Getting ‘Smart’ About Outsourcing

As the trend toward outsourcing grows, companies are gradually turning to “smartsourcing” to make the practice work for optimum effect.

“When a company is smartsourcing, it is leveraging its strengths and managing its ‘weaknesses’ — so to speak — through strategic partnering,” said Carl Frappaolo, Delphi Group executive vice president. Outsourcing only streamlines costs, while outsourcing with innovation — or “smartsourcing” — streamlines the entire value chain.

Harvard Pilgrim Health Care, a not-for-profit New England health plan with over 800,000 members and 22,000 physicians, took advantage of smartsourcing in processing claims and other IT-related applications so it could turn its attention to what it does best: patient care.

“While traditional outsourcing may emphasize replacing systems and bodies, smartsourcing focuses on the core areas of innovation in which an organization must excel to differentiate itself,” stated Thomas Koulopoulos, co-author of Smartsourcing, a business guide examining the new outsourcing model.

A Rising Tide

Business process outsourcing is a rising tide expected to experience a compound annual growth rate of 10 percent in the next three years, according to the Yankee Group report, “Global Business Process Outsourcing Still Booming.”

While many organizations outsourcing HR activities in the conventional manner have reaped the benefits of cost savings, outside expertise, service quality improvement and increased focus on their core business, those that have made innovation part of the process have seen the greatest rewards.

GE is a prime example. The company’s American offices grew both in size and personnel after moving its non-core processes — approximately 100,000 jobs — overseas, where its outsourcing partner could take those processes and improve upon them. GE, in turn, focused on what it does best — that is, its core processes.

Why More Companies Aren’t Smartsourcing

A common misconception about outsourcing is that it involves little more than a relocation of jobs. More than jobs, however, are affected by a company’s decision to outsource.

“Competencies get outsourced, and competencies are a combination of processes, people and attitudes,” explained James Champy, chairman of consulting at Perot Systems and co-author of Re-engineering the Corporation.

One of the more common pitfalls of outsourcing is the reluctance of the companies involved to open up and share secrets, preventing them from building transparent processes that cross between them. Smartsourcing requires both the company and the outsource partner to share information about costs and operations.

“Work across a value chain must be efficiently integrated, and transparency becomes critical in order to design cross-organizational processes that are in harmony — not in conflict,” Champy told CRM Buyer.

In spite of the obvious benefits, some companies fail to take a hard look at their processes to identify those that are central to their business prior to taking the outsourcing plunge. “But if you can’t answer that question, you can’t ultimately focus on what you do best and shed the rest, which is the essence of smartsourcing,” noted Koulopoulos.

“Innovation suffers at a time when it most needs to shine,” he added.

Striking the Right Balance

The standard outsourcing relationship sacrifices innovation and treats the outsource partner as a separate entity. Companies that smartsource collaborate with their outsourcing partners while stepping up their ability to innovate. There’s more to innovation, however, than simply taking products and services to another level.

“Innovation is more about creating a sustained capacity for myriad improvements in products, services and processes,” Koulopoulos told CRM Buyer.

Moving toward a strategic partnership with outsourced companies is no small feat. As the Delphi Group’s Frappaolo explained, a company must have corporate sponsorship from a leader “who is open to change and is considering the role of outsourcing in that strategy.”

The Yankee Group views “rightshoring” — balancing jobs performed locally and jobs moved overseas for optimum efficiency — as one of the main components of location-based business process outsourcing. “Whether choosing to onshore, nearshore or offshore, it’s important for companies to closely align their choice with their overall business strategy and corporate culture,” wrote Mindy Blodgett, business and IT services analyst.

“Open markets and information technology have made intellectual work movable. Work will naturally go where it can be best done — in quality and price. Trying to prevent this movement will just result in protected and weak economies,” Perot Systems’ Champy said.