Outsourcing and Compartmentalization

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There’s a great deal of debate these days about outsourcing, particularly offshore outsourcing. Like many business processes, the use of outsourcing can be interpreted in a positive or negative light.

On one hand, management typically is under tremendous pressure to control costs, so outsourcing can help with that. On the other hand, if you are a worker concerned about losing your job or an economist concerned about the long-term effects, it can be of grave concern.

The purpose of this particular article is not to take sides. Instead, it focuses on a model that looks at environmental stability and process maturity as two key factors of jobs that can be outsourced — offshore or not.

Environmental Stability

First, the rate of change in the environment is a variable. As the rate of change increases, the difficulty of change management increases. As the difficulty of change management increases, it becomes increasingly difficult to outsource due to the overhead involved.

For example, if an organization or functional area is static, their risks associated with change are lower. Conversely, if an organization or functional area is in a state of constant radical flux, the risks are far higher.

Process Maturity

In order to be effectively managed remotely, processes must be sufficiently mature that they are both defined and repeatable. Without at least these two elements, outsourcing becomes difficult, if not impossible. With this in mind, there are three process layers to consider:

Job-Specific Processes — These are processes unique to the job and are comprised of both formal and information duties. For example, a developer may be required to take a functional specification and write an application module using a particular development environment and perform alpha testing following a defined test plan.

Functional Area Processes — These are the next layer of processes surrounding the job. Essentially, they serve a supporting role in ensuring that the jobholder has the resources, including tools and information, necessary to perform the job responsibilities. For example, within IT, functional area processes include physical security, training, coordination, etc.

Integration Processes — These are processes that connect the functional area to one or more other areas. They may be shared services, provided services, etc. If the integration processes are in tatters, the outsourcing will be far more difficult or even be impossible due to constant conflict with other functional areas. Of key importance, information flows must be considered a process! Information must be able to readily flow between the stakeholders in order for outsourcing to work.

Ideally, all three need to be relatively mature. Bear in mind that a strong outsourcing partner can only help so much. The reason the diagram is a series of circles is that each ring is dependent on the others. Process maturity in isolation only works on paper! This intertwined dependency is true about operations in general and is not unique just to outsourcing relationships.

Compartmentalization

Now, by applying the environmental stability and process maturity dimensions to a graph, we generate the compartmentalization diagram. I refer to this as “compartmentalization” expressly to underscore the ability to isolate, package and move the job. Essentially, the model serves to illustrate how environmental stability and process maturity are two key drivers of whether a position can be outsourced or not.

To facilitate discussion, picture four quandrants inside a square. They are:

Quadrant One (top left) — High Stability and Low Process Maturity — In stable environments with relatively low process maturity, the ability to outsource exists, but may be difficult to attain, as the processes necessary may not be sufficiently mature. On the other hand, it is also possible that the ad hoc processes could handle the relatively few changes that take place. In other words, the processes are neither defined nor necessarily repeatable, but they get the job done.

Quadrant Two (top right) — High Stability and High Process Maturity — Jobs in this quadrant can be efficiently outsourced. Here, the environment isn’t in flux and the processes are robust. In this situation, jobs can be moved with relative ease.

Quadrant Three (bottom left) — Low Stability and Low Process Maturity — In short, these positions are nearly impossible to move. The environment is unstable and processes are not sufficiently developed to support the organization. Even if these positions are not outsourced, organizations should assess means to improve the situation.

Quadrant Four (bottom right) — Low Stability and High Process Maturity — Solid processes can compensate for a great deal of chaos. The question really comes down to the ability of the processes to handle the constant changes in an efficient manner. Certainly, risk management and service level management need to be taken into careful consideration. If they can, then outsourcing is possible.

Summary

Outsourcing — both within a country as well as offshore — is on the rise. Organizations pursuing an outsourcing strategy need to factor in the rate of change and maturity of their processes before proceeding. As environmental stability decreases, the need for robust processes increases. Organizations that do not take these dimensions into account will face unmanaged risks including potential failure.