A stalled outsourcing decision

Pragmatic criteria and techniques businesses can use to reduce the risk of a bad decision.

Dear Bob -

Our company is in the process of deciding if we will outsource a core part of our business. The stakes are high in this decision because of the potential financial impact of a wrong decision and the potential impact of a degradation of service.

What makes this decision difficult are the unknowns. While we can check references and even define service terms in a contract, we cannot be sure that we will get the same level of service that we are used to. From a financial aspect, there are many different measurements that we can define historically from our data, but we cannot get a solid feel for with the vendors we are talking to. This is due to the nature of the business and the confidentiality of the vendors business processes/methods.

The final struggle are the obvious complications of outsourcing and integration of systems. Not only are the processes involved, but there are several options to the final implementation and an ala carte menu of options to outsource.

We have some internal leaders who believe there are savings to be had by outsourcing, yet we cannot develop the proper evidence to make a sound decision.

Do you have any ideas on how to better approach this decision?

- Dazed and Confused

Dear D and C ...

I think we need to approach this from three directions to get to a satisfactory resolution. The angles that occur to me are the nature of evidence, risk management, and alignment of purpose.

Evidence first: You've gathered what evidence there is, and enough uncertainty remains that this isn't a sure thing.

Depending on the nature of the business process you're thinking of outsourcing, you might be able to gather better evidence. Many of the outsourceable business processes are transaction based or case based. If that's true here, pay the outsourcer to process a few months worth of transactions or cases, just as if they were real, and provide you with the results for analysis.

A comparison between their processing and your own would, I imagine, reduce the decision-makers' uncertainty to levels low enough to support a decision.

I'd expect the outsourcer would be willing to charge a discounted rate for this service, accounting for the balance as cost of sales.

Risk management: As a side-note, different types of company are better at this than others, and it works the opposite of how you'd expect it to work.

Insurance companies are worse at this than, for example, entrepreneurships. I think it's because insurance companies operate in statistical universes that more or less eliminate risk: If you know the odds for any individual policy you can calculate the rates you have to charge to cover the expected number and size of claims. That's what actuaries do.