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Outsourcing? Watch Out For These Pitfalls
[March 30, 2006]

Outsourcing? Watch Out For These Pitfalls

TMCnet Contributing Editor

Outsourcing. Solves all your problems, right? At least as long as you get someone who speaks decent English, at least as good as the kids they're somehow letting graduate from high school these days?

Maybe… not. According to business advisors Ralph Welborn and Vince Kasten, authors of the new book Get It Done! A Blueprint for Business Execution, "outsourcing sounds great in theory, but often falls short in execution.

Luckily you can learn from someone else's grisly post-mortem before jumping into overseas outsourcing yourself. Always great when you have that option, huh? Kind of like not being the first guy to try bungee jumping, but waiting until they more or less had the kinks worked out?

Not like your fellow Americans are rushing into it, though. The authors find that only 19 percent of US businesses even have an outsourcing strategy, whereas "95 percent if only Fortune 1000 companies" do.

It's growing at a healthy clip -- 30 percent a year between 1995 and 2003 -- and worldwide business process outsourcing, stuff like sending your back office scutwork, finance and accounting activities like accounts payable and accounts receivable to Ireland and India, is expected to grow from $110 billion in 2002 to $173 billion in 2007, and the overall outsourcing market is expected to grow to over $500 billion, of which nearly $380 billion will be information technology outsourcing and the rest BPO.

But all isn't rosy. "Outsourcing continues to experience double-digit growth," says Welborn. "Yet outsourcing providers are facing lower profits, shorter contracts, and unhappy customers. And few of the $100 million deals signed will generate the expected revenues."

The authors conclude that the outsourcing industry "rests upon an old business model based on inflexibility and cost reduction that doesn't account either for the predictable patterns of technology adoption or for the demands customers face for providing more 'value' and 'service' rather than simply reducing costs for their customers."

Basically, once the work leaves your organizational walls, you lose visibility and some degree of control over what gets done how and by whom, they explain. Welcome to the "execution gap -- the difference between what needs to get done and what actually does get done."

Some lessons from the field the book points out:

1. If it looks too good to be real . . . it probably is.  Ever heard this one before? At least 50 percent of outsourcing deals "fail," or don't return the results promised to customers, and 80 percent don't produce any savings at all, according to the Gartner Group, an industry analyst.

2. Too many outsourcing deals suffer "death by change order." Outsourcing firms underestimate the amount of work it will take to meet their promises, and ask you to make up the difference. What are you going to do, write off everything you've invested so far and ship the whole shebang off to the Philippines?

3. There's really no such thing as a "core vs. context" approach, outsourcing what's not important to focus on what is important -- keeping R&D at home and letting Egypt handle customer service Dell (News - Alert) Computer had to take back its outsourced customer service centers, the authors say, "because of the huge number of customer complaints they were receiving about it, and the drop-off in number of additional sales that usually accompanied customer service calls."

4. Outsourcing providers build in a lack of transparency, they find, the "black box" of costs and margins.

5. It's easy to underestimate the Bull's Eye Effect. Trevor Davis, the chief implementation officer of one of the world's largest business processing utilities, compares outsourcing to "hitting the bull's eye with parallel darts thrown with both hands."

6. Maybe getting locked into a five-year contract isn't such a great idea anymore.

7. Outsourcing firms are suffering from the Botox Effect. "There's a reason Barry Manilow, George Harrison, and Mary Tyler Moore can't smile anymore without making it painful for us to watch," the authors write, evidently unaware that George Harrison's guitar is gently weeping in rock'n'roll heaven these days. As Botox takes out wrinkles but inhibits normal facial expressions, so outsourcing gets stiff in the "upgrading" portion of their contracts.

Oh it's not all bad, there are things you can do to have outsourcing work to your advantage, like making sure you "understand your own business inside and out before you do the outsource thing," according to Welborn, and "blueprint your business processes to get visibility into what's really going on," according to Kasten.

David Sims is contributing editor for TMCnet. For more articles please visit David Sims' columnist page.

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