Last week I saw a question on Linked-In that I thought was particularly interesting. The question was, “What are the top five challenges in BPO transitions that  need to be addressed in the outsourcing/offshoring industry?”  If there were any “winners” in this contest, it was: Lack of qualified staff; bad estimates (of just about everything by just about everyone), and poor client management.  Some of these problems will not get any better, if anything they will get worse. Let’s take a look at my own “top 5” list  and perhaps this will shed some light on the challenges outsourcing faces.

1. POOR  CLIENT MANAGEMENT: This is the problem that every Outsourcer  bemoans, and with good reason. When the client decides to outsource, they could have come to this decision several different ways. It may have been the product of  long-term internal examination, guided by consistent and well communicated  sourcing policy and supported by comprehensive financial and operational  research. Sometimes this happens, but like most best practices, this is  usually an exception. Instead, the firm may be under significant financial pressure and must act quickly, skipping important analysis or communication stages. Alternatively, the firm may have chosen outsourcing because it does not believe that the internal group  is able or willing to meet performance standards. When this is the case, whoever is directing this outsourcing exercise many not want to involve the current managers of the service. Lots of problems with this scenario, but it happens. Lately, I have heard more talk about “resistance planning” as a critical stage in outsourcing and  change management. You need to plan for problems, but when your own management starts to rise to the top of the problem list… managers need to take steps to see that this is not how THEIR top managers view them.
2. RISK ANALYSIS: Managers don’t move on an opportunity until they see sufficient benefits to do so. If you think you’ve identified a high-risk situation, you want to see a pretty big benefit before you get engaged. Most managers look at risk this way: It is more important to avoid being part of a failure, than to get credit for a “win”. Depending on the size of win (or loss) this may be true. In the last wave of outsourcing, many firms put “regulators” in place: Project Management Offices (PMO’S), Procurement Offices, Business Improvement Offices, etc. Because they have less detailed knowledge about your functions, these groups are likely to see the benefits of outsourcing targets that you (with more insight) think are too risky. An analysis from a regulator asking to move forward on one of thee opportunities is usually considered more impartial, and therefore more likely to be followed, than a recommendation from a service manager to not proceed (if the manager is even aware that they are being examined). However, while we immediately consider bias when a service manager makes a recommendation, improvement managers are as vulnerable to bias. Service manager are biased towards finding fewer eligible outsourcing positions, and regulators see more. However, the number and power of regulators is increasing, moving decision-making towards higher risk projects. That doesn’t mean that the total number of outsourcing projects will significantly increase, since resistance is also becoming more common (and effective?).
3. REAL COSTS: Few clients truly understand their own costs. This is due to the
   distortion of costs that come from corporate service being an “internal” service. Service budgets are driven by internal processes, not by costs. Few internal services pay for real estate or other occupancy costs (electricity, cleaning services, security, etc.). When the corporation renews its lease (perhaps on a whole building), the service is unaware of how this affects cost… if the rent goes up, it may never be communicated to the service manager. In this situation, it makes sense to use the existing space without modifications,  to keep costs down (no new furniture, renovations, etc.). However, if you paid for  your space it could be more efficient to buy new desks… if you can fit more people in less space. Without a firm understanding of all costs besides compensation, you can’t have an intelligent negotiation with a vendor. Nothing in your previous corporate experience may prepare you for dealing with real costs, but until you understand it you will not be able to meaningfully participate in the pricing of an outsourcer. Instead your assumptions, based on your experience, may be injurious to the negotiation process.
4. VENDOR PRICING: Vendor pricing must reflect real costs. If not, you need to steal revenue from one client to pay for another. The procurement process is designed to be adversarial. A procurement manager must push against pricing to get a better price; if you don’t do this, you don’t know where the bottom of the vendor’s price could be. Unfortunately, so many different services could be outsourced that even an experienced procurement manager cannot know the right price for every sourcing project; in that situation, it’s too easy to resort to just pressuring the outsourcer for a lower price until they say I can’t go any lower. The problem is that you negotiate with a sales representative, who may not understand the fine details of operational costs. If you lack a realistic basis for internal costs (see above) and you negotiate aggressively or offer the possibility of future profits (“If you give me a lower price, you can make it up on our next contract), you can push the price below the real cost. When this happens, the pilot may work out, but when you move into the production stage and increase the size of the staff, you can enter into a cycle of quality and production issues never ends.
5. START-UP TIME: Location matters. Most outsourcing project move functions from one location (and expensive one) to another (a less expensive one). When you make this move, you may also be moving your staff away from the colleges, business centers and other elements that create specialized capabilities. In New York and London, it took decades to bring together the necessary resources to support: analysts in investment banking, MLS educated corporate library workers, legal document center operators, etc. If you are the first firm to outsource legal support staff to a small town in the Philippines, and there are no legal colleges or large legal firms in the town, can you build a professional staff of 200 in this location? You might. Can you build this operation in three months? I would highly doubt it. To successfully build a facility of this sort you should plan
   to take three to five years. If you were to move this to an offshore location with a history of legal support (and colleges, and local legal businesses), you might shave off 6-12 months. If instead you outsourced domestically, you might shave off another 6-12 months. The lowest priced location may NOT be the best way to achieve your goals; you need to better analyze how time affects your project. If you don’t understand the time element you will either misunderstand real cost, or not deliver the project on time, or break the process trying to meet an unrealistic time schedule.

There are of course, many other issues to comment on. Some of these issues will just become more challenging over time. There aren’t any magic bullets to make these issues go away, instead these are issues that you need to fully understand and educate yourselves on. If you do, you can contribute more meaningfully in an outsourcing project, and help guide those projects towards a successfully conclusion. And that’s my Niccolls worth!