PMO Genius: 8 Lessons Learned About Outsourcing

In our last “PMO Basics,” we covered the reasons and methods for building a lessons learned file. Today, we’re going to apply lessons learned to Outsourcing. Why single out outsourcing? There are several good reasons. First, the recent wave of  outsourcing affected most big corporations, creating vast pools of reusable knowledge about creating and managing outsourcing programs. Second, outsourcing was overwhelmingly driven by short-term cost savings needs created by the collapse of the world financial markets. Third, whenever a wave of change hits that is driven by disaster and panic, it’s a pretty good bet that a lot of mistakes will be made and there will be many opportunities for improvement on the early model; because the collapse was so big and so quick, outsourcing is littered with some pretty bad models that you need to be careful not to replicate. Consider a workforce tasked with building a dam overnight to prevent an expected flood or an evacuation created while a building is collapsing. Neither is likely to produce a model that’s going to win any awards. Finally, outsourcing contracts are typically for 3 or more years, and many of the “panic years” contracts are coming due for renewal. This is a REALLY good time to learn from the past. If not, you are very likely to be stuck with a failed contract.

Most of the outsourcing contracts created in the last 10 years have been focused on short-term savings. The outsourcing contract costs less than the current cost of operation, but after this first reduction the contract is “stuck” on maintaining this cost, with few provisions or incentives for continuous improvement, cost will not fall and quality will not rise (for details, see the previous blog on the “Downward Spiral”). Because these contracts were built when service demand was falling (i.e. in an economic downturn) most firms find that these services do not scale back up as well as expected.  As you will find when speaking to your colleagues, many people based outsourcing services hit their best stride around year 2-3, and then deteriorate (for reasons will we discuss shortly). Let’s  see what we’ve learned about outsourcing over the past few years:

WORLD ASSUMPTIONS: Many outsourcing programs were offshoring programs, because the lowest-cost  programs leveraged the lower wages in other labor markets. However, over the past few years the cost of US labor has dropped, the availability of talent has increased and the rate of inflation in popular outsourcing locations (such as India) has been high. In offshoring, the labor component is just a small part of the cost you pay. In India the cost of space much higher than in comparable US or UK outsourcing markets, power (computers, air conditioning, etc.) cost more and is rapidly rising as the price of oil rises, inflation is higher, and exchange rates add an element of risk into the next contract. These are probably not the assumptions you used when you created your first contract; it’s time to update them.

MANAGEMENT ATTENTION: When a program receives management attention, it improves. Study after study shows that any attention (make the work area brighter, dimmer, lower the temperature, raise pay), improves the work-product…  temporarily. Outsourcing focuses a lot of management attention on these programs. Far more attention than their in-house predecessors received. But senior managers don’t want to put time into this forever. Especially when the complaints start. What happened in your organization? In year two and three, did senior managers stop showing up to the daily, and weekly meetings? Are senior managers even attending the monthly and quarterly reviews? Are there other signs that senior managers are less involved? As the seniority of management drops, has the pace of improvement also fallen? What about your next contract?

EARLY VS. LATER DAYS: Aside from management attention, there are other reasons that performance drops over time. On a new team, an exceptional  new employee might become an assistant supervisor in six months, and then get promoted to supervisor, shift manger and eventually head of the service in rapid-fire promotions. However, after a little while, when the service hits it’s full size, the creation of new  promotional positions slows and then disappears. New “A” performers look for positions on other teams, and the “A’s” on your team look for their next position elsewhere. The same would be true of a domestic team. But in India there is an assumption of a promotion every six months or so, very much continuing the college system of competing two semesters a year. Once you cease to have rapid promotions, the stream of “A’s” drops off, negatively impacting performance and increasing staff turnover and loss of knowledge on the team.

TEAM AGE: Outsourcing teams are younger than the team they replace. Domestic teams are a bit younger, and offshore teams are a lot younger. For many offshore workers, working on your team is their first full-time job. That’s not necessarily a bad thing, but it does have an unexpected consequence. If this is your first job out of college, you haven’t yet decided what you want to do for the rest of your life. A significant number of these “freshers” as they are called, decide that they want to do something else and leave. When this stream of attrition joins the others, you get the typical offshore 30%-50% (or more) turnover in staff.

INTERNAL DEADWOOD: One of the unspoken reasons why outsourcing is attractive for corporations is that it provides the opportunity to get rid of problem employees. However, these employees often became problems because of past mistakes by the firm. Workers “promoted” into confused job positions because the manager had no other option to give them a raise. Workers who believe they are performing well due to inconsistent or non-existent annual reviews.  Annual raises for seniority rather than skills and performance. And genuine problem workers who have not been dealt with due to confused HR rules or weak managers (usually both). However, now that problem employees have long since been cleared out and processes are documented and work performance is accurately measured and reported…how does this affect future outsourcing? Is there still deadwood to clear? Or could more progress be made by applying what you’ve learned and increasing the employee value (performance, knowledge, motivation, etc.)?

METRICS & TRACKING: Before you outsourced you may have not identified metrics and produced monthly management reports. Even if you did, after working with your outsourcing programs you may have new ideas about which metrics to track and how to collect data. In light of new information… how well did the old operation work? How well is outsourcing performing? Should your outsourcing program be moved further away (from domestic to offshore), closer (from offshore to domestic) or can you run a better program in-house now that your tools have been improved?

PROJECT VS. BENEFIT: An unfortunate fact of project management is that we put a lot of effort into seeing that the project implementation goes as planned (all deliverables delivered on time, and on budget) but only the minority of projects are tracked until they deliver their proposed benefits. Like most efforts in life, outsourcing doesn’t always deliver the promised benefits. Many outsourcing programs start without clearly outlined benefits, or a fully defined cost baseline (you included salaries, but did you include space costs?) and only recently have programs looked at the cost of redundancies (severance packages for terminated employees). Current studies show that less… perhaps far less… than half of outsourcing projects succeed. Do you have exact success criteria for your outsourcing programs? How successful have they been? Are you seeing differences in success between onshore, offshore and programs that created improvements to in-house programs?

CONTRACT RENEWALS: Typical outsourcing programs can deliver short-term benefits. When it is time to renew, what happens? If the 1st contract was well designed, then there isn’t much room for cost improvement when you renew. Perhaps you did get a significant benefit in the 2nd contract, and you are about to renew again. Do you expect another big cost reduction? Alternatively, contracts that are built around the idea of continuous improvement and process redesign will continue to reduce costs and improve performance. You simply cannot institute a process of innovation and change under a short-term cost reduction contract… which always focuses on freezing processes and performing to pre-set standards. If your contract does not deliver additional improvements for the next three years (or 5 years, or even farther into the future), does it make any sense to continue to use this type of contract?  Have you looked at the alternatives (details in this Blog).

When you ask these eight questions, and put together your lessons learned file, you may be surprised. You may be surprised at how much the world has changed, and how much this affects your baseline assumptions. You may also be surprised at how the verified results of your outsourcing programs diverge from their assumed results. You need to apply these new lessons and challenge old assumptions on new projects. Decisions based on real data inherently use old data, perhaps obsolete data. In a rapidly changing world, your assumptions need to be based on the most-recent  data available. In outsourcing, today’s data is considerably different from just three years ago and very different from the many stories we heard that are closer to 10 years old.

Build your lessons learned file and keep the information up to date, and your projects will deliver much larger benefits. And that’s my Niccolls worth for today!

This entry was posted in Best Practices, Common Sense Contracting, Decision Making, Delivering Services, Learning and Development, Project Management Office and tagged , , , , , , . Bookmark the permalink.

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