Outsourcing continues to be an effective way for many companies to conduct business, but it hasn’t reached that point without numerous challenges and mistakes along the way. One thing is clear though: To have a truly effective outsourcing arrangement, somebody needs to be in charge of it — to own it.
Organizations without outsourcing ownership are at risk of losing control of their projects. In addition, neglecting outsourcing ownership can result in interference of internal operations and core services, as well as minimized outsourcing contributions by service providers.
“A multi-vendor or diverse outsourcing program cannot exist long successfully without skilled leadership and invested owners,” said Doug Brown, co-founder of Brown-Wilson Group, Inc. and co-author of The Black Book of Outsourcing.
The Value of Outsourcing Management
Any successful outsourcing arrangement succeeds because of proper management. That’s exactly what research conducted by Brown-Wilson discovered. The company’s 2006 survey of 600 outsourcing buyers — half with revenues of more than $500 million and half with revenues of less than $500 million — found that outsourcing governance and internal initiative ownership are the critical success factors for managing today’s complex enterprise outsourcing environments, according to Scott Wilson, co-founder and co-author of The Black Book of Outsourcing.
Without strategic ownership in place, companies lack the answers to key questions: How will we identify strategies that need to be defined to make the outsourcing initiatives effective? How will our organization implement the processes and tools to make the concepts actionable?
There’s definite concurrence as to the need for outsourcing ownership. Rajeev Sawhney, corporate VP of India-based service provider HCL Technologies, likened that need to that of a chief marketing officer, chief information officer or chief financial officer. “No business could survive without a chief financial officer,” he explained. Similarly, he believes, no business can truly survive without someone in charge of outsourcing. It’s that important. Yet, for the most part, that position is non-existent. “Why is there no one who takes overall responsibility for outsourcing?” he asked. “Where is the chief outsourcing officer?”
The Role of the IT Director in Outsourcing
People and organizations have varying beliefs about who should head outsourcing arrangements. Research done in the United Kingdom by Vanson Bourne, for example, shows that 83% of IT directors believe outsourcing ownership should be their responsibility, while only a single percent of finance directors and managing directors feel the IT people should be in charge. (They tend to prefer finance or operations directors to pilot that role.) However, only 48% of those IT directors believe they have an understanding of compliance issues that are necessary for effective outsourcing. And that is a large part of the problem.
Today’s CIOs, according to Rick Saia, research analyst in Aberdeen Group’s IT services, “need to know technology, but not as much as they need to know the business and business processes affected by IT.” The CIO is rising as a strategic player, he added. According to an Aberdeen Group survey of CIOs in July 2006, 70% of respondents reported they are playing key roles in IT outsourcing contracts.
Peter Borner, a freelance consultant based in London, found the same to be true. He said that in his experience, the CIO is usually in charge of outsourcing arrangements. “It’s more often driven from the CIO and CEO but always seems to be delegated to the CIO to make it happen,” he said. Why? “Because the CIO is the person that is there with the nuts and bolts [who] can negotiate the contracts and understand where the pitfalls are.”
Up until just a few years ago, according to Brown-Wilson, chief human resources officers and CFOs jointly decided who should own outsourcing arrangements in their organizations based on functional staff and leader displacement. Nowadays, COOs typically make the call. “Often,” said Brown, “outsourcing governance rolls up to the CFO when it reports up through compliance, audit or accounting leaders as a centralized department.”
Brown added that outsourcing buyers are more often turning to governance assessment firms that specialize in advising on outsourcing to identify their outsourcing readiness, organizational reporting structures and governance needs.
Brown-Wilson’s 2006 survey results indicated that only 3% of large companies and 6% of smaller companies have invested in outsourcing governance advanced management training and skill base preparations. Yet 95% of large company leaders and 91% of smaller organizations agree that effective outsourcing management strategies and competent outsourcing leadership are necessary for long-term success.
The company’s research further revealed that the most satisfied outsourcing-buying industries are those with the highest inclusion of outsourcing buyer governance programs. On average, 66% reported having a formal outsourcing governance program.
Complicating matters is that each industry seems to be building its own set of trends regarding the most likely candidate to head up outsourcing arrangements. For instance, the healthcare industry tends to place outsourcing responsibility on the materials management/purchasing/procurement directors or the CFO in 92% of appointments, according to Brown-Wilson. The high-tech products and services industry places that responsibility on accounting or IT directors and CIOs in 88%.
Brown-Wilson’s research also found that organizations tend to select an outsourcing owner based on managerial displacement caused by the outsourcing project rather than by competence, training or experience. “Often the appointment is more determined by the loss of an internal staff or function by outsourcing,” Wilson explained. “The incumbent leader is often placed in a position to monitor the incoming vendor and responsibility is broadened as other areas are outsourced corporately.”
Put in Place a Relationship Manager
The best way for an organization to gain ownership of its outsourcing arrangements, Aberdeen Group’s Saia said, is to have one relationship manager to communicate with all the affected business units. This relationship manager would be the go-to person for how the engagement is working, to ensure that everyone is getting what they need on a timely basis, to handle any suggestions to improve functionality, etc. “The relationship manager really needs to be having continual dialog with end users in the business units,” Saia said.
Aberdeen’s research indicated that to overcome initial outsourcing challenges, 59% of respondents dedicated more management time and talent, 30% implemented new or revised vendor management processes, and 24% established a cross-functional outsourcing management committee.
According to Brown-Wilson’s Brown, it really comes down to the old maxim: “What is not defined cannot be managed. What is not managed cannot be measured. What is not measured cannot be improved.”
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Brown-Wilson Group, Inc.
The Black Book of Outsourcing