Outsourcing Insights from PricewaterhouseCoopers

PricewaterhouseCoopers (PWC) recently released the results of their March/April 2007 survey of 226 customers and 66 outsourcing service providers on outsourcing in their Outsourcing Comes of Age report. Although quite lengthy (over 20 pages), it does contain a few good insights. Furthermore, given the complexity of outsourcing, and the conflicting claims we continually hear in the press, it’s important that studies of this sort be produced regularly, as its hard to form a justified opinion off of magazine articles that only tell us about the experiences of one particular company or outsource service provider.

This is a confusing topic because there is research that indicates many outsourcing deals collapse before the contract ends (and sometimes even before the contract is signed!), due to rising costs, lack of materialized savings, and mistrust. And they are right – most deals, especially in the early days (for the company doing the outsourcing or the service providers), do at least partially fail. Some analysts are going so far as to suggest that outsourcing is in a death spiral and that organizations will soon become disillusioned with outsourcing. Then you have the group of influencers and media pundits tirelessly heralding lucrative outsourcing deals, impressive benefits, and uncapped growth projections, often with 30% to 40% growth. And they are right – some companies do achieve that level of success. And the truth obviously lies somewhere in between. But where? And where does it lie for you?

What did PWC find? It found that outsourcing is growing in complexity, and that sophisticated leaders don’t fear that complexity – as the complexities of innovative partnering translate into the benefits of growth and performance. It found that outsourcing is as diverse as business itself, differing by country, sector, and even company – characterized by smarter suppliers, improved automation, and better-informed buyers driving toward long-term, sustainable, outsourcing arrangements. And it found that firms that effectively master the new complexities stand to reap the benefits.

PWC found that outsourcing is high on most companies agendas and that the major attractors are cost savings (76%), access to capabilities and talent (70%), and strategic benefit (63%). Sometimes a provider can do it better than you – and good firms use the best resources available, whether they be in house or not. PWC found that the most widely outsourced activity is IT services (57%), but that production or delivery is a close second (55%), and logistics a close third (51%). HR Services (35%), sales & marketing (33%), and innovation/R&D (32%), and procurement (30%) make up the middle tier. Call centers (25%) and finances and accounting (24%) round-out the bottom. It found that 27% to 55% of respondents (depending on the business function) plan to expand their outsourcing over the next five years and that there are three growth hot spots, finance & accounting (44%), customer call centers (45%), and procurement (53%).

The survey found evidence that customers need to rely increasingly on multi-sourcing and joint ventures and that successful customers are those that collaborate effectively with their service providers. To this end, the report presents two possible approaches to multi-sourcing, a lead supplier model, where one service provider functions as a general contractor who orchestrates other suppliers, and a collaborative partnering model, a collection of master partners governs the relationship, but more approaches exist.

They also found that although nearly half the service providers see employee opposition as a barrier to outsourcing, two thirds of the customers don’t see it that way. The report suggests two possible reasons: (1) vendors could be blaming employee opposition when the real issue is the business case and (2) customers are insensitive to the issue. I’d have to go with the second. Outsourcing is a significant change to the way you do your business, and requires sophisticated change management. You can’t just sign a deal and say “It’s the service provider’s problem now.”, because it’s not. It’s your problem – after all, it’s your business. It’s critical to get buy-in before you even start the negotiations with a provider, and have a transition plan in place – preferably one that results in as few layoffs as possible, with zero being the optimal number. (It can be done, Hallmark did it.)

Good outsourcing, especially in procurement, starts with the tactical and keeps the strategic in-house, at least at a high level. (For example, allowing your specialist serviced provider to strategically source your indirect materials is often a good idea, but giving up control of your critical direct materials is usually not.) This will significantly reduce the number of employees required to handle purchase orders, but that does not mean that it will significantly reduce the number of employees you need to effectively manage, and grow, your business or that getting rid of them is the best way to save money. If you’re an average company, with most of your spend not under management, the best way to save money is to train them to do proper sourcing and redeploy them on spend management projects to double or triple the spend you have under management and double or triple your savings (which should far exceed the cost of the retained resources).

One statistic that is particularly positive is the number of customers, 66%, who say that social and environmental issues will have a significant impact on their offshoring decisions. As long as they are not just giving lip service to the importance of corporate social responsibility, this is good news indeed. On the negative side, 52% of service providers believe that these issues are not important for their clients. I hope they get the message to “shape up, or ship out” before its too late. (Maybe PWC should arrange for them to get a visit from the Governator. )

PWC also found, not surprisingly, that there is a payoff for those that Collaborate, Collaborate, Collaborate, Collaborate. Emerging open business models are allowing firms to engage networks of partners and customers to generate higher value at lower costs and collaboration is yielding best practices in the capabilities and processes itself. Unfortunately, they also found that at this time, only 40% of joint governance structures are working effectively, indicating that many organizations and service providers still need to shape up and take a best practices approach both to collaboration and candour. PWC concluded by noting that a collaborative model of outsourcing is required to support buyers increasingly seeking to outsource core products to suppliers who want to rise to the challenge.