In the business world where Change is the only constant, leaders are under tremendous pressure to increase productivity of operations and simultaneously reduce costs. Is outsourcing always the right answer? Does offshoring always reduce costs? In this article we share 10 important elements that need to be considered before making a decision.
1. Business Case
There needs to be a strong reason to outsource a deal. From the client side there could be one or more objectives – cost reduction, focus on core activities, augmentation of skills that are not present in-house, variable demand-supply needs, leveraging new technologies etc. Not having a clear Business Case could result in a lot of issues down the line. Do not outsource a contract only because your competitor next door has done it. Have a clear baseline established and priorities set in order to succeed.
2. Outsourcing Scope
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There are multiple areas that can be outsourced. From a client`s perspective, it is ideal if certain core functions can be retained in-house. Architecture, mapping of IT metrics to business KPIs, alignment with end-client needs may be a few that need to be considered carefully before outsourcing. Everything cannot be done effectively offshore. Measure Productivity, don’t look at cost alone as an independent unit.
3. Cultural Understanding
Doing business in USA is not the same as doing business in Latin America or EMEA or Asia. If outsourcing is done with a company which is providing services from a different region, cultural understanding is a must. Some cultures will not say ‘no’ and some need to be directed more than others. Having someone from the client side sit with the outsourcing provider at an offshore location, helps a lot. Proper handoffs taking time zones into consideration are a must.
4. Transition v/s Transformation
Most companies outsource, finish the Transition and the status of the engagement remains the same while expectations are for the provider to come and Transform the client landscape. Do not wait till the contract is due for renewal to check if Transformation is being executed as planned. Plan it in multiple steps and have periodic checkpoints in place to measure progress.
5. Budgeting
Detailed financial planning and analysis needs to be done for the overall scope of the outsourcing contract. Not only should you Budget for the costs of the outsourcing deal, but you should also plan for the effort/costs at the client side to manage the outsourcing deal. The ROI for the deal should be a true measure of costs saved, additional effort needed, business KPIs met and productivity gained along the life of the deal.
6. Number of providers
Selecting the right number of providers is critical. Don’t distribute the work to many providers else it will become an administrative nightmare to manage all of them. Be very careful in outsourcing the work to just one provider. While efficiencies can be gained, backing out of the deal and ensuring competitiveness if market conditions change during the lifecycle of the engagement can be two challenges to watch for.
7. Security and data privacy
Underestimating security challenges in outsourcing deals can result in loss of end customer satisfaction besides invoking potential legal liabilities. Check the security & privacy requirements not only in the contract and but also ensure that the country in which the entity is registered does not have any laws that can override the agreement.
8. Governance
Success will be possible only with effective Governance in place. The right tools need to be used, the right processes need to be followed, relationship map needs to be in place and effective escalation mechanisms can help resolve conflicts quickly.
9. Contractual Terms & Conditions
The Contract is a key instrument for success in an outsourcing engagement. Clarity and objectivity are of fundamental importance. While aggressive terms & conditions are good, the contract needs to ensure a win-win scenario for both parties. IP retention and fallback plan in case things go wrong need to be worked out carefully and in details.
10. Type of relationship
If the client continues to treat the supplier as a vendor rather than a partner, minimal results will be obtained. The thermometer test is when a system goes down and the Supplier is willing to collaborate with the client and other providers to fix it. An effective Partnership needs to evolve as the engagement matures over the life of the deal.
In a nut shell, there is no right or wrong answer. Evaluating different dimensions and mapping it with your organization`s maturity and needs is critical. The above ideas hopefully help you in making the right decision.
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Hormuzd (Homi) Karkaria has been a leader in the IT industry with more than 18 years of experience in sales, pre-sales, portfolio, operations, strategy and global delivery. He has worked across the globe starting in India and subsequently moving across to UAE, Europe, Latin America and is currently based in USA.
His international experience in several delivery models was crucial to serve as an effective way to local, regional and global customers.
Homi is a graduate in Electronic Engineering from the MHSS College of Engineering, Mumbai, India and has Masters Degree in Finance Management from NMIMS, Mumbai.