Is Conventional Outsourcing Effective?

A whole series of research studies on this question adds up to a single unqualified answer: perhaps. The Center for Naval Analyses did one of the only existing rigorous reviews anywhere that looked at the actual financial benefits achieved in 16 military outsourcing competitions accounting for $100 million in precompetition operating costs and more than 2,800 military and civilian positions between 1988 and 1996. It concluded that outsourcing improved costs by 24 percent on a simple before- and-after basis. If researchers also gave outsourcing providers credit for the fact that services had actually expanded, costs improved by 34 percent over what it would have cost the military to perform those functions by itself.^[4]

Studies of private-sector outsourcing conclude that executives fully achieve their objectives at best about half the time. One study, for example, found that three-quarters of managers in companies surveyed believe that outsourcing outcomes have fallen short of expectations.^[5] Another study found that 20 to 25 percent of all outsourcing relationships fail within two years and that 50 percent fail within five.^[6] A 2003 Accenture survey of 325 U.S. executives found that only about 10 percent were completely satisfied with their outsourcing initiatives, although mean satisfaction for the respondents was above average—3.45 on a scale of1 to 5.

Executives clearly want more benefit from their outsourcing initiatives than they are currently achieving. But without hard facts about what they set out to achieve, what they actually did achieve, and what changed along the way, it is virtually impossible to tell where the performance gap comes from. Do expectations run ahead of what is even possible to attain? Do they advance—despite accomplishments—like that juicy carrot that hangs just out of the cartoon rabbit’s reach? All we know for sure is that executives want more out of outsourcing and that, as they become more experienced with the tool, they apply it to successively more sophisticated and complex opportunities in this quest. While transformational outsourcing still represents an extremely small fraction of the outsourcing population, executives are moving in that direction.

Transformational outsourcing holds a very different set of precepts from conventional outsourcing. It’s entirely appropriate for any activity that is critical to performance or growth. Whether these are core or not is a separate question. Cost is and should always be a factor that managers consider in any initiative, but transformational outsourcing targets a broader value equation. Finally, transformational outsourcing starts and stays on the CEO’s agenda because it is the tool he or she is using to achieve the company’s strategic aspirations. What could be more important?

^[4]Frances Clark et al., ‘‘Long-Run Costs and Performance Effects of Competitive Sourcing,’’ Center for Naval Analyses, 4825 Mark Center Drive, Alexandria, VA 22311–1850, CRM D0002765.A2, February 2001, pp. 2–6.

^[5]E. R. Greenberg and C. Canzoneri, Outsourcing: the AMA Survey (New York: American Management Association, 1997), p. 4.

^[6]Marq R. Ozanne, D&B Barometer of Global Outsourcing, 2000, www.dnbcollections.com/Library/kbarom.htm.