When service providers start their sales pitches, you’re bound to get an earful on how their services can make your company more nimble, more responsive to market needs and smarter about technology. Let’s look at five common claims they make — and explore whether they can be accepted at face value.
–> CLAIM #1: You will improve business accountability.
Claim: Since external vendors issue clear invoices, the more businesslike relationship will improve clients’ accountability for their use of the function in the business unit.
Reality: There is no reason an internal service provider can’t issue clear invoices for its work. Outsourcing is likely to be far more expensive than improving staff’s accounting systems.
Furthermore, there’s no reason clients throughout the company can’t be held accountable for their consumption of staff’s services. If they currently aren’t, then they probably won’t be more accountable when asked to manage an external vendor’s costs.
This problem is probably not isolated to a single function. If the mechanisms are not in place to induce clients’ accountability for one set of services, then it’s likely that the problem extends to many internal service functions. The entire company may be missing some fundamental control mechanisms. Outsourcing one function will not address this deeper root cause.
Real cost/benefit: Outsourcing does little to build an environment of business unit accountability for all their cost factors.
–> CLAIM #2: You will obtain greater competence.
Claim: Outsourcing vendors are more experienced and competent than internal staff.
Reality: A firm can hire competent people as readily as hiring a service provider.
In some organizations, there are real barriers to hiring qualified people — such as pay scales well below market rates, arbitrary caps on headcount, or extremely undesirable locations. In these cases, outsourcing may provide a viable alternative to recruiting, albeit at a higher cost.
But this is a costly and unreliable stop-gap. The better answer is to repair the recruiting process with compensation plans and other incentives (such as training and career-growth opportunities) that attract the needed talent.
Real cost/benefit: For most organizations, the right answer is to recruit and pay for the talent you need, without paying someone else a profit margin on people’s salaries.
It’s true that an outside vendor can supply specialists which an internal service provider can’t afford to hire full time. In this sense, vendors can bring to bear greater competencies. But, of course, an internal service provider can also bring in that same specialist on a contractor basis.
Put simply, the argument that outsourcers are intrinsically more competent than internal staff is specious.
–> CLAIM #3: You’ll have increased flexibility.
Claim: Outsourcing gives a company more flexibility, since it can buy just what it needs, when it needs it.
Reality: As the business environment shifts, internal staff can be quickly redirected or redeployed. Most outsourcing contracts, on the other hand, include fixed deliverables and performance targets. Adjusting the statement of work to match changing business needs requires careful renegotiation. Renegotiating these complex, legally-binding contracts can be much more expensive and time consuming than simply changing internal priorities and directions.
Even if the basic deliverables remain constant, work processes may have to flex to accommodate new business challenges. But vendors are not receptive when their customers tell them how to manage their businesses.
In one case, the executive overseeing an outsourcing contract felt the need to change the way the function was organized to meet new challenges. But the vendor didn’t want the company meddling in its management, and refused to make the needed changes. This constrained the effectiveness of the entire function.
Real cost/benefit: The claim that outsourcing gives a company more flexibility is hollow. Staff is generally much more flexible than outsourcing contracts.
–> CLAIM #4: You can downsize without firing people.
Claim: In organizations that must downsize, the outsourcing vendor will hire all of your people and then move surplus people to other jobs serving other companies. This appears more humanistic, since people may not be laid off.
Reality: If those other jobs exist, surplus staff can compete for them on the open market with or without the outsourcing deal. If people are good enough to deserve those other positions, they’ll get them — whether or not the firm pursues outsourcing.
On the other hand, if they’re not good enough to win those other jobs on their own merits, it’s unlikely that highly competitive outsourcing vendors will keep them in these positions for long.
Real cost/benefit: Ultimately, outsourcing does little to change the employment picture for surplus people. Outsourcing amounts to paying someone else to do the dirty work that your shareholders are paying you to do.
–> CLAIM #5: You can gain better access to newer technology.
Claim: Equipment vendors suggest that outsourcing through them provides customers with better access to new technologies.
Reality: Vendor sales representatives are always eager to bring new products to all their customers’ attention, with or without an outsourcing relationship.
Meanwhile, vendor-owned outsourcing services are less likely to tap opportunities presented by competing vendors (e.g., more cost-effective “plug-compatible” products).
More importantly, do you really want vendors deciding when you should adopt their new products? They have an obvious vested interest in selling every new product, whether it’s economical for you or not.
It’s always better to decide on one’s own whether to adopt a new vendor offering than it is to leave it up to the vendor.
Real cost/benefit: The relationship of an outsourcer to a product vendor is just as likely to be a cost as it is a benefit.
Useful Links:
How To Transform IT without Outsourcing: An Interview with N. Dean Meyer
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Two Vendor Claims on Cost Savings that Deserve Major Scrutiny
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© 2005 NDMA Inc.
