Business process outsourcing (or BPO) is riding on the crest of a wave of management popularity. And quite rightly so, as properly implemented, business process outsourcing can enable an organisation to:
– Obtain higher value generating, more efficient services than internal sources can offer.
– Improve its innovative capability by allowing it access to “best in the world” practices of outsourcers.
– Gain access to knowledge and experience that the organisation might not have.
– “Stick to its knitting” – focusing upon the processes that really make it different without the distraction of managing non-core tasks.
But is outsourcing or BPO really used as tool that will enable organisations to gain a unique competitive edge or is it just a cost cutting tool that may, in the long-term, sign an organisation’s death warrant?
How Outsourcing Can Deliver Problems
Outsourcing is probably at its most valuable when it is used to give the organisation access to knowledge that it doesn’t possess. The problem is, that in many cases, outsourcing is used a purely as a tool to reduce costs. As a cost cutting tool, outsourcing can deliver real long-term problems for top management that might not be appreciated when the decision to export activities and processes is first made.
Unfortunately, these downsides are not well known. So, in this article I will introduce the downsides and then move on to describe an approach to help avoid these pitfalls.
The outsourcing downsides you really need to worry about are:
1. Strategic Stalemate.
2. Declining innovative capability.
3. Reduced employee performance.
So, let’s examine the first of these.
Outsourcing is all about letting others carrying out your processes. But if we stop to think for a minute, it’s processes that are the real sources of advantage. Why? Well, we know that it is becoming increasingly easy to copy products – that’s a product of outsourcing and the increasing openness of information that the internet allows. So, it must be our business processes – decisions and interactions with our customers – that really create value and make organisations different. It’s business processes that really make strategy happen.
But, are we potentially exporting these core value-adding processes through outsourcing?
Cost based outsourcing can result in key customer facing processes (such as call centres) being exported outside the organisation. But, as we have seen, it might be just these processes that firstly create value for the customer and secondly really make the organisation different.
This is effectively outsourcing strategic advantage.
The long-term result? You may well end in a position where, in the eyes of your customers, core processes and activities are no different than those provided by your competitors. And you might not have the capability in the organisation to do much about it.
If that’s not enough, there’s another problem closely linked with the issue of outsourcing core business processes.
Declining Innovative Capability
The best ideas come from the customer. Really fast moving innovative organisations get most of their ideas from close interaction with their customers.
Outsource a significant part of your customer inter-action and watch, unless you introduce sophisticated controls, your organisation drift away from understanding the emerging needs of its customers.
If these first two downsides aren’t bad enough, it’s the final one that carries real organisation-wide headaches.
Reduced Employee Performance
To say that we live in an age of increasing uncertainty is a gross understatement.
In a changing environment your employees want more than a pay cheque. They want:
– Skills that will enable them to survive in an uncertain world.
These are the foundation stones of the new employment contract that organisations must deliver to maintain a motivated employee base in uncertain times.
Can cost based outsourcing deliver this type of working contract?
If it’s part of management strategy to outsource processes that can be performed more cheaply elsewhere, what will be the effect on the long-term motivation of the organisation’s core workforce if they know that if it can be done more cheaply elsewhere then they will loose their jobs?
Avoiding the Downsides
So, if you’re considering an outsourcing decision and want to avoid these three pitfalls follow this step-by-step process:
Step 1. Understand your processes not as cost centres but as strategy centres. Map your core processes and measure two things. Firstly, measure where value is created in the eyes of your customers and then determine if the process is central to delivering your organisation’s competitive strategy.
Step 2. Understand the costs. This is a more conventional approach. Measure the costs associated with each core process.
Step 3. Plot each process across these two dimensions – firstly strategy and value creation and secondly cost. The result will give you a clear map of which processes should be outsourced and which retained. Obviously the high cost, low strategy and value creation processes are the prime targets for outsourcing. If you’ve got processes that score highly in the strategy and value creation dimension, but are relatively expensive – consider cost reduction methods that will allow you to retain the processes within your organisation.
In closing I’ll leave you with two thoughts.
Firstly, if you’re in any doubt, don’t outsource primarily to save money.
Secondly, outsourcing is at its most valuable not as a cost reduction tool but where it can give you access to knowledge that you’re organisation doesn’t have.
If you enjoyed this briefing why not read a more detailed discussion of outsourcing’s problems – Outsourcing Problems and Disadvantages Revisited?