Over the last decade, a number of leading firms have attempted to take outsourcing and offshoring to a higher performance level. To this end, they have experimented in a number of areas including upgrading relationships with vendors, new service models, and different ways to structure O&O deals. I have often wondered how these programs have fared especially as the economic landscape has shifted in recent years. To get a better handle on this,  I queried a number of colleagues whose expertise covers a broad range of offshoring and outsourcing topics. While by no means a scientific survey, I think the information gathered is both interesting and useful.    

Some firms, it seems, have put such experiments on the back burner to deal with more immediate problems resulting from the crisis including liquidity problems, a general slowdown in business, and in some cases legal and reputational issues.  Even so, many others continue to innovate, not only to help navigate in the downturn, but also, more broadly,  to improve performance and scope of their  O&O programs. I think some of these innovations will help position them better in the post-crisis “new normal”.  

The innovations we have observed broadly encompass two themes. In the first, O&O is used to spearhead business transformation. They include:

 --O&O-led operational transformations – these involve either expanding a relationship with  an outsourcing partner to help spearhead operational transformation, or running an in-house transformation program that will enable incremental outsourcing or offshoring

--Integrated shared services outsourcing – this combines back-office operations into a single organizational unit, often  referred to as “global business services” or “GBS”. A portion of the GBS can then be outsourced or offshored

--New global footprints  -- some enterprises are exploring new geographies for O&O, including rural areas  of  developed countries such as the US-- with a view to harnessing a larger talent pool and addressing risks associated with geographic concentration  

 -- Alternate ownership models – one example would be divesting onshore or offshore centers to a vendor and leasing back the services to free up capital, to shift to a variable cost base, or free up management time to focus on core activities

    The above, of course,  will take time to pay off. In some cases they may demand significant improvement in current vendor capabilities to achieve the higher benefits.

The second theme centers on increasing the value of current O&O relationships, by radically improving how clients work with vendors.  A few areas of innovative practice we have observed include:

--Aligning vendor incentives with a company’s long-term goals—Using new metrics such as  balanced score cards can encourage convergence of culture and values.

--Introducing designed competition between vendors – this innovation involves structuring contracts in a way that forces vendors to “earn back” a portion of their business each year though high performance--or lose it to competitors

--Better engagement and pricing models – including managed services and outcome based pricing

--Turbo-charging the vendor management function – this requires  raising skill levels in vendor management groups to help create more value in the  relationship. One example:  working with vendors to optimize resources on the account

While some innovations in  this second group  may fall short of  transformational, they nonetheless can  add significant value to an existing or new relationship.

A final point. We have also observed that most firms are  moving to better manage O&O risks that arise in three key areas:  data and communications,  geographic concentration, and the financial and long-term viability of outsourcing partners.