Outsourcing decisions often come down to a relatively simple cost-driven Return on Investment (ROI) calculation: how much will the cost change in each scenario and how quickly can that investment be recovered?
On the surface, this purely economic approach seems appropriate enough. After all, economics are certainly important. But over-reliance on purely financial-driven outsourcing decisions is one of the biggest causes of the “strategy-to-execution gap,” namely the distance between a company’s business strategies and its ability to execute on them.
To fully understand this, it’s imperative to discern what is frequently overlooked by the ROI calculation most companies make.
The first thing
It turns out that when you pull back the curtains many of the biggest complaints about outsourcing have nothing to do with economics. In our own research and analysis, we examined in detail outsourcing complaints from both service providers and enterprises and found that most of them could easily be classified as operational in nature, not financial.
Though complaints and discontent came from both sides of the outsourcing fence, nearly half of the buyers queried cited inconsistent or poor service quality or delivery, while another one-third complained about lack of innovation or continuous service-level improvements.
Operational complaints, however, weren’t limited to just buyers. Service providers noted poor integration and team building, lack of clarity around expectations, limited ability to add value to clients, and even being unable to sell innovation opportunities among their top sourcing issues.
In reality, outsourcing decisions are driven by many factors, from cost pressures, staffing issues, technological disruptions and the general need to bring new innovation to the business. The tendency, nonetheless, is still to reduce these down to the bare financial necessities when it comes to making the final decisions – directly leading to failed deals. To successfully change this, we must first understand critical outsourcing mistakes that lead to this approach.
It’s all about outcomes
Incorporating innovation isn’t just critical for the long-term success of any outsourcing engagement outcome; it’s crucial at the very beginning of the outsourcing process. And typically, innovation is constrained right from the get-go, in the Request for Proposal (RFP) itself.
Buyers might stress the importance of innovation, but the RFP tells a different story by dictating not only the desired outcomes (the “what”), but also the way in which they want those outcomes achieved (the “how”). Dictating the how limits the flexibility and innovation in every provider’s responses and in the end, significantly impedes the supplier’s ability to deliver innovation.
In fact, RFPs in general are problematic by their very nature. If you’ll forgive an off-season baseball analogy: they’re not good as starting pitchers; they’re much better as relief pitchers. We’ve found that open-ended, collaborative Request for Information (RFIs) are a much better way to begin the procurement cycle. RFIs allow buyers to capture more innovation and “out-of-the-box” thinking. This innovation can be captured and integrated to make better RFPs. Lead-off RFPs limit innovation, and their prescriptive nature can set relationships off on the wrong foot.
A final critical use of innovation is to break free of the classic “zero-sum game” approach to buyer-supplier relationships: the assumption that anything good for the buyer must be bad for the supplier (and vice versa). This jaded viewpoint can quickly sour buyer/service provider relationships. Fortunately, these relationships can be improved easily if both parties collaborate up-front. The first step is to recognize that there are financial and operational win-wins.
If you can avoid making these mistakes, you can reduce the distance between a company’s business strategies and its ability to execute on those strategies. Or in other words, bridge the strategy-to-execution gap.
How to bridge the gap
Bridging the strategy-to-execution gap starts by evaluating your outsourcing process and avoiding the mistakes outlined earlier. It requires clearly articulating explicit desired and measurable outcomes on both sides, while avoiding dictating how—within certain guidelines—to achieve those outcomes.
It also requires changing how we think about our outsourcing relationships. You’ll notice, perhaps, that I’ve made exactly zero references to the word “vendor” up until this point in the article. The very term implies a subservient role, limiting the possible outcomes and constraining innovation.
Finally, it requires self-awareness on both sides of the relationship, and an honest evaluation of the buyer’s and seller’s readiness to participate in a progressive, outcomes-based relationship. This is not easy and requires commitment from both parties.
This overall approach to bridging the strategy-to-execution gap is the best way to reverse the all-too-many negative results we see in the world of outsourcing and change from a buyer/seller relationship to a truly collaborative partnership.