Solving the Outsourcing Paradox
Published May 16, 2005
The fundamental value premise of BPO is greater organizational flexibility and process efficiency with reduced costs of ownership. However, 70% of the participants in a recent survey by Deloitte Consulting ("Calling for a Change in the Outsourcing Market", April 2005) said that they had significant negative experiences with outsourcing projects and now exercise greater caution in approaching such deals. The study states that although BPO is largely driven by cost-related objectives, firms experience hidden costs related to contract administration, profit margins, and in-house management. Therefore, the management of BPO relationships was discerned more complex, expensive and time-consuming than anticipated. Such complexity calls into question the potential of BPO as a strategic driver for organizational cost savings and flexibility - an emerging BPO Paradox?
Well, my (doctoral) research offers alternative explanations. I point out that success in BPO relationships is contingent on a deceptively simple fact - a comprehensive and early understanding of the risks and challenges associated with outsourcing a business process and the design of a governance structure that best internalizes such risk. However, most outsourcing managers design BPO governance structures to the exclusion of process requirements. Therefore, dissatisfaction with outsourcing and the BPO paradox are explained by either (1) an under- or over- investment in governance capabilities or (2) design of governance capabilities to the exclusion of process requirements in favor of other factors such as broad strategic objectives, environmental dynamism, mimetic adoption of industry practices, etc.
Deloitte's study might also reflect sampling issues and the flaw with averages. It is necessary to control for factors such as firm size, industry, etc. while analyzing service satisfaction in BPO. For example, I find that most firms tend to use BPO as an organizational lever that provides access to skills and capabilities required to deal with dynamic business environments, i.e. they outsource the risk associated with volatile, uncertain business environments. However, they also seem to outsource the management of such uncertainty - we find that environmental uncertainty adversely impacts service satisfaction. This speaks for a decision bias amongst managers that contributes to the paradox.
A copy of the Deloitte study can be dowloaded at:
http://www.deloitte.com/dtt/cda/doc/content/us_outsourcing_callingachange.pdf
For more outsourcing news and research updates, visit my blog at:
http://bponews.blogspot.com
- Solving the Outsourcing Paradox
- Published: May 16, 2005
- Type: Review
- Section: Politics
- Filed Under: Books: Business
- Writer: Deepa Mani
- Deepa Mani's BC Writer page
- Deepa Mani's personal site
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Comments on this articleComments
Outsourcing is sometimes used as a life-raft by incompetent management teams. Management that wasn't able to complete a project with in-house resources for a predictable cost decides to throw out the in-house team and outsource the whole thing. The people who misunderstood the problem-set and the challenges the first time fail to understand either and end up in a another failure or two, a few years down the line.
In the case I'm thinking of, they did manage to put off the utter failure for long enough for the VPs to reach retirement.
They're not all like this, but there may be more coprorate infighting than greed to some of these brilliant decisions.
Well, if corporate profits and profitability translate into greed, then that's what sustains American (and most other) corporations. That aside, I think the "proactive approach" that you mention is critical to BPO success. To support, SAP Info Solutions asserts that four out of five BPO contracts concluded today will likely be renegotiated within two years. They further state that twenty percent of all contracts will collapse, the high likelihood of failure being attributed to the fact that risks in BPO are diverse and cannot be easily quantified when the contract is first drafted. Perhaps, its not too difficult - I've empirically shown that it stems from an analysis of the outsourced process. More in this CIO article:
http://www2.cio.com/higher/report3503.html
Interesting. I never quite thought of the paradoxical nature of outsourcing in modern businesses. Yet, it's not clear to me as to why you think firms' perception of the value created through outsourcing is not at fault. You assume that companies are not off-base in expected value, they go wrong in realizing this value. Which is what the other comments seem to suggest as well. Also, it's Deloitte. Consulting firms pointing to what's going wrong with outsourcing. That a credible source for you?
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The fundamental issue here is a problem based on gap analysis, compounded by bandwidth restrictions. If there were more synergy in the system, a bench mark could be achieved whereby our mindset would accommodate the proper leverage needed for a win-win conclusion. A value-added proactive approach that is result-driven would empower a knowledge base that would enable us to think outside the box. To achieve a fast track conclusion, we need a game plan based on best practice so that our client focus is not out of the loop. That coupled with a strategic fit would show a quality driven result. However, the bottom line is that when all the bull is taken out of the outsourcing equation all that is left is the greed of the purveyors of outsourcing. In summary -- outsourcing is the result of pure and simple GREED.