08.02.07
Commentary to Peter Allen’s Posting in The Deal
TPI’s Peter Allen, in a recent blog posting in “The Dealâ€, asked whether it was better to offshore a business process using a captive or third-party model. Interestingly, the article offered no real conclusion to the question of which is better, but did highlight the most important aspect – and the biggest shortcoming – in many outsourcing relationships: The client’s inability to get past the labor-arbitrage model and, instead, focusing on outcomes.
Of course, everyone would like to move past the labor-arbitrage model – and away from a pure cost-based measurement. Doing so would allow suppliers more flexibility in operating their model and offer, customers, theoretically, the outcomes that they desire. But moving to an outcome-based measurement can be difficult for companies who are focused on reducing their administrative expenses by next quarter.
Also, as hard as costs are to estimate accurately, they can often be measured with some level of precision. Developing outcome criteria, let alone measuring the results, can be a very difficult exercise at best. Furthermore, even the successful outcomes must be folded back into the value model so that the investment can be recouped.
A focus on outcomes can be dangerous for managers within an organization. If, for example, I outsource a process to get better results than I had from in-house staff, am I not commenting on my own organization’s and internal management’s weakness in dealing with a process and the people supporting it? Outsourcing for pure labor-arbitrage avoids those difficult issues by placing the underlying foundation on price, not skills.
I have, for years, counseled clients to look beyond the immediate bottom line and seek service and process improvements from their outsourcers. After all, a company that provides similar services across a range of customer likely has developed expertise and skill that comes from a broad base of experience. Unfortunately, this advice is rarely followed. Furthermore, legitimate concerns about proprietary processes are misused and too broadly interpreted by clients and their organizations, creating irrational lock-downs of information.
Ultimately, I do agree with Peter – that the only way to get the real value of outsourcing is to focus on outcome targets rather than labor arbitrage. However, a client must ask why those same outcomes were not looked at while the process was in-house and whether, given transactions costs and training costs, the end result will present savings significant enough to warrant the loss of skills and institutional knowledge. This remains the seminal question in outsourcing – the question that every organization will ultimately have to answer.
