Why (Most) Outsourcing Programs Fail

. 4 min read

Most companies undertake outsourcing as a means of achieving a specific business objective — including cost reduction, faster scaling, access to non-core expertise, and more. They select an outsourcing vendor who promises to fulfill these objectives and then negotiate a contract. Everyone’s interests seem to be aligned — that is, until the program goes live. So why is it that things so often go wrong?

Each Party Optimizes Their Own Returns

Despite getting off to a promising start, it’s quite common for each party to optimize their own returns — hurting the program’s overall chance of success. When this happens, the result is not only higher total costs than originally projected, but also lower quality of service and, quite often, more problematic outcomes such as loss of in-house expertise and even litigation — as in the case of the State of Indiana vs. IBM.

In this instance, a 10-year, $1.4 billion contract for overhauling the state’s welfare processing system was terminated just three years in, based on Indiana’s claim that IBM did not live up to its promises. Yet, as Presiding Judge David Dreyer ruled, “Neither party deserves to win this case. This story represents a ‘perfect storm’ of misguided government policy and overzealous corporate ambition. Overall, both parties are to blame, and Indiana’s taxpayers are left as apparent losers.”

Another classic example of self-optimization is for outsourcing contracts that are based on a per-transaction fee, with service-level-agreements (SLA’s) that are tied to customer satisfaction. In such cases, the client thinks they are getting the best of both worlds: paying only what is required, while maximizing customer satisfaction.

In reality, this is almost never the case. The vendor will typically conduct 2–5 times the number of interactions required to resolve a case or close a ticket. At each stage, they will also do “just enough” so the added customer interactions look genuine and required, due to the seemingly complex requirements the customer is presenting. For example, in one email they may ask for the customer’s browser information and computer operating system. After the customer responds, they will then ask for screen-shots or error messages. All of this leads to multiple, unnecessary interactions that will ultimately pad the vendors wallet, while only preserving customer satisfaction levels.

In cases such as these, something that was supposed to make things easier ends up becoming an even bigger problem. Yet for outsourcing to succeed, cooperation is not optional.

As Phil Fersht, CEO and founder of HfS Research explains, “To be successful at achieving maximum value from outsourcing, enterprise outsourcing executives need to work collaboratively with their service providers to create an environment of learning and innovation, in addition to operational excellence.”

Fersht goes on to assert, “A quality outsourcing provider should deliver the appropriate talent, technology and process acumen, but this will only reap rewards when the ambitious outsourcing buyer can work with their provider to define business outcomes together and forge a realistic path to achieve them.”

This kind of cooperation ensures that both parties’ interests and goals are aligned, leading to a more successful program.

Price Reduction Comes Before People

When the goal is finding the most affordable solution possible, more important objectives (like cooperation and collaboration) tend to fall to the wayside. In outsourcing, as in most areas of life, the cheapest solution is rarely the most effective or sustainable, and cost must be balanced with other, equally critical concerns — in particular, the talent and experience of the team you end up with, as well as the impact outsourcing will have on your product and customers.

A famous case in which cost-saving outsourcing measures ended up being both more expensive and less efficient is the so-called “Boeing debacle.”

The company’s initial goal was to “reduce the 787′s development time from six to four years and development cost from $10 to $6 billion.” Yet, as Jim Albaugh, Boeing’s Chief of Commercial Airplanes explained in 2011, “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.”

In order to avoid these kinds of situations, Forrester principal analyst Liz Herbert says that companies looking at outsourcing solutions should always examine the overall pyramid and ask themselves “Are we getting low rates but a huge team?”

A smaller, more experienced team is always preferable to a giant, inexperienced one — even if the solution is more expensive. After all, paying a bit more up front can mean avoiding the costly problems that result from a lack of cooperation or an inferior solution.

Competitive Advantages are Ignored or Ripped Out

It’s important that, when selecting an outsourcing solution, companies ensure that their current competitive advantages will be leveraged rather than ripped out. One highly-publicized instance of this comes from Best Buy’s adoption and subsequent termination of Accenture.

When the partnership began in 2004, Best Buy was flourishing while its competitor Circuit City was steadily declining. Per Bob Lewis, “Had Accenture’s pitch been that it had the expertise to help Best Buy leverage its bricks-and-mortar retail strength so as to beat Amazon.com at its own game, there might have been some sense in this arrangement,” but Lewis says that wasn’t logic behind the arrangement.

Instead, he explains that Accenture’s sales pitch was essentially, “In exchange for hefty fees, we’ll rip out your sources of competitive advantage and replace them with generic alternatives.” Looking at the situation from Lewis’s perspective, then, it’s unsurprising that Best Buy ended its relationship with Accenture in 2011. This is a prime example of what happens when parties look out for themselves rather than working together to achieve business goals.

It takes careful communication and cooperation to ensure that supposed “solutions” don’t actually neutralize advantages and thereby create problems.

Though it may seem counterintuitive, to ensure that outsourcing will actually achieve a desired business objective — whether the aim is cost reduction, faster scaling, access to non-core expertise, or something else — it’s critical to consider other factors as well.

As the examples above illustrate, it’s about more than just selecting a vendor, negotiating a contract, and turning over the reigns.