Getting the Most from Outsourcing

The Second Time Around:
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The Big Idea

For many, outsourcing has been a frustrating disappointment. The dream was of high-quality service at low costs with minimal management or oversight required. The reality: inflexibility, poor service quality, higher than expected costs, and inability to innovate in a changing market.

The fault usually lies in how deals are structured. Poorly structured outsourcing deals fail, and a surprisingly high proportion of deals are poorly structured. “Our mess for less” is not a viable strategy. Many companies enter outsourcing arrangements with unrealistic expectations, assuming that little to no management will be necessary, or contractually specifying service levels unachievable with real volumes and time periods, or paying no attention to demand management (so end-users get all they ask for and ask for all they can get, thus driving up costs).

These problems are solvable. But solving them means getting to the root causes of the problems. Outsourcing is not a magic wand. It is a strategic decision that creates strategic relationships to support business goals. Success requires strong internal governance and demand management to ensure that strategic priorities remain the focus. Many clients have seen great success when they share goals with vendors and align incentives so that both parties benefit when the goals are achieved. But to fully capture the value of outsourcing, clients must understand the underlying economics and cost drivers. This enables them to write contracts and service level agreements (SLAs) that reinforce the company’s goals.

Potential solutions to these outsourcing issues fall into three broad categories, representing increasing degrees of change:

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Address internal management issues
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Fix the supplier relationship
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Competitively re-bid the outsourced services

These solutions are not strictly sequential, but they overlap.

The Case

A large manufacturer was disappointed with an existing IT outsourcing arrangement, complaining that the supplier provided mediocre service, did not innovate, was inflexible, and had costs much higher than originally anticipated. The manufacturer had attempted to improve the situation by carving out bits of the main outsourcing contract and allowing individual regions to re-bid outsourced services independently. That piecemeal approach made matters worse by increasing complexity and costs; there were, for example, more than 40 instances of SAP. After building a robust set of internal vendor-management capabilities and attempting multiple times to fix the existing supplier relationship, the manufacturer decided to competitively re-bid the outsourced services.

With the main contract nearing expiration, the manufacturer planned to go to market with one of the largest corporate IT outsourcing efforts in history. But it needed a coordinated strategy to address the complexities of its global operations and the massive scale of the re-sourcing effort.

Based on Booz Allen Hamilton’s analysis and assessment of alternatives, the manufacturer’s leadership reached a consensus to solicit bids for a single global provider in each business function. This would eliminate the complexity of dealing with different regional suppliers in a single function. Each business function went to market independently — human resources, finance, manufacturing, sales, marketing, and so forth — using a standardized re-bidding approach to ensure consistency.

Given this go-to-market strategy, the next step was to design the specific scope of services of each request for proposal (RFP), as well as the overall operating model the manufacturer will pursue to allow these multiple suppliers to work together upon contract award. Booz Allen assisted the manufacturer in designing this new model, which strives to encourage suppliers to provide innovative ideas and help the manufacturer achieve its strategic goals.

After a global, comprehensive collection and compilation of data and cost information on applications and infrastructure was completed, the manufacturer went to suppliers first with requests for information (RFI) and then RFPs. Booz Allen assisted in evaluating the responses and selecting a short list of suppliers, who are now in negotiations that will result in a final selection. Meanwhile, transition planning is under way to address vendor-management improvements, including knowledge transfer, critical information and services, governance, and regional needs.

Based on the initial round of RFPs, the manufacturer expects savings in the range of 20 to 30 percent of its IT spending.

The Application

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Any organization wishing to learn from prior outsourcing deals before they re-assess their outsourcing strategy or transition to a new model.
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Relevant across all industries and types of outsourcing arrangements, from commodity processes to strategic services.
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The goal is to:
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Start a dialogue to uncover the root causes of outsourcing issues
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Provide a framework for addressing outsourcing issues at increasing levels of change
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Demonstrate Booz Allen experience in restructuring outsourcing approaches"