Once upon a time outsourcing seemed so simple. Send part of your operations to someone else, then sit back and enjoy your new, streamlined, ever-more-profitable organization. But companies that have taken the outsourcing plunge have found that reality is more complicated than theory. A lot more complicated. If you're one of them, take comfort in knowing you aren't alone. And if you're considering joining them, take a look at some of the challenges and difficulties of global outsourcing.

If it looks too good to be true, it probably is

At least 50% of outsourcing deals don't return the results promised to customers and 80% don't generate any savings at all, according to analysts at the Gartner Group. The key reason? Lack of contract flexibility and a one-size-fits-all approach. Outsourcers understandably try to lock customers into long-term deals with contract terms and pricing that will be out of date six months after the contract is signed. The result? Frustration, irritation, and a lack of understanding into why sales promises aren't meeting delivery realities.

Death by change order

Outsourcing firms don't always understand their clients' processes. Thus they underestimate the amount of work it will take to meet their promises. Often this is an honest mistake, but other times outsourcers underquote to get the business. Then, when they get further into the contract, they say: “Circumstances have changed and we're going to need more money.” Naturally, customers aren't happy, but because they have so much invested in the outsourcer, they have little choice but to pony up. When there are several change orders over the course of the relationship, it causes irreparable damage.

The core vs. context approach is becoming outdated

Some say companies should focus on their core competencies — things that directly impact shareholder value or that customers care about — and outsource everything else, for example context activities. Core activities may include R&D and context can include customer service, accounts payable, or accounts receivable. This distinction may have worked in the past, but not today. For example, Procter & Gamble outsources one of its core competencies — product innovation. The company created an innovation model with product designers around the world, harnessing the brainpower of people well outside its walls.

Contractual crunch and win-lose contracts have unintended consequences

When outsourcing first became popular, there were dramatic savings because it was easy to remove costs from redundant processes and bloated technology areas. But lately it has become harder to deliver savings for a few reasons. First, most industries have already cut the fat over the last five years because of global competition. Next, customers learned what to do and how to do it before they handed over processes to outsourcers. And third, customers have learned about service level agreements (SLAs) and change orders that ask for more money to compensate for poorly-planned bids. As a result, outsourcing is more difficult to support because processes are leaner. This leads to more contentious contract negotiation and a focus on tight SLAs. So an “I've-gotta-win-and-you've-gotta-lose” attitude often dominates contract negotiation. But in the long term, everybody loses. The animosity, frustration, and badmouthing are incompatible with what was supposed to be a mutually beneficial partnership.

What you don't know will bite you

There are many invisible factors and activities outsourcers don't know about when they're taking over your processes. An example is exceptions that have to be handled by staff because the computer application can't understand them. A signature is illegible, or the oil heating cost doesn't match what the invoice said it should, so it has to be reconciled for customers that staff has dealt with before. Another example is the “we've-always-done-it-this-way-because-it-works-better” activities that only staff know about because they've been here for 20 years. It's these invisible issues that keep processes running. And being invisible, the workarounds — both manual and automated — are hard to identify when outsourcing firms start doing them. Companies discover these unseen factors after it's too late, after customers complain and after frustration has exploded on both sides.

Outsourcing providers do not build in transparency

Understandably, outsourcers are worried about becoming a commodity. So they provide a vast range of consulting services all grounded by a host of change orders in complex contracts. Different services have different costs and margins. So outsourcers can claim to have used the ones that benefit him the most. After all, how do you know what a provider is doing and how much it charges?

It's easy to underestimate the Bull's Eye Effect

Lots of stuff has to get done to outsource a process. It can range from moving equipment to consolidating computer applications to moving and retraining people. As Trevor Davis, the chief implementation officer of one of the world's largest business processing utilities, puts it, “It's like hitting the bull's eye with darts thrown with both hands.” And if that's not enough, if one thing goes wrong, it has a cascading effect. If you don't get people trained, then customer service calls don't get made. If the calls don't get made service goes down. And if the service goes down, customers defect.

Companies are starting to reject long-term contracts

Long-term contracts once made sense. After all, it takes a long time to get a company up to speed and operating efficiently. But customers are wising up. They realize that being locked into a five-year contract may not be the wisest course. According to TPI, an industry analyst, 38% of the money earned by outsourcers in 2005 came from restructuring existing contracts. Only 62% came from new contracts. In other words, customers were so unhappy with their contracts they went through the cost, time, and disruption to change their deals, often going with shorter timelines. Unfortunately, smaller, shorter-term contracts come with their own problems.

Myopic outsourcing firms

Around year three to five of a contract, outsourcers are supposed to have taken out the easy process-based costs and added in simple automation. But along the way, they discover lots of issues they didn't know about back when the contract was signed. Turns out, they oversold. The new technology refresh is more expensive than they thought and they have too many operational challenges and cost pressures to afford the promised investments. They've become inflexible. They push out the timeline for new technology.

Customers want a flexible, innovative partner, but they usually get the opposite

Customers want an outsourcing partner who will introduce innovation into their process, help manage costs and service, and use relevant and emerging technology. They also want someone who will understand their specific requirements and business. Unfortunately outsourcers tend to offer standard technology and processes to everyone, including those who want to use outsourcing creatively, the early adopters and fast-moving companies.

Ralph Welborn and Vince Kasten have nearly 40 years of combined experience focused on business transformation, performance analysis, collaborative strategies, business and IT partnership, systems integration and management, and solution deployment. Welborn and Kasten also co-authored The Jericho Principle: How Companies Use Strategic Collaboration to Find New Sources of Value (Wiley, 2003) as well as a number of articles on different business and technology topics.