Outsourcing challenges ˑ How to carry out a make-or-buy analysis ˑ XTENSOS Solutions for effective outsourcingˑ An article written by our CEO, Paul McManus.
Before ever embarking on an outsourcing journey, every company should carry out a simple test called a Make-or-Buy analysis. Over the course of my career so far, I have come across many companies who are either outsourcing huge amounts of work, without ever having done this analysis or, worse still, who are producing everything in-house without ever having tested that decision by carrying out the analysis.
Make-or-Buy analysis is simple and it involves answering three basic questions:
- Can we make this product (or provide this service) in-house in a more cost-effective way than a specialist outsourced solution?
- Can we make this product (or provide this service) in-house better than a specialist outsourced solution?
- Is there a strategic reason why making this product (or providing this service) in-house makes more sense than outsourcing to a specialist solution?
If the answer to these questions is YES then an in-house approach is probably right. One caveat to this is that it is often wise to only carry enough internal staff to manage average demand in your business and outsource whatever else is needed in order to handle peaks. If the answer to the three questions is NO, then keeping a product or service in-house really defies logic.
Companies often make bad outsourcing decisions based on a key decision-makers own personal beliefs and experiences instead of using this proven technique. Many of the decision maker’s own beliefs can be self-limiting. They are often based on a very narrow experience of a failed outsourcing arrangement in the past or sometimes they can even be based on the decision maker’s own personality and attitude towards risk.
10 Deal-breakers for Outsourcing
So what are The Problems with Outsourcing? There are many reasons why outsourcing sometimes fails. I would like to share with you my own top 10 outsourcing deal-breakers, based on almost 30 years of working in Senior Management in Global Service companies. These are the main reasons, that I have seen, which have repeatedly caused outsourcing engagements to fail across the world
- The decision to outsource is not clearly understood or agreed upon
If the people directly affected do not understand the business need for outsourcing, or they disagree with the decision that has been made, they will passively resist it. This means that it is doomed before it starts and even if it does manage to get off the ground, the full benefits will not be realised by the company.
- There is a Culture-clash between the company and the outsourcing partner
This can happen in two ways. Firstly, if the organisational culture is very different between the companies, then this incompatibility can cause outsourcing to fail. Secondly, if the work is actually off-shored to a very low-cost location, then the culture of both countries may not be compatible and can become a major problem affecting the outsourcing.
- Language barriers add confusion
The key to effective outsourcing is clarity on all sides. Language barriers cause confusion, which in turn causes risk and can lead to major quality issues. Even if all parties share a common language such as English, sometimes heavy accents make phone conversations unproductive and this can lead to a complete loss of confidence in the outsourcing.
- The outsourcing is not driven
Effective outsourcing does not happen by accident. It must be driven by somebody in the company, a champion for the cause, who helps to steer things through early bumps, solving problems whenever they arise, etc. Companies can outsource projects, roles, or even full functions but they cannot outsource the ownership of making the outsourcing work for them so it must be owned and driven.
- Outsourced resources are not actively managed
The outsourcing provider should demonstrate a clear responsibility to actively manage the people that they assign to their clients’ engagements. If the attitude is one of “we just provide cheap resources” then it is unlikely that the outsourcing will work and even if it does, only low-level tasks will be successfully outsourced. When resources are actively managed locally the outsourcing can deliver much greater and more sustainable value.
- Outsourcing scope-creep
It is imperative that everybody is on the same page about roles, responsibilities, processes, and deliverables. Often if this is not clear at the start then the scope creeps beyond what was originally agreed between both companies. This can seriously undermine confidence and what was once an effective outsourcing arrangement can fall apart.
- Expected savings are unrealistic
This is especially a problem if the Make-or-Buy analysis was skipped before committing to outsourcing or if the main aim of the outsourcing is to save money but with no real idea of the existing cost structure (including hidden fixed costs associated with headcount). Often outsourcing allows a company to benefit from fresh talent pools or specialist skills that wouldn’t be available otherwise so it is important to set realistic savings estimates right at the start.
- Staff attrition on either side
If the outsourcing provider suffers key staff attrition then this can jeopardise the whole engagement. Clearly different countries and even different cities within one country can have varying degrees of attrition which can be a drain on an outsourcing arrangement. Likewise, if there is high attrition in the customer’s organisation then the outsourcer faces challenges as they will have to cope with a constant stream of new people with different expectations and the outsourcing arrangement must be justified again and again.
- Outsourced resources are treated as second-class citizens by the customer
This usually arises when the customer’s staff are either not aware of the circumstances of the outsourcing or they feel like they are merely outsourcing their unwanted tasks to a cheaper location. I have often heard people say that “one person in our company (country) is the equivalent of two or three people in this other company (country)”. My own experience has been that people are just people, no matter where on earth they work and that somebody who says something like this usually has no real interest in making the outsourcing work.
- The customer does not look honestly at their capabilities
Many companies feel that what they consider to be their core competence cannot be outsourced as, after all, “who could do our stuff better than us?”. This is where the second question in the Make-or-Buy analysis becomes the most important. If other people are better than us at something then we would be foolish to overestimate our own capabilities. I have seen several companies waste a huge amount of money on this and even some who have ultimately failed because of this lack of honesty in assessing their own actual capabilities.
How do we avoid these Deal-breakers?
At XTENSOS, we don’t just offer the same run-of-the-mill low-cost outsourcing that many other companies do. We have built our offering based on our 30 years of experience in avoiding the deal-breakers listed above. Our services are specifically designed to help customers get access to broader talent than they might normally be able to find and also at a cost-effective price. We like to call these our Multilingual Business Support Services. The next sections will show you how we address each of the deal-breakers listed above and how we strive to set every single customer engagement up for success long before the customer actually decides to work with us.
We work very hard to make sure that all potential customers understand their decision to outsource and that key stakeholders in their company are in agreement. We always try to carefully assess the culture of a potential customer to make sure that we have some alignment on core values and culture and also to be sure that we will be the right partner for them.
When I started XTENSOS, I deliberately chose to locate our outsourcing centre in Cluj-Napoca, Romania. This city has one of the most service-oriented, multilingual talent pools that I have ever encountered which makes it the ideal location for delivering high-value, cost-effective outsourcing.
Over my career to date, I have managed sales and operations centres all over the world. I have had a lot of personal experience in outsourcing to the various countries you might think of when exploring this topic such as India and China. When I started XTENSOS, I deliberately chose to locate our outsourcing centre in Cluj-Napoca, Romania. This city has one of the most service-oriented, multilingual talent pools that I have ever encountered which makes it the ideal location for delivering high-value, cost-effective outsourcing.
Our staff members already speak several languages so language barriers will not be a problem for our customers. We always look for a Champion in our potential customer who will drive the outsourcing initiative and who we can work with to ensure that the customer gets all of the benefits. We actively manage, and develop, each and every one of our staff members to ensure that they are engaged in their customers’ mission.
We set up every engagement with a detailed Master Services & Non-Disclosure Agreement (MSNDA) to detail the terms and conditions and guarantee the security of the engagement. We also begin with either an annual or project-based Statement of Work (SOW) outlining roles, responsibilities, and deliverables so that scope creep does not happen. We start all of our outsourcing engagements with an accurate estimate of the savings that it will deliver using our outsourcing savings calculator.
At XTENSOS, we focus on keeping our staff turnover to a minimum. Living by our core values of Humility, Integrity, People and Service helps us to ensure that our staff are engaged and happy working with us and with our customers. While we have no control over our customers’ own staff turnover, we do build Business Continuity Plans with each customer to ensure that a key person leaving on their side does not ruin what has been built up for that company.
We schedule regular business reviews with our customers to make sure that everyone is still happy with the outsourcing arrangement and that every person in our team is working exactly as we agreed they should. We also use these to plan any upcoming changes in resource needs and role requirements.
Finally, because XTENSOS also offers Business Advisory & Consulting Services, we can actually help our potential customers to honestly look at their capabilities by carrying out a Business Maturity Assessment on their company before they make a decision to engage with us for outsourcing. This helps them to look at their functions with fresh eyes and even if they choose not to work with us, they get a detailed analysis of their business and a clear roadmap of things to consider to help them to move forward.
In the coming years, skills shortages, talent wars, business growth, and rising internal fixed-costs will all play a part in whether you choose to outsource or not. Remember that a simple Make-or-Buy analysis will help you to make the right decision for your company and I hope the experiences, shared in this article, might be useful for you in avoiding The Problems with Outsourcing.
Please reach out to us at XTENSOS.com, LinkedIn, or Twitter if you like to discuss a Business Maturity Assessment for your company or to explore for yourself the full range of our Multilingual Business Support Services.