Outsourcing with Skill: Three Types of Outsourcing Relationships

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While reading the book, Enterprise Architecture as Strategy, by Jeanne W. Ross, Peter Weill, and David C. Robertson, I came across their section on outsourcing.

I wish I had their frame for looking at outsourcing models long ago.   On the Microsoft patterns & practices team, we regularly partnered with vendors around the world to scale our business while focusing on our core competencies.   While I did manage to think through a lot of the issues and risks, I didn’t always have a great way of framing the conversations or recommendations.   When you have names for the three outsourcing models, key distinctions for each, and a map of the main outsourcing objectives, it gets a lot easier to both think through decisions, and frame conversations for more effective outsourcing decisions.

Three Outsourcing Models
According to Ross, Weill, and Robertson, there are three mutually exclusive outsourcing models:

Model Notes Client Success Vendor Success
Transaction Narrowly defined, repeatable process. 90% 90%
Cosourcing Project management and implementation. 63% 75%
Strategic Partnership Broad responsibility for operational activities. 50% 50%

Outsourcing Objectives
Ross, Weill, and Robertson, share examples of common outsourcing objectives:

Category Items
Efficiency Objectives
  • Cost reduction
  • Variable capacity / expertise on demand
Architectural Improvement Objectives
  • Re-engineer internal business processes
  • Increase business process discipline
Strategic Adaptation Objectives
  • Management focus on competencies Strategic agility
  • Leverage new IT
  • Mitigate technology risks Technology / expertise transfer

The Three Outsourcing Models Explained
Ross, Weill, and Robertson, provide insight into the distinctions and uniqueness features of each mode:l:

Transaction

  • The key metric is quality and/or cost per transaction.
  • The client-vendor relationship is an “Arm’s length” model.
  • Client expectations include world-class processes, variable capacity, and a management focus on core competencies.
  • Vendor offerings include standard best practice process components, economies of scale, and distinctive platforms or assets.

Cosourcing

  • The key metric is project success.
  • The client-vendor relationship is joint-project management.
  • Client-expectations include cost savings and access to expertise on demand.
  • Vendor offerings include labor arbitrage, project management expertise, and expertise on specialized technologies.

Strategic Partnership

  • The key metric is bottom-line impact.
  • The client-vendor relationship is negotiated accountability.
  • Client-expectations include cost savings, variable capacity, and management focus on core competencies.
  • Vendor offerings include capability to deliver a broad range of services, integration expertise, disciplined practices, and economies of scale.