Transformational Outsourcing

Outsourcing isn’t what it used to be. When executives began outsourcing substantial portions of their operations more than a decade ago, they did it to offload activities they declared to be noncore in order to cut costs and improve strategic focus. Today, however, companies are looking outside for help for more fundamental reasons — to facilitate rapid organizational change, to launch new strategies and to reshape company boundaries. In doing so, they are engaging in transformational outsourcing: partnering with another company to achieve a rapid, substantial and sustainable improvement in enterprise-level performance.

This concept has gained some currency recently in the technology press.1 The media have reported, for example, about the many outsourcing vendors that are touting their work as transformational — even though in most cases it is not. Unfortunately, media hype just confuses executives about what the term means and how the approach works. Another red herring is the emphasis on technology as a means of achieving transformation through outsourcing; many technology manufacturers and consulting firms have made grand claims on technology’s behalf. But while new technologies are often needed, the defining factor in transformational outsourcing is executives’ commitment to use the approach to change their organizations.

Transformational outsourcing is an emerging practice, but the track record of companies that have engaged in it is impressive. In a study of 20 companies, 17 have been in place long enough to show results. Of that group, 13 have achieved dramatic, organization-level impact. (See “About the Research.”)
To the extent that other companies can replicate such success, transformational outsourcing will be a more effective way of improving performance than major internal change initiatives, mergers and acquisitions, or joint ventures. The key issue is new capabilities. In undertaking an internal initiative, a company has concluded that it lacks an important set of skills — otherwise it would not be seeking transformation. But it often proves too time-consuming to develop the skills internally. In an M&A scenario, the company acquires the capabilities it lacks, but cultural clashes often interfere with its ability to use them effectively. An acquiring company seldom, for example, puts executives from the acquired company in charge of its own organization in order to learn from them. Similar cultural impediments make it unlikely that a company will transform itself with the expertise it gains in a joint venture.