Executive Summary
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Start outsourcing by constructing the exit clause; this will tell you and your outsource partner what you are focused on and will save you time and expense if things go wrong.
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Focus on the downsides first and understand the management changes required, the communication strategy, the training needs, and your regular engagement with the outsourcer.
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Outsourcing is a process, not an event. What and how you outsource will change over time.
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Outsource chore and focus on core. Keep value creation for your clients in-house.
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In general, outsource a process as is. Let your outsource partner reengineer processes.
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Do not manage your outsource partner; rather, monitor, review, and reassess.
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Choose a partner, not a supplier—one that you can work with through good and difficult times.
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The lowest-priced outsourcer will usually be the most expensive in the long term.
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Outsourcing can not only save money and increase efficiency, but can also reju-venate your business by refocusing your attention on what makes you great.
Introduction
As a tool for the CFO, outsourcing has an important role to play in reducing costs and improving efficiency. It is important, however, to bear in mind that in addition to the direct and indirect benefits of outsourcing, there are also direct and indirect disadvantages. Outsourcing isn’t the answer on its own, and it has to be part of a holistic analysis to be successful.
Start with the Exit Clause
Without putting a damper on the idea, whenever you contemplate outsourcing always consider how you will exit. This may seem curious, but over the years I have found it to be absolutely essential. If outsourcing does not deliver what you expected, if your strategy changes, if the outsource partner decides on a different business model, or if the whole market turns in a different direction—all of which can happen—you need to be able to regain control of what is often a vital, if not mission-critical, process. In such circumstances, you will need to be able to take it back yourself or pass it to another outsourcing company.
Think carefully about this because what you take back won’t be what you outsourced. There may well be new IT systems being used, and certainly the processes won’t be as you left them. If you haven’t an exit agreement, working out who owns the intellectual property underlying the new processes is very difficult and is just one example of the problems that can occur.
The moment to decide how you want to be able to exit is before it becomes a necessity and, preferably, when you are negotiating the contract. If this sounds obvious, many companies fail to do so and suffer as a result.
Understanding your exit strategy will also tell you a great deal about what you want from the outsourcing process. You may be rightly seduced by the idea of not having to spend management time on human resource back-office processing, or by the advantages of not having to worry about expense account processing. If at this same moment you think rationally about what would prompt you to exit from the contract, you will understand most clearly what your business drivers for outsourcing are. If, for example, you put in the exit clause that you have the power to terminate if the proposed savings are not realized, you know what your real objective is. It may be that you insist on a range of triggers and if, for example, you focus on service levels and your end clients’ satisfaction with your overall service, you have the same knowledge about your objectives and, more importantly, so does the outsource provider.
In short, brainstorm why you might want to get out of the contract—preferably together with the company that you intend to outsource to—and you will find that not only do you have the comfort of being able to get out of the contract effectively, but that you are also much less likely to have to do so. You will have a much better sense of the advantages and disadvantages of working with your outsourcing partner—and that company will better understand you.
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