Original article published on Outsource Magazine

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... 

...Read the full article at Outsource Magazine

Creating effective, high-performing and well-governed outsourcing deals was one of the key services Capto offered at our launch in 2009. SYNAPTIC Outsourcing is still a key service we offer our clients. The fundamentals remain solid, but how we help make these deals successful has evolved dramatically. I’ll explain how we’ve applied our SYNAPTIC Sourcing methodology differently over time.

SYNAPTIC Outsourcing was born out of our personal experience supported by extensive research that confirmed our hypothesis at the time: IT outsourcing was broken. Deals were under-performing economically and operationally when compared to other broad business trends such as supply chain management.

 “54% of IT Executives report challenges in managing vendors and improving this situation is crucial, because failure to manage vendor relationships effectively can destroy up to 90% of the value expected from the contract” - CIO Executive Board Survey, 2009

Suppliers and their clients complained that most outsourcing relationships failed to meet objectives for many reasons, but we found a few key reasons that profoundly impact outsourcing relationships that are still true today:

• Buyers tend to be over-prescriptive, dictating not just the what, but the how. Resulting in diminished ability of the supplier to innovate – or, as some call it, “outsourcing my mess for less”.
• Suppliers and buyers engage in a zero-sum game where what is good for the buyer must be bad for the supplier rather than invest up front in mutually beneficial, outcomes-based relationships.
• Buyers fail to solicit the ecosystem to properly harvest the best ideas as part of their procurement process through the over-use of RFPs rather than more open-ended RFI’s to refine their requirements prior to formally entering a procurement cycle.

In 2010, we reviewed and found tremendous merit in research done by the University of Tennessee for the US Air Force that resulted in a progressive outcomes-based outsourcing arrangement as initially described by Kate Vitasek, Mike Ledyard, and Karl Manrodt, in the book “Vested Outsourcing: Five Rules That Will Transform Outsourcing”.  The guiding principles of Vested Outsourcing are[1]:

1. Reciprocity – commitment to fair and balanced exchanges.
    
2. Autonomy – the party with more power will not use that power unfairly to promote a narrow self-interest.
    
3. Honesty – each party must be honest about their intentions and the facts of the relationship.
    
4. Loyalty – being loyal to the relationship and not act in a self-serving way.  Through acts and deeds you support and promote the partnership.
    
5. Equity – understand and look critically at the distribution of the rewards in the relationship.  This is not always a 50:50 split, for example, one party may be given a reward for taking on additional risk.
    
6. Integrity – acting in a consistent trustworthy fashion.

We agree, and still believe, that these six guidelines provide the fundamental underpinnings of a high-performing, collaborative sourcing relationship.  The ways in which we have gotten our clients and their sourcing partners to embody these principles, the sustainment of long term deal performance, and the types of disruptive technology projects we have done are what has evolved over the past seven years.

The Business Environment - What Has Changed and How Capto Has Responded

The technology executives we talk with initially try to convince us that they have “been doing outsourcing for a long time; we know how it is done”. However, when we do an evaluation, we typically find that the deal is underperforming and sometimes is actually failing. Usually for the same reasons found seven years ago.

If the past seven years of putting progressive, outcomes-based sourcing deals together has taught us anything, it is that this approach isn’t just theory. It works. And it works really well for those open-minded enough to try a new approach to outsourcing. It requires a shift from short-term tactical thinking to using outsourcing as a longer-term strategic tool focused on outcomes and innovations[2].

Disruptive technologies such as robotics, Internet of Things (IoT), and cognitive process automation continue to unsettle existing businesses. We believe outsourcing can assist forward-thinking enterprises to more quickly and successfully harness these technologies and processes.

The workforce skills deficit in fields such as healthcare informatics[3] , data scientists[4], and technical staffing in general provides a strong rationale for the use of outsourcing and “as-a-service” models to meet staffing requirements.  Getting the most from your partner relationships takes on new urgency with these new challenges.

Initially, we focused more on the strength of the client/partner relationship and the partner’s ability to bring a strong staffing mix to the deal. While these two areas continue to be of importance, over the last seven years we have had additional focus on the following areas as the rate of business innovation and change has escalated:

• New Technologies, Business Disrupters and Innovation – Use of outsourcing to harness new technologies and processes with a focus on time to market, that affect the foundation of our client’s business enterprise.  Outsourcing can be used to boot strap implementations of Internet of Things (IoT), advanced analytics and big data, and cognitive process automaton efforts.
   
• Governance - Instituting a well-focused governance process has been shown in practice and research[5] to facilitate a successful win:win relationship – we have therefore focused significant efforts on implementing a strong governance process for all our deals.
   
• Organizational Change Management (OCM) – Spending more time and effort on OCM has become a priority.  Additional training is needed so both parties understand the deal and don’t revert to old habits.  We provide training in the tools included with the deal to influence behavior, for example: new metrics, dashboards, governance, as well as contractual items like hold backs and the use of incentives.
   
• eSCM (eSourcing Capability Model) – We have integrated the sourcing framework – eSCM - created by Carnegie Mellon University, into the Capto methodology.  We do not require that our clients adhere to eSCM as it a relatively complicated framework. However, it provides a strong industry standard methodology, which ensures we cover all avenues in our analysis and implementations. 
   
• Business Case Focused– Our background in M&A (merger and acquisition) work makes us more financial and business case focused.  Building and using a business case is occasionally something clients have to be trained to do so it becomes integral to our OCM efforts.

Having now implemented and governed numerous deals using SYNAPTIC Outsourcing the importance of -- strong governance, implementing and adhering to a transition strategy that is phased and based on success metrics, and putting in place a comprehensive OCM program – is clear.  We continue to be optimistic about the future of outcomes-based outsourcing to meet the innovation goals and objectives required for business success.

[1] http://www.vestedway.com/step-3-establishing-the-six-essential-relationship-principles/

[2] “Global Outsourcing Survey 2016” http://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html

[3] “Missed Opportunities?  The Labor Market in Health Informatics, 2014” http://burning-glass.com/research/health-informatics-2014/

[4] “Help Wanted: Black Belts in Data” http://www.bloomberg.com/news/articles/2015-06-04/help-wanted-black-belts-in-data

[5] “Theorizing the IT Governance Role in IT Sourcing Research” Association for Information Systems 2016:  http://aisel.aisnet.org/amcis2016/SCU/Presentations/15/