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The primary objective of outsourcing should be to create value. Everest consultants, who have completed hundreds of outsourcing transactions, have spent a great deal of time recently examining the outsourcing process to understand how and where outsourcing creates value. What we're observing is this: each new component of value builds on the results of what came before, improving and changing ever increasing areas of the organization until outsourcing addresses the company's deepest concerns. There, outsourcing unlocks the greatest value.

Most buyers initially decide to outsource an important but non-core process to save money. Understandably, cost reduction sits at the center of most outsourcing arrangements.

Outsourcing, however, promises more than just reducing costs; it also impacts other services, related processes and different constituencies within the company. This, in turn, creates greater value in addition to the desired direct cost savings.

Outsourcing typically affects every corner of a company because the process being outsourced typically is woven throughout the whole fabric of the organization. Who isn't affected if a company outsources its IT or finance and accounting departments?

Outsourcing has three major effects on the rest of the organization. They include:

• Impacting operations.
• Creating positive competitive tensions.
• Speeding the rate of cultural change.

The New Way Of Thinking Rubs Off On Those Left Behind

Outsourcing service providers provide good and services to their buyers through a different business structure than most corporations. An outsourcing supplier usually has a clear handle on what things cost. If a buyer asks its supplier to add an initiative, the supplier has a good idea of what that will cost and how that will impact its revenue and workload. In addition, suppliers know they must deliver on their promises. They expect to be judged by strict metrics set out in their service level agreements (SLA).

Operationally, this new way of thinking has a significant impact on the way people carry out their day-to-day jobs. Now, they are forced to think through what they are doing and how it relates to the company's core goals. Department objectives now have to be based on a sound business rationale.

However, these changes are not extra work that slow down the process. Instead, they facilitate, streamline and speed up the process. This change allows the same process to now run like a well oiled machine.

The result: every manager throughout the organization now has more time to become focused on core corporate issues. The marketplace notices. This creates value.

Creating Competitive Tensions

After seeing the benefits of outsourcing, company executives begin to expect the non-outsourced departments to operate in a manner that's consistent with the operations of the service provider. Often, for the first time, they expect each department to continually chronicle its performance using SLAs. Management also demands each department gather better data, starting with costs. Over time, each internal business unit begins to look, sound and feel like an outsourcing service provider. And they begin to interact with other internal departments in the same way buyers and suppliers in an outsourcing relationship might.

Outsourcing Creates Internal Cultural Change

Outsourcing also forces every department in the company to adopt a different point of view. Old relationships become shaken up. For example, in the new scheme of things Peter, who runs department A, can't send a request to Paul in accounting and expect instant approval just because that's the way those two have worked together for the last 20 years. Now Peter has to determine the costs of this new initiative and develop metrics to measure his performance. In other words, each department begins to behave more like the outsourcing supplier.

At the same time, outsourcing non-core but critical processes tends to reduce or even eliminate provincial interests within the corporation. Interdepartmental wrangling disappears to a great extent. This energy is now channeled to more positive corporate initiatives.

Companies outsource to gain the benefits of leverage that a service provider offers. These include access to capital, technology, best practices and high quality employees who are passionate about their careers. Some of these advantages rub off on the employees still on the corporate payroll. These influences create operational efficiencies that can impact all departments, creating even more value.

Lessons from the Outsourcing Primer:

• Departments that are not outsourced often begin to act like an outsourcing provider. This creates internal operating efficiencies, which results in additional value.
• Outsourcing can shake up long-term internal relationships. This speeds the rate of cultural change.
• Internal departments now must gather data and monitor their performance through established metrics.
• Managers have more time to focus on core strategies that affect the company's position in the marketplace.
• Refining the process and implementing SLAs to measure the process facilitate, streamlines and speeds up the process.

Publish Date: June 2002

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Copyright © 2002 - Everest Partners, L.P.

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