Outsourcing can be a strategic weapon for companies to use to reduce costs and increase space for innovation—that is, if they can overcome the challenges associated with it. Megha Chawla, a partner with Bain's Performance Improvement practice, discusses the obstacles that some companies face with outsourcing and how they can overcome them.
Read the Bain Brief: Outsourcing Aims Higher on Cost, Performance and Innovation
Read the transcript below.
MEGHA CHAWLA: Outsourcing is a mature performance improvement level that's been around a long time. Yet, we find many organizations find that outsourcing hasn't lived up to its initial promise. The cost benefits, while exciting upfront, tend to tail off. The service outcomes and the innovation outcomes are often felt to be underwhelming.
At the same time, there are many organizations that have learned to turn outsourcing into a stealth weapon. They see not only initial cost benefits, but sustained cost benefits, often to the tune of 25% above normal. Additionally and very interestingly, they leverage outsourcing as a way to infuse greater flexibility into the business and spur greater innovation by leveraging their partners effectively.
When outsourcing falters, it's usually on account of four reasons. The first is that sourcing objectives are not aligned to business objectives. Sourcing organizations are quite used to operating a couple of steps removed from the business, and as a result of that, the objectives of the business, both current and future, tend to be underrepresented in the outsourcers mandate.
The second reason is that while desiring of innovation, organizations often fail to realize, or fail to estimate, the extent of behavioral change needed. For instance, to move from a more prescriptive to a more collaborative style with vendors, or from being more hesitant about sharing data to being more open with vendors, the change required for something like that is quite marked and quite deliberate.
The third reason is that in a very understandable urgency to deliver quick value, the initial vendor dialogue is focused excessively on base price negotiations, and organizations, in this process, fail to take a view of the total cost of ownership. Not surprisingly, as a result of this, over the course of the contract you will find things like change requests, variations in volumes, exceptions—all being an open and a very expensive task.
The fourth and very important and almost most commonly cited reason is insufficient investment in internal capabilities. Many executives lament that this is one of the largest drivers for their lack of satisfaction with outsourcing.
So with the right knowledge and the right currency of knowledge of the vendors capabilities, with the right alignment with the business, and with robust sourcing management capabilities, organizations can turn outsourcing into a very powerful weapon to drive cost, quality, and innovation improvements.
A growing ecosystem of providers can improve cost and service levels—if a company redesigns its partnership strategy, metrics and sourcing management.