If you’re in business, you’re probably relying on third parties to manage key parts of your infrastructure, business processes and services. Having spent the past decade in the outsourcing world, I can testify that despite how strategically important third-party reliance has become, organizations are not realizing the full benefits they should. Most complex organizations are not fully aware of the risks involved in reposing trust in others, are not structured to manage those relationships and are unwittingly leaving financial rewards, productivity and competitive advantage on the table.
In this post, I’ll highlight seven of the forces that have driven greater risk from reliance on third parties. In another post, we’ll look at what steps you can take to drive better outcomes.
- Cost Reduction Above All – Despite indications that the US economy is recovering, the recent economic contraction has forced businesses to focus on the potential cost reductions rather than the sustainable value, capability, innovation or strategic alignment that providers will bring.
- Short Term, Not Long Term – This intense focus on cost reduction is often accompanied by unrealistic expectations of immediate, short-term returns from outsourcing and “off-shoring” of key business processes. (And those expectations have been met, in turn, by commitments from service providers which cannot be achieved).
- Pace of change – Technological change is happening too fast to allow enterprise to sustain pools of trained, skilled and low-cost internal talent, or to adapt when new skills are needed. Third-party reliance offers the potential for ready-made skills in the right disciplines, in the right numbers at the right time…at a cost. Managing both outsourced and retained pools of talent can be extremely challenging.
- Political Landscape – Corporate social responsibility, sustainability and nationalist movements and global labor-rate inflation have driven in-sourcing, local outsourcing or co-location rather than off-shoring, with consequent impact on costs.
- New Providers & New Business Models – Emerging technologies like cloud computing, automation and robotics force organizations to place significant business reliance on little-known and unproven third parties. Moreover, these new technologies are typically based on buying a limited suite of offerings from a service catalog; legacy or “in-house” solutions which are still used may have to be retained. Technology has also driven new third-party business models, such as crowdsourcing, homesourcing, farmshoring, co-sourcing to emerge, for which governance frameworks may not exist.
- So Many Partners to Dance With – Reliance on niche specialists in supply-chain, manufacturing, logistics, compliance, infrastructure and business process management add untold complexity to managing a portfolio of relationships. A recent study in the life sciences sector estimated that pharmaceutical companies have an average of nearly 150 outsourcing contracts simply to managing the product packaging process.
- What’s A Human to Do? Robotic business automation is removing or radically changing human involvement in key business processes. Automation is not simply a technological solution; the underlying processes and teams frequently need to undergo transformation. To anticipate the rare instances when human intervention is required, organizations may need to retain people with far higher levels of technical skill and adaptability.
Becoming aware that there are risks in third party reliance is a start. Understanding how specific risks may impact your business is the next step. If you have questions, please email Rob Brickman & Associates Ltd. at rob@robbrickman.com.
