Home: Issue 1 2008 Lead Story › TAKING A GAMBLE?



18/02/2008 | Channel: Manufacturing


Outsourcing is an emotive issue. Not least because, as cited this year, 50 per cent of outsourcing deals fail due to poor working relationships.Whether it's offshoring production, near-shoring product assembly or contracting out other business functions, such as IT or HR, outsourcing remains a bone of contention for manufacturers.

So why do we still bother with outsourcing? What's in it for you, other than time-consuming evaluation processes, bottomless costs and loss of influence? Haven't all the horror stories blown away any hope of striking that elusive costreducing, efficiency-improving deal?

New research from Downton Consulting, entitled 'Strategic Service Management - Leadership and Best Practices' 2007, sheds new light on how some of the leading players across sectors including capital goods, print, medical, HVAC, IT and utilities feel about this thorny issue.What business functions are outsourced and which are kept in house? What are the biggest concerns regarding outsourcing? What have been the greatest successes, and failures? And, above all, where are the business opportunities?

When asked about the role of outsourcing within their business, 82 per cent of respondents said they had used outsourcing to some degree in their own operation. While the respondents were very aware of the bad press that outsourcing has received, and some admitted that they had major concerns about the issue, it was still felt that it could offer a better option than modifying their own organisations.

When asked which aspects of their business were outsourced, participants stated that those functions which were customerfacing were, on the whole, kept in-house, while others, less likely to jeopardise customer relations, were outsourced.

84 per cent of respondents, for example, manage their call centres directly and 82 per cent keep the customer care function inhouse, while 67 per cent outsource human resources and 68 per cent have an external company running distribution activities.

In addition to the areas above, the market leaders interviewed all focused on using outsourcing to employ a skill that they did not have in house or to provide the organisation with capability for growth.

Outsourcing Strategic Service Management (SSM)
However, the area where outsourcing was the most contentious, and respondents offered the widest variety of opinion, was SSM.While 13 per cent simply said that they would not outsource this area of the business, a further 32 per cent said that they would be concerned about the customer interface if this went ahead. In contrast 30 per cent of respondents believed that this approach could provide a flexible response to changes in the market, and a further 25 per cent commented that they would be willing to have a look at the pros and cons of outsourcing SSM.

It is perhaps understandable that the Downton report found such a wide spectrum of responses in their approach to outsourcing SSM, with the perceived costs and risks associated with handing over management of a customer facing function. Reasons for their reluctance to consider outsourcing elements of the service business included concerns about the contractor representing a future competitor, a loss of direct contact with the customer and the possible leakage of leading-edge technology as new products are introduced.

Why it doesn't always work
For many businesses, outsourcing's reputation is tarnished because delivery typically fails to meet the high expectations set during the sales process. This is often caused by unaligned business goals between client and supplier: the way the former may hope to reduce costs may not be how the latter may hope to increase revenue. A relationship where the commitment level is promised by sales staff, finalised by lawyers and delivered by engineers is not likely to be a happy, long-term one. Whereas one where the parties share an open book, and the service is delivered by professionals without contractual fears would be far more likely to prosper to everybody's benefit. So why does this so rarely happen?

One of the key challenges for outsourcing is ensuring transparency. Breaking down the communication barriers requires give and take from both sides. The traditional
supplier/client relationship often means that both parties are reluctant to share their knowledge of their respective businesses, and are working to different agendas.

Once the business process leaves the organisation's walls, the customer loses visibility along with control over what gets done, how, by whom and by when. You run immediately into an ‘execution gap’ between what is needed and expected to be achieved and what is actually accomplished. Recommendations based on maximising
revenues from support services have a vested interest in things going wrong for the client. And no supplier wants that, do they?

A missed opportunity?
But what if the benefits associated with outsourcing - the reduced headcount, the improved efficiencies and financial savings - could be generated with reduced risk? In its traditional sense, considering outsourcing requires a choice between enjoying control and responsibility… or neither. Yet surely the point is to outsource the operational responsibility whilst retaining the influence?

Outsourcing the service element of the business doesn't have to mean losing control of your customer service - and of your reputation. Implemented as part of the right strategy it can deliver flexibility for manufacturers to react to changes in the marketplace, and to profit from the most lucrative areas of the business. What is ultimately critical is gaining visibility over the entire service chain - another key recommendation of the Downton report. And, with the tools available today, that can be achieved both through outsourcing and through in-house management. The real challenges lie elsewhere.

How to make it work
‘Open for business’ is what is needed to guide outsourcing relationships out of perilous waters and securely into profitable win-win relationships, irrespective of the business function involved. Used as a checklist of principles to adhere to the likelihood of the relationship being a success story, not a statistic, is improved.

Open for business: the four cornerstones
  • Objectives and goals,mutually agreed
  • Profitability for both parties (win-win)
  • Effective communication, knowledgesharing and collaboration
  • No surprises - clear processes and procedures
Effective communication is essential from the outset to enable transparency and to understand the implications of changing objectives.With the tools available to accurately measure results and swiftly share them, expectations are managed, fulfilled and often exceeded.

Furthermore, the decision must make financial sense.Massive financial investment isn't required; indeed, the savings realised can make this exercise self-funding. Another clear-cut indicator of a win-win partnership is when both companies are realising a positive ROI. And when a supplier has the resources and the expertise that sets the leaders apart, they have the capability to deliver results to their clients that exceed their investment. Such a compelling financial argument, coupled with increased levels of specialised knowledge, makes it easier to understand how outsourcing's true potential can be unlocked.

Outsourcing provides the tools to make businesses agile and dynamic, allowing them to focus on core competences. By working with thought-leaders, companies can evolve from reactive to proactive and ultimately, pre-emptive. Suppliers can address their customers' needs before customers even realise they have them; expectations will never be the same again.

Such benefits make the case for reversing the current trend of uncertainty more compelling than ever. Attitudes to outsourcing must change on both sides of the supplier/customer relationship: and now is the time to do it.What is required is for
both sides to set common goals at the outset, and to establish communication channels to facilitate regular reviews leveraging available technology. These goals must be flexible enough to be adjusted as changes in circumstances dictate. Only then can both parties reap the maximum benefits of a successful outsourcing deal, and both parties concentrate on what they do best - running their business.

The Downton report concluded that successful outsourcing deals are those which are part of a seamless strategy focused on delivering improved performance, growth
and profitability throughout the service operation - those where the business operates tight controls over the process. While the outsourced service approach will continue to sit uneasy with some manufacturers, industry leaders are showing how, implemented with the right strategy and for the right reasons, outsourcing the service business can work. In terms of increasing margins and differentiating their offering into the future, leading companies will see this as not merely a quick hit, but as a long term profit generator