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The drawbacks and trade-offs of outsourcing

2019-05-17 Business No comment

In the second part of a three-part series, analysts will address the shortcomings and trade-offs of outsourcing to answer common questions: “What are the advantages and disadvantages of outsourcing and shared services?”

In the first part of the series, the company emphasizes the need to evaluate the reasons for the new procurement strategy and adopt a “one size fits all” approach to meeting their unique needs.

Considerations should include:

  • Range
  • Features
  • Provider/model preference
  • Financial driver

There are three delivery modes to consider:

  • Outsourcing
  • Exclusive shared service
  • Build, operate, and transfer [BOT] shared services

The outsourcing advantages cited in the first part:

  • deal with
    1. Higher standardization
    2. High process maturity
    3. Mitigation and speed of lifting and / or slowing down
    4. More efficient staffing
  • performance
    1. Strengthen accountability
    2. Service performance
    3. Performance metric
    4. Use experience
    5. Gain world-class innovation
    6. Cross-functional integration
  • cost
    1. Accelerated savings
    2. Cost structure transformation
    3. Support technology
    4. Benefit realization – now and later

Outsourcing can provide a strong business case for many companies. The unique attributes of organizational and business objectives may point to different strategic approaches, namely “one size fits all”.

Disadvantages and trade-offs of outsourcing:

Area: Process

Disadvantages: from

 Control the impact of outsourcing: less direct control of daily processes

Disadvantages: from

 What does new management skills outsourcing require: management's attention shifts from a management process to a new governance structure. This is usually a "spoof". On-site, consume more time than expected to manage relationships at all levels and ensure smooth communication from operational to tactical to strategic and regressive levels.

Disadvantages: from

 Need new management skills from

What does outsourcing bring: from

 The skills required to manage an outsourced provider are very different from managing internal resources. Many organizations underestimate the resources needed to successfully manage outsourcing relationships and do not seek external advice during the development process.

Disadvantages: from

 Long-term commitment from

What does outsourcing bring: from

 The long-term nature of outsourcing contracts means that you have been locked out for a long time, thus eliminating the "better" solutions that are unforeseen in the future. . The “change” requirements in business and future delivery process improvements need to be clarified, negotiated and agreed with the provider.

Disadvantages: from

 Hard to exit from

What does outsourcing bring: from

 Outsourcing contracts may be difficult to exit [penalties, etc.] and it may not be easy to relocate to an insourcing or other service provider at the end of the contract.

Area: Performance

Disadvantages: from

 Changing obstacles from

What does outsourcing bring: from

 Repairing poor performance can take weeks or months instead of hours or days because providers typically have a set of "time to resolve" performance issues that may be beyond the patience of the end user.

Disadvantages: from

 Reduce internal talent pool from

What does outsourcing bring: from

 As a leading role in certain functional departments, the ability to develop and develop leadership talents from the statutes is outsourced.

Disadvantages: from

 Intellectual property loss from

What does outsourcing bring: from

 Lose all internal capabilities and the risk of “tribal knowledge” in the process. Providers' understanding of institutional knowledge, internal relationships, and business culture may take time.

Disadvantages: from

 The link between departments has been lost from

What does outsourcing bring: from

 When multiple functions are withdrawn from the organization, people's perceptions of “lost control” are getting stronger and stronger, and the handover between departments is “difficult”.

Area: cost

Disadvantages: from

 "cost creep" from

What does outsourcing bring: from

 Unexpected additional cost risk for special projects and activities if the contract does not clearly define which services are in scope and how to manage/price "new" services.

Disadvantages: from

 Penalty for volume changes from

What does outsourcing bring: from

 Higher costs/transactions to reduce trading volume [eg F&A] – consent is required within the contract volume, and the customer needs to know the provider's minimum trading profit threshold

Disadvantages: from

 Redundancy cost from

What does outsourcing bring: from

 There may be technical cost redundancy between the company and the service provider, which may increase overall technical support costs.

Disadvantages: from

 Expanded retention organization from

What does outsourcing bring: from

 The retained organization needs to change to achieve revenue. Re-skills [as described above] and monitoring are needed to ensure that new operations are implemented and maintained.

Using a “one size fits all” approach based on proven procurement methods will lead the company to build a good business case. The goal is to promote a true partnership model based on equality, and both parties understand the requirements, responsibilities and interests that are gained for both organizations throughout the engagement process.

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