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The organization of a company can be carried out by relying on a number of strategies with regard to the location of the business units. Outsourcing and insourcing, nearshoring and offshoring are some of the strategies you can organise your company with.
For many businesses in today’s world, insourcing is still the only strategy available but certain other sectors such as IT are typically confronted with more complex strategies in order to support business strategies.
With more than a decade in IT, I had the chance to lead some sourcing strategy initiatives and changes in small and large organisations. My executive MBA paper was linked to this area, making it a subject that I like and which I am passionate about.
Why am I writing a post on this?
No later than last week, I was in a conference where speakers from different sectors shared their experiences. For some it had been a success while others reported a failure.
In another conference, I was in a discussion stating that offshoring could bring value. The people in front of me were looking at me with big eyes which were expressing the thought, “why should you do this, you must be crazy.” So I just thought I would put some of my ideas and experience in a very short post.
So why outsource.
There are different reasons for why you should outsource. However, the first big mistake you could make is outsource for budget savings alone.
The first thing to do is think about your sourcing strategy. What do you have, why are you thinking of change, and the benefits and issues that every solution could bring
Some of the reasons for changing your sourcing strategy are
- Organisational flexibility: Could increase, decrease staffing depending on the needs. Absorb up and down staffing needs. Be flexible when organisation needs to change.
- Competitiveness, innovation and skills
- Price: When you outsource, and even more when you nearshore/offshore, you expect savings. Yes, it will be there but could not be so much as you think plus know that over the initial years, the total costs could easily ramp up to 50-60% more than the signed contract;
- Reduce complexity: Internal organisation could after time become very complex. Changing your sourcing strategy could be one way to change the way you organized and start from scratch.
- Productivity: You outsource specific tasks to niche players who are specialized. This will be more productive that doing it internaly
- Risk sharing: If you don’t know how to do certain activities
- Greater focus on core activities only: Don’t bother with standard activities and commodities and outsource it; keep value added ones internal.
- Talent and experience: Difficulty to attract talent and keep it. Some experiences are only available if you go in for outsourcing
- Etc …
Different types of sourcing
- Insource: Having internal Full time equivalent (FTE) on your payroll
- Outsource: Hire someone as a freelancer or having a contract with a company in order to delegate one or several tasks within a defined contract and framework. Final responsibility should stay within the company.
- Shared service center: Center where you group different functions that support an organisation.
- Near shore: When you outsource not in your country but to countries that are +- close to you.
- Offshore: When you outsource to a country that is far away from you
- Smart source: Hybrid strategy of sourcing, where you do a mix of several sourcing types in a way that supports the best results for your organisation
What could be outsourced
Not every business can be outsourced; this is a certitude. Now, what is preferable to be outsourced? This is something that will depend on the sector, country, organisation and culture of the company you’re working for.
One magic rule doesn’t exist but you need to pay attention to
- Don’t outsource business critical functions/ positions
- Don’t outsource leadership
- Ensure that what you outource is well mastered and documented. Don’t expect that the provider will clean the mess.
- Ensure that if business strategy is changing, you can change your sourcing strategy. Don’t be stuck with one model.
Tips and tricks – Lessons learned
- Strategy and sourcing decisions: Before you outsource, define your strategy and operating model
- Undertand the market: Check and evaluate the different possibilities that are existing at a certain moment.
- Ensure internal staff has the skills to manage the outsourcing contract and transition. As well promote internal flexibility
- Be fair: Your actual staff will be impacted with the new solution. So be fair. Search if they can internally/externally have a career move and help them with it. And if it is not possible, ensure fair compensation.
- Internal sponsorship: You need to have support from top layers. Changes will have an impact on the organisation, and you will face hard times before seeing benefits.
- Start with Proof of Concept, prove the value: As mentioned, you need to have people following you in this strategy, this could be achieved with a POC and showing fast benefits; In the end, it is not the management that will engage people, but people engage people.
- Governance is key. There is a strong need to have regular checks on how the service is going, and set measures if deviations exist.
- Invest in training and rotations: Not only technical training but as well in soft skills training. If you go for offshore, it’s critical that your staff understand the cultural differences and how to deal with it. This to avoid frictions, tensions and misunderstanding. As well sending people for x weeks to the offshore locations and vice versa, will help to build a unified culture. It’s not them and us anymore but WE.
- Organisational transformation: As with any transformation, you need to have a good change management program. This will affect people and their way of work, so you will have a lot of questions to answer and resistance. Ensure that the program is fair and has a clear communication.
- It takes time: It will be not perfect immediately. You need first to plan enough time where legacy and the new solution will be able to do switch over. Afterwards, you will face some service degradation. It takes time to build a performing service. Therefore, do not change every year
- Knowledge management and transfer. In a few weeks or months, you will transfer knowledge and know how from several decades of experience to some staff that know nothing or less about your organisation. So, documentation is key to mitigate this risk, ensure knowledge is somewhere and not lost. This will speed up the ramp up of the new solution
- Attrition rate: For some countries such as India, it is around 20%. Know this, set counter measures as necessary.
- Manage delays. Keep a very close follow up. Don’t micro manage, but do regular checks to follow up closely on the delivery. Focus on the results.
- Location (timzone, infrastrucutre, skills, language, business travel): You need to take these factors into mind and the ways it will affect your work.
- Sense of being part of organisatons: People need to be engaged with your organisation. When they are, they will deliver better service and retention will be higher. So treat them as you would internal employees
- Retain crucial roles in IT as mentioned already.
- Capacity management: As mentioned, when outsourcing you have some flexibility and can increase/reduce staff depending on the needs. Don’t forget good capacity management is needed as you have the flexibility. If you reduce, this will have an impact on outsource staff and if you increase, it takes time to find good staff. So plan plan and plan
- Opt Out strategy: If it goes wrong, have an exit possibility
- Create a company culture: Engage your internal and external staff. Show them what is the value of the company but as well which role and which value they bring to it. I love one famous statement. One architect in the Middle ages asked two stone cutters what they were doing. One says he is cutting stones while the other one responds that he is building a Cathedral. You should strive to inculcate the second way in your staff and make them feel part of a big family
- Contract: Be clear in your agreement and what you expect. Don’t allow opportunities for different interpretations. What and how you want the service must be written down clearly.
- KPI: You don’t know what you don’t measure. Set challenging KPIs in order to evaluate the service. Don’t just evaluate technical indicators but set business outcomes measurements as well;
- Be realistic: Don’t think outsourcing will solve all your problems. Set realistic expextations and make continous improvements
- Get help from experienced individuals or entities : A lot of organisations fail in their sourcing strategy. It is not as easy as you might think. Experienced counsel could be more than useful to succeed in this transformation.
Defining and changing your sourcing strategy is not easy. No magical solution exists and it will have an impact on people, and in the beginning, on performance.
The journey will take time, cost you even more in the beginning and will probably make you unpopular.
But not changing will bring you other troubles such as inflexibility, not being able to find some skills, lower productivity, complexity, focus on activities that aren’t core, …
So not reviewing the strategy is not an option as well.
Therefore, my final conclusion is to be smart, follow best practices and if you have never worked on this, ask for help. Failure in this area is very easy and will have disastrous consequences.
Success will be much more difficult but will ensure better productivity, more engaged staff and a solution that should fit to your organizational needs.