Outsourcing has been widely implemented in all industries. While some of these partnerships have failed miserably, others were perceived as successful. The aspired advantages, such as cost savings, flexibility and access to innovation, have often turned into dependency and inability to get the full value of the relationship. Taking a fresh look can provide the opportunity to transform the operational as well as the contractual set-up and to radically increase the value.
In the past decade, companies have outsourced services at the core of their value creation to external service providers. While support functions such as HR, finance and facility management are typically among the outsourced services, many services that are much closer to the core business, such as customer service, maintenance of core assets, IT and supply chain operations also have often been outsourced.
Companies enter into outsourcing agreements with either the goal of pure cost reduction, or of achieving greater flexibility, access to innovation and the latest technology. Although the advantages of outsourcing have certainly been achieved – at least partially – many companies rethink this set-up. The common fear of dependency on outsourcing partners and difficulties in steering them has reduced anticipated benefits. Limited flexibility in adjusting services to changing demand, higher costs and dependency on the provider’s technology may have turned the situation around and caused companies to feel they are not getting the full value out of the partnership.
Figure: Improvement levers and benefits (from Arthur D Little's project experience)
In this situation it is necessary to take a fresh and holistic look at the set-up of the company’s value creation. The goal is to find the right balance between efficiency, quality, access to innovation and technology, flexibility, and risk. In order to review and optimize the sourcing model, Arthur D. Little analyzes the design of strategy, services, steering, sourcing and skills. This holistic view of all dimensions of the sourcing model ensures not only that problems are covered on the surface, but also that the optimum set-up can be achieved.
Firstly, we need to analyze the strategic rationale, demand and operating model in a function. The required activities need to be fully transparent in order to allow understanding of the nature of the demand. This is necessary to establish an unbiased picture of the value question and avoid any compromises based on habits and existing structures.
Secondly, we take an in-depth look at the services and service levels that are required to sufficiently cover the demand, and how they need to be designed to provide the required flexibility. This detailed work often leads to elimination of many existing services that have been useful in the past, but which the dynamic changes inside the company or its environment have made obsolete. Furthermore, it allows redesigning of the function in a comprehensive way that radically increases the generated value. Our case study on transforming the customer service function (see below) shows the extent to which a function can be optimized.
The service portfolio needs to be managed and steered towards achieving the company’s value objectives. A governance structure with clear guidelines for transparency, KPIs and target levels needs to be established. Responsibilities within the firm need to be defined to ensure the organization supports the newly defined service model. A mechanism for reporting and monitoring needs to be set up. It is necessary to distinguish between KPIs that are used for steering a particular service and other data that is reported for other reasons. To keep a steering mechanism pragmatic, no more than five to 10 variables should be used.
To make a decision on the sourcing model, to insource, or to partially or fully outsource the situation on the supplier market as well as the strategic relevance, transaction cost and risk of dependency are the key factors that need to be assessed. It also allows organizations to define whether to aim for a partnership approach, or whether the company has the ability to leverage its market power to maximize its own benefit. Furthermore, the analysis can provide indication of how many suppliers a service needs to be sourced from. The actual outsourcing model needs to be implemented through robust contracts. In our experience, many existing outsourcing contracts are driven by the vendors. For a company choosing to outsource, it is essential to define the structure, pricing and steering mechanisms and the terms and conditions in all outsourcing contracts.
Finally, the company needs to reassess the capabilities required to support the changed set-up. In our experience, gaps in internal capabilities for steering providers are key reasons why companies lose control over vendors. Furthermore, the outsourcing partner also needs skilled people to manage and optimize the relationship.
Transforming the outsourcing model of a company happens at the core of the operation. By taking a fresh look at the operating model, radical improvements in terms of costs, quality, innovation and flexibility can be achieved. The key steps that need to be made are defining the right services, transparent management of the services, a clear sourcing decision and building the required capabilities. While MROs need to address the questions highlighted, and apply a structured approach to business transformation, ultimately, it may be the airlines, and specifically the sophistication and decisions made by airline procurement teams that play a decisive role in shaping the future of the aftermarket.