Outsourcing: It Doesn’t Have to Hurt!


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published May 28, 2003

“Traditionally, the large, multinational corporation was held together by ownership. Today, it is held together by a strategic purpose. Ownership of the total means of production is becoming an impediment, a commitment that many organizations—from corporations to healthcare providers to universities—are moving away from. In its place is a focus on organization purpose and the development of networks of cooperating organizations that together can flexibly provide the services or products the ‘owned’ enterprise once provided.”

The Conference Board
The Drucker Foundation

The quote above should make it clear that outsourcing is definitely not a passing fad, but rather a business model that is growing in use and popularity. This is not surprising, since the emphasis on “core competence” in the last decade requires that companies have some alternative means of providing goods and services that are not within the core competence. Outsourcing is the answer.

From this perspective, the curious thing is not that outsourcing is growing; but rather that it is not being adopted even more rapidly. The reason for this is that the growth trend is offset by bad experiences with outsourcing. Such experiences – failures, or at least dissatisfaction – slow the trend toward outsourcing, and even reverse it in some specific instances.

The pressure to outsource, and the fear of failure, has spawned an entire industry; the outsourcing consulting/management, industry. Based on my experience, and a lengthy review of the common practices of this industry, it seems apparent that the industry complicates the process, extends the schedule, and expands the workload. It is not uncommon for outsourcing to take between 12 and 18 months, require multiple “phases,” and substantial financial and human capital from the outsourcing company. It’s not surprising that sometimes the commitment is too much to accept, and the outsourcing fails, or never gets started. The only reason I can think of for these practices is that the resulting process amplifies the importance and role of the consultant, and the subsequent bill to the client.

The results of these needlessly complicated, lengthy, and expensive processes are high transaction costs, relatively unknown outcomes, excessive dissatisfaction, and unintended consequences in the form of higher costs and lower results for the outsourcing company. The resulting risk aversion in observers of the these results is to be expected.

Also based on my experience, IT DOESN’T HAVE TO BE THAT WAY!

Having been deeply trained in modern quality principles and practices, I have been successful outsourcing processes into hundreds of millions of dollars, with a team of a handful of people, a budget under $10,000, and less than 60 days. The results were completely successful. You can achieve similar results by following a few basic guidelines.

1. Accept several modern quality principles and keep them in mind at all times:

a. As Deming prompted, do not award business based on price alone (this is only appropriate when the product or service is a “commodity” in the truest sense of the word; this is rarely the case).

b. Deming also counseled giving people a chance to excel (this means that you must accept the fact that you can’t think of everything to put in the contract, and have to allow for evolution of the product, service, and relationship, in good faith).

2. Recognize limitations: if you can’t contractually cover every contingency, concentrate on contracting for a process to address contingencies as they arise. This makes the contract dynamic, rather than static, and is a strong relationship builder.

3. Concentrate on being a good customer; be as open as you can with the supplier, they’ll appreciate it and regularly go the extra mile for you.

4. Focus together on the costs of the contract, and be willing to award extra profit in exchange for reduced cost. Profit is easy to identify, at least theoretically, and it’s the reason the supplier is in business. The biggest portion of the expenditure, however, is in their costs; they welcome your help and support in reducing those costs.

5. Include measurements in every contract, but pay close attention. Most often the measures that get incorporated in agreements are there because they are easy to measure, rather than important to the outcome. Make the measures meaningful, and few, even if they involve some effort to extract.

If you follow these guidelines, outsourcing can happen quickly, effectively, and the results will exceed your expectations for years to come.

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.