Outsourcing is harder to manage than you may think

Jul 23 2008 by Nic Paton Print This Article

Modern-day outsourcing is more akin to a spider's web of intricate and overlapping relationships than simply a single function or solution that has been shunted overseas, new research has suggested.

A study by IT advisers EquaTerra has concluded that the perception that outsourcing is simply a one-dimensional transaction between a U.S or European organisation and a company in India or the Far East is dangerously simplistic, and managers who think of it in this way may trip up.

In fact the reality of global outsourcing today is that managers will often be overseeing a highly intricate and complex manufacturing supply chain.

"Services supply chains have steadily become both more diverse and more widely distributed, with large organisations forming hundreds of different relationships with hundreds of different service providers worldwide," explained Stan Lepeak, managing director of research for EquaTerra.

"Ongoing globalisation is accelerating that process and adding new layers of complexity," he added.

Yet many organisations fail to do a good job in managing and arranging these relationships with services providers, he continued.

The skills of buyers – or the managers in the firms looking to outsource – at developing quality outsourcing business cases were often mediocre, particularly when it comes to assessing costs versus achieve desired improvements or gauging what indirect costs there were likely to be.

Their ability to measure service-level agreements and end-user satisfaction levels also tended to be poor, even though these were often critical to the success of an outsourcing agreement.

"It took decades for manufacturing supply chains to mature. Now organisations are steadily migrating from those vertical integration models to horizontal specialisation," said Lepeak.

The organisation's poll of more than 200 C-level and other senior executives from 19 industry groups worldwide found more than half reported the main effect of greater globalisation of the outsourcing process had been a greater emphasis on improving business process efficiency and effectiveness.

Similarly, almost half said their firms were investing in new or existing operations in foreign markets, including third-party outsourcing relationships.

More than a third said they were investing in IT applications to become more competitive and reduce costs – this included increasingly tapping into local IT talent pools in emerging markets.

And despite the choppier economic picture in the West, demand for business process and IT outsourcing this year was expected to exceed that of 2006 and 2007, the survey reported.

Key outsourcing growth areas included engineering, research and development, financial modelling and analytics and legal process work, it found.

There were more than 150 outsourcing deals in the second quarter of this year, with an average total contract value of $270 million, it calculated.

This compared with 120 deals in the first quarter of the year, with an average total contract value of $120 million, it added.