It’s not hard to understand why outsourcing has become so popular in recent years. In theory, it should help companies become more efficient by farming out work and freeing up scarce resources for more important initiatives. But there’s a simpler explanation for outsourcing’s increasing appeal: It saves money. Deloitte surveyed 300 companies in the United States, Canada and Europe about their experiences with outsourcing projects. More than 80 percent said that outsourcing vendors had met their financial expectations, and the average return on investment was 25 percent.1 Those are numbers that ought to make any chief financial officer (CFO) happy. But dig beneath the surface, and the story is a bit more complicated. While companies were happy with the outsourcing experience overall, half reported they had experienced problems with staffing, quality or support. And these weren’t just minor misunderstandings. Seventy percent of respondents had to escalate these issues to senior management in the first year of the contract. Nearly half had to escalate issues on as many as five occasions. Perhaps the most telling statistic: 39 percent of respondents were forced to terminate or replace an outsourcing vendor at some point during their career.  Which is it?
How to account for this apparent contradiction – the fact that 80 percent of companies say vendors met their expectations, but half or more also experienced major problems with their outsourcing relationships?
Part of the answer lies in how buyers prepared for the deal. When service providers were asked about this problem, they reported that buyers hadn’t always done their homework before exploring outsourcing options. This may have created pricing or operational expectations that could not be fulfilled. For example, when it came to measuring vendor performance, some buyers had no formal benchmarks for internal services and therefore could not provide any to outsourcers. Without a tangible way to measure progress, it’s easy for misunderstandings to arise. Meanwhile, buyers reported that many vendors promised during the sales cycle to provide continuous performance improvement efforts as part of their overall services. Often, outsourcers did not follow through once the contracts began. The outsourcers did, for the most part, deliver the services that they had signed up for at the prices that they had agreed to. They simply did not put in the extra effort and creativity that they had talked about in their initial presentations. Get specific
It all starts at the negotiating table. Companies and outsourcing vendors often argue for weeks about pricing, termination clauses and other terms. But, they typically spend little time defining the service levels in service level agreements (SLAs). To avoid misunderstandings, it’s important to get specific: - If improving reliability or service quality is an outsourcing objective, then the contract needs to incorporate specific performance metrics to assess whether the service provider is meeting these goals. The expectations for improved service then need to be captured in SLAs that are realistic, feasible and measurable.
- Come to the negotiating table with baseline data and desired improvements already in hand. The fact that some executives – two-thirds, according the survey – develop their SLAs in collaboration with service providers is worrisome, as it raises the possibility that the SLAs may be set below what could reasonably be achieved.
- SLAs have traditionally tended to focus on cost-related metrics, such as cost per transaction. If costs are all you care about, that’s fine. But if you care about more strategic objectives such as responsiveness, customer satisfaction, reductions in defects or errors, or the time needed to implement a new process, make sure they are included in the terms of the contract. The key is to operationalize the concept of improvement. Don’t just focus on the rate card. Insist that value-added results be measured as well.
In short, make your improvement requirements as clear as possible. Put your vendor on notice. Make sure their expectations match yours. Otherwise you’re likely to be disappointed. The role of finance
The CFO should play a key role in this as well. Finance monitors the cost savings generated by outsourcing, of course. But Finance also needs to focus on the potential for operational improvements, and how these improvements can be mapped to financial benefits. Think about a call center. One way to reduce costs is to redesign the Interactive Voice Response (IVR) unit that initially answers calls so that it satisfies more callers without having to transfer them to the call center itself. Since IVR-served calls cost only a few pennies each and most agent-handled calls cost several dollars each, the savings from improving IVR performance can be significant. In fact, if the agent-handled calls are expensive enough, outsourcers who can find ways to eliminate them might save you more money than those who agree to a lower rate card for the calls. CFOs usually look for hard financial benefits first. That’s their job, and data from the vendor’s rate card is easy to plug into a spreadsheet. But an outsourcer’s improvement suggestions could actually create more value over the length of the agreement. The impacts of these suggestions can be harder to measure, but they are not impossible. Get this part of the equation right, and you’ll be much happier with your outsourcing experience. 1 “Why Settle For Less? Deloitte Consulting LLP 2008 Outsourcing Report,” Deloitte Development LLC, 2007. As used in this document, “Deloitte” means Deloitte Consulting LLP, a subsidiary of Deloitte LLP. Please see www.deloitte.com/about for a detailed description of the legal structure of Deloitte LLP and its subsidiaries. This publication contains general information only and is based on the experiences and research of Deloitte practitioners. Deloitte is not, by means of this publication, rendering business, financial, investment, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte, its affiliates, and related entities shall not be responsible for any loss sustained by any person who relies on this publication. | 
