Today, I’m going to drill down on coverage of “structural risk” in Deloitte-Touche’s report on outsourcing.
The greatest risks in outsourcing, according to the report, are vendor underperformance and loss of control, cited by 35% of respondents. Nearly a third reported cost and knowledge loss risks as well.
Forty five percent of respondents said an organization shouldn’t outsource processes it doesn’t fully understand. The risk? If the processes and cost structures aren’t understood, how can you know what to demand from vendors or figure out what’s a fair price? A quarter of respondents said they’d brought functions back in house after realizing they could handle them better and/or at lower cost. (This isn’t easy to do, considering you must rely upon vendor cooperation to do the transfer.)
On the topic of knowledge loss, “institutional knowledge” loss is greater when outsourcing “thought leadership” than “commodity processes.” One respondent is quoted as saying, “We came up with a rule: If it is a ‘rule-based’ process, it can be outsourced; if it is a ‘decision-based’ process, it is not to be outsourced.”
The report emphasizes the risks inherent in long-term (six to 10 year) contracts, because that shifts the balance of power to the vendor. As one respondent said, “that’s quite a leap of faith, putting yourself in the hands of someone for 5 years.” These companies don’t want to find themselves trapped in deals with above-market rates and diminishing service standards.
Slightly more than half of these large organizations have shifted to shorter contracts (up to five years). None currently has long-term contracts that they expect to go full-term.
They’re also avoiding single-source agreements, calling them “extremely risky,” since they can engender a form of vendor apathy.
However, neither is a panacea. Even when signing short-term contracts, companies still become dependent on the vendor, since there are no easy ways to transfer back people, processes, systems or knowledge, once the outsourcing structure is in place. Plus, multi-vendor outsourcing increases the complexity of management and vendor oversight.
Tomorrow, I’ll look at what the report says about cost matters.