Purpose-driven Outsourcing

Putting the horse before the cart in outsourcing strategy


Simply put, purpose-driven outsourcing is aligning sourcing models with the business goals behind outsourcing to optimize the chances for outsourcing success. Once a company determines why it is outsourcing, it can then decide how it should outsource to accomplish its goals.

Three-phase Lifecycle. Purpose-driven outsourcing views outsourcing as a lifecycle made up of three basic phases: 1) evaluation and selection of outsourcing providers; 2) management (sometimes called “governance”) of the service performance and delivery; and 3) sharing, ending and transitioning outsourcing services. For example, we have seen a description of how sealed bidding handles the first phase, sourcing, by reducing the process to fulfillment of requirements and proof of qualifications. Sealed bidding also minimizes the second phase, management, by including performance-related standards and certifications in the qualifications. The third phase, ending services, is also cut-and-dry under sealed bidding as compared to other sourcing models.

Non-price-driven Outsourcing. What if cost savings are not the reason for outsourcing? What if quality or innovation are more important? Using purpose-driven outsourcing, we would probably conclude that there are other, more effective ways to achieve these goals than strict sealed bidding, just as Government regulations prescribe sourcing models other than sealed bidding when, for example, the nature of the work is highly risky or there is uncertainty about the availability of qualified personnel. Very likely we would look at other outsourcing models, beginning with “best value” solicitations that sacrifice maximum competition and simpler selection procedures in favor of fewer bidders and more sophisticated evaluation criteria.

Figure 2 is a quad chart depicting the relationship of popular sourcing models and methods to outsourcing how’s and why’s in purpose-driven outsourcing.

Six Discriminators between Purpose-driven Sourcing Models. Why do purpose-driven outsourcing models look and work differently from each other?

1. Competition. Competition imposes up-front transaction costs on the parties, depending on the formality and complexity of the manner in which it is used. For non-price goals, the field of providers capable of performing may be limited. Competition may not be worth the cost and the exposure of internal processes and data. On the other hand, competition is the single most effective tool for obtaining not just best price but also obtaining provider commitments to other goals.

2. Visibility management. Quality of service, benchmarking, seamless integration of operations, uptime, disaster recovery and scalability are just a few of the reasons for customers monitoring or managing provider services. Visibility raises issues of transaction cost and division of responsibility. Management by the customer, either total or in concert with the provider, goes beyond visibility by attempting to directly control performance.

3. Product. Describing services in terms of staffing – positions descriptions and minimum personnel qualifications – is an example of indirect service description. Sometimes there are valid reasons for taking this approach, such as process reengineering. The opposite approach is to describe services as projects with deliverable products. Products are much easier to review for completeness, quality and ROI.

4. Flow. Flow is the way work and payment are exchanged between customer and provider. Services can be performed and paid for on an order basis, or they can be provided on a time and materials basis, without connection to any defined scope or milestone, such as staff augmentation. Flow-based transaction costs, such as project management, are usually considered necessary to protect against unnecessary work and runaway budgets.

5. Ownership liability. Work may be performed using customer- or provider-owned processes, technology systems and data. Ownership by one party decreases both financial and operational risk for the other party, which can constitute a major piece of an outsourcing business case.

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