Global enterprises have spent decades buying, selling and managing contracted services, from isolated commodities to sophisticated IT operations. As the number and complexity of such sourcing relationships continues to grow every year, multinational corporations are tasked with effectively managing the performance of these contracts — if they are to achieve lasting business success.

Yet, the outcome of most sourcing arrangements remains mediocre. Cost savings — a primary driver for outsourcing — has proven elusive to 65% of the companies surveyed in Forrester Research’s 2004 report titled Offshore Outsourcing: Internal Preparation, Not Labor Rate, is Key to Savings and Success.

The average Fortune 1000 company spends an estimated 30% of its budget on external services, according to Deloitte Consulting. The challenge lies in realizing a return on those outsourcing dollars. IT sourcing is especially difficult to manage — in part, because of the complex nature of such business operations. Gartner estimates that by 2007 almost all the Fortune 1000 companies will have outsourced some portion of their IT functions. However, anticipated benefits of that outsourcing often fail to materialize according to Deloitte, and a majority of companies will end up bringing some of those services back in-house.

Prescription for Failure

The reasons for disappointing sourcing results are myriad: Employees, including executives, often fail to think through the implications of an outside services contract on their operations; departments fail to change internal procedures to accommodate work that is now done outside the organization; requirements are not clearly defined, and internal communications are not adjusted to facilitate the new arrangement.

Inadequate contract management at the start of an external service agreement, in addition to unclear written contracts and poor documentation of technical requirements, also leads to confusion and inefficiency throughout the life of the contract.

As the scope and complexity of contracts increase, it becomes more important for companies to design, implement and administer effective control structures to manage the sourcing relationship. With increased complexity in the sourcing venture, organizations require more oversight and across-the-board knowledge. For measurable success in Business-process Outsourcing (BPO), the amount of integrated knowledge is immense.

Cross-functional Sourcing Solutions

Executives and sourcing-team members should be aligned at all levels of the organization. This implies that they must develop expertise in multiple organizational disciplines and demonstrate cooperation across the board. This cross-functionality is a necessary prerequisite for long-term success.

Too often, a single executive within an organization suggests an outsourcing project to save money for his division. Such decisions, when made in a vacuum without inputs from other executives, often overlook the impact a sourcing contract will have on all levels of the organization. To avoid this common pitfall and successfully manage all aspects of the sourcing lifecycle, organizations must develop individuals with skills that are applicable across a variety of operating units, ensuring that all perspectives are considered throughout the sourcing process.

Many of the problems encountered by organizations acquiring goods and services, whether locally or offshore, are rooted in the poor definition of roles and responsibilities of those involved — business analysts, contract managers and project managers. For a sourcing venture to be successful, cross-functional knowledge in each of these disciplines is critical.

Integrated project teams made up of representatives of the key organizational components that have a stake in the outcome of a project are valuable tools for any sourcing venture. Specialists trained and experienced in procurement, project management and business analysis must collaborate and share ideas and insights at all stages of the sourcing process, from developing contract requirements to transitioning the work to a supplier, monitoring the work and closing out the relationship.

The key is having a clearly delineated procurement or sourcing lifecycle, and defining specific tasks associated with each phase of that lifecycle. Organizations must identify the types of skills that might be required, and then establish a training program to cultivate those skills across three disciplines in the following manner: