This article examines the challenges that we believe the outsourcing market is currently confronting. In particular, I explore how to get the sourcing model strategy right. We introduce Vested™, which has been described as a “business model, methodology, mindset and movement for creating highly collaborative business relationships that enable true win-win relationships in which both parties are equally committed to each other’s success.”
During the last 10 years, the outsourcing industry has been reinventing itself. It is a market with fierce competition, relatively low supplier margins and huge differences in business maturity – even between neighboring countries. While outsourcing operating models have delivered greatly on the bottom line all over the world, they have been, and to some extent still are, considered a necessary cost and a completely operative task. However, companies at the forefront are now expecting their sourcing strategy to deliver on their strategic objectives, promoting the outsourcing operating model to an area for the CXO team to own. In a volatile global marketplace, it is important that service delivery is flexible and can contribute with real value by adapting to the ever-changing needs of the business, i.e., scaling up and down, as well as closing and opening new sites effectively and efficiently.
In order to support transformation and to be at the forefront of outsourcing of services, a focus on innovation is crucial. A mechanism must, therefore, be in place to support and incentivize innovation which needs to be a joint priority for the supplier and the buyer. Currently, there I see a movement away from traditional transactional contracts that are based around each party trying to maximize their advantage over the other. In contrast, contracts are being founded on more partnership oriented models based on trust and win-win ideology that aims for strategic value for both parties. Moreover, the focus is shifting toward more strategic and company-wide benefits such as proactivity, savings, innovation and contribution to corporate transformation.
However, I have discovered that the outsourcing market is confronting some very obvious challenges:
- Suppliers are not the proactive and innovative integrators that many wish for.
- Many outsourcing deals suffer from unfit sourcing business models.
- Both parties experience opportunistic behavior in their relations.
- Deals do not drive strategic business transformation.
Many outsourcing deals and relationships in the current market neither satisfy the buyers nor the suppliers. At the negotiation table, it is very clear that the fight is about “what’s in it for me,” and the least scrupulous individual “win” the deals and the respect. In order to build long-lasting partnerships, buyers, suppliers and procurement will gradually have to revolutionize the way in which they organize the outsourced function with the company. In order to respond to these new requirements, companies and suppliers must rethink how they create value.
What is the future of outsourcing?
We know that fundamental change is required to be successful in the market, overcome the challenges, be proactive and innovative, and enable constant transformation. Proactivity, flexibility and innovation are values that the marketplace requires from outsourcing operating models. If you transactionally buy services, you will get just that. However, if a company desires strategic value, the company needs to buy just that. Strategic value beyond savings can not be generated transactionally. The more strategic and complex the deals that need to be designed, the more relational the contracts must be. Only relational contracts can enable the collaboration needed to achieve mutual strategic outcomes. Simply put, to prepare for business, one must understand which sourcing business model to use.
Getting the sourcing model strategy right In our view, both transactional, output-based and outcome-based business models will continue to be used in future. However, we predict that a growing number of deals will be strategic outcome-based relational partnerships by nature.