outsourcer and the customer are interdependent during this relationship - changes in one side's infrastructure will affect the other * The relationship must change over time to reflect new business objectives, technologies, people, and business conditions. What Is Outsourcing ?

 Partnering with an external provider to increase service levels and lower costs.

 Leveraging and growing new relationships to get the job done.

 Doing more with less!!!!

Why Companies Outsource?

 Focus on Core Business

 Control growing internal costs

 Control internal headcount

 Leverage expertise of other organizations

 Better manage service quality

 Increase organization's flexibility

Will Outsourcing Work For Me?

 What is the problem I am trying to solve?

 Do I have the internal resources?

 Are there outside resources available?

 Do I have a budget for this?

 What will it take to manage this project?

 Am I willing to take the risk?

 Will I save money?

What To Look For In An Outsourcing Service Partner  Technical competency.

 Great references.

 Significant infrastructure.

 Well defined processes.

 Ease of doing business.

 Commitment to quality.

 Accountability and Flexibility.

Ingredients For Success  Executive commitment by all parties

 A good project definition

 Well defined service level agreements

 An agreement to communicate

 Good people everywhere

Ingredients For Failure  Outsourcing vendor is looking for a relationship - You are simply looking for a low cost supplier.

 You negotiate price too hard. The vendor makes no money, you receive poor service.

 You don’t open the kimono, and the vendor is constantly surprised.

Important Steps To Successful Outsource Partnering  Ask someone who has done it before.

 Clearly articulate your goals to your potential vendors, and yourself.

 Clearly articulate these goals to management.  Write a short RFP or a detailed statement of work if possible.

Important Steps To Successful Outsource Partnering 2  Evaluate your vendors on a multidimensional basis.

 Communicate with your team, keep no secrets about your plans.

 Right Source only what makes sense.

 Stress the need for continued flexibility.

 Maintain a "relationship" manager.

Important Steps To Successful Outsource Partnering 3  Continually test your understandings of the service expectations.

 Approach outsourcing as a win-win partnership for you and the vendor.

 Document new requirements and test your partner’s understanding.

 Don’t expect perfection, do expect quality and continuous improvement.

Important Steps To Successful Outsource Partnering 4  Verify that your selected vendor can handle your changes and project growth.

 Agree upon a measurable service metric now and don’t be afraid to update it.

 Always keep informal lines of communications open with your outsource partner and their management.

Sample Outsource Partner Selection Criterion

 Company Stability

 Aggressive Management

 Commitment to Flexibility

 Modern Facilities

 Quality Focus  Service Capability

 Project Specific Qualifications

 Adequate Training Capability An Outsourcing Peril

An Inflexible contract can cost you money.

Outsourcing Pearl

Convert Fixed costs to variable costs

An Outsourcing Peril

Poor communications could cause a loss of touch with your customer or project.

Outsourcing Pearl

Concentrating on core competencies can increases focus and corporate productivity

A lack of outsource partner training can cause a reduction in service quality.

Outsourcing Pearl

An expanded group of stakeholders can increase creativity and enhance long term project planning.

Outsourcing access to new technologies and competencies can reduce internal corporate rate of change.

Outsourcing Pearl Recent studies by the outsourcing institute show that over 90 % of organizations that outsource are satisfied with their strategic partnerships. Avoiding Pitfalls - Three Warning Signs 1. Finance, Legal or Vendors Dominating the Purchasing Process 2. Vendors not Pre-Qualified Based on References, Reputation or Existing Relationships 3. Short-Term Benefits Dominate as Decision Factors Special thanks to The Outsourcing Institute at www.outsourcing.com. http://www.800support.com/Reference/pitfalls.html Statistics From Various Industry Outsourcing Studies The following contains selected industry statistics on Outsourcing.  Business Services  Logistics  Information Technology  Human Resources  Health Care Business Services

 77% of the firms studied had efforts under way to outsource some aspect of their business support services

 39% of the firms studied outsourced some or all of their electronic imaging, and another 12% expect to within one to two years

 7% of the firms studied outsourced records management, while another 14% expect to within one to two years Source: Pitney Bowes Management Services, 1994 study of 100 of the FORTUNE 500 Corporations Logistics

 66% of the companies surveyed outsourced import/export services

 63% of the companies surveyed employed freight brokers for transport selection, carrier monitoring, insurance, tariff and customs compliance

 49% of the companies surveyed outsourced freight audit services

 48% of the companies surveyed outsourced warehousing. Source: KPMG-Peat Marwick, 1994 study of 309 Fortune 1000 Corporations

 80% of executives believe that product delivery is now as important as product quality Source: Ryder, 1995 study of 1,300 Corporate Executives Information Technology

 50% of all companies with I/T budgets in excess of $5 million are either outsourcing or are actively considering it

 85% of banking and finance companies with I/T budgets in excess of $5 million are either outsourcing or are actively considering it

 By the end of 1995, one in every $12 spent in corporate America on I/T will flow through an outsourcing contract

 By the end of 1995 over $38 billion will be spent in corporate America on information technology outsourcing Source: The Outsourcing Institute/Frost & Sullivan Market Intelligence, 1992 survey of 1,200 companies

 Voice and data network outsourcing is a $2 billion dollar market today and will grow by 22% per year through 1999 Source: G2 Research, 1994 study Human Resources

 85% of the executives surveyed had personal experience with leading an outsourcing effort

 67% of the pension departments studied outsource at least one function Source: Conference Board, 1994 study of Human Resource Executives

 45% of the executives surveyed stated that they outsource payroll management

 38% of the executives surveyed stated that they outsource tax administration

 35% of the executives surveyed stated that they outsource benefits management

 34% of the executives surveyed stated that they outsource workers compensation

 The number of HR executives using outsourcing as part of a flexible staffing strategy increased from 18% to 30% in just the past year Source: Olsten Corporation, 1994 study of 400 Corporations Health Care

 67% of hospitals use outsourcing providers for at least one department within their operations

 90% of these hospitals use outsourcing providers for support services; 77% for clinical services, and; 51% for business services Special Thanks to the Outsourcing Institute at www.outsourcing.com . The Top Ten Reasons Why Companies Outsource One of the most important insights gained from working with hundreds of companies looking into and implementing outsourcing is the simple but too often overlooked fact that for outsourcing to be successful, management must have a clear set of goals and objectives in mind from the start. Outsourcing may entail significant organizational upheaval, transfer of important assets, dislocation of people, and long-term contractual relationships with an outside partner. None of these make sense unless the benefits to be gained and the risks involved are clearly understood and managed from the outset. Through a series of studies conducted since 1991 (including surveys of over 1,200 companies), ongoing work with its members, and ongoing reviews of other major studies, The Outsourcing Institute has developed a clear understanding of the reasons companies outsource and the potential benefits to be gained. The Top Ten Reasons Why Companies Outsource  Improve Company Focus  Access to World-Class Capabilities  Accelerate Reengineering Benefits  Share Risks  Free Resources for Other Purposes  Make Capital Funds Available  Cash Infusion  Reduce and Control Operating Costs  Resources Not Available Internally  Function Difficult to Manage or Out of Control The Outsourcing Institute recently completed its 1995 Trends Report entitled Outsourcing Purchasing Dynamics, Expectations and Outcomes. In this study, we discovered that over emphasis on short-term benefits is a clear warning sign of an outsourcing project that will prove unsuccessful. When the strategic reasons for outsourcing are overshadowed by short-term business concerns, companies are often disappointed with the results. Outsourcing is a long-term strategic management tool. For this reason, we will review the ten reasons for outsourcing in reverse order of strategic importance. The first five reasons are tactical, near-term issues and the second five are more strategic, long- term benefits.

Reason #10: Function Difficult to Manage or Out of Control Outsourcing is certainly one option for addressing these types of problems. Outsourcing does not, however, mean abdication of management responsibility nor does it work well as a knee-jerk reaction by companies in trouble. For example, in the Institute’s 1995 Trends Report, “better operating controls” rated no higher than 4.9 on a scale of one to ten as a reason for outsourcing. Companies that did rate “better control” as an important reason for outsourcing were more likely to be dissatisfied with the results. Why? The reality is that when a function is viewed as “difficult to manage” or “out of control” the organization needs to examine the underlying causes. If, for example, the reason is that the requirements, expectations, or needed resources are not clearly understood, then outsourcing won’t improve the situation -- it may, in fact, exacerbate it. If the real problem is that the organization doesn’t understand its requirements then it certainly won’t be able to communicate them to an outside provider either.

Reason #9: Resources Not Available Internally Companies outsource because they do not have access to the required resources within the company. For example, if an organization is expanding its operations, especially into a new geography, outsourcing is a viable and important alternative to building the needed capability from the ground up. Or, perhaps a major reorganization has divested the company of the resource, or a subsidiary was spun-off but a needed functional area such as logistics or computer data center remained with the parent company. In these types of situations, where the required resources would otherwise need to be built from scratch, outsourcing becomes a viable and attractive alternative. Similarly, rapid growth or expansion of operations is a strong indicator that outsourcing may be right for a company.

Reason #8: Reduce and Control Operating Costs The single most important tactical reason for outsourcing is to reduce and control operating costs. Access to the outside provider’s lower cost structure, which may be the result of a greater economy of scale or some other advantage based on specialization, is clearly and simply one of the most compelling tactical reasons for outsourcing. Additionally, companies that try to do everything themselves may incur vastly higher research, development, marketing and deployment expenses -- expenses that have to be passed onto the ultimate customer. Today’s customers are too sophisticated to accept the costs associated with an organization’s attempt to maintain singular control over all its resources. Reason #7: Cash Infusion Outsourcing often involves the transfer of assets from the customer to the provider. Equipment, facilities, vehicles, and licenses used in the current operations all have a value and are, in fact, sold to the vendor. The vendor then uses these assets to provide services back to the client and, frequently, to other clients. Depending on the value of the assets involved, this sale may result in a significant cash payment to the customer. There is one subtlety of this transaction which needs to be pointed out, however. When these assets are sold to the vendor they are typically sold at book value. The book value can be higher than the market value. In these cases, the difference between the two actually represents a loan from the vendor to the client which is repaid in the price of the services over the life of the contract That is, part of the cash is income from the sale of the assets and part is a loan to be repaid. Reason #6: Make Capital Funds Available Outsourcing is a way to reduce the need to invest capital funds in non-core business functions. Instead of acquiring the resources through capital expenditures, they are contracted for on an “as used,” operational expense basis. Outsourcing makes capital funds more available for core areas. It can also improve certain financial measurements of the firm by eliminating the need to show return on equity from capital investments in non-core areas. There is tremendous competition within most organizations for capital funds. Deciding where to invest these funds is probably one of the most important decisions that an organization’s senior management is called upon to make. For example, when a firms outsources its fleet vehicles, buildings, or computers these areas no longer compete for the company’s capital. Often, these types of investments have been difficult to justify when compared to areas more directly related to producing product or serving the customer. Reason #5: Free Resources for Other Purposes Every organization has limits on the resources available to it. The constant challenge is to ensure that its limited resources are expended in the most valuable areas. Outsourcing permits an organization to redirect its resources from non-core activities toward activities which have the greater return in serving the customer. Most often, the resources redirected through outsourcing are people resources. By outsourcing non-core functions, the organization can redirect these people, or at least the staff slots they represent, onto greater value-adding activities. People whose energies are currently focused internally can now be focused externally -- on the customer. Reason #4: Share Risks There are tremendous risks associated with the investments an organization makes. When companies outsource they become more flexible, more dynamic, and better able to change themselves to meet the changing opportunities. Markets, competition, government regulations, financial conditions, and technologies all change extremely quickly. Keeping up with these changes, especially where each next generation requires a significant investment of resources and dollars, is very difficult and “bet your company” types of investments are all too common. Outsourcing is a vehicle for sharing these risks across many companies. Outsourcing providers make investments not on behalf of just one company, but on behalf of their many clients. By sharing these investments, the risks born by any single company are significantly reduced. The result is that when companies outsource they become more flexible, more dynamic, and better able to change themselves to meet the changing opportunities. Outsourcing is, in effect, the management tool for becoming what is popularly called the “modular company,” the “virtual corporation,” or the “agile competitor.” Reason #3: Accelerate Reengineering Benefits Outsourcing is often a byproduct of another powerful management tool -- business process reengineering. It allows an organization to immediately realize the anticipated benefits of reengineering by having an outside organization -- one that is already reengineered to world-class standards -- take over the process. Reengineering is the fundamental rethinking of business processes, with the aim of seeing dramatic improvements in critical measures of performance, such as, cost, quality, service, and speed. But how are the benefits of reengineering to be realized? And when? Outsourcing allows an organization to immediately realize the anticipated benefits of reengineering by having an outside organization -- one that is already reengineered to world-class standards -- take over the process. There can be a lot of executive time invested in taking an internal function to world-class standards. More and more frequently, organizations are deciding to outsource the function to an organization that can immediately guarantee the improvements offered by reengineering and assume the risks. Outsourcing becomes a way to realize the benefits of reengineering today as opposed to tomorrow. Reason #2: Access to World-Class Capabilities By the very nature of their specialization, outsourcing providers can bring extensive world-wide, world-class capabilities to meeting the needs of their customers. Just as their clients are outsourcing to improve their focus, these vendors have honed their skills at providing the services in which they specialize. Often these vendor capabilities are the results of extensive investments in technology, methodologies, and people -- investments made over a considerable period of time. In many cases, the vendor’s capabilities include specialized industry expertise gained through working with many clients facing similar challenges. This expertise may be translated in skills, processes, or technologies uniquely capable of meeting these needs. Partnering with a world-class provider can offer the following advantages:  Access to new technology, tools, and techniques that the organization may not currently possess;  Avoidance of the cost of chasing technology and the training costs associated with each new generation;  Better career opportunities for personnel who transition to the outsourcing provider;  Enable the client’s staff to concentrate on building new and improved capabilities that meet business requirements rather than managing current operations;  Outsourcing providers typically have more structured methodologies, procedures, and documentation -- as well as larger, more experienced staff -- this can result in fewer operational problems;  Competitive advantage through expanded skills;  A better price/value mix on investments;  The provider’s primary business is delivering world-class support to clients and partners. These companies have a track record of proven experience and leadership in the application of their specialty to business processes;  Access to better tools for estimating the costs of new solutions;  Access to industry knowledge and expertise the provider has gained from other clients/partners;  On-site staff to support the client’s needs. Reason #1: Improve Company Focus Outsourcing lets the company focus on broader business issues while having operational details assumed by an outside expert. Outsourcing is an organization-shaping management tool which can lead to a clearer more effective focus on meeting the customers’ needs. For many companies, the single most compelling reason for outsourcing is that several of the ‘how’ type of issues are siphoning off huge amounts of management’s time and attention. Too often, the resolution of these issues are stuck in middle management ‘decision gridlock.’ This creates financial and opportunity costs that affect the organization’s future. Outsourcing can enable an organization to accelerate its growth and success through expanded investment in the areas which offer it the greatest competitive advantage. Special Thanks to the Outsourcing Institute at www.outsourcing.com .

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Lead Author: Lori Hornback, Irvine Sensors, Costa Mesa, CA (http://www.eng.uci.edu/~top/ContractManufacturer) By Nick White (http://www.data.com/25years/outsourcing.html) Peter Bendor-Samuel The Pearls and The Perils of "Outsourcing" , presented by Dan Mendel,, (http://www.800support.com/Reference/orerug.htm#An Outsourcing Peril 4)

Special thanks to The Outsourcing Institute at www.outsourcing.com.