The global dynamics of business today have spurred great interest in outsourcing work to partners who can complete certain tasks at a lower cost, to a higher level of quality, and with a faster cycle time than a multi-faceted organization can.  Outsourcing non-core functions allows the organization to focus on its core competencies.

Right-sourcing: Making customized decisions for the organization

There are certain cases where it would be to an organization’s disadvantage to outsource work.  This is demonstrated in a recent decision by a global automotive manufacturer’s decision to in-source their IT functions back from a longtime offshore partner.  The company realized that the outsourced processes were actually critical to their competitive advantage and ability to make financial and operational decisions that could help differentiate them.  While the “all or nothing” approach may not make sense in today’s environment, organizations need to be smart about which processes they choose to outsource.  That said, how can an organization decide which processes to outsource?

A key component of the answer to that question lies in the business processes that the organization executes, how mature those processes are from a design, measurement, and control perspective, and whether those processes provide the organization with a significant point of differentiation.

A successful outsourcing strategy is going to be different for each organization.  For example, while Accounts Payable (A/P) management may be a commoditized, back-office function for many companies in a given industry, a single company in the industry might have a proprietary technology that enables them to negotiate special discounts for early payment.  This technology could enable the company to manage payment based on predictive modeling of cash inflows and the trade-off between early payment discount and projected interest rate fluctuations.  The organization may have a differentiator in their mature A/P process and it may not be in their best interests to outsource this financial “trade secret”.

Leveraging the Process Framework to Right-Source

In an effort to determine the future management fate of their business processes, an organization must first understand “what” it does from a business process perspective.  Organizations often have very detailed process models, which detail “how” to do work, but often times do not articulate these models up into the value chain of how the business operates and meets customer demands.  To fill this gap, the organization needs to create a process hierarchy – from value chain, to business function, to the decomposed process model – and assign owners at the business function level (the lowest level where headcount, budget, etc. is assigned).

Next, the organization should assess each business function, and rate it on the basis of process maturity (level of documentation, implementation, success metrics, governance), and process differentiation (importance to adding financial value to the organization), relative to all the other processes in the organization.

Each process should then be ranked, in the appropriate quadrant:

Based on this prioritization and ultimate mapping to the quadrants, organizations can make objective decisions that deliver sustainable results, through the right mix of in-sourced and out-sourced business processes.

Summary

Using an objective framework and categorizing processes based on level of process maturity as well as level of differentiation / competitive advantage provides organizations with a fact-based way to decide which processes to consider for outsourcing, and which to address with other process management strategies.  Rather than falling in the pitfall of losing control over a process that might be a strategic differentiator, organizations can apply the framework to outsource the right processes, and deliver optimal shareholder value.

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