7 Myths of Outsourcing exposed by WSJ article

Wall Street Journal article reveals the 7 Myths of Outsourcing

A recent Wall Street Journal Report published in April of this year helps illuminate from a senior executive point of view , what the harsh realities of Outsourcing may await the intrepid firm looking beyond it’s shores and or personnel for business processes.

There often is a great deal of misconception by the community at large about outsourcing and the following is a summary of the article. Readers of this summary are welcome to follow the link at the bottom for the full article

Written by Phanish Puranam and Kannan Srikanth, both of the London Business School, it sums up a survey in which sixty two top executives from among the 100 largest financial-services firms in the U.S. and Europe, were surveyed on expectations, goals and challenges from their firms outsourcing initiatives.

The authors found seven common myths that apply to both vendor and client when a firm out-sources some aspects of their business. . They “ range from unrealistic expectations to poor ideas about how to structure contracts to mistaken views of risk.”, according to the article.

The authors’ 7 myths also outline some of the ways to overcome the challenges encountered Here then is a brief outline of the 7 Myths.

1.Outsourcing can accomplish many objectives with one fell stroke:

The executives’ criteria for success were among other things, efficiency, cost reductions, effectiveness, or improvement in service; and flexibility ie. Increase production or decrease rapidly as needed.

The Problem? If for example a call center needs improvement in service by adding more staff on at peak periods that can only increase cost’s. The vendors evidently add to the misunderstanding by maintaining all areas will be addressed to the client’s satisfaction. ( I can’t imagine a salesperson saying such a thing but alas!)

The article states the solution may reside in communicating to the client that accomplishing one objective is often times at the cost of another.

2. Outsourcing is a commodity

Evidently the myth that outsourcing is like procuring stationery, is prevalent among some of the firms management staff. Transaction costs can mount , from the actual moving of the service to the vendor’s site, to transition costs which unfortunately can bog a firms resources down.

The article cited one offshoring manager as saying the firm still had a significant number of key personnel in India, and due to lack of confidence, they will remain there.

3. Iron Clad Contracts please…

The author’s point out that the entire process evolves over time and is not a one time transaction. The natural response is for companies legal teams to draft complicated Contracts designed to control the vendor and protect the interests of the company through a host of possibilities. ( I couldn’t imagine a lawyer not getting some billable time in here)

The Executives found out that it’s usually far too complicated and can bring a project to a standstill. Better to focus on vendor’s and clients roles and responsibilities and then define the process for negotiating changes.

4. Never mind the Contract

The next myth struck me as a bit odd, which is that a contract was not necessary. Largely due to a rush to consummate a deal the entire relationship is sometimes put together on a memorandum of understanding or letter of intent without critical operational details.

The results point out that both sides need the format of the contract to properly understand the risks, rewards and interests of both sides.

5. Outsourcing firms as a form of Insurance

How risk is shared can elevate the contentiousness of a project. Getting the project off to a more positive start is tough given the propensity of a client to want the vendor to bear greater liability for failure.

The authors offer up as a means of getting around this obstacle, clients and vendors should focus on understanding “the process as it operates. They should identify acceptable rates of error based on real data and –jointly—invest in understanding and eliminating the problems.

6. One Less Headache for the Client

Too often the client believes they can disengage from the project once outsourced. The article cited an example of one of the U.K’s largest insurance firms whose senior management team remained involved throughout the project. This strategy resulted in what the company’s spokesperson termed a very successful partnership.

Too often a client loses valuable knowledge in the area outsourced. The authors warn that a vendor could take advantage by threatening to end the relationship when the client is unable to evaluate other vendors or “even lay out how the job should be done”.

7. I’ll never Outsource again, (if this doesn’t work)

If at first you don’t succeed, try try again is the mantra of Myth 7. The article points out that very few companies report great success with their first outsourcing project. The point being that valuable experience is gained by both parties. This is good news for vendor firms and clients alike.

For a complete copy of the article from the Wall Street Journal log on to

http://online.wsj.com/article/SB118166189129632603.html

Bob Stillman is the Director of Sales for Chi Networks, a Managed IT Services Provider Headquartered in Chicago IL. He works with small and midsize businesses looking to increase efficiencies and decrease IT costs. He can be reached at 312-756-1500 xt 616

Or email him at rstillman@chinetworks.com