Outsourcing and value for money improvement–incompatible?

Why would an outsourcer ever want to offer its clients value-for-money improvement?

Perhaps before we answer that question, we should consider what value-for-money improvement is and what leads to it.

To me, value-for-money improvement means I pay less for the same thing or I pay the same and get more. And most importantly, it is my choice which of those two I choose. For example, in the PC world, that could mean I get that bigger screen and faster CPU today for the same price I would have paid for a "smaller" machine a few months ago, or I could buy that "smaller" machine for less today than it would have cost a few months ago.

If that’s what value-for-money improvement means, then how does it get delivered, in particular in relation to services? Some ways are:

• Automation removes labor and associated costs;

• Process improvements reduce labor effort, and therefore, costs; and

• Wage arbitrage can be used to reduce costs.

The key with all of the above is that at least some of the reduced costs need to be passed on to the buyer. Many believe that all the reduced costs should be passed on, but that leaves no money for the supplier to invest in actually making the improvements to get a return on that investment.

So that’s our first sign for how to set up an outsourcing relationship to achieve value for money improvements. Align savings with whoever made the investment in the improvements. If it was you as a buyer, you should get the savings; if it was your supplier, they should get some, too.

A special challenge with this topic in many situations is that the supplier’s people have bonuses based on the revenue from their client, and how much they increased the revenue by. In such a situation, individuals tend to avoid any activities that reduce revenue because it makes them look bad and potentially lose their bonuses. And if you think this isn’t a real issue, think back a number of years to how slow the US multinational companies were to offer offshore delivery options–they were afraid of the revenue reductions that would follow even if their profit margins went up.

How do we solve that one?

Source: http://www.zdnetasia.com/blogs/sourcinginsight/0,3800011231,63011916,00.htm