While the general population is agonizing over whether to get that new gym membership or whether 2012 is the year they're really going to become more organized, business leaders will continue to be challenged to find ways to optimize their functions. Many executives facing challenges such as cost reduction, enhanced focus on core competencies and improved service quality have considered IT or business process outsourcing as a path to optimization. While outsourcing has proven itself as a business strategy that can help address many organizational challenges, it is not a panacea, and when not executed responsibly, it can actually make matters worse.

Organizations that are contemplating outsourcing in 2012, whether expanding an existing outsourcing relationship or creating a new one, should consider these 10 practical insights when assessing the opportunity to outsource, selecting a provider and transitioning the delivery of services.

1. Decide on "black box" vs. "white box" outsourcing. Black box outsourcing focuses on achieving certain outcomes (results oriented), while white box outsourcing is specific about how the provider should provide the services (process oriented). The direction selected will have a significant impact on the outsourcing approach, such as SLAs, service provisioning and governance structures.

2. Determine the evaluation approach upfront. Establishing the evaluation criteria and scoring methodology before proposals are received helps to preserve objectivity, identify any gaps in stakeholder alignment, and define the balance between cost and quality considerations without bias. The evaluation approach and prioritized criteria should reflect the overall objectives of the initiative, as well as any nuances that are specific to the buyer's unique business environment.

3. Control the agenda. By communicating clear, comprehensive and precise business and technical requirements to providers, as opposed to asking them to provide general explanations of their capabilities, buyers can validate that the provider can meet their specific needs. By controlling the agenda, buyers can negotiate from a strong position, as they have completely and unambiguously defined what is required for the provider to be successful.

4. Get the provider "A" team. Outsourcing success is very dependent on the quality of the resources performing the outsourced services. Personnel variability in provider organizations can be dramatic and capabilities of individual resources can be inconsistent, even in tier 1 organizations with sterling references and reputations. It is essential to not only select a provider based on the capabilities of the organization, but also on the quality of the key delivery resources.

5. Model real-world transition costs. It is common for outsourcing business cases to underestimate the costs associated with the transition to an outsourced solution. The resulting budget overruns often trigger a mandate to forgo necessary activities in an effort to become budget neutral, which jeopardizes stabilization efforts. Transition costs should be conservative, including incremental internal labor, equipment and services costs, as well as "soft" costs such as change management implications and productivity loss.

6. Encourage innovation that benefits the buyer. While it is true that providers are constantly identifying ways to become more efficient, they are not necessarily passing the benefits along to their clients, but may be improving their own margins. By creating the right contract structure and related incentives, such as productivity commitments hard-coded into the contract as automatic cost reductions, buyers can ensure that they realize the benefits of provider innovation.

7. Plan for a challenging transition. The coordination of countless interdependent integration activities requires precise choreography from resources that likely have not been through such a complex implementation. Dedicating a transition team to the task, engaging experienced transition management resources, and establishing unambiguous transition milestones and metrics will help to ensure a more smooth transition.

8. Develop meaningful SLAs. Service level agreements (SLAs) should provide for a comprehensive measurement of provider performance that aligns with business objectives and required results, but with as few financially impacting metrics as possible. By maintaining fewer metrics, providers can focus efforts on achieving the most meaningful performance targets, and buyers can apply greater amounts at risk for non-performance without experiencing an unmanageable SLA administrative burden.

9. Prepare for negotiations. Only enter into negotiations after having reached consensus on critical deal points. Determine overall approach, deal breakers, least acceptable alternatives and trade options. Establish specific roles and responsibilities, and proactively try to establish the provider's likely perspective.

10. Remember that the right answer might be to not outsource. Organizations contemplating outsourcing also have an option to optimize on their own, or not to change anything at all. Prospective buyers retain the ultimate leverage, as an outsourcer is not only competing against other providers, it is also competing against both the status quo and an optimized, in-house solution.

Outsourcing is a key piece in the global business services strategy of many leading companies, and the benefits of properly conceived and managed outsourcing relationships have been well documented, as have the pitfalls of failed ones. While these best practice insights are just the tip of the iceberg, they will help frame the approach and intensity that a successful engagement requires as organizations evaluate their outsourcing potential in 2012.

Source: Business Finance