Think you have Outsourcing Handled? Think Again.
Author: John Fisher
Outsourcing has changed over the past few years and three things NET(net) is seeing in the market are:
1) A significant increase in the levels of client dissatisfaction with their outsourcing agreements
2) A focus on smaller, more manageable, strategic, multi-sourcing agreements with more specialized suppliers
3) Because of these and other factors, we have seen a tripling of the volume of outsourcing deals while overall outsourcing spend has not significantly increased.
So, what does all this mean to you? It means that outsourcing has become more complex and more focused at the same time. Companies are moving away from large, monolithic outsourcing agreements as fast as they can. While this can provide additional clarity and direction to your outsourcing, it also increases the need for strategic supplier management and what we call Organic Contracting. In a previous NET(net) blog, we stated that most companies don’t have agreements that are flexible enough and have the sustainability to handle these changes.
In fact, a vast majority of the deals we see in the market are not only inflexible, they are overpriced. Our research shows that over 70% of the time, our clients are in an outsourcing agreement where they are paying a significant premium over market. That’s the bad news, but the good news is that 60% of the time we have been able to successfully renegotiate agreements, even mid-stream, and when we have been able to renegotiate and optimize, we have helped our clients achieve an average of over 50% savings.
At one time, outsourcing was relatively simple. Of course, there were companies that just outsourced everything, but that was never really a good idea and rarely produced the hoped for outcomes. Most companies did an analysis of the costs, benefits and risks of outsourcing a specific area and then made an informed decision about what to outsource to whom. Sometimes the results of that decision did not produce the desired benefits and the risks became more of an issue, but after one or two years of struggle most organizations were able to adapt and reap the benefits of outsourcing arrangements. Now it is a whole new ball game and companies are once again struggling with getting the expected business value from their outsourcing partners. What has happened?
From NET(net)’s view of the market, there are three major forces that have an impact on the outsourcing value proposition: Complexity, Approaches to Service Levels and Pricing Adjustments.
Outsourcing has many different faces within most companies these days. It used to be that you knew what was being outsourced, it was help desk or network support, but now with cloud based apps and a multitude of SaaS, PaaS, IaaS options for your business units; it is often mixed in with other products and services. This makes it more difficult to determine the actual cost of outsourcing and also the potential risks. It is also very common for organizations to have outsourcing arrangements with multiple suppliers, and it is also common for organizations to have multiple outsourcing arrangements with the same supplier. With multiple agreements and multiple areas of responsibility, it can be difficult to take advantage of economy of scale. All of these factors make outsourcing a much more complicated proposition than it has been in the past. Hidden costs, hidden risks, multiple touch points and multiple priorities are not uncommon these days and unless your organization is very adept at keeping track of all the outsourcing agreements, value can fall through the cracks.
New Approaches to Services and Service Levels:
In addition to increased complexity, many organizations are now looking to their outsourcers to provide a very different kind of service and consequently service level agreements. Leading practices at this point focus the suppliers on business outcomes rather than specific components of those outcomes. For example, at one time data center outsourcing metrics were based on uptimes, network availability, security provisions and other detailed areas that were easy for the outsourcer to measure and almost totally meaningless to your business partners. NET(net) is now advising our clients to base their outsourcer’s scorecards on simple, business oriented metrics such as … “Is my application available – yes or no?” The outsourcer certainly needs to measure uptime and responsiveness, but at the end of the day the focus should be on business value rather than technical details.
A third area where outsourcing has changed is in pricing. Of course, we are all looking for lower prices, but focusing on unit prices (hourly or monthly rates), is no longer an appropriate metric. For as long as I can remember, technology costs have gone down and people costs have gone up. Savvy organizations are now asking their outsourcers to start applying automation to their own practices with the goal of reducing overall costs. Taking an example from the outcomes and value based approach, if the outsourcer can get the job done with more technology and fewer people, then the cost can go down while the hourly rate can stay the same.
In short, outsourcing is a different ball game now than it was a few short years ago, and many organizations are not keeping up with the changing times. At NET(net), our job is to keep up with the market and give you an advantage when dealing with your outsourcing suppliers. Many times, our clients ask us what types of Outsourcing agreements on which we can help them. We have extensive experience in all the major categories of outsourcing including: Helpdesk, Application Development, Application Maintenance, and Business Process Outsourcing (BPO). In addition, many of our same disciplines and best practices apply to Software-as-a-Service (SaaS) agreements, as well as Platform-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS) agreements.
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