Beware of outsourcing myths, warns survey

By Emilie Reymond

- Last updated on GMT

Related tags: Outsourcing

A number of outsourcing misconceptions are luring companies
into viewing offshoring as an easy process, new research reveals.

The outsourcing market is booming and more and more companies are relying on external firms to save on costs and improve efficiency. Indeed, outsourced pharmaceutical R&D spending is set to increase at twice the expected rate of general R&D expenditure for the next five years, according to recent data, and in particular outsourcing clinical trials is seen by many pharma companies as a means to make the process cheaper, quicker and more efficient. However, companies that think transferring an operation to an overseas provider is a trouble-free, straightforward task can get a rude awakening, warns new research published in the Wall Street Journal (WSJ), and companies often find that their high hopes about cost savings and greater efficiency don't pan out. The study based on an industry survey found seven common myths that outsourcing vendors and clients cling to about offshore outsourcing - false assumptions about how the process should work - and gave some advice on how to overcome them. The first common myth is the idea that the three main objectives of outsourcing a development stage - cost reductions, improvement in service, and flexibility - can be achieved at the same time. "In general, it is not possible to achieve all three in the same project,"​ Phanish Puranam, one of the researchers, told the WSJ. "The kind of skills you need to achieve cost reductions, production flexibility or enhancement, are usually different. Even when you offshore, where in principle you can get low cost and quality, it is better to begin with just one objective." ​ He added that his advice for companies was to emphasise on just one criterion, pick a priority on one of the three objectives and make sure people in both organisations know it. Puranam and Kannan Srikanth, both from the London Business School and authors of the WSJ study, conducted a survey of senior executives at 62 of 100 largest financial-services firms in the US and Europe. They also conducted around 100 interviews with outsourcing clients and vendors from financial services as well as other sectors such as pharmaceuticals. They found that the second most common myth was to see outsourcing services as simple as buying commodities, such as stationery. "Many companies think outsourcing is a frictionless market, with no transaction costs or other restraints,"​ said the researchers. In reality, the process does involve significant transaction costs, starting with finding a vendor and negotiating a contract, and followed by the costs of moving operations from one location to another while maintaining the connection with the rest of the company. A third false assumption, according to the survey, was relating to negotiation of the contract. The outsourcing process should not be seen as a one-off deal, but instead as a relationship that keeps evolving and needs constant updating. The researchers found that writing a highly complex contract, trying to include clauses covering all possible situations, usually proves to be a waste of time. "It is impossible to take all contingencies into account. Instead, companies should see the contract as blueprint to guide the exchange, and ensure that all parties understand their roles and responsibilities,"​ explained Puranam. On the other hand, there is another mistaken belief that a company does not need a contract because the deal with the vendor is seen as a partnership rather than a simple procurement relationship. Furthermore, the number five on the list of common misconceptions that clients and services providers accept as true is to view the vendor as an insurance company who should bear greater liability in case of problem. "The sharing of risk between client and vendor is one of the most contentious issues in outsourcing, leading to acrimonious negotiations and poor relationships,"​ said the research. "The client can specify standards that the vendor must meet and penalties for falling short. However, it is unrealistic for the client to ask the vendor to take on unlimited liabilities for failure."​ The study gave the example of pharmaceutical companies who outsource clinical research, explaining that in this case the responsibility for the integrity of the research still rests with the pharmaceutical companies. Moreover, the survey found that sometimes companies think once they have outsourced an operation, they can just forget about it and rely completely on the service provider. The researchers explained that it was crucial for the client firm to retain the knowledge of the process outsourced to avoid difficulties down the road. "If the client simply abandons the process to the vendor, it can compromise its ability to produce future innovations,"​ found the researchers. "It also puts the client in a difficult position if it wants to end the relationship. The client may no longer have the competence to evaluate other vendors, negotiate suitable contracts or even lay out how the job should be done." ​ Finally, the seventh most common myth in outsourcing is to think that the first attempt will automatically be a success and relinquish at the first failure. "Very few companies report great success with their very first outsourcing project but that doesn't mean they should give up,"​ the researchers said. "Our survey indicates that companies with greater experience have greater success implementing more complicated models and face fewer problems in their outsourced and offshored activities." ​ The research called "Seven myths about outsourcing" was published in the WSJ' business insight section on 16 June.

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