Realising the Real Benefits of Outsourcing: Measurement Excellence and Its Importance in Achieving Long Term Value

Abstract

These days firms are, more than ever, pressed to demonstrate returns on their investment in outsourcing. While the initial returns can always be associated with one-off cost cutting, outsourcing arrangements are complex, often involving inter-related high-value activities, which makes the realisation of long-term benefits from outsourcing ever more challenging. Executives in client firms are no longer satisfied with the same level of service delivery through the outsourcing lifecycle. They seek to achieve business transformation and innovation in their present and future services, beyond satisfying service level agreements (SLAs). Clearly the business world is facing a new challenge: an outsourcing delivery system of high-value activities that demonstrates value over time and across business functions. However, despite such expectations, many client firms are in the dark when trying to measure and quantify the return on outsourcing investments: results of this research show that less than half of all CIOs and CFOs (43%) have attempted to calculate the financial impact of outsourcing to their bottom line, indicating that the financial benefits are difficult to quantify (51%).

There is no doubt that client firms need to improve their ability to measure the benefits of outsourcing. These benefits go beyond the one-time cost saving. They strongly relate to the firm’s competitive advantage and therefore often represent the key success factors (KSFs) in a particular industry. We identify seven lessons that will guide executives to achieve better results from their outsourcing engagements. The starting point for any client firm is to understand the context of its outsourcing activities followed by the planning of its outsourcing strategy according to its resources and capabilities. Once an outsourcing strategy has been devised, a clear benchmark should be designed and clearly communicated to stakeholders involved. Setting up such a benchmark will allow the firm to then more carefully identify the service provisions expected from the vendor.

However, value is a dynamic concept that changes over time. Therefore, client firms should revisit the value generated from outsourcing relationships over time and as the rules of competition in their industry change.

The last three lessons concern building outsourcing capabilities within the client firm. This will be achieved by making the CIO a strategist, shaping the retained organization according to present and future needs and by fostering outsourcing learning capabilities and close relationships with vendors.

As some vendors continue to specialise and to develop domain knowledge, we believe that client firms should adopt a learning approach in engagement with their suppliers. Put simply, if a client firm is to become a sophisticated outsourcing consumer, it has to learn how to closely work with its suppliers in order to avoid making mistakes as well as learn how to maximize the returns from its outsourcing arrangement.