Outsourcing Failures and Their Causes
Making global outsourcing work requires a carefully
planned and orchestrated approach. Quite a few firms had to find that poorly-managed efforts to leverage
outsourcing as a cost-saving opportunity led to quite the contrary: communication didn’t work well, expectations
were not met, work quality was substandard, and the need for frequent rework wiped out any cost advantages.
While others report good results and high satisfaction, it pays to look at why outsourcing fails and what can
be learned from that.
A recent study by the
Outsourcing Center was based on a survey of more than 300 buyers and providers of outsourcing services. The
most frequent causes of outsourcing failure were identified as
#1 Buyer’s unclear expectations up front (23% of resp.)
#2 Poor communication or poor cultural fit (16%)
#3 Interests became misaligned over time (15%)
The report observes that “the dominant theme recurrent
in the tips provided, whether from buyers or providers, is that those who spend more time and effort up front ensure
predictable results and less chance of failure in their outsourcing initiatives.” Defining and setting clear
expectations, targets, and deliverables at the beginning of an outsourcing engagement and following up diligently are
factors critical to its success.
Communication and cultural fit, the other identified
primary causes of outsourcing failures, are often paid little attention in the early stages of an outsourcing
engagement. That can be a costly mistake, since especially relationship aspects can hugely impact all stages of a
foreign business engagement. Making the communication work, building mutual trust, and ultimately establishing a
win-win relationship requires considerably more effort in global outsourcing than it does within the framework of a
domestic business engagement.
Lately, the global competitiveness of Mexico in manufacturing seems to have declined some as other destinations combine
improved workforce skills with significantly lower cost. However, it continues to be attractive to the U.S. as an
outsourcing destination, especially in light of its NAFTA status. In Latin America, Brazil is the current
manufacturing heavyweight, combining skilled workforce with a decent infrastructure, albeit in a still-shaky political
and economic environment. The country is also an up-and-comer in the IT industry. Cross-cultural aspects
need to be carefully managed in all of these countries.
Former East bloc countries like Hungary, Czech Republic, and Poland have become attractive manufacturing destinations,
combining good infrastructure, skilled workforce, and stable political and economic environment through their integration
into the EU. Current wage and salary levels still give them a strong cost advantage. In software and other
high-tech areas, Ireland maintains a favorable position owing to its young and well-educated workforce, but its cost of
labor now exceeds the EU average. Here, Hungary, Czech Republic and Poland are again strong competitors, each of
them with an effective public education system. Cross-cultural aspects deserve attention but don't present huge
hurdles, while language barriers can be difficult to overcome.
A fiercely competitive field with many low-wage countries like China, Malaysia, Indonesia, Thailand, and the
Philippines. Worker efficiency and quality of work can be spotty, so it pays to select carefully and to
establish effective control systems. In technology and services, India has become the 800-pound gorilla.
Since the country’s most highly qualified resources are concentrated in a few centers such as Bangalore, and
since there is much competition between local and foreign employers to hire the best of them, salaries, while still
low to U.S. standards, have gone up quite a bit. India’s overall infrastructure and political stability
are still gating factors. In all of Asia, cultural differences present additional challenges, requiring
preparation and constant guidance.