Can risk be reduced by sourcing from multiple suppliers offshore?

Multi-Shoring – can risk be reduced by sourcing from multiple suppliers?

Although the reality is very different a recent article in computer weekly (a UK based IT Magazine) suggested that companies are being more flexible and attempting to spread the risk by outsourcing to different suppliers in different countries. As Leslie Wilcox of the LSE suggested the process looks like ‘spread betting’. Although this was a nice idea at least in print the practice of doing this for real is proving more difficult as the basis of off-shoring is often to move low value commodity call-centric services to locations where the language matches that of the home country. Accordingly much of the UK based off-shore market has naturally gravitated to India where a large number of skilled, low paid and disciplined people are available to man the phones. The Indian subcontinent turns out twenty to thirty thousand IT graduates a year for example and as a corollary of their degree course often speak English to a high standard. Another factor that causes management heartache with multi-shoring is the problems of managing several off-shore suppliers – its bad enough with one as the practice has shown.

Although innovation is appearing as more important at least in surveys when deciding on outsourcing the main attraction for off-shoring still remains labour arbitrage – i.e. cheaper wages. However in India of late they have been ‘enjoying’ 25% wage inflation in the outsource industry as highly skilled graduates are demanding better salaries – furthermore the attrition rate is extremely high and it seems that graduates do not relish a long term ‘career’ in a call-centre but treat the job as a stepping stone into the world of work. It is these factors (rather than risk reduction) which is causing companies to explore the world more carefully looking for the next low wage spot. Unfortunately there are not many options and talk of using Malta, Singapore are fanciful and only really in the margins, and Russia and China have immense language barriers to overcome before they can be considered

Another remark was made in the article that rather than always going down the low cost route ‘companies are asking for more innovation’ from their suppliers – this is not borne out by any evidence of course and is not clear what is meant by innovation but there is something useful in this comment. That’s the idea is that outsource providers can take up the proposition of innovation and actively improve their service, be more efficient, deliver in more up to date means, whilst constantly improving the cost base. In my view you can have innovation and cost improvement at the same time and suppliers rather than resting on their laurels after the deal is closed should from day one start to improve the service and pass on a fair part of this to the customer. Can you imagine what it would be like to be a customer of such an outsource provider? Working to improve their part of your business to make it more efficient and effective whilst reducing your bill year-on-year – rather than the account manager just turning up once a month to make sure you pay the bill and renew the contract! If suppliers did this they would probably have continuous rights to the business and be invulnerable to critique and outsourcing would look something more like a real partnership based on performance rather than just a mechanism gaining access to the market without much risk.


see more of my posts on the Bizface Forum

People in an Outsource will respect a manager who is fair and honest

Can people in an outsourcing respect their manager for saying how it is but hate the organisation who are letting them go

I was thinking about outsourcing change management and the observation that those being outsourced often speak with respect about the boss delivering the message whilst being very hostile to the organisation actually forcing through the reorganisation. It has often happened to me when talking to people being outsourced that some managers or leaders are able to give bad news when it is necessary whilst still maintaining a good relation with their staff.

From a justice perspective, followers, or in this case the ones on the ‘receiving end’ of the outsourcing change, will judge the leadership exercised as to the degree which it is fair. That is leaders can motivate followers by following ‘fair procedures’ and followers can as a result become more supportive of the direction or goals being proposed and exercise good organisational citizenship – even when the goal being proposed is adversely affecting them.

This can be sharply contrasted if you think of a more distributive type of process where the person affected by the change only sees the instrumental issues – how the change is materially affecting them (loss of income or job for example). What this forces us to consider is how people apply different yardsticks when looking at an organisation’s position and how this can inform us why a person could simultaneously ‘respect’ the person who is communicating the bad news whilst keeping this distinct from poor justice perceived at an organisational level – or from another person or department elsewhere. I.e. is it seen as fair what the company is proposing as articulated by the manager compared to the way it is actually carried out at a company level. For example an outsource in order to gain cost advantages over an incumbent workforce would I suspect be judged adversely in a distributive justice sense, whereas a correct and fair application of the selection of the people affected by the outsource, as done by the manager, could be seen as procedurally fair if done with integrity – you would probably hear things like ‘he’s only doing his job’ or ‘he has no say in the matter’ but never the less ‘he’s a good chap.’

You could also take another view more directly related to identity and leadership: followers internalise the leaders perspective and construct an identity congruence to the leaders (buy in to the vision) and the issues around Identity in terms of the organisation (letting go and the processes involved in breaking the psychological contract) and constructing a new identity with the new organisation in outsourcing or ‘downsizing’. These types of processes also affect those left behind – i.e. be distanced from the organisation as a consequence of a poor outsource process. These sorts of processes could also help us ‘explain’ a differential response to the different players within an organisation (respect the manager but despise the organisation) – this is seen a lot in downsizing or outsourcing organisations people leave and organisation with a bitter taste in the mouth. It should not be forgotten that poorly outsourced people are probably lost as customers for the rest of their lives!

What this means is that the response of workers to an outsource can be greatly affected by the way messages and procedures are actually executed. A fair and equitable approach delivered by a well trained and respected manager can actually help in reducing resistance to change – in effect stopping causes of resistance at source.


Why Outsourcing often does not deliver value

Why are the benefits of outsourcing only rarely achieved

In a recent Dun & Bradstreet report they noted that “25 percent of all outsourcing fails” completely and over 50% of all outsource deals do not deliver any substantive benefit at all. Outsourcing failures are often the result of companies rushing into transactions with unrealistic or unsubstantiated expectations of cost savings and performance improvements that cannot be met because the client does not communicate its requirements in a clear way either internally or to the potential vendors. The outsourcing of many business processes besides IT also has the same less-than-stellar results – call centre problems are almost a
cause célèbre. Some people believe you need hundreds of pages of detailed specifications as complex as War and Peace to make outsourcing work at all tying up the whole thing in a tight contract that covers every possibility – clearly not a practical proposition.

The main causes of failure in an outsource in my view are :

  • The buyer’s unclear expectations up front as to its objectives – poorly defined goals and requirements and a lack of outsourcing contract management capability are two of the top reasons for IT outsourcing failures.
  • The parties’ interests maybe aligned up front but become misaligned as the buyer’s business environment or needs change over time (as they will inevitably)
  • The provider’s poor performance against service level agreements – which in some cases is dramatic.
  • The parties do not consider each other’s interests to ensure their relationship is mutually beneficial – the naturally conflicting objectives and the need for vendors to make money are often not really internalised by clients.
  • Poor governance structure for managing the ongoing relationship – in some cases this is left just to account management.
  • Poor cultural fit compatibility of the parties – asymmetric sizes between client and vendor as well.
  • Poor communication; the parties do not proactively share necessary information with each other – the relationship deteriorates rapidly when information is hidden

In another recent work I have been involved with there have been several instances of buyers and outsourcers in direct conflict and not inclined to acknowledge their own influence on outsourcing failures. The blame game starting early on in the relationship. Hidden costs, high staff turnover and poor cross-cultural communications are also some of the key causes of offshore outsourcing failures. Another big source of outsourcing failures is the way that outsourcing vendors tend to “sell high,” pitching their projects to the CEO rather than to the IT staff and managers who really know how to run the business – this enrolment of ‘C’ level managers is often the source of great difficulty when the real discussions take place. They have bought into a process based on high level aphorism that have little practical value on the street corner.

If you choose to look at global outsourcing as an opportunity, as numerous companies do, you may quickly realize that making it work requires a carefully planned and orchestrated approach. I suggest, though, that the current failure rate of performance improvement in outsourcing is only tolerated because the full extent of failure is disguised; few organizations or individuals are willing to admit the extent of failure on a major outsource contract. Failing at this game can have career damaging consequences.

See more at Bizface in the Outsourcing forum