Productivity is the ratio of inputs to outputs. Doing more for less is good. While outsourcing has aspired to do more for less, we have typically seen what has been called “the same mess for less.” Tightly controlled outsourcing contracts that have reduced risk and cost have also limited creativity and reengineering that could lead to improved labor productivity. They also run the risk of creating what management consultant Margaret Wheatley calls “highly controlled mechanistic systems that only create robotic behaviors.”
Outsourcing to save money is necessary but not sufficient to create value for the customers, staff and shareholders. We need to shift the focus to productivity and do more for less. These top 5 ideas will help you reimagine outsourcing as a driver of increased productivity.
1. Create a clear outsourcing objective and operating model. Outsourcing objectives vary in their degree of control versus their degree of freedom to innovate, their degree of certainty versus creativity, their access to capability and capacity and their cost structures. To increase productivity, begin by designing an operating model that best facilitates your objectives. Focus on specialization of labor, economies of scale, labor arbitrage, agile development teams, demand management and cloud computing to reduce the cost of inputs. You can increase outputs with process reengineering, automation, virtualization and resource efficiency.
2. Establish a baseline. Organizations that benchmark costs and service levels better understand their input baseline and performance gap. A consumption management assessment helps to gain understanding of the utilization of assets and how to do more with less. Use a customer satisfaction survey and staff satisfaction survey to gain a view into what users and employees consider to be scope for improvement. Such a baseline helps to define the end point as well as the starting point, with measures of output such as the number of ideas generated, the lines of code written per developer, the increased utilization of servers and/or reduced usage of storage. Measures of output also extend to business outcomes, such as the number of new products brought to market, or public service outcomes, such as student participation rates and reduction in hospital waiting times. Measures of output also extend to business outcomes.
3. Align the interests of demand-side and supply-side stakeholders. Successful organizations understand that they must seek win-win outcomes for the client and the service provider. Be sure to deal with any potential conflict between the client and the service provider in terms of who profits from greater productivity. Contracts that include incentives and service levels will help to align behaviors, share the benefits for both parties and maintain their focus on continuous improvement.
4. Role model the right behaviors. While increased labor productivity can come from the application of capital and automation or from removing unnecessary work through process reengineering, the right behaviors remain a key ingredient. Improved productivity comes from selecting, augmenting, empowering and motivating the right employees to work hard and to work smart. Used narrowly, clearly defined outsourcing contracts, statements of work and service levels can create ‘robotic behaviors’ in individuals as well as organizations. Used more broadly, outsourcing contracts can allow scope to foster collaboration, innovation, continuous improvement, personal productivity, dignity and purpose.
5. Establish good contract governance. Managing the contract effectively helps to reduce value leakage from such basic compliance areas as errors in service levels or unmet deliverables. ISG findings show that these errors can have a cumulative cost to the client of 10-20% of the annual contract value (as well as a cost to the service provider). Good governance focuses on the relationship with the external service provider and with the internal customer to manage by exception, hold each other accountable and explore areas of process improvement.
With courage up front and strong ongoing governance, an organization can reimagine outsourcing as a driver of improved productivity and do more for less. For more information on how outsourcing can drive increased productivity, read this ISG white paper Reimagine Outsourcing to Drive Productivity.