Dating back to the 17th century, with the English East India Company, outsourcing is nothing new. Yet, we still make the same blunders. Here’s how to stop history from repeating itself:

Although it’s been grabbing headlines recently, outsourcing is actually more than 400 years old. Trace its roots, and you will have to go as far back as the 17th century, to the English East India Company. Among one of the earliest companies to outsource, this firm surprisingly faced many of the same dilemmas confronting current companies, including information management problems and process management issues. And to this day, despite the increasing scale of outsourcing, companies are still committing many of the same mistakes and failing to fully realize the benefits of this strategy. Here’s how to avoid five all-too-common outsourcing blunders:

1. Viewing outsourcing as an instant solution. Adopting this strategy to “get rid of a headache” is misguided. While outsourcing can indeed ease some operational sore spots, this should not be the main reason for employing the strategy.

2. Oversimplifying. Managers should not view outsourcing as one massive, all-encompassing concept and ignore alternatives that may be more suitable. It should not be lumped together with other strategies such as transplanting operations offshore, moving operations or functions within an area, and distributing and integrating services. While all these concepts are related, they are not interchangeable. Aside from addressing the “hows” of outsourcing, companies should also explore whether they should apply the strategy to entire functions or only certain services, agree to long-term contracts or short-term trials, and use several vendors or seek one outsourcing partner.

3. Handing over badly managed operations. Outsourcing operations that have been poorly handled internally will just create more problems later on. For one thing, just writing up a reasonable and realistic service level agreement or contract will be hard because the company doesn’t fully grasp the requirements of the operation being outsourced. And managing the relationship with the vendor will be problematic as well, since it will be difficult for the company opting to outsource to comprehend, define and evaluate performance indicators.

4. Failing to take a systematic approach. Companies have to carefully analyze, select and deploy an outsourcing strategy in order to optimize results. For example, they should not take a superficial approach to defining what is core and non-core to their business because they may lose future capabilities, raise operational risk or lose control over crucial business processes. The effectiveness of an outsourcing strategy hinges on how well they can comprehend operational performance and how scrupulously they can follow a proven process for evaluating, optimizing, implementing and monitoring the service.

5. Neglecting to monitor market developments. Companies must keep in mind that market changes can completely alter the relative value that outsourcing can offer. For example, in the pharmaceutical industry, small drug manufacturers seemed poised to become popular outsourcing partners in emerging markets until large pharmaceutical and biotech companies started to combine operations and shifted the focus to better utilizing unused internal capacity rather than farming out functions and operations.

By sidestepping these five pitfalls, companies can enter outsourcing agreements with the correct mindset and a results-driven approach, both of which can help them take full advantage of this centuries-old strategy.

Source:

Avoiding the Five Pitfalls
John Norcross
Darwin Magazine, April 2004
www.darwinmag.com/read/040104/pitfalls.html