Outsourcing - A Better Way

As a software engineer and security professional one can not help but be exposed to and involved in outsourcing of all types - BPO (Business Process Outsourcing), software development and maintenance, KPO (Knowledge Process Outsourcing), etc.  While outsourcing does not necessarily mean off-shoring the two are usually closely linked.

Defining our terms -- Outsourcing is the process of subcontracting services to a third party.  Where off-shoring is relocating the business processes from one country to another.   The overwhelming reason companies outsource work is to lower costs and increase efficiencies.

The Usual Approach - We run your mess for less

I have been involved in evaluating vendors, negotiating contracts, and implementing outsourcing deals across many business domains for the last ten years.  In the vast majority of cases a senior executive (or team) decides to outsource to save many -- typically thinking that they will take advantage of the labor arbitrage because outsourcing and off-shoring are thought of as the same thing.  The senior staff's thinking goes something like: "we have problems let someone else (the experts) run/manage this thing".

The marching orders are then filtered down to the line staff that evaluates vendors, negotiate the deals and lives with the day to day consequences.  This dance usually takes the form of the company doing the outsourcing writing contracts and statements of work telling the service provider how they want to manage the work and for the most part the processes are the same as those used before outsourcing.  In addition to these process constraints the contracts are usually written to manage piece work.  That is to say, suppliers are reimbursed by how many operations they perform or manage.  For example; vendors that manage data centers get reimbursed by number of servers managed, calls centers by how many calls, and if you outsource development then you pay for each of the developers.  The incentive for the outsourcing vendor is to sell more of whatever it is they are managing.  Cost savings are not passed along and innovations are not sought; why would they be.

Now how is this process managed?  Not by mutual cooperation because it is a zero sum game.  It is managed by nit-picking the contract by both sides, antagonism and the larger more powerful company throwing it's muscle around (the proverbial 300 pound gorilla).

Overlay these process inefficiencies with a piece-work mentality, all wrapped around a zero sum game based contract and there is no wonder that the typical outsourcing arrangement evolves from, year one when the supplier tells the company "don't worry you will see savings when the process settles down".  In year two, the company moves to disillusionment and hope that this will turn itself around.  To finally, in year three of a seven year deal where the company is just counting down the time until it all ends.

Vested Outsourcing - A Better Way

Over the last two years I have been involved in a better approach and methodology to outsourcing.  It is called Vested Outsourcing (VO) - www.vestedoutsourcing.com.  Unlike other approaches VO has been tested in academia and across a number of business sectors (public and private).  VO is based on research conducted by the University of Tennessee and the Air Force in which five key tenets were developed and built upon, to set the stage for companies to fix their outsourcing issues.  I have become involved in VO as a research analyst conducting a VO study for the University of Tennessee (UT) and as a implementer of VO concepts for companies across the USA as an associate with a consulting company (www.capto-consulting.com).  My work in these two areas has convinced me that VO is truly a better way to outsource.

I won't try to explain all of VO in one blog post (there are many other sources for that) but I will summarize the five rules of vested outsourcing:

Rule 1: Focus on the outcome - As you look to outsource, the focus should be on the goals not on the transactions.  The supplier is paid to meet mutually agreed upon outcomes.  Outsourcing is then about buying and achieving desired business outcomes not about transaction management.

Rule 2: Focus on What not How -  Remember earlier in this post, I was talking about running your mess for less... well usually the company outsourced a function because they wanted to leverage the experts.  When it came time to write the contract they are then structured specifically telling the experts how to do their tasks.  A vested deal focuses on what the outcome should  be not telling the supplier how to implement.

Rule 3: Agree on Clearly Defined Measurable Outcomes - I am convinced that the focus shifts to measuring transactions because it's easier.  remember Rule 1 - stay focused on the outcomes and measure results against those.

Rule 4: Optimization of Pricing Model Incentives - this involves the balance of risk and reward while setting up a deal that is mutually beneficial to both parties and adhering to tenets of VO.  In the past I have witnessed companies that have set up incentive structures for vendors and then went to great lengths NOT to pay them the incentive.  In a vested deal the pricing is optimized and tied to outcomes the customer wants to pay the incentive - it is to the advantage of all parties to reach their outcomes based incentives.

Rule 5: Governance Structure that Provides Insight Not Only Oversight - In a vested deal we look for insights, ways to improve outcomes, methods and processes that help all parties reach their goals. 

Due to space constraints this is a simplification of VO but hopefully it will entice you to do more research.  I am involved with a number of companies at this time assessing their capabilities for outsourcing, implementing VO, and researching the field.  VO as a methodology will be a fundamental enabler or successful outsourcing.


-npv