The decision to outsource is usually supported by some sort of business case or cost-benefits analysis. The main reason for this is that the transfer of a business activity or process to a third party usually involves the passing of key decision rights, including budgetary control, access to business-critical information and intellectual property rights (IPR). Other reasons commonly cited include gaining access to “best practice” capabilities or to focus the business on core competences. However, an outsourcing arrangement often fails to deliver to set expectations. Why should this be?

The growth of outsourcing has traditionally been driven by a number of factors, including the need for cost savings, reducing headcount, accountability with greater control of operating costs, moving from fixed to variable costs and leveraging economies of scale. In addition, the decision to outsource has been in response to adverse business or economic conditions or perhaps the need for restructuring as a result of mergers, de-mergers or takeovers.

”What’s in it for me?” has frequently been the buyer’s reaction, which has led to high expectations across a spectrum of business needs. These may include: improving business return on investment (ROI); gaining access to technology, methodology and talent; improving service levels; gaining access to better career opportunities; removing wastefulness; and increasing competitive advantage.

However, such high expectations need to be moderated. Outsourcing, as a strategic business move, must take account of the business environment, its instabilities and its complexities if it is to yield cost-effectiveness and performance efficiencies without engendering business risk.

New business drivers are changing buyers’ strategies and unlocking new outsourcing opportunities. These new forces reflect the transformation of industry sectors, perhaps stemming from the effects of government deregulation or the relentless speed and disruptive qualities of technology innovation. This continues to open up new markets on a global basis and offer access to an international workforce.

Paradoxically, such changes are creating a shift in the reasons to outsource, away from lowest cost to greatest value. More informed buyers are challenging the perceived value the third-party supplier claims to offer. Reported improvements in purchasing, processes and service performance are increasingly being called into question.

The decision on whether to outsource perhaps hinges on one fundamental question: has the buyer identified a suitable third-party supplier that is willing to invest in resources to effect change, mitigate risk and perform in a way that enables the buyer to sustain business success?

You can analyse the business environment in two distinct ways. First, with an objective view, from both a business and technical perspective. For example, the degree of technical integration will determine the difficulty of outsourcing IT activities to a third-party supplier. Business risk will increase where technical solutions are highly integrated with other business processes across the organisation.

Consequently, stability and complexity become variable attributes that affect the business environment. As the rate of change in these attributes increases, so does the difficulty of managing change and the best way to unlock the value from outsourcing IT becomes more elusive.

Second, there is a subjective view from a perspective of cultural fit. This includes co-operation, problem solving, reputation, brand protection and commitment as seen from the buyer’s needs.

If outsourcing is approached in this way, a decision-support framework takes shape and enables the buyer to address these key relationship questions: are we clear about the type of relationship we desire with the third-party supplier? Are we certain about the ability and willingness of the third-party supplier to provide the required value? Are we ready, internally, with time, funds and personnel, to establish and maintain long-term relationships with the third-party supplier? What is the minimum relationship required to deliver the required business value? And is there sufficient trust to support the relationship?

How far an outsourcing decision can be justified depends largely on how critical it is to the business and its contribution to competitive advantage. So total outsourcing may be deemed unsuitable if the predicted business risk is too high.

There are other options, however, as shown in the decision framework illustration. For example, there is growing awareness that successful IT outsourcing projects are associated with a reasoned and incremental approach to outsourcing. These characteristics are associated with selective sourcing, perhaps where there is internal resistance to total outsource from functional units that foresee a loss of core competences or internal coherence.

Selective sourcing presents the opportunity to trial outsourcing without full commitment. It provides a learning curve for management while retaining budgetary control and minimising risk. Selective sourcing is suited to a business environment where there are many suppliers, an excess of expert resource or short-term drivers for cost advantage.

Modular sourcing focuses more on competitive advantage. Detailed plans are likely to support a medium to long-term corporate strategy. For example, product development activities such as research and development, value engineering and other project-based activities could be candidates for modular sourcing.

It is perhaps best to consider this option if seeking to penetrate new global markets, or to share capital investment or business risk. Joint ventures can enable businesses to achieve their goals more easily because they address business risk and gain-share.

The decision framework illustrates that the choice to outsource or do nothing/in-source is no longer straightforward. There continues to be a great debate about outsourcing, and increasingly around value rather than cost. Either way, it places tremendous pressure on management and employees alike, whether it is to reduce and control costs, change locations, access new technologies and expertise or refocus on core competences.

The “do nothing/in-source” decision is about finding a new audience, particularly from within business functions that have lived through a total outsource but have not seen the value improvements that create competitive advantage. Issues remain, of course, such as the threat of losing IPR and other critical assets and not realising the expected cost savings.

These decision frameworks provide a basis for questioning the extent to which outsourcing is justifiable in relation to business criticality and consideration of competitive advantage. Yet many buyers pass swiftly over the identification and development phases. For example, buyers are choosing to outsource IT technology that is still new and potentially unstable, where they or the third-party supplier have little or no experience of the technology. This presents increased business risk.

Where budget control has already passed to the third-party supplier, the potential for conflict and misalignment between the respective business interests can manifest itself in failed promises to access new technology and lead to prohibitive switching costs.

Every outsourcing decision needs to be judged on its own set of attributes. Today, the decision framework must assess a wider set of criteria, such as market reach, risk-share and the protection of brand. The key challenge is to discover the real drivers for change that make your outsource decision unique. Otherwise, the expectations from outsourcing will be too difficult to deliver.