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Vested outsourcing - How outsourcing is meant to be

The concept of outsourcing emerged from business academia in the early 1980s and gradually gained adherents.  Today it’s simply part of normal business practice.

Friday, February 9th 2018, 9:57AM

by Scott Alman

In fact, the underlying idea of outsourcing has been a long time coming. It originates from the economic principle of comparative advantage identified by David Ricardo in 1817.

Just ponder on that. For more than 150 years, organisations have housed under their roofs all sorts of functions irrespective of their level of competence.

Peter Drucker, one of the giants of management consulting and education, succinctly made the case for outsourcing saying: “Do what you do best and outsource the rest!”

However, rather than properly implementing Drucker’s ideas, many seized on outsourcing as a way of cost-cutting, causing Drucker to describe the outsourcing equals cost-cutting crowd as “delusional.”

In Drucker’s view, outsourcing should be about creating eco-systems in which best-of-breed organisations cooperate to deliver value.  He noted that outsourcing “…may actually increase costs, but you also get better effectiveness.”

You have to wonder how many managers and business leaders understand outsourcing in this way.

The Drucker version of outsourcing is inspiring with profound implications for professional services, in particular.

There is no shortage of data showing that white-collar work, professional work, remains “grotesquely unproductive” recalling another Drucker rhetorical firebomb.

“Vested outsourcing” is a way of tackling lacklustre professional services productivity. This creative approach is named this way because the company that is outsourcing and the service provider are vested in each other’s success.

Each party brings its core competencies to achieve something neither company could achieve on its own. Under arrangements like this both the company outsourcing and the service provider cooperate for tangible benefits, either through tangible or intangible incentives. In other words, they work together to identify and bring about improvements in their relationship.

Here’s how it works: The outsource provider looks at how it can best apply processes, technologies and capabilities that will drive value to the company that is outsourcing. This commitment to deliver results for that company – such as a drive to improve quality, lift brand impact on identified market segments or increase market share – shifts risk to the outsource provider.

In exchange, the company outsourcing commits to allow the outsource provider to earn additional profit – above and beyond industry average profits for their service area – for achieving this lift in value. Finally, the company that is outsourcing commits to providing a certain level of business for the outsource provider.

The globalisation and digitisation trends disrupting so many industries are now lapping at the shores of professional services. White-collar industries might recoil at comparisons with production line approaches that are upturning so many business models, but the essence of professional work is not so different.

The forces that have disaggregated and dispersed manufacturing will eventually hit professional services too. Far-sighted professional services participants should now be forensically examining all components of their value chains and bringing the best together to deliver the highest possible value for customers at each point.

Consilium, a specialist provider to the financial services industry in New Zealand, has been implementing and refining this approach for some time and now see exponential growth among the financial advisory firms with whom they collaborate. 

1. Vested outsourcing is a concept and methodology based on award-winning research conducted by the University of Tennessee College of Business Administration

Read the article on our website

Read the published article on NZBusiness.co.nz

Scott is the managing director of Consillium

Tags: Consilium

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