Friday, 7 October 2016

Why Outsourcing Fails

Every year, we see corporations outsource operations only to pull back back some, if not all, of the operations. When this happens, the cost of pulling back operations or splitting things over multiple countries can leave you with significant operational issues and similar or worse costs.

Successful corporations understand the need to control costs in operations. The "spare no expense" philosophy of John Hammond in Jurassic Park is a one way ticket to disaster.

But, a focus on cost reduction is what leads corporations to face-fault when they outsource.

Corporations are seduced by the idea of potentially cutting costs dramatically; why pay expensive resources to do repetitive things when overseas people can do the same work for pennies?

The cardinal rule when outsourcing is:

Only operations that you completely understand and control can be outsourced 

To understand operations is to understand the costs of exceptions as well as how they are processed and escalated. Local resources deal efficiently with exceptions because they have informal relationships in the organization and use them to get things done efficiently; those relationships are not available to outsourced resources.

When operations gets outsourced, not only do foreign employees not understand how to deal with exceptions but also:

  • They are often in another time zone 
  • They don't have full access to local resources 
  • They don't know who to contact inside the corporation 
  • They don't understand local business rules 
  • The network configuration can make it impossible to communicate properly 

Understanding an operational function means that you capture all details, including exceptions, in your information systems. Often, legacy information systems capture exception information as unstructured fields (i.e. memo fields) and off shore resources will not understand this.

99% of your operations might be straight forward, but the 1% of exceptions can at best lead to longer implementation times.  Best case scenario is that you will look bad to your customers and at worst, it will kill your bottom line.

If your information systems contain exception information in a structured way then at least you can eventually train foreign resources to resolve them. But unless exception information is captured so you can control it (i.e. not in general text fields) then it is the same thing as not having it.

When outsourced resources are under strict performance guidelines, they will do anything to clear their work queues. This often involves kicking back work they perceive as an exception as improperly specified; they will claim 'garbage in, garbage out'.

This will result in miscommunications and longer lead times to implement your services. Not only will delivery times, and errors go up, and your customers will get mad.

By the time you have fired the local employees, all the knowledge of the function has left the building and you are left with a broken system.

Key questions to get answers to:

  • What does each exception in operations cost? 
  • How often do they happen? 
  • Can the information systems record exceptions in a way that you can track and control them? 
  • Are the mechanisms that local resources use to resolve exceptions be used by outsourced resources? 

If you don't have a clear answer to each of these questions then outsourcing is likely to be a disaster. When you have a clear answer to the 3 questions and understand how you will address each exception then you will have much more success outsourcing.