Outsourcing Essentials

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I’ve written about outsourcing before. But since it’s growing at an incredible pace, I think we need to talk about it again — as honestly and realistically as possible.

The appeal of outsourcing is still cost savings and, increasingly, discipline in the form of elegant software documentation and improved reliability (in the case of software development and systems integration) and efficient processes and excellent customer and employee interaction (in the case of call centers). Everything’s a candidate for outsourcing it seems — front office, back office, virtual office tasks are all on the list. You can always find someone to do whatever you need them to do — for a price, of course.

But before you leap into a short-term or (especially) long-term outsourcing agreement, you need to know some things.

First, you need to know how to craft a diagnostic outsourcing request for proposal (RFP). The most important aspect of this process is the width and depth of your understanding of the work you want to relinquish: If you don’t fully understand what you want an outsourcer to do, the deal will explode.

The incarnation of this understanding will be your RFP of the tasks to be performed, and the details of the service level agreement (SLA) you’ll want the outsourcer to honor. These documents need to be works of art — though don’t expect elegant pieces of paper to actually manage the arrangement. You’ll have to do this personally.

Second, you need to know what should stay close to home and what you can export to India, the Philippines, Ireland, Russia or wherever. Companies have outsourced technology and business processes to a variety of companies outside of the United States in order to save money and improve quality. When tasks are well-defined and repeatable — and when you know a lot about them — they can be exported.

When the outsourcing deal is with a company thousands of miles away, it better be well-conceived and well-oiled: Outsource far from home only when you understand the processes and objectives, have a mutually beneficial explicit service level agreement, and metrics that enable you to track performance at least quarterly (I actually prefer monthly tracking).

Third, you need to know how to develop contingency plans — and the more distant the partner, the more robust the plans should be.I understand that ubiquitous communications shrinks distance and time, but we should never underestimate the need for hands-on, face-to-face management — especially hands-on, face-to-face crisis management. If an off-shore outsourcing effort is extremely strategic to your company, you should consider opening an office near your partner to stay close to progress and problems.

Fourth, you need to tap into insight about social and political climates in the countries and regions where you have outsourcing partners. It’s obviously a volatile world, and it’s possible to have great partners who find themselves held hostage to paralyzing economic, political and military events: Do you want to be the champion of outsourcing deals to countries whose economic and political systems are fragile, or whose military enemies are formidable — and close?

Fifth, be completely honest with yourself (and management) about the total cost of outsourcing. While the essential tasks — coding, answering phones, processing checks, etc. — may be much cheaper, there are all sorts of additional costs that must be calculated, costs such as additional travel, additional management, on-site presence and performance monitoring. So-called “soft costs” will also kill you here. Model all of the hard, soft, and other costs before you outsource, and then again during and after the outsourcing experience.

Finally, you need to keep asking tough questions about your current and anticipated core competencies. Why are you outsourcing? By this time, you should know that just saving money is sometimes a horrible reason to outsource anything. Outsourcing decisions should be driven by objective assessments about what it is you do well (and poorly), cost-effectively (and too expensively), what you think your competitive differentiators are (and will be) and what you really want your company to be (and not be) going forward.

One more thing: Try as hard as you can to keep the politics as quiet as possible when you’re making important outsourcing decisions, especially decisions that will land a continent away.

Outsourcing can often make perfect sense. But it can sometimes result in hideous outcomes. Be careful out there.

Steve Andriole is the Thomas G. Labrecque Professor of Business at Villanova University where he conducts applied research in business/technology convergence. He is also the founder and CTO of TechVestCo, a new-economy consortium that focuses on optimizing investments in information technology. He can be reached at stephen.andriole@villanova.edu.