Outsourcing may be on the increase, but so is the rate of failure. The key to successful outsourcing is aligning the organisation to business models that focus on the organisation’s core competencies, says Panos Sakellariou.

The growth of outsourcing in recent years has been staggering. Market Research company Gartner forecasts that it will grow from $8.4bn in 2004 to $12.2bn in 2007.

In discussions with CEOs over recent years, I have come across four broad drivers for this increase in outsourcing. The number one reason given by our clients is strategic flexibility. They value the increased freedom to switch strategy without having to deal with the onerous and expensive task of re-engineering functions, processes and systems. At the same time they see partnerships as a route to new, previously inaccessible, business models.

The second most quoted reason is access to best practice skills and knowledge to drive quality improvements and customer satisfaction. CEOs don’t need to invest to keep up with the latest software development methodology anymore, leaving that now to the IBMs and Accentures of this world.

Interestingly, cost benefits have faired a poor third. CEOs are looking for up to 30% off the bottom line through outsourcing non-core, non-mission critical functions and processes, including HR, IT, accounting and finance, back office operations and even, but to a lesser extent, customer service functions such as call centres.

The final driver is an enhanced operational focus: focusing effort and resources on core competencies. Take Philips. The company offshored manufacturing, simplified its back office and focused the group resources on product innovation in solid state and automotive lighting.

Reality not matching expectations

However, in recent discussions with clients, outsourcing clearly has not lived up to their expectations. Our experience reflects the findings of several surveys:

• 50% of companies that have outsourced reported that their outsourcing programmes fall short of their expectations.
• Only 6% of companies that have outsourced are highly satisfied with their outsourcing partners.

So what are the underlying reasons for this failure? A quick look at the inordinate amount of effort spent on contract negotiations and management is a telling sign. Managers do not take a strategic view of outsourcing, and more often than not, outsource in a piecemeal way looking for one-off cost savings. In fact, that was one of the main reasons for BA’s problems with Gate Gourmet.

Add to that the widely held misconceptions across organisations about their core competencies, and you have compounded the problem. This confusion may have been okay in the past, but when you start unravelling the value chain, clarity in the core competencies becomes business-critical. It is the DNA of the company and guides streamlining towards real value adding activities. For example, JP Morgan Chase recently cancelled a $5bn outsourcing seven year deal with IBM because the new CEO believed that IT was a core competence in financial services.

Finally, companies fail to realign their organisations to the new business models. Organisation alignment is often reduced to a mere adjustment of the management roles. Re-engineering of the outsourced processes is left to the vendor, whose immediate focus lies in reducing costs through offshoring and
shared service models.

Add all these up and you end up with a largely opportunistic attitude to outsourcing, which can only weaken the value chain reinforcing further the contractual element, locking the organisation into a vicious circle (see Diagram 1 above) delete this line if there is no diagram.

Diagram 1: The Vicious Circle of Outsourcing

The key to success is not in what you have but knowing what to do with it! For example, in the early ’80s, companies invested heavily in IT in the quest for a sustainable competitive advantage. CRM solutions were bolted onto organisations and costly ERP solutions were implemented across the enterprise, but the desired sustainable advantage remained as illusive as ever. Sound familiar?

Organisations realised that technology alone cannot provide a sustainable competitive advantage. It is achieved by leveraging technology with a unique business model supported by an appropriate organisational architecture.

Capitalising on outsourcing

To capitalise on outsourcing, ER Consultants believe that you need to understand how it impacts your organisation architecture. You can reduce the complexity of your organisation down to five elements:

Work – Advances in IT continue to separate service ‘production’ from ‘delivery’ and make it possible to outsource more work areas. As a result, the work of western companies shifts increasingly upstream towards relatively more complex and more client-facing, value-added tasks.

People – Organisational capabilities shift even more strongly towards teamwork, empowerment and value-based relationships across functions, organisations and geographies. Outsourcing places renewed demands on leadership for vision, stamina and courage to design and see through continuous and significant change. Leaders need to develop skills and capabilities in organisational design and to take up new roles that enact new business models.

These, for example, may include organisational architects within HR with an ability to forge work, people, process, technology and structure into a cohesive design. CIOs may need to develop business model designs that combine technology with organisation design to create novel ways of generating shareholder value leaving business-as-usual to long-term partners. Performance reward and staff motivation must reinforce the role of multiple partnerships and alliances.

Process – Business processes are delivered increasingly across multiple centres and geographies, and are unbundled to focus on those parts of the organisation that can add real value from those that are best left to a partnership. Core processes need to be redesigned for flexibility and efficiency in response to changes in the business model and the environment. Eventually, re-engineering follows deconstruction as surely as night follows day.

Structure – Structures can no longer be designed through ‘power bargaining’ or the latest theories and arguments. As business models evolve to match changes in the environment, the ability to build organisational models and translate them into structures becomes business critical. Accountabilities, increasingly shared across functions and organisations, demand clarity and co-ordination that must be built in the structure.

Information – In the knowledge economy information is one of the primary sources for sustainable competitive advantage. Information is increasingly managed not just across systems and processes, but also across organisations. Organisations need innovative co-ordination mechanisms to facilitate this information sharing. In addition, capturing and transferring vital knowledge within and across organisations becomes critical to the survival of the business.

So what can be done to make it happen?

Your gut reaction to build on the existing business model or to change structure and jobs will no longer suffice. Instead, you need to develop a posture and the capability to evolve radically different, emergent business models. This means that the organisation must be capable of:

• Translating the deconstructed value chain and business model to an organisational architecture, where work, people, process, structure and information are continually optimised.
• Building and capitalising on the core competencies of the organisation. Prerequisite to this is the clear articulation of the core competencies and the underlying business logic.
• Translating systematically and explicitly deconstructed business processes and value chains into leveraged structures and accountabilities.

All this may sound rather onerous and complicated. However, once you come through the initial barrier of thinking in terms of organisation architecture, the rest is pretty straightforward.

ER CONSULTANTS 5 POINT PLAN:

What should my organisation focus on?

1. Dust down your outsourcing business case and create (if you have not already done so) a new Business Model that exploits the added strategic flexibility and operational focus. Make sure that the strategic intent and the organisation core competencies are an explicit part of the model.
2. Translate the business model into an Organisation Model that describes the ‘new logic’ of the organisation. That is how the critical concepts that underpin your strategy are linked together in the organisation.
3. Create an Organisational Blueprint, a ‘bird’s eye’ view of the organisational landscape to act as the design framework. A ‘single page’ describing how the critical concepts of the organisation model are linked together from different viewpoints, such as work, people, process, structure and information will come together to enact the ‘new logic’ of the organisation.
4. Identify a small number of Critical Interventions that will move the current organisation towards the desired Organisational Blueprint through an explicit and costed roadmap.
5. Mobilise a Phased Change Programme to deliver the critical interventions that you have identified.

For more information contact: Topics@erconsultants.co.uk