Outsourcing Mistakes -3

Don’t provide incentives to promote outsourcing, unless you also provide adequate training and oversight

I was talking to a consultant at one of the largest consulting firms in the world and he mentioned several incentives his organization has set up to maximize the amount of work sent to their captive BPO center in India. These incentives range from letters of appreciation from senior leadership, to small gifts of appreciation, to short all-expense-paid expatriate gigs in India.

My first reaction was that this is a great idea. I am a firm believer that every task should be carried out by the person best able to deliver the highest overall value regardless of his / her geographical location. Given the number of outstanding finance gurus, economists, and statisticians in India, this incentive scheme seemed to make perfect sense. [Quick aside: I especially liked the idea of the expatriate gigs. If you can get a short to medium term expatriate gig in India or China, grab it with both hands. In the next decade, lack of international experience is likely to become a major Achilles’ heel for anyone hoping to become a senior executive. I believe Infosys even has a significant internship program targeted at US students. I am sure other major firms have similar programs.]

However, this consultant was not properly trained in outsourcing management and as such ended up having a bad experience with the India center. He felt that while the Indian team charged a low hourly rate, they ended up taking way too much time to get the task done, so that net net they ended up being more expensive. The Indian team also wasted significant time trying to do one part of the task in a very complicated and ultimately incorrect way instead of asking the US team for the best practice way to do the task. While some of the problems were due to errors on the Indian team’s part, I believe the larger problem was my friend’s lack of training in outsourcing management. Most of the problems he faced could have been avoided with proper training, or even oversight / mentorship from an outsourcing expert.

To Avoid This Outsourcing Mistake:

Before outsourcing a task, ask the project owner to estimate the following costs:

• Task documentation costs: If you are going to send a task to a team across the world, you first have to document the task as specifically as possible. Even if the outsourcing partner has carried out similar tasks previously, unless the actual individuals working on your task have recently performed a substantially similar task, you will save yourself significant grief by documenting the task as unambiguously as possible.
• Training costs: Managers inexperienced in outsourcing invariably underestimate the amount of time they need to spend on training. This problem is actually worse for short-term projects where managers often wrongly assume that because it is just a short project, they can do the training on the fly.
• Total outsourcing costs including quality control costs: It is imperative that you consider the number of hours it would take to carry out a project, not just the hourly rate. Also, most outsourcers carry out significant quality control and some include this cost in the hourly rate, while others do not. If they did not include the QC cost in the hourly rate, you have to explicitly add the hours spent on quality control.
  
  This focus on the number of hours as well as the hourly rate seems obvious, but I invariably hear complaints about how an outsourcing vendor turned out to be much more expensive than estimated, because they charged for 2 to 3 times the number of hours the customer originally expected. Personally, whenever possible, I negotiate a set price for the delivery of a specific quanta of work conforming to specific quality criteria and refuse to sign “time and material pricing” contracts.

If you sum up the above three costs, you will have a better sense of the overall cost of an outsourcing project. The sponsor of each proposed outsourcing project should be required to estimate the total cost using the above formula and then be evaluated according to the actual total cost upon the completion of the project. In the absence of such basic checks and balances, and in the presence of strong incentives to promote outsourcing, your employees are likely to over-consume outsourcing and your firm is likely to lose money due to outsourcing. As one anonymous visitor to this blog commented, “Trusting an outside supplier to perform your company's business processes must not be an impulse purchase.”