Outsourcing: Strategic Advantage or Disadvantage?

Many organizations are turning to outsourcing in the expectation that they
will make considerable cost savings, reach higher levels of quality and achieve
better service levels. These include the outsourcing of IT functions and even
the relocation of whole business units to countries such as India — a strategy
known as off shoring.

After all, if a company in another part of the world can do the same job
equally well at lower cost, why not? Indeed, many large organizations believe
outsourcing provides them with strategic advantages and have consequently
restructured their business in such a way that major chunks of the business
operation are outsourced.

While this all sounds good in theory, cracks in the theory are now beginning
to show. Many organizations wrongly view outsourcing as essentially as
cost-reduction strategy and neglect the significant business risks associated
with outsourcing.

 

What could go wrong?

Take for example a company that decides to outsource its call-center operations
to a firm in India. Many things could go wrong. Imagine what will happen if the
call-center agents do not speak nicely to the people calling in or if the
call-center agents take too long to resolve a customer's query or if the
call-center agents lack local knowledge about the companies other products and
services. Or worse still, if the call-center agents break policies regarding
customer confidentiality.

While this is an alarming scenario, it isn't too far-fetched. One of UK's
high street banks is right now considering whether or not to terminate its
Bangalore-based call-center operation because of problems.

Sure, the company can slap the call-center provider with warnings, penalties
and other legalities, but the point is that the harm to customers and damage to
the company's reputation has already been done. The company can argue that all
this is the responsibility of the call-center provider. But at the end of the
day it is still the company's customers who get a raw deal. Furthermore,
finding another call-center provider and investing all that time, effort and
training means switching costs are high.

 

Is outsourcing the right answer?

Outsourcing is not about mitigating risk. The risk is always there, whether it
is with the company or transferred to the outsourcing provider is somewhat
immaterial.

It is also clear that outsourcing over the longer-term cannot be based on
formal and exact specifications of work activities. In a changing business
climate, organizations need to respond accordingly to maintain competitiveness
rather than being hindered by decisions that may no longer be appropriate.

A call-center for example, might have to take on additional service functions
for new products that a company is offering, or may have to increase
customer-response times as industry benchmarks are raised. Hence, both parties
need to adapt.

From a client point of view, selecting the right outsourcing provider is
therefore a good starting point, but this is only a small part of the bigger
outsourcing picture. Critically, senior executives within an organization should
view outsourcing as a relationship between the company and the outsourcing
provider, which needs to be nurtured, and where both parties have
responsibilities.

If the relationship has an imbalance, is too rigid, or is built upon
expectations which are inconsistent with either parties ability to deliver, then
outsourcing is likely to become a strategic disadvantage rather than advantage,
with significant business ramifications.

The author is Director, MISM Program and
Associate Professor at Universitas 21 Global and can be contacted at hlange@u21global.com