The Causes of Major Outsourcing Failures

Outsourcing. Business Background.Many organisations are guilty of sub-optimal strategies because they do not understand the potential pitfalls of outsourcing.

Managers are faced with an avalanche of advice about what they should do to be successful. The academic and consulting management literature is replete with articles and books that provide guides to success, with many case studies explaining why a particular individual or company was successful and what practitioners must do to emulate it in their own organisations.

This is not surprising, because practitioners are keen to find shortcuts and are desperate to emulate those who have been successful. Outsourcing is no different, as it has become something of a dominant approach as organisations seek ways of improving competitive advantage and bottom-line performance.

There are, however, problems with this approach.

  1. Practitioners copying what others have done can be dangerous if the emulator is not operating in exactly the same circumstances as the originator.
  2. A little knowledge can be dangerous. A cursory perusal may allow an emulator to understand in general what the originator did, but not fully to appreciate what was required to put it into practice successfully.

Given that emulators often fail to achieve the same success as originators, it is somewhat surprising that managers do not spend more time trying to understand why. Even more so because, from an early age, human beings do not normally learn by being told what is the correct thing to do. In fact, most of us learn from experience – that is, from making mistakes.

Most of the outsourcing decisions that IIAPS staff have analysed over the last two decades have been failures rather than successes.

By understanding what goes wrong strategically and tactically in outsourcing decisions, practitioners will be in a much better position to understand how to be successful. This is a radically different approach to the normal advice that practitioners receive.

An IIAPS White Paper highlights the major outsourcing failures that we have identified:
Pre-Contractual
1. Outsourcing strategically critical assets
2. Retaining tactically non-critical assets in-house
Post-Contractual
3. Failing to understand post-contractual “moral hazard” and lock-in
4. Inappropriate post-contractual relationship management

Each of these generic problems is outlined, with case studies to provide empirical evidence of the errors that organisations make on a fairly regular basis.

The Whitepaper also provides the 10 major reasons why organisations appear to make these mistakes when outsourcing and the 5 steps to successful outsourcing.

What is clear in practice is that, despite the many thousands of words written on the subject of outsourcing, most organisations we have worked with appear to be guilty of sub-optimal strategies. This is because practitioners do not fully understand the pitfalls of outsourcing.

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.

7 thoughts on “The Causes of Major Outsourcing Failures”

  1. 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.

    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. 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. Peter, I totally agree with you that a focus on cost reduction may contribute to many outsourcing failures (see number 4 in our blog providing a list of 10 reasons why outsourcing fails). 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 leads to significant post-contractual problems. This can manifest itself in very poor performance (cost and quality), but also lock-in the organisation into the contract so that future actions are restricted. Understanding how the relationship can go wrong and putting in safeguards against this is critical.

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