In this second part of a three-part series, analysts will address the downsides and tradeoffs of outsourcing to answer the frequently asked question, “What are the pros and cons of outsourcing and shared services?”

In the first part of the series, it was emphasized that the company must assess the rationale for a new sourcing strategy and take a “one size fits all” approach to meet its unique needs.

Considerations should include:

• Scope
• Functions
• Vendor/Model Preference
• financial drivers

Three delivery models to consider:

• Outsourcing
• Captive Shared Services
• Build, operate and transfer (BOT) shared services

Advantages of outsourcing cited in the first part:

• process
  1. Greater standardization
  2. High degree of maturity of the process.
  3. Ease and speed of acceleration and/or deceleration
  4. More efficient staffing
• Performance
  1. greater responsibility
  2. performance department
  3. performance measurements
  4. take advantage of the experience
  5. Access to world-class innovation
  6. Cross functional integration
• cost
  1. Speed ​​up savings
  2. Transformation of the cost structure
  3. support technology
  4. Realization of profits – now and later

Outsourcing can be a strong business case for many companies. Unique organizational attributes and business objectives may point to a different strategic approach such as “one size fits all.”

The Disadvantages and Tradeoffs of Outsourcing:

Area: Process

Cons: Control what outsourcing brings: Less direct control of the daily process

Cons: Need for new management skills What outsourcing brings: Management attention shifts from managing the process to managing the relationship through a new governance structure. This is often a ‘tipping point’ and takes much more time than anticipated to manage the relationship at all levels and ensure smooth communication between levels, from operational to tactical to strategic and vice versa.

Cons: Need for new management skills. What outsourcing brings: The skills required to manage an external provider are very different from managing an internal resource. Many organizations underestimate the resources required to successfully manage an outsourcing relationship and do not seek outside advice on development.

Cons: long-term commitment What outsourcing brings: The long-term nature of outsourcing contracts means you’re locked in for a long time, preventing unforeseen “better” solutions later. . The requirements for the “change” in the business and future improvements in the delivery process must be clarified, negotiated and agreed in advance with the supplier.

Cons: hard to get out What outsourcing brings: It can be difficult to get out of outsourcing contracts (penalties, etc.), and the transition at the end of the contract to outsourcing or another service provider may not be easy.

Area: Performance

Cons: impediments to change What outsourcing brings: The time to fix poor performance can take weeks or months instead of hours or days, as the provider often has a “time to fix” for performance issues that may be beyond the patience of the end user.

Cons: Decline in internal talent pool What outsourcing brings: The ability to nurture and grow leadership talent from within declines as leadership roles in certain functions are outsourced.

Cons: loss of intellectual property What outsourcing brings: Risk of losing all internal capacity and “tribal knowledge” in the process. The provider’s understanding of institutional knowledge, internal relationships and company culture can take time.

Cons: Loss of connection between departments. What outsourcing brings: Increased perception of “loss of control” as multiple functions leave the organization and transfers between departments will be “lost”.

Area: Cost

Cons: “Cost slippage” What outsourcing brings: Risk of unforeseen additional costs for ad-hoc projects and activities, if the contract does not have a clear definition of what services are in scope and how the “new” services would be managed/charged.

Cons: Penalties for volume changes What outsourcing brings: Increased cost/transaction (eg mergers and acquisitions) to decrease transactional volumes – Again during contracting, volume change bands should be agreed upon and the client should understand the minimum volume break-even threshold for the provider.

Cons: redundancy costs What outsourcing brings: Sometimes there may be technology cost redundancy between the business and the service provider, which could increase overall technology support costs.

Cons: Inflated retained organization What outsourcing brings: The retained organization needs to change to reap the benefits. It requires retraining (as noted above) and monitoring to ensure the new way of operating is implemented and lived.

Using the “one size fits all” approach based on a proven sourcing methodology will lead the company to a well-constructed business case. The goal is to facilitate a true partnership model based on equality in which both parties understand the requirements, responsibilities and benefits to be realized for both organizations throughout the engagement.