KUHN CAPITAL Sunday, February 25, 2018
Dispatches from the front

Right Outsourcing

May, 2006

Gartner claims that, according to companies using outsourcing, half of them report the deals failed to deliver promised results, and 80% didn’t even save money. Worse, many now say they're trapped in long-term relationships that resist innovation while delivering sub-par performance.

But for all those blaming this on the outsourcer, that would be their second mistake.

Problems, Problems
We think that, ironically, the fundamental problem is entangled with outsourcing’s chief benefit. When you pull entire departments out of company operations to gain cheaper labor and scale costs, you also disconnect them from your employees whose “exception handling” wisdom came from long-time market contact. While many processes may indeed be routinized, how you manage exceptions can distinguish your business from others and it is precisely these exceptions that disappear behind the veil of remote-control outsourcing.

A further implication of moving any activity halfway around the world is the fact that myriad market financial and technological changes -- changes that rain upon your business incessantly -- now become invisible, hidden behind the outsourcer’s black box of prescribed activities. The result is a gradual disconnection from feedback loops and key market forces.

The problem is exacerbated, not ameliorated, when you attempt to assure high service quality with over-lawyered, rigid contracts designed to address every contingency. Since this is a Quixotic task, the contracts instead end up inhibiting the very flexibility that quality demands.

Outsourcers are not without blame, of course. They try may try to lock you up with a long-term contract in an effort to amortize start-up costs over years and to block competition. The result is a set of quickly outdated terms. In addition, whether through lack of client preparation or in order to get the business, they often low-ball their quotes, then are forced to hit your with a blizzard of “change orders” to recover costs.

Some Solutions
1) The old mantra -- retain “core” activities, outsource non-core activities -- is rightly conceived but wrongly applied. What’s wrong is to define whole departments (R&D, customer service, manufacturing, marketing, HR) as non-core. What’s right is to define only those highly routinized functions that may occur within any department as non-core. So while you could class 90% of your customer service encounters as outsourcing candidates, the remaining exceptions present your managers with an invaluable view not only into the effectiveness of outsourced solutions, but into key market and technology changes. Don’t outsource exceptions.

2) Match you business cycle stage with that of your outsourcer. That is, pair the younger innovative client with a similarly flexible outsourcer. Conversely, link mature, process-intensive clients with outsourcers specializing in the cost control of stable operations. No contract language can replace the mutual understanding that comes from this life cycle synchronization.

3) Eschew longer-term contracts, at least until you and your outsourcer have had the opportunity to work together for mutual benefit and to build trust.

4) For increased flexibility and shorter terms, be prepared to pay higher outsourcing fees with the knowledge that you’ll probably save money by avoiding change orders and poor service.

5) Another well of outsourcing competency is specialized vertical expertise in your industry. Such experience increases the probability that the outsourcer will better comprehend what activities define success in your business.

6) Keep the lawyers in check. If you find yourself engaging in hard-nosed negotiations fed by a desire to anticipate every adverse contingency, step back and determine if you’re damaging the precious commodity of mutual trust before operations even begin. If that’s true despite your own good will, you may be talking to the wrong outsourcer.

7) In a related point, keep the metrics that define acceptable outsourcer performance simple, few and enlightened. Consider using statistics that reflect the importance of the outsourced function to your overall business. For example, reward the outsourcer for increased referrals or repeat purchases made by customers after contact with the outsourcer’s service center. In a word, move the trusted outsourcer closer to your own core objectives.

Ryan Kuhn

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