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Is Your Outsourcing Initiative Designed to Succeed? - May 2010

Enterprise Applications: The Cost of Keeping Current...Or Not

How Organizations can Elevate Business Performance through Advanced Document Process Management

The Power of Partnering in Accomplishing Your Green IT Agenda

HRO Innovation: Building Blocks to Derive Full Value

Leveraging Information Technology Infrastructure Library (ITIL^®) Best Practices to Attain Organizational Maturity

Impact of Web 2.0 on Outsourcing

Operational excellence: The new force driving high performance through outsourcing

Outsourcing for Business Growth

Improving Merger Success through Outsourcing

Trend Report: Key Challenges in Implementing an Enterprise Master Data Management Program

The Rise of Progressive Sourcing

Enterprise Email Security: The Strategic Case for Outsourcing

Evolution vs. Revolution: business transformation without the resistance

Converging on the Future: Viewpoint

Guidelines For IT Management: Planning for Offshore Outsourcing

How do you drive the most value from an outsourcing relationship? That leading question lies at the heart of this four-part series on value creation. This article offers one answer to that question. After years of studying outsourcing relationships, we believe there is a formula for creating successful, beneficial and enduring relationships: build them around distinct service provider strengths.

Creating an enduring relationship is an important goal, because breaking up is hard to do, especially in the outsourcing world. Divorce is expensive - emotionally and financially - for both parties. Buyers, who originally made a significant cash outlay to outsource, now are dependent on the service provider's services. Switching costs for them can be just as prohibitive as 10 years of child support. Service providers, on the other hand, have made a considerable up front capital investment to improve the buyer's process. Both sides experience significant hardships when the relationship doesn't work.

For these reasons, buyers and service providers need to work together at the outset to create enduring outsourcing relationships. The best way to do this is to build the relationship around a long-term value proposition. That includes aligning the business solutions and the business objectives of both parties. The easiest way to do that is to shape a solution around a service provider's strengths.

In the past we have structured service provider procurement by developing rigorous specs for the relationship and then outlining them in an offering package. Interested service providers competed for the business in an adversarial atmosphere.

This method did produce the lowest cost for the buyer. But the adversarial stance often got the relationship off on the wrong foot. Moreover, basing the relationship on the lowest cost often obscured the true value the service provider could offer.

After more than a decade of working with buyers and service providers, sometimes in remediation disputes, at other times watching relationships prosper and grow, I believe the best way to build great outsourcing relationships is to wed the buyer's true business objectives with the seminal strengths of the service provider. This allows them to travel down the tough road of business with the same destination.

Different Service providers Have Different Strengths

Different service providers have different strengths. To select the best outsourcing partner, buyers need to understand each service provider's strengths, taking into account the distinctive leverage points where the service provider can add value. Then, select the service provider whose culture best fits your own. Those two characteristics -- a similar business culture and the ability to add value - are the two decisive factors in this decision.

Here's how this approach works. Buyers looking to outsource human resources (HR) realize there are three industry leaders. Service provider A has built shared services centers that allow it to share its infrastructure, people and software with many customers. This creates large economies of scale for its buyers. Service provider B, which has decades of IT experience, has the industry's best data processing prowess in the HR world. Service provider C has the most practical process experience. Buyers must evaluate these differentiating factors and select a service provider based on the best fit for their business needs.

For example, Exult, a pure-play HR service provider, has a well-developed self-service vehicle. Companies who want to add this popular capability to their HR roster and who need to move quickly would find Exult a good fit -- as long as the business cultures are compatible.

The same principle applies to vertical industries as well as business processes. In the insurance arena, CSC, an IT and BPO outsourcing service provider, has an unequaled software library for the insurance industry. Insurance buyers interested in using this software in their outsourcing engagements will select CSC as the best fit for them.

Assessing Apples-To-Oranges Comparisons

However, when you base your comparison on a service provider's distinct strengths, it is impossible to compare apples-to-apples. By definition, this is an apples-to-oranges comparison. The best way to assess service provider strengths in a thoughtful and effective way is to develop individual specs matching buyer needs with service provider strengths. Intermediaries like the Everest Group are ready to help buyers through this much more complex service provider assessment, using their experience to make an enduring match.

Next month I'll discuss how outsourcing creates value through its impact on the overall corporate strategy as well as other departments in the company that weren't outsourced.

Lessons from the Outsourcing Journal:

• The best way to create enduring outsourcing relationships is to wed buyer's business objectives with service provider strengths.
• Every service provider has different strengths. Selecting a service provider that adds the most value is the best recipe for long-term outsourcing success.
• Select a service provider for its strengths as well as a business culture that's compatible with your own.
• This kind of evaluation is no longer an apples-to-apples comparison. Intermediaries like Everest can use their knowledge of the service provider community and their outsourcing experience to help buyers with these apples-to-oranges comparisons.

Publish Date: May 2002

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Co-creating Successful HR Outsourcing

Copyright © 2002 - Everest Partners, L.P.

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