Partnership, Not Procurement, New Path to Effective Outsourcing

London — May 23, 2007 — While outsourcing remains a critical element of the corporate strategic mix, success in today's complex outsourcing marketplace is contingent on new dynamics, specifically the customer and service provider relationship, according to a PricewaterhouseCoopers' Global Outsourcing study, "Outsourcing Comes of Age: The Rise of Collaborative Partnering."

The study explores a key issue raised by CEOs in PricewaterhouseCoopers' Annual CEO Survey at Davos and reflects insights garnered from both outsourcing customers and providers representing 19 countries across several continents.

A large majority of customers (87 percent) say today's outsourcing delivers the benefits projected in their original business plan. However, outsourcing is perceived as such an essential business practice that 91 percent of customers, whether completely happy or not, said they will outsource again.

In addition to the continued growth and significance of outsourcing, one clear trend from survey data is the frequent disconnect between the needs and expectations of customers and service providers. A quarter of customers think "many suppliers/providers" work better than "few suppliers/providers," vs. only 10 percent of service providers. While 52 percent of service providers recommend offshore outsourcing, only 20 percent of customers believe this works best in real-life outsourcing.

"Outsourcing is still very much the game, but the rules have changed," said Pat McArdle, Global Outsourcing partner at PwC. "The lightning pace of growth in outsourcing is only matched by the transformation of the market as traditional models are gradually being replaced by multi-sourcing, joint ventures, and "best of breed" arrangements. Managing this extended network of relationships requires more transparency, better communication, greater trust and genuine reciprocity. In a nutshell, success in this environment will heavily hinge on shifting the customer-service provider relationship from adversarial to collaborative; from one based on procurement to one grounded in partnership."

In fact, survey results indicate that there is a tangible payoff to collaboration. Companies identified as "expert outsourcers" (those who met their business plan goals completely) measured their service providers as better collaborators than "learners" (companies for whom outsourcing only partly met business goals) with 81 percent stating that they have honest and transparent dealings with providers (versus 62 percent for the learners).

Furthermore, customers who were defined as "high collaborators" (based on rating their providers the highest overall on the key indicators of collaboration such as "business dealings being honest and transparent") experienced the most mutual engagement with their outsourcing providers.

Other characteristics of "high collaborators" include: greater likelihood of being open-minded, enabling them to better manage around barriers to outsourcing; tendency to support the use of multi-sourcing (many suppliers/providers) over limited sourcing (few suppliers/providers) far more than other respondents; and the tendency to support shared risk and reward over traditional commercial terms.

"Outsourcing is growing fast and delivering results," continued McArdle. "High collaboration between customers and providers yields increased confidence in overcoming the challenges of outsourcing, broader business model innovation and expanded outsourcing investment in key areas of the business."

In other findings, while information technology still accounts for a predominant part of outsourced activity, the scope is extending rapidly into inherently strategic areas such as production/delivery of core products/services and innovation/ R&D, both of which are expected to experience growth during the next five years. The expansion into innovation and R&D is particularly visible in the media/telecommunications/IT sector, likely due to competitive pressures to mine every potential source of new ideas and revenue streams.

Furthermore, 66 percent of customers say that social and environmental issues will have a significant impact on their offshoring decisions as providers remain skeptical, with 52 percent claiming that they do not feel that these issues will be significant to their clients.

However, both customers and providers agree that labor and employment standards at potential offshore locations are a key concern.

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