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The Three Types of Outsourcing Relationships

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This article represents an insightful perspective from Dan Berthiaume of Nearshore Blog, originally posted by Dan April 15, 2013 at 1:21 PM

The Three Types of Outsourcing Relationships

While no two outsourcing relationships are alike, some broad generalities can be drawn about different types of common relationships. For example, HfS Research identifies three main types of outsourcing relationships in its recent white paper, “The Great Talent Paradox in Outsourcing.”

As the type of outsourcing relationship you have plays a crucial role in determining how much (or little) value it will deliver, it is worth reviewing these three categories. Which one best describes your own outsourcing relationship, and are you satisfied with the result?

‘Lights On’ Outsourcing
As defined by HfS Research, a “lights on” outsourcing relationship is marked by a buyer seeking to simply drive out cost without incurring any “disasters.” As the buyer sees little to no strategic value in outsourcing, they see no need to pay for high-level talent or expertise. The “lights on” buyer is satisfied with basic execution of outsourced processes at a cheaper cost and governance typically consists of enforcing SLAs and otherwise meeting essential goals.

‘Efficient’ Outsourcing
The “efficient” outsourcing relationship includes a buyer that recognizes developing a management plan to facilitate continuous improvement and efficiency gains can deliver more strategic value. However, the buyer does not see the potential for true competitive differentiation that higher-level outsourcing can provide.

Thus these buyers may be willing to invest in specialized talent to execute efficiency programs such as Six Sigma, but are not willing to invest in widespread talent upgrades. HfS Research estimates that some “efficient” outsourcing buyers will take an immediate 20% savings gain from an outsourcing initiative and reinvest 10% to ensure future efficiency improvements.

‘Strategic’ Outsourcing
Usually more experience outsourcing buyers will enter a “strategic” outsourcing relationship. This relationship category is characterized by a recognition on the part of the buyer that simply offshoring work to reduce upfront costs is a short-term measure that will not produce longterm savings without onshore-to-offshore staff exchanges and process improvement investments.

In addition, strategic outsourcing buyers make decisions on what work to outsource based on internal needs and goals (rather than simply offshoring whatever they can to produce upfront savings), collaborate with provider staff to define and improve business outcomes, and take a flexible approach to setting goals, milestones, SLAs, etc. These buyers see provider talent as an important resource that needs to be developed and evaluated according to a set of jointly developed metrics that change as the scope and goals of the project change.

So which of these three categories best describes your outsourcing relationship? Ultimately you should be aiming for a strategic relationship, but they take time and practice to develop, and almost everyone starts out trying to keep the lights on. Just remember where you start is a lot less important that where you finish!