Procurement Intelligence Unit

Outsourcing during the recession has seen mixed results. Some companies outsourcing to low-cost destinations have been dissatisfied by the quality. But finding the right outsource partner can contribute to long-term success. The best deal is not always the contract with the lowest price. Here, the PIU blog considers some of the non-cost factors that are vital to securing the success of an outsourced contract.

1. Picking the right partner

The most important factor in outsourcing success is finding a provider that understands the needs of the client. This is more than just expertise in the industry sector, but an awareness and responsiveness to specific business requirements. Planning for changes in the relationship and building in flexibility within the contract should ensure that the nature of the outsourcing agreement changes over time. There are also increasing trends for businesses renegotiating contracts mid-way through the deal. By changing with the client, outsourcers can improve quality and the strength of their relationships. Companies would wish to avoid a similar row to the dramatic fall-out between the State of Indiana and IBM.

2. Picking the right geography

India is no longer the only destination meeting outsourcing needs. New entrants are now competing for position. Eastern Europe, Latin American and the Middle East are all experiencing high growth in their outsourcing markets. Although India is still the favourite outsourcing destination, emerging markets offer the benefit of near-shoring (outsourcing to states in similar time zones). A firm based in New York is may consider Santiago (Chile) remote, but the two cities, despite their 5,000 miles distance, share the same time zone.

3. Consider in-sourcing

Many US-based firms are 'in-sourcing' more of their operations. Higher costs offshore, and lower costs in a recession-hit domestic market, has allowed more companies to 'bring home' previously outsourced positions. GE, for instance, recently announced it was to in-source 830 positions from its China operations back to an energy-efficient Kentucky-based plant. Each company needs to find the right mix of outsourced and in-house positions to maximise the profitability of business operations.

4. Think big

Other companies have found expanding the scope of outsourcing more appropriate to their needs. The scope of outsourcing has increased, with more firms offering specialist services at lower prices. The breath of this outsourcing can offer substantial gains. UK-based law firm CMS Cameron McKenna, for instance, outlined plans last month to outsource its entire back-office function. All HR, business development, communications, facilities management, finance, HR, IT and knowledge management will be delivered by a third party. The firm estimated that it would receive a total 10-15% in efficiency savings. It also allows the practice, and its leadership, to focus on its area of specialism, and push for its own niche market.

Companies can also outsource key buying functions, with more providers offering outsourced procurement operations. DHL, for instance, recently announced a new outsourcing procurement service, with the potential to integrate logistics and procurement in a seamless outsourced package.

5. Think small

The growth of the internet has allowed small-sized companies to engage with smaller outsource providers in distant locations. The opportunity to connect with small suppliers also presents an opportunity for larger firms. IT development, creative services and other one-off projects can be conducted by a single expert. Many sites on the internet allow companies to connect to a freelancer or consultant, possibly in a remote location, to deliver a stipulated service. Companies can plug into this low-cost pool of talent, evading consultancy fees, to obtain the same high-quality advice.