Breaking the Rules: When Business Needs Drive the Outsourcing of Specialized Business Processes

June 6, 2011
With the right approach, leadership, and support, outsourcing specialized services can exceed objectives and provide a competitive advantage for years.

Under constant pressure to slash costs, maximize throughput, and ensure premium quality, manufacturing companies are increasingly exploring outsourcing as a mechanism to drive rapid improvement and achieve best-in-class performance. This includes targeting core processes -- ranging from specialized production (e.g., biopharmaceutical manufacturing, specifically engineered subcomponents) to differentiated customer support (e.g., white-glove service, 4-hour delivery window) to support for highly customized systems and applications -- many of which have historically been dismissed as viable outsourcing candidates.

Outsourcing success is generally more achievable when limited to repeatable, transactional, low-complexity tasks, so some may assume that deciding to outsource judgment-based activities, critical processes, and even key differentiators ("specialized services") will certainly result in failure. However, this is not necessarily the case-while outsourcing specialized services presents additional challenges, with the right approach, leadership, and support, such outsourcing initiatives can exceed objectives and provide a competitive advantage for years.

Adopt a Collaborative Approach

Generally, when outsourcing commoditized activities (e.g., payroll, invoice processing), the scope of a prospective outsourcing relationship can be well-defined prior to engaging vendors, as proven capabilities to support these activities are commonly available from multiple outsourced vendors. The model for engaging with these vendors and the general approach for migrating to a vendor-provided solution is widely understood. Conversely, when outsourcing specialized services, organizations are attempting to find or create a market capability that may not exist in a mature form. This creates a challenge, even for organizations with prior outsourcing experience (and success), as it requires an alternative approach to engaging potential vendors -- most likely involving a jointly developed solution with a trusted vendor partner, rather than relying on a vendor to provide an "off the shelf" solution.

In some respects, this collaborative approach resembles the means adopted two decades ago, when companies first began to seriously consider contracting with third parties to provide critical business processes and services. Vendors worked collaboratively with clients to accommodate unique business needs, often through developing processes, tools, systems, and applications that later evolved into 'solution enablers' to drive efficiency and productivity. This joint venture approach, where the vendor and the client work synergistically to develop a new but efficient capability, is essential when outsourcing specialized services.

Address Scope with Modular Design

One of the first challenges companies face with specialized services outsourcing is defining scope as a ready-made option that encompasses all elements of the desired solution. There are often grey areas around discretionary elements of scope, depending on the cost, service levels, and terms, which are often complementary to the core solution, but are not aligned with proven and mature capabilities demonstrated by vendors in the marketplace (in some cases vendors may not even have an interest in providing such services). As an example, a contract manufacturer may lack expertise in providing operational support functions, such as finance and accounting or tax reporting expertise, or may not have the technical capability to build and maintain an operational data store. As a result, when outsourcing a specialized process, portions of the resultant Request for Proposal (RFP) may more closely resemble a Request for Information (RFI), as companies attempt to understand vendor offerings and capabilities via open-ended requests for approach descriptions, rather than precise, close-ended requirements.

While this approach is somewhat contrary to the typical competitive sourcing approach, the ability to evaluate both proposed solution descriptions and compliance with known requirements will allow companies to more precisely focus outsourcing efforts on scope elements for which vendors have offered a compelling solution. Therefore, a modular approach to outsourced services, where particularly troublesome or non-competitive elements of scope can be isolated and excluded from the final services solution, allows companies to execute a contract that strikes the right balance between proven vendor capabilities and willingness to develop a solution that meets all quality, accuracy, and cost requirements.

Set Expectations Around Benefits Realization

As establishing and managing expectations appropriately is also integral to the success of specialized services outsourcing, initiative sponsors must set and communicate realistic expectations about implementation timing and the realization of benefits. Complex one-of-a-kind services often require more time to yield the quality improvements, efficiency enhancements, and cost savings than do more traditional outsourced services, due to the time required to develop customized solutions, document processes, train resources and stabilize an outsourced environment.

Consequently, the return on investment for outsourcing specialized services is typically measured in years rather than months, and the contract term will likely need to be longer to offset the increased risks and investment required by the vendor. This is especially true if the vendor is limited in leveraging any developed tools, processes, and systems for other clients due to the unique nature of the services. In this case, the vendor is likely sharing in the risk and investment, which will be reflected in the cost of the services.

Be Flexible with Vendors

Possibly the most important element in successfully outsourcing specialized services is ensuring that the corporate decision-making body is committed to being flexible. Even if vendors have proven experience and capability to perform some of the requested scope, they may need to partner with other providers (with whom they may or may not have existing relationships), or may need to develop the processes, systems and capable resources to perform the full scope of services. Additionally, mandating that vendors develop solutions that are "unnatural" for them increases the likelihood that they will drop out of the competitive process or provide solutions so riddled with assumptions and caveats that they barely resemble the final, contracted solution. Therefore, companies need to be nimble enough to course-correct throughout the sourcing and solution development processes, as opposed to dogmatically adhering to a sourcing strategy that may become increasingly implausible.

Outsourcing even the most mature, transactional, and simple activities is challenging given the change management implications, supplier relationship management requirements, and requisite level of organizational and process maturity. While incorporating the above-listed attributes into an outsourcing approach does not guarantee success of a specialized services outsourcing initiative, companies can realize a much higher rate of success if they employ a well-conceived strategy, leverage a modular sourcing approach, set appropriate expectations for the realization of benefits, and ensure the flexibility to adjust in response to inevitable obstacles as they are faced. With these foundational elements in place, companies will be well positioned to reap the benefits and competitive advantages of specialized services outsourcing.

Adam Cummins and David Borowski are senior associates at Pace Harmon, an outsourcing advisory firm providing guidance on complex outsourcing and strategic sourcing transactions, process optimization, and supplier program management.

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