The worst mistakes companies make when they evaluate outsourcing—and how to avoid them.

by Phil Fersht

Most enterprises today are evaluating the potential business advantages of outsourcing entire processes to third-party providers; namely, whether they can reduce their general and administrative costs and benefit from added process rigor and new technology upgrades in the process. However, many enterprises fail to get past Phase 1—the sourcing evaluation phase—simply because they made some fundamental errors approaching the whole issue. Enterprises that fail to develop a strong business case for outsourcing can reach insurmountable—and often costly—problems if they move into a vendor selection process without having conducted significant prior due diligence.

Figure 1 gives an overview of the typical phases enterprises go through when they evaluate their outsourcing options, beginning with sourcing evaluation and proceeding to solution design, contracting, and finally transition and governance on their way to an outsourced end-state. After each phase, enterprises can opt to terminate the process, but the toughest challenge is for them to get the initial evaluation phase right in order to proceed.

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The following issues are the most common mistakes many enterprises make when evaluating an outsourcing business case:

• Poor Communication to Key Staff. If a company is going to explore outsourcing its business or IT processes, it needs to evaluate how it is going to gather the information it needs to support its decision-making. When bringing in a consultant/adviser to develop a business case, the advisor will need to talk with key staff to access data, conduct interviews, etc. The instant employees get wind that consultants are onsite discussing the “O” issue, panic will spread and all sorts of strange behavior can occur. The rumor mill, staff turnover, politicking will begin; when staff members start worrying about their jobs, all hell can break loose.

You must identify which of your key staff is needed to conduct the business case, and be open with them from the get-go about what you are evaluating. If you want their support, you have to explain their jobs are not on the line, and you need their support because resistance from staff can destroy the process. A major financial services firm recently investigated moving some of its finance processes to a third-party provider but failed to communicate with several middle managers that it was merely exploring some opportunities for cost optimization. As a result, several key managers left the firm in the space of a few weeks, even though the company had not even completed an initial evaluation.

• Failing to Weed Out the Dissenters. Many outsourcing evaluations have led to “no-go” decisions because some key people simply were not onboard with the process. If a function leader is highly resistant to the outsourcing, he will attempt to derail the process at every possible opportunity—and it will most likely fail. If you try and transition a function where no one is playing ball, you are in serious trouble from the get-go. Constructive criticism and healthy discussion of the issues are important, but some people will be against change—and will never change.

Have open and honest talks with key staff about outsourcing; many simply will not understand much about it. Having a group workshop—perhaps with an independent expert present—will be very helpful in educating your staff. Outsourcing is not rocket science, and you will quickly understand who is onboard and who will never be. Then you can make whatever decision is needed to get over that hurdle.

You may find your company simply does not have people who will allow this to happen. So why not save everyone's time and money and call a halt to the proceedings before a load of time and money is wasted?

• Not Involving HR from the Get-go. Outsourcing is all about people, job roles, staff reductions, knowledge transfer, training, and change management. That sounds like something HR should help with. Too many companies get excited about the economic benefits of outsourcing and fail to devote enough time and resources to dealing with the human capital issues regarding how they can execute. This involves acquiring and retaining key talent, avoiding the loss of critical knowledge within your organization, facilitating cultural integration (especially where offshore staff are involved), and ensuring legal, SAS 70, and SARBOX compliance.

• Not Involving IT in BPO Assessments. Business Process Outsourcing (BPO) always involves a varying extent of process re-design and standardization, and there are always critical issues with data security and privacy that need addressing. Any changes you need to make will need to be supported by your existing technology platform and IT staff. This doesn’t mean you have to engage in a major IT evaluation from Stage 1, but having a firm understanding early on of the IT issues and opportunities a BPO engagement will create can save many headaches down the road.

Several enterprises are now exploring BPO as a result of all the work they have done rolling out new ERP software. When you need to invest so much money in re-designing process and re-training staff, wouldn’t this pose the ideal time to look at outsourcing some of it?

Certain companies have recently engaged in “multi-sourcing” engagements, where they outsourced such business processes as HR and finance to separate service providers, while transitioning application management and development services to alternative IT service providers. There was very little discussion between the business process leaders and the IT leaders, and the IT and business process tracks were treated as entirely separate. There are significant synergies when the application services can be tightly aligned with the relevant business processes.

• Not Seeking Peer Advice. “Best Practices” are formed through the experiences of firms innovating and trying out new ways of doing things. In reality, that means they will tell you where they went wrong, and give advice on how they got it right, and how they would do something differently a second-time around. Outsourcing is no exception; in fact, it is a shining example of how to learn from other enterprises’ mistakes.

Seek out peers in other organizations that have gone through the outsourcing process. There are several peer forums you can visit to have these discussions. Good examples of peer groups where you can learn from other firms’ experiences of outsourcing include SharedXpertise (www.sharedxpertise.com) and the Sourcing Interests Group (www.sourcinginterests.org). AMR Research also conducts a series of peer forums where senior executives discussion critical issues, such as outsourcing (www.amrresearch.com) .

• Not Using a Good Advisor. You will likely need an advisor to help facilitate the various stages of the outsourcing process, especially if you do not have internal executives who have deep experience of outsourcing evaluation. Beware of any advisor that fails to tell you any of the points above. You must make sure you use one that is going to do more than merely facilitate a transaction, and can talk from experience about how to avoid making these types of mistakes. Get them to tell you how they can help you work through these issues, and ask them to share examples of their client work and research that highlight best practices for outsourcing evaluation.

Just the Start of the JourneyRemember, the potential pitfalls are only the start of the outsourcing process. Once you get to the point of developing a business case, the issues become a lot more tactical until a transaction is reached, when a whole new set of challenges open up.

Yes, outsourcing can offer firms cost savings and the opportunity to add rigor and standardization to their processes. However, if you don’t go about evaluating it correctly, you may never get the chance to find out.

Phil Fersht is research director for AMR Research, covering outsourcing, shared services, and implementation services for AMR’s enterprise clients. He can be reached at pfersht@amrresearch.com.