In brief
- Outsourcing is a proven solution for beating talent shortages, transforming business processes, and focusing on core competencies — when it’s executed properly.
- About a quarter of outsourcing relationships fail within two years, according to Dun & Bradstreet research, while others don’t completely meet expectations.
- Avoiding 7 common mistakes – and following these strategies for how to overcome outsourcing problems – can ensure your company achieves expected benefits.
The demand for outsourced solutions is surging amid labor shortages, greater comfort with remote work models, and the need to ensure consistent productivity. However, outsourcing is a major transformation initiative — and critical outsourcing mistakes can prevent companies from capturing the value they expect.
Half of company executives surveyed in the most recent “Deloitte Global Outsourcing Survey” cite talent acquisition as a top internal challenge, while 52% outsource business functions and 76% outsource IT functions. Using external resources is undoubtedly here to stay, as the practice has become integral to business stability and growth.
But not every outsourcing strategy is created equal — and one estimate by Dun & Bradstreet reports that 20-25% of all outsourcing relationships fail within two years. In other cases, an outsourcing arrangement fulfills its essential function but not its full promise, with clients receiving an “okay” solution that doesn’t entirely meet efficiency, productivity, skills-enhancement, or cost-lowering goals.
So, why do some companies achieve excellent results while others don’t? Here are the top outsourcing problems and solutions – detailing the most common outsourcing mistakes that impair these relationships, along with the best ways to avoid them.
1. Prioritizing cost to the exclusion of quality
A high-level shift is happening in outsourcing.
Fifty-five percent of outsourcing projects still center on traditional roles, including staff augmentation and managed services, according to KPMG’s “The Future of Outsourcing” report. Many of these tasks are driven by clients seeking cheaper labor and economies of scale.
However, a growing 25% of the market now involves outsourcing providers that serve as strategic suppliers, and 20% are full partners driving comprehensive organizational transformations.
More and more companies need value beyond leveraging labor arbitrage; they seek strategic business processing outsourcing (BPO) partnerships focused on innovation, better customer experiences, and improved business outcomes. Further, many outsourcing clients have realized—often through experience—that lowering expenses isn’t their primary objective.
Factors that deliver better service, including an outsourcing partner’s technological resources, proximity, communication skills, and the ability to handle more complex, core business functions are higher priorities.
Thus, the “best” outsourcing solution no longer boils down to the cheapest labor cost. Vendors often bid lowly to potential clients who engage in the relationship without fully understanding what they’re receiving. Only after the project commences and after significant time and expense does the client realize their external partner doesn’t have the task maturity, technology, language capabilities, or skills needed.
For example, some large outsourcing companies, including those focused on labor arbitrage in Asia, struggle to provide quality services and best practices at bottom-of-the-barrel prices. Deloitte recently reported a quality decline in India, for instance, with nearly 60% of workers earning only an “average” rating.
INSEAD’s 2023 Global Talent Competitiveness Index also demonstrates a widening talent gap between Asia and Latin America – with the top nearshore markets outperforming Asia’s most popular destinations. India’s talent competitiveness has decreased every year since 2020 on the report as its saturated job markets create an increased skills mismatch for employers, the report states.
Businesses seeking external relationships must closely vet potential outsourcing partners—a process that starts with a fundamental question: “What are we actually getting for the cost?”
To avoid such risks of outsourcing, companies should scrutinize a potential provider’s resources and experience to ensure they can deliver what needs to be accomplished. Preemptively asking about their specific processes and how they approach the additional outsourcing mistakes covered below can provide invaluable insights.
2. Minimizing the migration, documentation, and training processes
Too many outsourcing companies—and some of their clients—gloss over processes crucial to ensuring a successful transition and avoiding costly mistakes.
Quality outsourcing partners have a thorough methodology for assessing your processes in their current state, determining their upstream and downstream impacts, documenting steps with business subject matter experts (SMEs), and defining standardized future-state workflows. Further, they ensure the people who will execute non-automated tasks will be well-trained and understand how to deliver services that meet objectives.
A successful project starts with a dedicated, well-designed transition document. A provider takes stock of tasks to be outsourced, validates the client’s processes, documents them, and thoroughly trains personnel with the client’s support.
If an outsourcing company fails to complete these steps, or a client mistakenly insists they’re unnecessary, the odds of failure increase significantly.
Challenges of outsourcing compound when a client’s organization and function involve numerous tasks and multiple units – and/or variations in rules, processes and systems across these units – and the transition documentation fails to capture all of them. Another difficulty arises when the individuals attempting to explain critical tasks aren’t particularly good at teaching others how to do them. These issues can result in inconsistent training and unstable execution.
Regardless of the outsourced function and organization, creating a transition template that methodically standardizes training and implementation is a must. This investment avoids backtracking and iterating forward to do what could have been done in the first place—everything begins with the migration and documentation roadmap.
Nearshore vs. Offshore: Navigating the Hidden Hassles of Outsourcing to Asia
3. Overlooking the nuances and complexities of roles being transitioned
Another common failure stemming from a poor roadmap arises after implementation, when external staff hit roadblocks while executing their tasks.
Some clients and outsourcing providers underappreciate the complexities of business operations, failing to consider exceptions and resolutions, for example. Many tasks don’t follow a straight path and have exceptions and variations within them. Capturing the nuances of a process, where the road “forks” and how to correctly navigate it, is another critical element in successfully transitioning a process.
In many cases, processes are also people-dependent, relying on the knowledge of specific staff members instead of repeatable steps that appropriately trained individuals can perform.
For a simple example, consider outsourcing accounts receivable (AR). Let’s say that a company bills a customer for a good or service, but the customer pays less than what’s on the invoice. Further, the customer responds to an inquiry about the variance by claiming a salesperson quoted a lower number or the order arrived damaged, incomplete, or has some other problem. Regardless of the scenario, the outsourced team needs to know how to handle it. Crucially, the remedy must be repeatable and widely understood for outsourced tasks to scale effectively.
IT help desk services provide another all-too-familiar example. If someone calls in and says their password to a key system doesn’t work, help desk staff always have repeatable processes outlining how to address the problem. However, users occasionally have system- or situation-specific challenges, and this template doesn’t work—so what’s the resolution plan? Outsourced help desks must anticipate these issues and have processes to provide higher levels of customized support.
Complicating matters is that many companies possess “tribal” knowledge: information that employees know but haven’t written down or widely shared. The organization has relied on people to do their jobs based on this understanding without any documentation.
This situation doesn’t work well to scale, especially when employees leave or processes change. And it certainly doesn’t work when an external partner attempts to execute tasks without this crucial knowledge.
These issues must be identified and accounted for when outsourcing; only proactive and detailed planning can mitigate or prevent them. Exceptional outsourcing providers are business experts with a deep understanding of your core functions and industry. They also know how to ask the right questions to fully capture process steps, exceptions, and the nuances of people-centric tasks that enable standardized workflows.
4. Failing to define the scope and scale needed to be effective
Many assume outsourcing is always a modular, “plug-and-play” solution, where an external partner entirely handles a discrete task or department while siloed off from the rest of the organization.
However, there is always some complexity that requires accurately assessing the true scope and scale of the outsourcing project. Labor shortages have also increasingly created situations where outsourcers are hired to extend internal teams – necessitating seamless integration.
A comprehensive outsourcing roadmap must account for the full range of processes, systems, and people necessary to create a smooth relationship.
For example, consider another outsourced AR scenario where something goes wrong with a customer invoice. On the surface, this situation involves an individual function: billing.
However, say that an invoice is sent with the wrong address, name, or other information. This error stems from a customer master data issue—an area that may or may not be within the scope of the outsourcing partnership. If the external provider doesn’t have direct responsibility for validating customer data or another means to do it, they have no way to remedy the issue quickly.
Roadblocks that cause delays ensue – and the company’s internal team winds up spending too much managing the outsourcer’s process exceptions.
Thus, accurately scoping the entire accounts receivable task to be outsourced includes assessing and assigning clear responsibilities for billing, customer master data, collections, cash applications, resolving billing disputes, and more. Operational “hand-offs” need to be clearly defined, with the people responsible for picking up an activity within the flow of a process aware and accountable of the resolution needed – regardless of where that person sits or which organization he or she belongs to.
Service levels should also effectively reflect all sides of the process. “Two-way” service levels, measuring the responsiveness and accuracy of all parties within the process, should be part of the metrics reviewed regularly.
Regardless of the outsourced function, proactively assessing the full scope required to run tasks smoothly is essential. And only a detailed roadmap created by an outsourcing partner asking the right questions will achieve this goal.
5. Expecting better outsourcing results without alignment and process optimization
Shifting a process to an external resource without fixing its underlying flaws only replicates the issues a company already faced. Quality outsourcing companies are business transformation experts—coming to the table with the tools, knowledge, and experience to optimize processes. Some solutions may involve automation, while others are merely best practices that increase efficiency and productivity.
To understand where things can go wrong, and clients end up disappointed, it’s instructive to look at how to do an implementation right:
- The effort starts with defining the internal processes as they are, including how they are currently completed and what they achieve.
- From there, an outsourcing provider looks for ways to optimize processes, examining what they can do differently to make things run more efficiently and effectively.
- An external provider then clearly defines service levels—setting realistic performance expectations and defining how the provider will achieve them.
- These objectives may be activity-based, such as the number of invoices processed; time-based, like average time to resolution for IT issues; or accuracy-based—often, it’s a mix of metrics. Well-defined service levels stem from evaluating current performance, conducting process optimization, and defining both current and target metrics.
Setting these expectations lays the groundwork for implementation, and the client and provider must be aligned on achievable objectives. A disconnect after failing to complete the above steps is one of the biggest reasons companies become disappointed with outsourcing.
In particular, process optimization has immense potential to achieve target metrics, and outsourcing companies with significant experience in a task and industry are excellent at identifying opportunities. Some new solutions may be simple yet effective, such as standardizing invoice templates in AR functions or digitizing documents. Others are more complex or involve advanced technology, such as automating manual tasks with robotic process automation (RPA) and artificial intelligence (AI).
Regardless, clients and providers must align on the current functions, target objectives, and optimization needed to achieve desired results.
6. Lacking executive sponsorship and employee buy-in
Outsourcing relationships are a two-way street, and clients play a pivotal role in successful partnerships. Executive sponsorship of the program is crucial.
A new external provider means some new ways of doing things. And unless company leaders set an example for their organization, some individuals may resist change or fail to see its utility.
Many issues can be avoided when key executives get behind the initiative and say, “I want this to work, and we should do everything possible to make it work.” Leaders can also achieve greater buy-in by explaining what the outsourcing relationship can achieve—in terms of organizational objectives and making employees’ jobs easier.
Sometimes, companies can lose organizational buy-in when companies or business units merge, and the new entity doesn’t immediately see or understand the value of an external relationship. In other cases, departments may create friction when they’re siloed off from an outsourcing function but really need to integrate with it, or leaders have failed to communicate enough support for the initiative.
In all cases, outsourcing still relies on relationships, and leaders play a pivotal role in defining good ones. Executives who support an outsourcing initiative enable others to embrace the transitions, implementations, and process optimizations that achieve exceptional results.
7. Choosing the wrong outsourcing provider
While clients help make outsourcing successful, most of the mistakes above can be avoided with a quality provider. This external partner will have significant and specific experience with the outsourcing function and do the work to create a roadmap that sets the relationship up for success. They will invest in migration and documentation steps, accurately define the necessary scope and scale, and understand the nuances of a role while optimizing tasks.
In many cases, problems of outsourcing tie back to clients seeking the lowest-cost option without vetting a provider’s resources, experience, and ability to achieve goals. For example, some companies fail to understand the difference between offshore and nearshore locations and how they align with their services.
Outsourcing to top Asian markets like India and the Philippines can work when your priority is to save costs on highly transactional work. However, as many Auxis clients have realized, nearshore markets offer better solutions when a business needs proximity and more collaboration, judgment, and flexibility.
By reducing operational challenges, physical proximity has become the #1 factor for choosing an outsourcing provider, according to the 2023 IT Outsourcing Statistics report by Computer Economics.
While Asia offers the lowest cost, many executives are rethinking the challenges of outsourcing processes to the other end of the world while aiming to achieve the best performance. Time zone, language and cultural differences combine with lesser infrastructure to impact service quality in these relationships.
Asian models driven by labor arbitrage also tend to rigidly adhere to contractual agreements based on cookie-cutter approaches, leaving little room for customization.
In contrast, nearshore models offer a better balance between cost savings and performance. Latin America’s closer location and similar business culture are more conducive to judgment-intensive processes, real-time collaboration, decision-making at every level, and flexible services that allow outsourcers to integrate seamlessly into your organization and reduce reliance on internal teams.
Deep pools of highly educated resources in top nearshore markets also offer the critical-thinking skills, certifications, and strong English proficiency to deliver advanced tiers of business and IT work while matching U.S. business hours.
To learn more about the challenges and opportunities of nearshore vs. offshore outsourcing, read our latest report: “Nearshore vs. Offshore: Navigating the Hidden Hassles of Outsourcing to Asia.”
Why Auxis: A partner who knows how to avoid common outsourcing mistakes
At the end of the day, if clients and providers don’t fully grasp the work, have the right expectations, and possess a good plan to get the project on track, outsourcing will fail. Auxis knows what’s needed to make these relationships successful, and we do what it takes to meet and exceed expectations.
We offer a range of customized solutions designed to meet the unique needs of your business and industry. Auxis defines clear service-level agreements (SLA) based on achievable goals and honors the spirit, rather than just the letter, of our contracts—adapting to optimize processes and achieve objectives above and beyond your current performance.
Learn more about our business process optimization services and nearshoring from Latin America, and check out this case study showing how we helped a client make significant process improvements. You can also schedule a consultation to discuss your outsourcing needs.
