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Time For Outsourcing To Aim Higher On Cost And Performance

Sourcing leaders have started to reboot their programs by following six principles

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Many firms still haven’t fully realized the promise of outsourcing, even after years of experience. The cost benefits have not been as impressive as anticipated, and service levels have remained largely the same despite being handed over to specialists. 

A few companies, however, are learning how to turn outsourcing into a stealth weapon, achieving outsize cost and performance improvements. For example, a US-based healthcare provider worked with its vendor on focused automation in the service desk, such as an analytics tool to figure out the root causes of the most severe recurring issues. As a result, the company dramatically reduced service ticket volumes and improved service outcomes. The cost and performance benefits were significantly greater than in traditional outsourcing, where benefits result from arbitrage and basic automation. 

Such “transformational sourcing” delivers up to 25% improvement in functional total cost of ownership, over and above the benefits from traditional sourcing. These improvements result from process redesign, digitalization and automation over the course of an outsourcing engagement. 

In addition, some companies have adopted more flexible pricing models, where cost depends on consumption and outcomes, thereby turning fixed costs into variable costs, and more important, sharing accountability with vendors for a defined set of operational and business outcomes. At one health insurer, operations outsourcing vendors signed up to spur improvements not only in operational metrics, but also in customer and provider Net Promoter Score® (a key metric of loyalty). Performance improved through work redesign, automation and other technology interventions. 

Why outsourcing falters

As we look across industries and regions, several common problems hinder sourcing programs from achieving their full potential. Sometimes, the sourcing function doesn’t align closely with business objectives, because sourcing programs and vendor relationships operate one step removed from the business. For example, at a global electric utility, the CIO’s sourcing management team continued to push vendors for incremental cost and performance improvements, while the business’s critical technology objective (an applications overhaul to attain greater flexibility and digital readiness) was largely absent from dialogues with the vendors. 

Another problem is that many companies tune their sourcing processes to deliver steady, reliable improvements in execution, not to take on an innovation agenda. Regearing a sourcing program to foster innovation involves deliberate adjustments to design and scoping, vendor selection, pricing and risk-reward models. 

Furthermore, by shifting accountability to an outsourcing partner, companies may end up with limited visibility and understanding of the vendors’ pricing and operations.  

The main opportunity to push for greater innovation and to draw on specialist capabilities obviously comes at contract time, and there is good news here. To keep up with rapidly changing technology requirements, corporate buyers have been trimming the sourcing cycle. The average contract length for IT and BPO deals shrunk from 4.8 years in 2007 to 4.3 years in 2017, according to IDC, and we expect it will settle at slightly more than 4 years.

Maximizing sourcing value

Sourcing leaders have started to reboot their programs by following six principles.

  1. Design for the future state. Among the most advanced companies, the CIO, functional heads and sourcing executives actively define future technology and service requirements for the business and design the sourcing program accordingly, rather than focusing only on immediate cost improvements. They also inject future requirements into RFPs, vendor selection and ongoing governance.
  2. Revisit the vendor partnership strategy. Leading outsourcers redefine their partner strategy to ensure the appropriate balance of scale, capabilities and competition between vendors. The point is to keep vendor partners invested in the business. 
  3. Cocreate rather than dictate. When companies are highly prescriptive, or hesitate to share information on internal data and systems, they constrain vendors from innovating. A BPO vendor struggled to find the right talent to meet a company’s specific demands for experience, skills and qualifications. By contrast, when the company and vendor collaborated on upgrading the skills of in-house employees, thereby relaxing some of the specifications, they got much better results. 
  4. Focus on metrics that really matter. The SLA monthly dashboard may be flashing largely green, but executives might still be disappointed with the quality of service and, more important, the quality of the partnership. Successful SLA design focuses on what matters most to the business and which metrics best gauge those goals. The utility mentioned earlier had identified poor service quality for internal customers as a major issue, yet all of the SLA metrics delivered by the vendor were green. The company decided to redefine metrics and prioritize them so that they would more accurately measure the end-user experience. 
  5. Price to motivate both parties. If companies focus disproportionately on billing rates during vendor selection, they wind up squeezing the vendor’s profit margins, which leads to the vendor cutting corners to make itself whole. During negotiations, outsourcers must provide sufficient and timely data so that the vendor can effectively price its services as well as understand the drivers of cost. That way, negotiations can focus on solutions, not just the billing rate. At one pharmaceutical firm, the CIO determined it would be more effective to collaborate with the provider on improving productivity in average handling time rather than asking to reduce the billing rate per person. 
  6. Overinvest in sourcing management capabilities. The team working directly with providers will make or break sourcing partnerships. Effective sourcing organizations stand up a small, high-performing management team that takes accountability for a clear set of tasks, decisions and outcomes. They recognize that it takes two to tango. That means investing time in the relationship, through governance forums, rewards and recognition for the outsourced staff.

Many providers have wide expertise across industries that allows them to broaden the art of the possible. The idea of the lone genius may still grip the imagination, but most innovation flows from the right team assembled in doing the right tasks—and outsourced vendors will play an increasingly prominent role for the companies that learn how to shape a fruitful partnership.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Bhanu Singh

The author is partner with Bain & Company’s Performance Improvement practice

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Megha Chawla

The author is partner with Bain & Company’s Performance Improvement practice

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