The most successful IT outsourcing decisions create truly innovative execution strategies that deliver meaningful business results. The outsourcing decision, however, frequently comes down to a cost-driven ROI calculation: how much will all this innovation cost us, and how long will it take to recover those costs? This is the wrong mindset and often the primary reason why IT outsourcing is generally underperforming.
Surveys from various industries have shown dramatic failure rates as high at 70 percent. Complaints come from both the clients and the service providers they turn to for the outsourcing. In one survey, more than 50 percent of buyers reported lower-than-expected economic outcomes. But service providers also complained about economic outcomes; specifically, about significant margin compression between 5 and 50 percent.
Some of the biggest complaints, however, had nothing to do with economics. For example, 70 percent of buyers claimed that IT-outsourcing service providers failed to meet innovation goals. Clients also complained about inconsistent or poor quality and lack of flexibility. Service providers complained about unrealistic expectations, limited ability to add value to clients and even being prevented from selling innovation opportunities. Many if not most of these complaints can be categorized as operational outcomes, as they aren’t necessarily tied directly to cost or revenue metrics.
The Three Biggest Outsourcing Mistakes
Years of experience implementing outsourcing relationships, validated by university-led research, attribute these complaints to three fundamental mistakes made by both parties. First, buyers stress the importance of innovation but then place unnecessary constraints on innovation by dictating not only the “what” (the desired outcomes) but also the “how” (i.e., how to achieve those outcomes). This overprescriptive approach virtually eliminates the ability of the supplier to innovate.
This focus on the “how” leads to the second mistake: overreliance on proscriptive requests for proposals (RFPs) rather than open-ended requests for information (RFIs) to begin the procurement cycle. By their nature, RFIs allow buyers to capture more innovation and “out-of-the-box” thinking from a market scan, which can then lead to better RFPs. Leading off with RFPs stifles innovation and tends to set the relationship off on the wrong foot.
The third and final mistake is to assume that what’s good for the buyer must be bad for the supplier, and vice versa. This “zero-sum game” approach is simply inaccurate: mutually beneficial relationships between buyer and service provider can happen easily if both parties collaborate up front.
These flaws result in a failure to achieve both operational and economic outcomes, evidenced by a lack of innovation, poor quality, reduced velocity, missed savings and, most importantly, failed delivery of a competitive advantage. And fingers can be pointed at both parties when it comes time to assign blame.
Getting to Go
A major reason to outsource is to close the strategy-to-execution gap: the distance between a company’s business strategies and its ability to execute on those strategies. These mistakes can make closing that gap almost impossible for the buyer, and they create just as many frustrations for the service provider.
Overcoming these mistakes requires changing how we think about our outsourcing relationships—it requires doing away with the term “vendor” completely. It necessitates explicitly and clearly articulating desired and measurable outcomes on both sides, frequently a difficult challenge. It also requires client self-awareness and an honest evaluation of the client’s readiness to participate in a progressive, outcome-based relationship.
This new approach seeks the best outcomes for both the client and the service provider. It shifts the relationship between client and service provider from buyer/seller to a true collaborative partnership, with shared goals through measurable outcomes.
Unearthing Internal Sources of IT Funding
An important part of the outsourcing picture is the IT investment strategy. Here, reexamining budget allocations and unearthing internal sources of funding is critical for the C-suite to effectively plan business growth and IT investments while also keeping pace with rapidly developing technology advances.
IT must have its house in order to free up innovation dollars to better support outsourcing strategies, marketing departments and other business units that can take advantage of technology advances to reduce customer churn and improve customer experiences. Uncovering internal funding sources can help drive positive business transformation and results, and one important tool that can aid this process is insights as a service.
Buy Versus Build Data Insights
Big data and the Internet of Things (IoT) garner more than their fair share of headlines every day but have yet to realize anything close to their full potential. Perceived complexity, massive amounts of data that aren’t well understood or actionable, hefty time requirements, and new skills are some of the barriers to efficiently taking advantage of these transformative technologies. Moreover, many companies are reticent to outsource strategic aspects of their business, instead opting to take months and years to build internal data-analytics infrastructure. In so doing, some fail to see the advantages of combining internal data with external open-source and third-party data for even better answers to their most difficult questions. In this realm, insights-as-a-service models can enable companies to quickly capture results-oriented answers while alleviating concerns about infrastructure and complexity.
Outsourcing answers to difficult business questions this way can be an effective tool in the strategy toolbox. It can reduce costs as well as accelerate innovation and true competitive differentiation.
Outsourcing should be understood and contracted with an eye on the prize—the real business outcomes—rather than being treated as an activity-based transaction between two parties. Shifting this perspective from zero sum to mutually beneficial is critical to the ultimate success of the outsourcing effort.
Companies that put in the work to cross the strategy-to-execution gap using an outcome-based outsourcing relationship will be rewarded with achieving those outcomes faster, and with greater accuracy and satisfaction, than the competition.
About the Author
Tracy Currie is CEO of Capto, a management consulting firm that specializes in the health-care, telecommunications, media and entertainment industries. With more than 25 years of experience, Tracy is an expert on outsourcing and other critical business-management issues.