How to develop an Outsourcing Strategy?

Over the past 10 years, interest in Sourcing, esp. Outsourcing, has surged. Many of the back-office functions like Customer Support, Call center, IT Maintenance, Application Development etc, have already moved to BRIC countries and is growing with revenues of upwards of $373 billion/year.

Many a times, organizations are quick to jump to Outsourcing w/o a sound Outsourcing Strategy. Cost saving has been one of the most important objectives for many organizations in any global sourcing decision. But with sound sourcing strategy, many strategic and tactical objectives/benefits can be derived, other than cost saving. Failure to create a strategy and establish a framework with a clear set of project goals spells disaster for an offshore outsourcing arrangement.

First step, Outsourcing Strategy:

Strategy is a key for winning everything. Organizations should spend considerable time defining their Outsourcing Strategies. Once defined, the Outsourcing Strategy should be refined on annual basis, and adjustments made as necessary.

Preferably, the strategy should be an organization-wide strategy. Doing so, will set directions and provides guiding principles for individual LOBs to plan and execute Outsourcing engagements. In order to achieve this, the organization must address a number of key questions:

  • What are the business imperatives for Outsourcing?
  • What are the Outsourcing goals & objectives?
  • What can be outsourced? And what should not be sourced? [What is your core and non-core business?]
  • What are the Outsourcing drivers?
  • What type of Outsourcing models/relationship should be used?
  • What are our competitors and/or industry doing w.r.t Outsourcing?
  • What are the key trends in your business?
  • What are in-house skills/capabilities?

Factor in the risk and organization culture as well, while crafting the strategy. Outsourcing strategy should be clearly aligned with business and IT strategy.

Fig 1: Sourcing objectives alignment with organizations’ Business Strategy

Establishing a clear Outsourcing Strategy involves the following steps:

  1. Set the Vision – Executive Management should set the vision, direction, guiding principles
  2. Self-Assessment: (a) Assess the Outsourcing capabilities using a framework like Gartner’s’ Self assessment framework. The assessment will help organizations understand where they stand w.r.t Outsourcing capabilities (both Strategy and Execution capabilities). Least, it will create awareness on Outsourcing. (b) Second option is to perform SWOT (Strength, Weakness, Opportunities, Threats) analysis to further assist is developing strategic options
  3. Identify potential Outsourcing areas (of business)
  4. Identify potential Outsourcing models E.g. JV, In-Outsourcing, Multi-Outsourcing, Co-Outsourcing, etc
  5. Develop the Outsourcing objectives in a measurable/quantifiable way [e.g. reduce the cost of running IT Operations by 20%]

Next step, translating Strategy -> Operation:

Once the Outsourcing Strategy is defined, next step is how to execute this Strategy? The following three elements helps address on how the Outsourcing engagements should be run:

  • Sourcing Policies and Procedures – has the purpose of making the sourcing objectives and strategy operational.
    Policy should set guidelines for LOBs in outsourcing relationships.
    • How to identify an outsourcing opportunity?
    • How to design OLA, SLA?
    • RACI matrix for outsourcing?
    • How to manage risk?
    • How to craft a contract?
    • How to initiate procurement?
    • What are the communication guidelines? etc.
  • Outsourcing Life Cycle process/framework – a framework for executing Outsourcing strategy engagements and managing vendors
  • Governance Structure – Governance enables management to make operational, tactical and strategic decisions that increase the business value derived from the outsourcing relationships, while reducing the risk associated with using a global team

Outsourcing also means internal reorganization, rationalization of processes and resources in order to achieve stated business goals and objectives. Outsourcing will almost certainly touch employees, their employment status or benefits. Clear and honest communication is of paramount importance.

Think of Outsourcing as a business strategy, not a point solution.


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