Seven Myths about Outsourcing

Not too long ago, Business Insight ran a really great article entitled, appropriately, Seven Myths About Outsourcing since the goal was to elucidate seven myths about outsourcing.

The article starts off by noting that the transition of an operation to an overseas provider often proves to be much more costly and complicated than expected. It then dives right into the seven destructive myths, and how to overcome them.

We can have it all.
Firms that outsource often expect cost reductions, service improvement, and flexibility. Achieving any one of these objectives requires a trade-off in another. Throwing your operation over the wall doesn’t change that fact.

Outsourcing Services is like Buying Commodities.
Outsourcing is not a “frictionless market” without transaction costs or restraints. Outsourcing carries significant transaction costs that start day one with your search for a vendor.

We need an Ironclad Contract.
Outsourcing is not a one-time transaction – it’s a recurring transaction that needs to evolve over time. Thus, spending huge amounts of time trying to write a complex contract that protects you under every eventuality, which is impossible, ends up wasting time and money and risks souring the negotiation process. The proper way to approach the contract is to clearly spell out the roles and responsibilities of each party and the process for negotiating changes down the road if they are needed.

Contracts Don’t Matter.
While some companies try to engineer the every eventuality contract, others believe they can rush into a deal without a contract. Either they think that a memorandum of understanding or letter of intent is enough or they think that because the vendor is a “partner”, a contract is not necessary. But contracts, and more importantly, the negotiations that revolve around them, are important because they enable both the client and the vendor to understand the risks, rewards, and interests associated with both sides.

Vendors are Insurance Companies.
There is a very common – and reasonable – perception that vendors should bear greater liability for failure than regular, in-house, employees. But that does not justify an exaggerated view of risk or belief that risk can be outsourced entirely. You can specify quality standards, and penalties for failing to live up to those standards, but it still remains your responsibility to insure that those standards are met.

It’s Not Our Headache Anymore
Just because you outsource a process does not mean you can wash your hands of it. In fact, it means the opposite. You have to monitor it regularly to make sure the vendor is performing to agreed upon service levels and that you are getting the savings, service, or flexibility you expected.

Our First Failure Should Be Our Last Attempt
Very few companies report great success with their first outsourcing project. However, that does not mean you should give up. Companies that succeed are those that learn from the initial project, figure out how to improve, and try again with a vendor willing to work with them to make the relationship successful.