The Hindu Business Line : An inside view of outsourcing

In outsourcing, the chances of success are 50:50, say experts. Want your company to make it a neat 100 per cent? Here's a checklist to help one avoid pitfalls.

OUTSOURCING, which is quite simply the transfer of operational responsibility of business processes, infrastructure management or an IT application to a third party for a fee, is gaining acceptance amongst corporates globally. Indian companies are not far behind and a number of them, across industries, are seeking alternate arrangements to their in-house operations - especially the IT requirement. This is to cut cost and to concentrate on their core business — manufacturing, for instance.

However, it is felt that Indian firms have not correctly understood the concept of outsourcing, compared to their counterparts abroad. "Indian firms want to outsource just because a competitor has done it. It is like the dotcom craze a couple of years ago when every other company wanted to have a presence on the Web just because their competitors had gone in for it," says an expert.

"No proper homework is done by Indian firms before going for outsourcing," he says.

According to Gartner, in outsourcing, the chances of success are at 50/50. "It is frightening statistics, but it is true. Over half of all outsourcing deals are unsuccessful. For IT outsourcing, it is even worse. Over three-quarters of IT deals fail to perform because most outsourcing is anything but strategic," says the research agency in its advice to enterprises on Strategic Sourcing, "The Book."

"We see it every day. Clients rush ahead without knowing the territory; long-term contracts are agreed for short-term reasons.

Relationships start falling apart the moment the deal is signed. Sourcing is a game played for high stakes, with too few rules. That is a not a good combination," it says.

Is there good news? Yes, there is hope. And there are rules. In the shorthand out, Gartner has pointed out the essential `wisdom' of a thousand outsourcing deals. Based on Gartner's role as an `impartial' adviser to both clients and service providers, it has given a set of guidelines to companies planning to go for strategic outsourcing.

eWorld takes a look at the Gartner advice, which could be of use to Indian firms. Here's what it boils down to:

Begin at the end

Start at the end: There are four key stages in the strategic sourcing lifecycle — sourcing strategy, evaluation and selection, contract development, sourcing management.

Many enterprises focus too much on the middle stages — selecting a service provider and completing the contract. They forget the strategy. And they put too little effort into managing the relationship. Says Gartner, the "clever approach is to start at the end."

First focus on what benefits you (companies) expect from sourcing. What kind of relationship do you want? Who will manage it? How will it be controlled? How will you correct problems? How will you measure success? What new opportunities will the deal offer?

Build strategy on the answers to questions like these. And base the deal on that strategy, says the research agency.

Think long-term: Long-term outsourcing deals are too often made for short-term reasons. Outsourcing means a way to improve the cash flow, or a shortcut to new skills and technologies. Suddenly the focus is on doing the deal. Someone else can worry about the long-term consequences, later.

Long-term reasons for outsourcing are usually subtler. They include benefits that are difficult to measure, such as greater flexibility and agility. Modernise the infrastructure, which allows for new Web-enabled e-business applications, which in turn helps boost market share, reduce operating costs and improve customer satisfaction. These are `powerful' reasons to outsource, with a lasting impact, says Gartner.

Look around: It is surprising, says Gartner, at how many sourcing clients do not compare service providers. They have an existing relationship. The service provider seems to be an obvious choice. It is the easiest approach. This is called "sole-source outsourcing." It is not a good idea. You seldom reduce your effort. You have to collect the same information, whether you need it for one service provider or for a dozen. But the real problem is more serious. You do not see all the opportunities. Your provider may not offer the full range of services you need. And with no competition, why should they offer you the best possible deal? And how can you tell? Competition is health. It almost always reduces costs, shortens negotiations and produces more favourable agreements.

Hire an interpreter: You want to outsource. The service provider wants you to outsource. That's where the similarity ends. What you really want is improved service, the latest technologies, the best skills, access to new capabilities and cost control. What they (the service provider) want is a signed deal, the longest possible term, the highest possible profit and increasing revenues in the future. You speak two different languages. The solution is to find out what you both want, and make it the heard of the agreement. But first, hire an interpreter, says Gartner.

Be honest about the price: In outsourcing, says Gartner, there often seems to be an unspoken agreement not to talk openly about cost. It is felt that outsourcing is usually not a good way to save money. It can be a better way to operate. But it is seldom a cheaper way.

Nevertheless, managers almost always have to justify outsourcing on the basis of cost. Outsourcing deals are often `financially engineered' by service providers to reduce initial cost and make the deal more attractive for the first year or two. The payback comes later. The service providers rightfully want to make up for the shortfall in later years — with extra charges and added new business.

Enterprises also underestimate the continuing costs of managing the relationship. Allow for an additional 10 per cent of the value of the contract. If you spend less, the relationship can suffer — and so will the quality of service you receive.

Apply the glue: To senior management, downsizing is one of the great benefits of outsourcing. That is where the real savings come from. True? Not always. People are part of the "corporate glue" that holds strategic outsourcing deals together. You need two kinds — knowledge holders and relationship managers. You already have the knowledge holders, although you might not realise it.

The relationship managers are just as important. You probably do not know them because you have not needed them before. They are specialist intermediaries, skilled at matching outside services with internal business requirements. Hire some. These people are the main ingredient in corporate glue, says Gartner.

Expect the unexpected: Negotiating an outsourcing agreement can be hard work. Most clients want to be sure they get what they asked for. So they agree on every detail. Ant they make sure the terms of agreement are fixed. Absolutely. Forever. The problem is that when something is fixed, it cannot move. But businesses move. Business change is inevitable. It will happen in future. If anything is certain, it is uncertainty. And if your contract does not allow for movement, it will paralyse your business.

To be able to manage change in the future, build flexibility into your agreement from the start.

raja@thehindu.co.in

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