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Stay Hungry. Stay Foolish.

A blog by Leon Oudejans

Outsourcing and Shared Services Centers

I am not an advocate of internal outsourcing (shared services centers) or external outsourcing. In fact I am against it. I wonder who really drives such decisions. I suppose it must be a CEO (BU / division / country / group) as the fall-out of such decisions usually is for others to clean up. As a CFO I have never really seen the benefits of SSC’s or outsourcing. Only the mounting irritation and frustration.

Let’s start with internal outsourcing or Shared Services Centers (SSC’s). While the SSC staff member used to be part of a team in a business unit, (s)he is now no longer privy of daily operations. Information does no longer come naturally but needs to be requested. This works both ways. Ad hoc meetings, reports or questions become cumbersome as it may well conflict with the SSC manager’s priorities. A SSC manager is always under attack as gains are claimed by others and pains are blamed on the SSC. Escalation processes are however internally and solutions may arise on a timely basis although grudges may be building and lingering.

Economies of scale tend to be absorbed by appointing supervisors and the well-paid SSC manager. The Business Unit (BU) loses flexibility and starts blaming the SSC, rightly or wrongly. The increasing control at the SSC is eroded by the decreasing communication with and information from the BU. SSC recharges to BU’s suddenly become a management board issue even if the cost level is equal or less. The motto usually tends to be “if you cannot beat them, confuse them”.

Outsourcing however is far worse than a SSC. Staff that used to be under your control is no longer able to answer questions, attend meetings, or solve emergencies. Everything needs to be formally requested and responses are based upon a Service Level Agreement (SLA). The SLA is the heart of the problem. With the knowledge of hindsight it never covered all the issues that would be arising.

The biggest frustration of outsourcing is the lack of control in the new situation. The biggest deception of outsourcing are the savings. In case the outsourcing partner is smaller than its client then cost control may still be feasible. Once the outsourcing partner is much bigger than its client then cost control becomes an illusion. Finding a workable exit (clause) in an outsourcing agreement may prove difficult. Continued renewal of the contract may be the only option left.

SSC’s, outsourcing contracts, and group recharges are usually an obstacle for selling – or purchasing – any business. Fully independent businesses are much more transparent and easier to value.

Outsourcing vital knowledge to countries that are well-known for hacking and stealing sensitive company data, violating patents, and then taking legal action after finding cheap copycats is even beyond my comprehension. How stupid can one be?

The worst possible situation arises when management wants to outsource its internal problems. Outsourcing a problem is sheer impossible. In fact the former problem will come back and turn into a (financial) nightmare. You must clean up your house before you even consider outsourcing.

I wonder why outsourcing and SSC’s are still popular themes. Perhaps no one is willing to talk about the failures or exploding cost. Perhaps the outsourcing partner was a related party and the deal not at arm’s length. I have even witnessed an – early – extension of a long-term outsourcing agreement only to mask the exploding cost as the attempt to turn fixed cost into variable cost had failed miserably.

If you want to lose your flexibility, communication, cost control, or – worse – your company’s sensitive data then please consider SSC’s or – worse – outsourcing.

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