Outsourcing is often seen as an efficient way of improving business performance, decreasing costs, and changing the main focus of a company. Nowadays, it is commonly applied in various companies all over the world, although even such an appealing concept has its downsides. The most common mistakes that lead to a failure of outsourcing have been highlighted and explained in the article by Jerome Barthelemy “The seven deadly sins of outsourcing”. Thus, the aim of this paper is to explore the reasons for unsuccessful outsourcing from the article in order to understand the best ways of applying the concept.
The Insight of Outsourcing
The author defines outsourcing as a process of partially or completely turning the company’s activity to an outside vendor. Nowadays, it has become a common practice for businesses to outsource their activity especially in the services industry connected to information technology, telecommunications, human resources, accounting, etc. A carefully planned outsourcing strategy creates valuable opportunities for improving the overall state of the organization and significantly cut the costs due to it being able to concentrate on its main business while outside vendors take care about other operations.
However, despite outsourcing having a number of advantages, the vast majority of the companies have had a negative experience of applying it in practice. The lack of information about outsourcing failures is explained by many managers not willing to bring negative publicity to their companies. However, the author understands the necessity of highlighting this issue instead of presenting only positive outcomes of outsourcing as other articles normally do. He carried out a research of 91 companies’ outsourcing practice in the European and American markets that assures him getting a deep understanding of the problem and being able to find the reasons that led to a failure. Hence, Barthelemy provides valuable information in the article that should be taken into account by every company before considering outsourcing in order to avoid common mistakes, which the author called the seven deadly sins of outsourcing.
Deadly sin # 1
According to the author, the first deadly sin of outsourcing is connected to some companies not having a clear understanding about which activities should be outsourced and which should be dealt with inside the organization. Some companies are so enthusiastic about the possibility to decrease costs and improve their performance with the help of outsourcing that they easily ignore the fact that not every activity should be outsources. For instance, the main mistake that can be made, or so called, deadly sin of outsourcing, is for a company to outsource its core business activities that are based on the unique capabilities and resources that differentiate the company from its competitors. Outsourcing the mentioned resources and capabilities will most certainly lead to the company losing its competitive advantage that would create a real threat for the further development of an organization.
The author argues that only non-core activities outsourcing will bring positive results since it will help the company to concentrate on its main business activities and significantly reduce costs. Hence, the benefit of outsourcing the non-core activities will be based on improving the overall performance of an organization.
Deadly sin # 2
Second common mistake of the outsourcing activity is based on the wrong choice of vendor. The author divides the factors of choosing a vendor for outsourcing into two categories: hard qualifications and soft qualifications. Many companies focus on decreasing their costs by searching for a vendor who offers the lowest bid and the most modern methods to dealing with the situation that are referred to as hard qualifications. However, the main factors that should be taken into consideration when choosing a vendor are soft qualifications that include flexibility, a good cultural fit, trustworthiness, a commitment to improvement and developing long-term relationship. Sometimes the costs can even increase after outsourcing which shows that quite commonly companies choose to outsource for the reasons other than financial benefit.
The author argues that the best way of choosing a vendor is to examine the vendor’s reputation, interview its clients and industry experts which is less time-consuming or costly than evaluating potential vendors directly through the first-hand experience.
Deadly sin # 3
Another reason for a failure in outsourcing is connected to writing a poor contract with a vendor. Quite often contracts are not seen as a necessary step of establishing relationship with a vendor since their cooperation is based on a partnership and trust. However, the business practice shows that a well-developed contract is crucial for building regulated relationship balancing the power between the two parties. A contract helps to set short-term goals and responsibilities of both a client and a vendor in order to assure their expectations are met and they are legally protected in case the cooperation fails. The author recommends keeping the contracts precise, complete, incentive based, balanced, and flexible to avoid misunderstandings between the parties on the main issues of their cooperation.
Deadly sin # 4
Overlooking personnel issues is called the fourth deadly sin of outsourcing by the author. Employees tend to believe that outsourcing is an underestimation of their abilities. The decision of a company to outsource might result in employees losing loyalty to the company and a feeling of job security, and becoming less productive.
Thus, in order to avoid negative tendencies amongst employees during the process of outsourcing, the author suggests motivating the key employees by monetary incentives and benefits. Moreover, offering new responsibilities is likely to help securing the commitment of employees. The employees should also be offered multiple trainings to prepare to the shift of their roles from delivering a certain service to dealing with the vendor and end users.
The process of transferring some employees to the vendor can be rather difficult and requires high attention to the employees, although the outcomes will be beneficial as for the company, as for the employees who will get an opportunity to develop their career.
Deadly sin # 5
Some companies can fail their attempt to outsource by losing control over the activity that was outsourced. The fact that the outsourced activity is now handled by the vendor does not mean that the company should stop controlling it. In fact, the author argues that a small group of managers should be retained in order to monitor the vendor performing an activity for the company. Moreover, a contract is another necessary tool that would allow controlling the activity ensuring the effectiveness of the outsourced service.
Deadly sin # 6
Another fatal mistake the managers might have is forgetting about some hidden costs of outsourcing that becomes a big issue for the companies’ budgets. Assessing if outsourcing will help saving costs for the organization can be quite challenging because of the costs that are not directly included into the calculations. Such hidden costs generally include overlooking contracting costs and finance needed for searching the outsourcing vendor. Additionally, costs for managing the outsourcing vendor that include monitoring the agreement, bargaining with vendors, and negotiating changes in unforeseen circumstances are also quite often ignored on the planning stage.
Deadly sin # 7
The last sin explained by the author is a consequence of managers not planning an exit strategy in advance which can lead to disputes and financial losses in case one of the parties changes its mind. Usually, managers do not think about the possibility of ending a contract on the planning stage, which leads to them being unprepared to the situation when they need to stop cooperating with the vendor. However, having a clear exit strategy is crucial for every process of outsourcing because sometimes even in case of the successful outsourcing companies might decide to switch to another vendor or decide to have deeper cooperation with just a few of the vendors ending the contract with the rest.
Thus, the author provides essential information regarding the most common mistakes made by the majority of companies that result in the failure of outsourcing. Each of the mistakes can turn even the most promising outsourcing attempt into failure, although the worst mistakes are connected to managers writing a poor contract and not having control over the activities that have been outsourced. Therefore, to assure the success of outsourcing, companies need to consider every stage of the process in order to avoid the seven deadly sins of outsourcing presented by the author.