Avoiding the 7 Deadly Sins of Outsourcing

Jerome Barthelemy’s 2003 article in Academy of Management identified 7 deadly sins that underlie most failed outsourcing efforts. While all seven are important, and you should carefully plan to have the countermeasures outlined below in place for any strategic sourcing initiative, some of the “sins” are much more impactful than others.

The author surveyed nearly 100 outsourcing efforts in Europe and the United States to identify characteristics of failed outsourcing initiatives vs. successful ones. Reviewing the supporting data, we identified two that clearly drive the majority of success/failure of outsourcing initiatives.

By far the most impactful “sin” was writing poor contracts – a characteristic identified in 69% of failed initiatives. Oftentimes, the contracts are written to provide too much benefit to the supplier, leaving the client with little recourse when costs rise or performance doesn’t meet expectations. But sometimes the contracts give too much power to the client, with the unintended consequence of suppliers reducing service levels and imposing extra fees in an attempt to make the relationship profitable.

Three steps companies can take to avoid writing poor contracts when awarding sourcing to suppliers are:

• Devote the time to draft and refine the contract to ensure expectations are clear (see countermeasures below).
• Ensure you have functional expertise (subject matter experts) for the commodities/categories in question involved in drafting and reviewing the contract. They will bring invaluable information about critical success factors and potential pitfalls of sourcing.
• Do your homework – review contracts and experiences from sourcing similar materials, and talk to client references for the supplier. Tap your network to identify other people within the reference client that the supplier didn’t point you towards to get more unbiased feedback.

Another impactful “sin” is losing control over the outsourced activity. While this was an issue in 37% of failed initiatives, even more importantly, companies maintained control in 94% of successful initiatives. Control is typically lost when the client either doesn’t have the capabilities to manage the supplier, or they simply abdicate managing the supplier.

Three steps companies can take to avoid losing control after awarding sourcing to suppliers are:

• Engage company leadership in the sourcing decision and keep them engaged throughout implementation. Develop goals and Key Performance Indicators whenever awarding sourcing and update leadership on progress at least quarterly.
• Meet routinely with suppliers. Quarterly business reviews are a best practice, where suppliers present their progress and plans to resolve any issues identified.
• Support implementation at the business units. Too often, sourcing is awarded by one part of the organization and implementation is managed by another, leading to a disconnect in supplier management.

Here are the 7 Deadly Sins of Outsourcing identified by Jerome Barthelemy and APD’s recommended countermeasures.

1. Outsourcing activities that should not be outsourced

Don’t outsource core activities that bring competitive advantage.

• Identify non-core activities at the activity level, not the function level, that are suitable for outsourcing

2. Selecting the wrong vendor

Select vendors that are qualified both tangibly and attitudinally (high levels of trust are often associated with outsourcing success).

• Verify hard qualifications (ability to provide low-cost and state of the art solutions)
• Assess soft qualifications (commitment to continuous improvements, flexibility) through first-hand experience (trials) and second-hand experience (interviews with current clients)

3. Writing a poor contract

Ensure contracts establish a balance of power between the client and vendor.

• Precise – establish cost and performance requirements
• Complete – avoid renegotiations
• Incentive-based – encourage the right behavior from the vendor
• Balanced – don’t favor either party to the detriment of the other
• Flexible – able to accommodate environmental changes

4. Overlooking personnel issues

Open communication is key to preventing an exodus of skilled employees with firm-specific knowledge.

• Retain and motivate key employees
• Secure commitment of employees transferred to the vendor

5. Losing control over the outsourced activity

Retain managers to develop strategy that aligns with corporate strategy and actively manage the vendor.

• Managers must negotiate results with vendors while ensuring effective use of the outsourced service by internal users
• Ensure managers have vendor management skills plus technical skills

6. Overlooking the hidden costs of outsourcing

Plan for vendor search, contracting, and vendor management costs.

• Invest in outside experts for vendor search, contract negotiations, and management
• Keep these costs at a decent level

7. Failing to plan an exit strategy

Plan an exit strategy – anticipate the end of the outsourcing contract.

• Include material reversibility and human reversibility clauses in the contract

Managing supplier relations is an ongoing process. Click the button below to watch the recent APD webinar that tackles a particularly sticky issue: Overcoming Objections & Intransigence in Negotiations.