As the former global leader of the Operations practice, Hal has extensive operations experience across a wide range of topics and industries, in all regions. He is coauthor of Globality: Competing with Everyone from Everywhere for Everything and Payback: Reaping the Rewards of Innovation. He is a monthly columnist for BusinessWeek, has authored a wide range of articles for periodicals such as Harvard Business Review and Industry Week, and is regularly quoted in the press.
What outsourcing trends are you seeing today?
Outsourcing continues to be an important part of business. Companies must be cost-competitive in virtually everything they do, given the current economic downturn, the increasingly global nature of business, and the emergence of low-cost challengers from all corners of the world.
Companies that try to do everything themselves end up sacrificing speed, flexibility, and valuable resources. Outsourcing allows companies to shed processes, functions, and tasks that are high-cost, nonstrategic, or outside of their current skill set. By focusing only on mission-critical activities that are true differentiators, companies can direct most of their resources toward building a sustainable competitive advantage in these key areas.
What are the biggest challenges that companies face when trying to succeed at outsourcing, and how can they overcome them?
The biggest challenge is striking the right balance between cost and service. It’s very tempting to focus on cost, especially during the current downturn, but if your outsourcing vendor isn’t providing the right level of service or quality, you can do long-term damage to revenue and profits.
To offset this risk, companies must specify detailed service levels in advance, rather than simply choosing the lowest-cost vendor. If you find that costs are lower than expected, you can reinvest some of that by increasing the service level.
To keep costs as low as possible from the beginning, bear in mind that an outsourcing vendor generally starts the negotiations with a company’s current cost structure. If your operations are extremely inefficient, you may pay more than you should for the service. So before contacting any vendors, look for ways to reduce the existing cost structure of the activity to be outsourced.
Another important issue is developing a long-term dependency on a single outsourcing provider. To avoid this risk, use multiple vendors or maintain some skills internally, in case the vendor doesn’t perform well or wants to hike up the price too much during contract renewal.
Does the current recession change the way companies should approach outsourcing?
Some cash-strapped companies may be tempted to outsource out of panic, in a misguided attempt to save money. Don’t be tempted. You’re likely to end up in a high-cost arrangement that will offset any potential savings—and could jeopardize future revenue. Instead, take the time to ensure that you understand the implications, that you’re working with the right partner, and that you’ve structured a solid agreement.