"There are three reasons that larger companies consider outsourcing and offshoring," says Peter Allen, partner and managing director of market development at consulting firm TPI, in Houston, Texas. "The first is cost, but it's more than just the cost of an hour of labor. It's transforming what is otherwise a fixed cost into a variable one that is more productive." In addition, Allen says, "There's a whole category of reasons around capability enhancement," especially in terms of helping companies get IT and transactional business processing support with the skills that are needed to do the work more productively.
The third reason? Market endeavors—which, Allen says, include "strategies to be acquisitive or pursue divestitures, or even penetrate emerging markets." Outsourcing makes it easier to handle corporate changes because back-office IT and support functions can be separated from core operations. Newly acquired divisions or new branch offices can come online, with full support, with little pain to the organization's infrastructure.
For many companies, Allen says, outsourcing is a way to bring major change to an organization. "This is largely a political decision within many companies, a decision about introducing change when other avenues for change have been exhausted," he says. "It sends the message that we need to do something fundamentally different—to break the status quo regarding the organizational and operational direction of the enterprise." When a company has a problem getting people to follow standard processes or conform to corporate policies, which can affect management's ability to make decisions or deploy resources into new markets, the solution may be outsourcing the back-office services so that the front office can do the work of the business.
Outsourcing also changes how C-level executives do their jobs. The job has "gone from being purely technology oriented or process oriented to having to really be conversant on the latest in technology features and functionality to a period in which functional executives in IT, finance, or HR have to be much more business aligned," Allen says. "I think we're on the third era. Executives responsible for corporate functions need to be much more sourcing proficient and need to understand that they're, in essence, an integrator of various internal and external delivery organizations. It requires a whole new skill set of performance management, financial management, contractual management, and socializing roles and responsibilities, and doing it in a fashion that insulates all of that integration from the business consumer of the services."
One part of the executive's job will not change: the accountability for the functionality of the services lifecycle. "Accountability never gets outsourced," Allen says. "Sometimes companies think they're doing that contractually, but this is competency that needs to be retained within the company."
Ann C. Logue is based in Chicago and has written for Barron's, the New York Times, and Compliance Week, among other publications.