The Future of Outsourcing
by Glen Hiemstra on 03/03/10 at 3:22 pm | 
Recently I had the chance to sit down with Kate Vitasek, author of the new book, Vested Outsourcing, with Mike Ledyard and Karl Manrodt. Outsourcing is a controversial but fundamental business activity – as Kate notes Peter Drucker used to say “Do what you do best and outsource the rest,” and the idea of finding people who can do something better, faster and cheaper than you goes all the way back to Adam Smith and beyond.
In recent history outsourcing has become conflated with off-shoring. Having some other company do your IT work, your PR work, your janitorial work, and so on, does not mean, necessarily, sending that work out of the community or overseas. Though of course, in practice it often does just that. I support policies that would limit off-shoring and certainly would not reward it. And, in general I believe that the future well-being of the economy depends on building more local capacity within a global economy.
Leaving the issue of off-shoring aside, however, there is a great deal to learn from Kate and the concept of Vested Outsourcing. The goal is to make outsourcing a win-win-win proposition when practiced. That is, if done right outsourcing a particular function should lead to cost savings for the company outsourcing, higher margins for the company that gets the work, and better service for the customer. That is the goal of Vested Outsourcing, and this is accomplished by implementing five basic rules explained in the book.
1. Focus on outcomes, not transactions.
2. Focus on the WHAT, not the HOW.
3. Agree on clearly defined and measurable outcomes.
4. Optimize pricing model incentives for cost/service trade-offs.
5. Governance structure provides insight, not merely oversight.
These rules add up to a constructive, mutually beneficial relationship between the companies involved. The research done by Kate and her colleagues at the University of Tennessee demonstrates that outsourcing following these rules lead to such a relationship.
My take on all this is that some outsourcing is inevitable and optimal and, given that, it ought to be done well.
[Video production: David Ryder]
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Leroy Hurt
Mar 3rd, 2010
A very interesting interview. What I’d love to hear more about is the role of social responsibility among the book’s ideas, whether this can benefit government procurement and acquisition. Regarding government work, the ideas sounded similar to performance based contracting.
Matthew Hooper
Mar 5th, 2010
This is an excellent piece. I think Kate highlights some excellent points and helps to really clear up some misconceptions about the value of outsourcing. Working for a US Based Tech Support and Systems Management outsourcer, I’m constantly challenged to present our value proposition to justify the higher costs of our support services. However, time and again TCO and ROI analysis shows that we are less expensive.
For example, we recently bid on a tech-support business that was bid from an Indian firm. Our rates were higher per minute. We tried to argue that our call times were lower, but he Indian off-shore actually had the same call time. Then we presented our per customer call time. This was the total minutes combined per customer. What was revealed is that customers who called the Indian firm had called on average 5 times more often. This was a huge difference in total support cost vs. our levels. We won the business. Now this is not a an Indian vs. American thing. it goes to what Kate said about localization of resources. Especially for BPO, the cultural influence does pay dividends. Having a culture that understands, can communicate, and interact with a complex situation really makes the difference.
SShah
Jun 28th, 2010
A very intriguing concept indeed: Focus on the WHAT, not the HOW. I think that the future is outsourcing and we see a rise in the number of contract workers, in-shore or off-shore. I believe that many now see that outsourcing is not all about getting the lowest cost, but also getting value for money. Still, outsourcing is just a toddler trying to find its way in this world. Laws will definitely catch up to ensure ethical outsourcing as well as fair business practice for all. Thanks for sharing this news!