When is Outsourcing Bestsourcing?

November 5, 2006

Outsourcing has bubbled under for some time as the management strategy that barely dare speak its name. With the announcement by Clifford Chance[1] of their aim to save £10 million by outsourcing finance and IT to Delhi, it has burst into the legal headlines.


Clifford Chance certainly aren’t alone: one estimate claims $17 billion dollars of IT services will go offshore by 2008.[2]


It is a buyers’ market: the number of outsourcing deals is on the rise, so price and duration of contracts are down because of increased competition.[3]


Like all great management concepts, this area has its own undergrowth of jargon (‘rightsourcing’ being preferable, presumably, to ‘wrongsourcing’?) but it is, in a nutshell, ‘The transfer or delegation to an external service provider of the operation and day-to-day management of a business process or function’.


That definition is from The Black Book of Outsourcing by Douglas Brown and Scott Wilson,[4] a work of more practical bent than Thomas Friedman’s groundbreaking The World is Flat, which posits ‘the death of distance’ through the modern technology that facilitates outsourcing of intellectual capital.


Somewhat counter-intuitively, the selling point of outsourcing is that it can actually give you more control, at less cost, than when a given function was in-house. This is because a formal service level agreement, setting out the expectations of the relationship, should ensure monthly progress reports, with sanctions if performance targets are not met.


I have a stern warning for any firm considering this path: most organisations, say the authors, experience a 20% decline in productivity in the first year because of the time spent in transferring knowledge to the vendor. This may be why Clifford Chance’s global director of business services was quoted as saying ‘Very few firms have the size to do this and to improve the quality of service’.


The cost savings are real – but they need to be carefully offset against the cost of managing the contract. The authors of The Black Book suggest (without attribution) that between 5% and 12% of the total contract value is typically spent by outsourcing buyers just on managing the contract.


So, what do you need to succeed? Good preparation, and the right partner. A key part of the preparation is developing a watertight cost-benefit analysis document, and a tightly drawn matrix of roles and responsibilities on both sides. Remember: if it’s not in the contract, it’s not in the deal.


One of the more inspirational suggestions in The Black Book is the notion of setting fewer service level measures with higher stakes. An example given is counting orders completed per hour rather than counting the hours taken to complete a project. On a similar practical level, when considering partners, investigate where they are investing resources. Ask about the turnover rate of key personnel – outsourcing has created a dynamic labour market with turnover commonly running at between 15% and 20%.[5] Take references from the existing customer base. Most important, ask yourself if your respective corporate cultures will fit.


Apart from suggestions like checking the office look and feel of your prospective partner, the authors of The Black Book recommend seeking out corporate cultures where employees feel valued and where innovators are rewarded.


Which brings us neatly to the greatest risk of this sort of strategic move: undermining staff morale. Even the suggestion of outsourcing can undermine morale and cause your staff to jump ship in anticipation of a purge. The second part of The Black Book offers some toe-curling career advice of the ‘Be flexible and open to change’ variety: ‘Think of outsourcing as the beginning of a new career path, not the end of the road’. Perfectly fine, but cold comfort if you are one of the 700 business support staff downsized from Clifford Chance in the last three years.


For a war story direct from someone who manages an offshore team, may I recommend the Project Management Podcast[6] interview with Eric Smith. In his firm, a clear distinction was made between staff replacement – which is the understandable fear of existing employees whenever outsourcing is mentioned – contrasted with staff augmentation to use overseas talent to bolster the on-shore team. This last can work if the intent is clearly and regularly communicated to the existing workforce. Communication is the absolute key to any successful outsourcing initiative, whether it is with your own staff or your new partner.


Communication issues are highlighted in this interview as the downside of having teams working 24 hours a day to leverage the time difference with India: it makes holding conference calls a real challenge. Video-conferencing, Smith says, is vastly more effective because at least you can pick up non-verbal clues, but cultural differences can impact badly on effective business communication – never underestimate the value of repeating back what you believe was said by colleagues on the other side of the world, to make sure that both parties are actually on the same page.


Network security – specifically, not exposing your own network to attack by your outsourcing partner’s staff should the deal go sour, yet allowing a walled garden for collaboration on documents, is another practical issue to resolve. Clifford Chance are reported to have thumbprint access and bag searches in place at their outsourced data centres to protect confidentiality.


Intriguingly, a week after the Clifford Chance announcement, Dick Tyler, Managing Partner of CMS Cameron McKenna, was interviewed[7] and spoke of his ambition to keep trainees with the firm for the whole of their career. Quoted on talent retention he saw the battleground for future law firm success not as India or China: “It’s talent … Five years hence the firms at the top of the tree will be the ones that crack this”.


Whilst The Black Book cannot be recommended as great literature, the challenges and opportunities of managing outsourcing can no longer be ignored by senior management. In a field not currently well served with inspirational texts, I commend it to you as essential reading.


Author Note

Paul Heritage-Redpath is a solicitor, project manager and Lexcel consultant. He sat on the founding committee of the Law Society’s Law Management Section and the PISCES HIPs workgroup. He is employed as a Project Manager for CS Group.

Any views expressed are those of the author and not his employer.

[1] The Lawyer, 9 October 2006

[2] IDC Inc. News Release 25/10/2004

[3] www.theregister.co.uk/2006/10/12/outsourcing_surveys/

[4] Wiley 0 471 71889 0

[5] META Group IT Staffing and Compensation Guide 2004

[6] www.thepmpodcast.com/index.php?option=com_content&task=view&id=96&Itemid=9

[7] The Lawyer, 16 October 2006