10 Reasons Why Organisations Make Mistakes When Outsourcing

outsourcingAThe list of major outsourcing failures is extensive and demonstrates that many organisations are guilty of developing and implementing sub-optimal make-buy strategies.

The following provides 3 case examples where outsourcing has led to significant commercial and operational problems.

The NHS’ NPfIT project has seen estimated overruns of £7.6bn, inherent security problems, medical staff unhappy with proposals, and deadlines going out of the window. EDS, Fujitsu, CSC and Capital Care Alliance are amongst the names taking the blame.

Cable & Wireless outsourced global IT services to IBM. 14 months later a benchmarking process revealed an overcharge of £115m for UK operations alone. The dispute between C&W and Big Blue went all the way up to the High Court before being settled in an ‘amicable resolution’, but this meant that C&W could not insource again until after the agreement had expired.

The UK’s Department of Work and Pensions outsourced its IT to Microsoft and EDS. A worker decided to upgrade his desktop to Windows XP, but accidentally applied the changes to the entire network of 80,000 computers which all crashed. This is widely regarded as the worst computer crash in UK government history.

This short blog highlights the following 10 common reasons why organisations appear to make such mistakes when outsourcing:

  1. A lack of a robust and rigorous make-buy methodology that is consistently used by all staff throughout an organisation, with individual managers developing their own idiosyncratic approaches.
  2. A failure by managers at all levels within organisations to be trained in the basic principles of commercial exchange.
  3. A failure to understand pre- and post-contractual power and leverage, and its relationship to moral hazard and lock-in.
  4. Short-term decision-making that is focused primarily on financial headcount reductions and/or operational cost reduction, without consideration for the long-term strategic and operational consequences of this.
  5. A lack of cross-functional participation by all relevant managers and functions within the organisation.
  6. Decisions being made to protect or defend standard operating procedures and historic “turf” boundaries unrelated to a strategic or tactical understanding of value add in the business.
  7. A lack of iterative review of past outsourcing decisions, with a view to a flexible approach to re-insourcing or re-outsourcing past decisions.
  8. A failure to monitor market and supply chain circumstances externally once outsourcing has been undertaken.
  9. A failure to create proactive sourcing mechanisms to drive continuous performance improvement by the supplier once outsourced contracts have been awarded.
  10. A failure to create a robust exit strategy before entering into any outsourcing relationship.

Many companies think about make-buy issues infrequently and this leads managers to devise their make-buy (insource-outsource) methodologies on the spur of the moment. These are normally informed by a common-sense understanding of the key issues, but often without a proper understanding of the keys questions that must be asked about post-contractual moral hazard and lock-in.

Indeed, in over 30 years of working with public and private sector organisations it is very unusual to find those that have a rigorous and robust make-buy methodology that it is taught to all aspiring senior and middle managers in the business.

Many current make-buy decisions appear to be made in order to massage quarterly or annual returns by finding short-term cost reduction opportunities, without any real understanding of the medium to long-term post-contractual risks being entered into.

This is compounded by the fact that the decisions are often made by senior managers, who lack a basic understanding of the principles of commercial exchange, and who have decided what the answer is before the review is undertaken.

Such managers often decide to exclude from the decision-making process those with the necessary commercial knowledge, who are often the very managers who will be operationally responsible for managing any subsequently outsourced business relationships.

Paul Ireland
Paul Ireland
Director of Corporate Services,IIAPS
Paul has over 20 years procurement experience in academic, consulting and management roles with leading universities, global blue chip companies and major public sector organisations. His work has focused on the development of best practice in strategic sourcing and category management and the use of the Internet and IT applications to facilitate best practice. This work has been presented widely at academic and practitioner conferences and disseminated in numerous books and articles.

10 thoughts on “10 Reasons Why Organisations Make Mistakes When Outsourcing”

  1. I think you make some interesting points here Paul. There is an increasing amount of academic research showing that outsourcing decisions, like other decisions people make, are affected by various biases that we all suffer from. For instance, in order to reduce complexity, decision-makers use simple cues like observing what some other organization did and extrapolating this to their own organization, which creates bandwagon effects. Limitations to individual and organizational memories also pose major problems to the kind of learning you describe. In general you could say we tend to oversimplify outsourcing decisions in the immediate present to then eventually have to spend lots of time dealing with the negative consequences in the future!

    1. Totally agree with your comments, which highlight the causes of many poor outsourcing (and business) decisions.

      First, the ‘copying mentality’ in business is evident everywhere. Practitioners will, not surprisingly if they are under intense competing pressures for their time, always look for short-cuts and imitating what others are doing provides the basis for doing so. However, you always need to understand the circumstances surrounding any decision and the issue of appropriateness is key. What is appropriate for one organisation in a particular set of circumstances will probably not be appropriate for another organisation in a totally different set of circumstances.

      Second, individuals do not know what they do not know and base decisions on bounded rationality. This is a key business problem, but practitioners do not always understand their limited knowledge and understanding.

      Finally, reporting of the post-contractual issues that have arisen from poor outsourcing are widespread in the business and academic literature. Such cases provide significant material for academics and opportunities for consultants.

    1. Thanks Tim. Problems frequently occur with IT outsourcing due to the inability of the client to clearly specify its requirements, the high levels of uncertainty regarding the (evolving) technology, and the very nature of the contracts being structured, remunerated and incentivised inappropriately. Whether the disasters are less common in non-IT outsourcing I am not sure as I have encountered many more of these cases personally. However, the fact that IT disasters may be more costly and impact on the continuity of business operations may mean that they are reported more widely and cited as the worst (or best depending on your angle) cases of outsourcing failure.

  2. Other mistakes include outsourcing problems in the hope that an external organisation will fix them, they won’t, and not maintaining expertise in house to oversee the outsources contract and manage any transfer or in sourcing if it fails.

    1. Agree with you Simon. Organisations frequently outsource in attempt to overcome internal problems or inefficiencies. If done correctly, it can be successful. However, they often misunderstand the in-house resources required to oversee and manage the provider which looks to significant post-contractual problems. This can manifest itself in very poor performance (cost and quality), but also lock-in to the contract so your future actions are limited. Understanding how the relationship can go wrong and putting in safeguards against this is critical.

  3. Outsourcing is not a one-fix-all solution to curb costs for any kind of operational activities. In order for the contractor to perform well & up to speed, concerted efforts from related teams of the job assigning company are required to work closely with the contractor – to map out & control the scope of work for the least disruption to the business operations.

    1. I agree Candice. Many outsourcing decisions are made on the basis to cut costs or reduce headcount. A focus on value for money is critical as it may actually increase costs or short-term disruption, but increase value (aspects of quality, delivery, etc.), which generates more significant benefits for the organisation. Performance Management (at the contract level) and Relationship Management (possibly across multiple contracts) is key to ensure desired outcomes are achieved and maintained.

  4. Great post, Paul. You highlight many pertinent truths about outsourcing which are valuable. Sadly, it seems a significant majority of organisations are still making the same mistakes!

Leave a Reply