While there are many benefits and rewards to outsourcing certain business processes to offshore service providers, there are also risks and trade-offs to this strategy.
Many of the risks of outsourcing can be mitigated with solid preparation and planning, but nothing helps more than understanding what the potential pitfalls are, and how they might be avoided.
Six potential outsourcing issues are highlighted in this article, along with some ideas and suggestions to prevent, avoid, or minimise the impact of each.
The very first challenge that companies are likely to experience when outsourcing certain functions is that of a possible lack of buy-in from people inside the company. This may take the form of active or passive resistance. The prospect of outsourcing also creates uncertainty for existing employees, who may decide to look elsewhere for employment.
The best way to address both these problems is to implement an effective change management strategy as soon as (or even before) the outsourcing contract has been signed.
A comprehensive communication programme should be developed and disseminated to all stakeholders who will be affected by the outsourcing process. The message should be tailored to different levels of employees. It should essentially answer the question: “What about me?” Employees need the opportunity to air their concerns and ask questions.
Managers Fear Change Too
Remember that managers, especially, can suffer from a shift in equilibrium when you outsource. Their concerns will range from the possibility that their jobs will be at risk, to a sense of lost control when tasks for which they were accountable and had direct control, shift to an external provider.
Your managers may still have accountability, but will need to take a completely different approach to monitoring processes and ensuring results.
It may even be that their roles will change substantially, and that they will have to manage relationships with external counterparts, where before it was all about being seen as a leader by internal reports.
Keep Your Managers in the Loop
This can be quite a change indeed, and some managers may not be naturally imbued with the right qualities for managing operational partnerships. If you expect that some management jobs will be sacrificed, you will need to be ruthless about identifying which people it makes most sense to retain.
On the other hand, you might find that investment in targeted training will help retained managers to adjust to the new modus operandi.
The important point here though, is that you should not make the mistake of neglecting your management team in your change management plans. While you may be depending on your managers to lead your workforce through the change, they can only do so effectively if their own reservations and fears are first allayed or they at least know exactly what the changes will mean to them.
When embarking on offshore outsourcing, cultural differences should not be ignored. Two types of cultural differences cause difficulties between companies and their outsourced service providers. These are corporate differences, and national or regional differences.
In terms of corporate culture, a company and its outsourcing partner may have different norms relating to organizational structure, authority, and style. In terms of national culture, there may be differences in language, religion, and values.
Keeping Culture in Context
For example, so-called high-context cultures, such as Asian cultures, value politeness and respect more than clarity, and will minimize confrontation in order “to save face”. On the other hand, low-context cultures, such as American or Australian cultures focus more on figures and closing a deal, sometimes leading them to be perceived as aggressive.
A diversity or multicultural awareness training programme will assist employees at the client company to understand the culture of the service provider employees’ norms and customs.
Outsourcing service providers often implement such awareness training for their own staff, and in many cases, will be happy to share material and content with their clients. It also makes sense to reciprocate this process, with the outsourcing service provider receiving training to understand the client company’s culture, values, and norms.
Address Corporate Culture During Provider Selection
Of course, outsourcing does not always mean offshoring, but even if national culture is not an issue, the impact of differences in corporate culture is not something to be underestimated either.
Fortunately, this is one outsourcing problem that you can mitigate (or perhaps even prevent) at the very outset of your company’s venture. To do so, you will need to include corporate culture and values in your criteria for service-provider selection.
It may be a good idea to give preference to providers that…
- Can demonstrate similar business values to your own organisation
- Are of a similar scale to your own company
- Embrace a corporate culture and structure that is aligned with your enterprise
Prevention is always better than cure, and if you can find an outsourcing partner with a culture compatible with yours, you might be able to save a lot of inertia as your project gets under way, and improve the chances that your partnership will be long and fruitful.
Another outsourcing challenge arises when the client company harbours expectations that the outsourcing service provider will take care of everything.
If outsourcing expectations, especially those held by the management of a company, are too high, there is a risk of over-critical feedback and disappointment.
It is important that a company’s executive management team be informed about the reasonable risks, potential costs, and mitigation strategies relating to an outsourcing project. Equally, employees, customers and other stakeholders should also be kept informed as the project unfolds.
Managing expectations is not difficult, but it is frequently overlooked because it involves confronting problems before they arise. However, if handled effectively, managing the expectations of outsourcing can create a great deal of goodwill among the venture’s stakeholders.
It Takes Time to Make a Good Match
Beware of unrealistic timeline expectations too. Many are the companies whose leaders have been woefully optimistic about how long it takes to get an outsourcing partnership running sweetly (or even running at all). Outsourcing is seldom a short-term business solution, and shortcutting during the planning, provider selection, and contract negotiation processes only increase the risk.
Possible consequences can range from the errant selection of a poorly matched provider, through misunderstandings over deliverables and accountabilities, to the implementation of contractual terms that hamper, rather than support the performance of the partnership.
None of these outcomes is good news when two companies must try to work together for perhaps five years or more. So be realistic in your expectations of the time necessary to find the right partner and make the right agreements.
Lack of Alignment Over Contractual Terms
After the initial signing of the contract, both the client company and the outsourcing service provider will deploy their separate teams to manage the implementation and management of the deal.
It is at this early stage that serious misunderstandings could arise to poison the new relationship even before it has had a chance to develop.
The client’s staff, for example, could easily misinterpret one or more terms of the deal, either because they have their own view of what the service provider should be delivering, or because they are opposed to the entire outsourcing process.
The service provider’s team, for their part, may not fully understand the nuances of this particular agreement and may wrongly begin implementing it according to previous similar contracts they have dealt with.
The problem becomes compounded when a large number of people on both sides are involved and/or there is a need to implement the contract as speedily as possible.
It is not unusual for tempers to fray and for harsh verbal exchanges to take place over ‘what’s in the contract’.
To avoid heated clashes such as these, the following steps could be taken:
- Both negotiation teams should include executives who will be responsible for future delivery.
- The client and service provider should each designate single accountability, either a person or a department, to deal with issues arising from contract interpretation.
- Both sides should have defined processes for team members to seek an accurate interpretation of the contract from those responsible.
Intellectual Property Issues
The intellectual property of companies includes business plans, trade secrets, and other proprietary knowledge. Outsourcing presents a considerable risk that client companies will experience theft or hacking of this property. In addition, there is the challenge of securing the confidential information of companies’ customers or clientele.
In order to mitigate this risk, it is necessary to develop stringent safeguards and protocols when outsourcing.
Technical safeguards include the protocols governing access to information. Physical safeguards will protect buildings and equipment from unauthorized access, and administrative safeguards stipulate policies and procedures for operations, the conduct of employees and the use of security controls.
An outsourcing service provider should adopt an information security risk management strategy that complies with best practice.
Counting (or Miscounting) the Costs
When outsourcing a project or other business functions, it is important that all the relevant costs, as well as time frames, are calculated accurately by the various parties involved from the outset. This is to prevent criticism that the work may be taking too long to complete and to avoid unpleasant surprises when the bill arrives.
If the task to be completed requires specialised skills or knowledge, the outsourcing service provider should indicate in advance that premium rates will apply and explain these in detail to the client company.
Beware of the Hidden Costs
When calculating the outsourcing price tag, companies should be aware of—and beware of—the following hidden costs:
- Costs of identifying a suitable outsourcing provider
- Costs of communication and coordination between client company and provider
- Costs of creating the contract
- Costs of managing the transition phase
- Costs of redundancies (severance pay and unemployment benefits)
- Costs of transfer of company know-how to provider
- Costs of training provider’s staff
- Costs of managing the relationship with provider
- Travel costs
- Costs of changing business processes.
A US study found that the average company spends about 2% of the value of its outsourcing contracts to manage its relationship with the service provider.
When it comes to IT, some activities cost more than others to outsource, with applications development considered the most expensive, while data-centre operations and mainframes are seen as the least costly.
IMPORTANT: Before making a final decision whether to outsource a business process, companies should double check their calculations to make sure that the value of the outsourced activity outweighs all the costs, hidden or otherwise.
Focus on the Benefits, but Prepare for the Challenges
Nothing is without challenge, and there are few rewards without some risk. By outlining six of the potential issues associated without business process or operational outsourcing, the intention is not to deter you from pursuing the strategy, but rather to help you step forward with clarity and realism, and to prepare for the changes that outsourcing brings about.
If you get it right, outsourcing can help you improve your costs, scale your business, and become more competitive—and with knowledge of the potential pitfalls and their solutions, there is absolutely no reason not to get outsourcing right.
Editor’s Note: This post was originally published in January 2017. It has since been updated and expanded several times, most recently in March 2020. The latest version includes a new section to make the information contained in the post more comprehensive.