The Evolving Nature of Outsourcing
Outsourcing has been trending in the business world for the last 20 years. It started with IT and then expanded to other areas such a payroll, finance, and real estate. Each of these areas is considered non-core for the business and, therefore, can be given to a third party to manage.
Investors, shareholders, and CEOs consider outsourcing as a means for cost reduction. However, outsourcing has not delivered cost reduction. Many assumptions made to justify outsourcing were wrong. The larger scale of outsourcing providers did not lead to lower costs, bundling more and more areas did not decrease cost, and processes that worked for one company did not work for another.
Our team recently interviewed 40 large corporations across different industries that had outsourced real estate and facilities management. They found that 80 percent of the firms continue to emphasize the need for cost reduction while many claimed to have achieved cost savings as written in the contract. How is that possible? Well, many functional leaders focused on a few areas while writing contracts with outsourcing providers. They declared success when those projects got delivered, even though the total cost increased because of increases in areas that were not covered in the contract.
Some of the newer contracts were limiting outsource providers to a fixed cost and asking them to pay for any increases beyond the set limit. Though the contracts were addressing an incentive problem, they were, however, short-sighted as outsource providers did not have the financial capability to take the risk. To manage to budget, outsource providers started cutting services, delaying routine maintenance, and postponing capital investment, to the overall detriment.
A better approach will be for companies to focus on the main cost areas and find ways to reduce them. Company’s in-house resources and outsource provider resources contribute to a small portion of the overall cost. The majority of the cost is with third party providers or suppliers who provide services such as janitorial, catering, security, construction, and others. Most suppliers for real estate and facilities are local service providers. Standard competitive sourcing techniques, used for buying widgets, will not optimize services costs. A maintenance person will not work 16 hours just because an outsource provider got another client. You have to find a way to reduce wasted time, travel, and wait time for the person to be more productive. This is not easy as it requires visibility to supplier operations and also optimization in each of the local markets.
My book, “Smart Outsourcing: Strategies for Effective Facilities Outsourcing,” shares outsourcing trends, approaches to reduce service provider costs, and how new technology can make the work simpler. The book provides information about the evolving nature of the facilities outsourcing industry and how companies can make smart choices. Though the book focuses on real estate and facilities, the concerns and concepts are equally valid for other functional areas such as IT, HR, finance, and others.
Suman Sarkar is a partner with Three S Consulting, a management consulting firm that drives excellence in supply chain and sourcing. Find more information in a short video (1 minute, 12 seconds): Video Link. Sarkar’s mission is to free supply chain management and sourcing from the “box” of traditional thinking, thereby helping companies achieve a competitive edge in the marketplace. Sarkar understands the power of creativity that will be unleashed if businesses can harness the talent they already have in-house. With more than 20 years of international consulting experience, Sarkar has a proven track record for bringing an innovative and strategic approach to supply chains and sourcing that delivers outstanding results. He has worked with leading companies across multiple industries, including financial services, wireless, pharmaceutical, technology, consumer goods, retail, and government agencies.