Everyone who has attempted or conducted a study about outsourcing will agree that outsourcing is difficult. Outsourcing relationships have high failure rates as of now though experts aren’t unanimous about the exact rate (could be anything from 40 to 70 percent).
The specific reasons vary from case to case, but at the core of it all is the conflict of interests. The client wants better service at lower costs, while the vendor wants to make a profit. Thus it requires constantly keeping things in balance for the relationship to be successful and mutually rewarding.
From the client’s side, a rushed decision to outsource without a good business case is another common cause. Outsourcing is not a quick-fix solution to all the maladies in an organization. Rather, it should be viewed as an investment towards greater capabilities, global expansion, increased agility and profitability and a higher competitive advantage.
Apart from general reasons, a lot depends on the nature of work and the organizations coming together. Some are easier to make work than others. Transactional outsourcing deals, where only discrete processes with clearly defined rules are outsourced, have the highest success rate at 90 percent. Co-sourcing projects (application development or maintenance work) show 63 percent success rates. It is strategic partnerships (a huge bundle of IT services taken care of by a single vendor) that have the minimum success, at 50 percent.
This shows that the more well defined the roles of the client and the vendor, the higher the success rate. The scope of responsibilities also plays a role. A successful outsourcing contract has to create win-win solutions.
What if it doesn’t Work?
If an outsourcing relationship does not work out for the client, they have to consider bringing back the work to be managed in-house. The relationship may have failed due to lack of proper evaluation in the beginning or because the business situation has changed, but bringing the work back could be an option. The difficult part is getting out of the contract. Thus many companies dissatisfied with their outsourcing relationship go for restructuring the contracts. (This was a very predominant trend in 2005.)
However there are situations where restructuring does not help, and companies do well to bring back the work. This situation has to be managed with a lot of care.
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