Outsourcing Risks

Business has two contradictory interests; profit and a happy customer. While in the old days, the to-be captains of industry would start somewhere in a shed and sweated for years to reach a success, nowadays business seems to focus on short-term profits. All the involved, from your banker up to your CEO, you need to deliver a business case with impressive multi-coloured graphs to demonstrate an even more impressive return on investment as soon as possible. But, is this really what it is all about?

As business has gone global, and thanks to computers and internet the world has truly become a smaller place, regional distances play hardly any significant role any longer. In contrast, the mere fact that regionally labour costs do vary considerably, has created a trend in outsourcing. Not so much talking of outsourcing your catering or cleaning services to a specialised service supplier, rather talking about specialised processes, like HR, IT and even Finance & Accounting.

Whether such a trend is indeed justified, depends on certain preconditions, which are not in all instances correctly understood, properly defined, resulting in unexpected higher operating costs - contrary to the projected saving. Especially, when dealing with the certain "offshore outsourcing" the risks are relatively high. Technical constraints - provided the hard- and software are compatible to the customer's - are hardly an issue, as even an in-house department can equally be affected by a technical failure. 

When building a business case for outsourcing, the driver is a lower price tag, usually represented by lower labour costs more or less in combination of other lesser costs like office space. The more customers get on board, the cheaper the service. Yet this may in some cases, as I witnessed in the past with two customers, a merely theoretical model, which when put into practice, proved to be far less profitable, even incurring a loss.

My first encounter in an outsourcing project was back in 1998, when the concept was rather new. The second was in 2006, where one could have had multiple reports from prestigious audit companies, delving in detail with possible pitfalls. Yet, the project has equally been grossly underestimated, resulting in a poorly structured project, where the individual customers felt far from being content. The former company could absorb the kind of set-back, the latter, a Brussels controlled but Finnish company was less fortunate.

Some basics have been overlooked; statistical data were badly interpreted, which negatively influenced the decision-making. The low price tag, became almost an obsession, which delivered at the onset enthusiastic staff, but poorly equipped to execute their tasks in line with the customers' expectations. This dramatically changes the success of the whole endeavour, where the saving is guaranteeing only poor output. Proper training come at a cost, but it only ensures that teams are comfortable with the tasks given. Otherwise, the quality will sway and a risk of personnel outflow is hanging in the air.

Coming back to my introduction; the main interest of any service provider should be a happy customer and from there trying to be cost effective. Fully understanding the customer's needs is a skill, which comes first, and fully realising, that setting up a new service centre is an investment, which will pay itself back after some years - and not from the onset.

Keeping in mind this, to properly invest in your people and ensure that the service deliverables are acceptable to the client, then moving towards excellence and process improvement can take place, which makes the whole business profitable. If not, it will become a costly prestigious project that is doomed to fail from the very beginning. And believe me, an unhappy customer is almost no customer and without him you make hardly any profit at all.