Process Improvement v. Outsourcing

Process improvement caused a fair amount of excitement a few years ago in the business management community.

Thanks primarily to efforts by such corporate giants as General Electric, process improvement methodologies such as TQM (Total Quality Management) and later Six Sigma became standard approaches to assessing existing processes for improvement opportunities and as a basis for process design.

The aim was always to reduce overhead and to improve the quality of the process output.

Lately, the idea of process improvement has given way to the idea of process outsourcing. Many companies that made significant investments in Six Sigma are now focusing on cost reduction.

Other companies, rather than adopting process improvement methodologies, are going straight to an outsourcing model, hoping to address both endemic problems and cost.

The focus is on immediate returns rather than on the process improvement methodologies, which are thought to only return savings over the longer term.

However, there needn't be any disconnect between process improvement and outsourcing. It is possible to build outsourcing into business as an adjunct to the objective of implementing a thin business model: That is, one in which the company focuses on core competencies rather than adjunct or support functions.

Click here to read about the high potential costs of outsourcing.

How does an enterprise ensure that such an integration of outsourcing will lead to a seamless process that is as efficient, if not more so, than the original process? And how does the company do this without a significant investment in a process improvement methodology?

According to Ed Baker, CEO of Alpine Business Technologies, the key is to think of outsourcing as a normal adjunct to process improvement. As he told me recently, "First of all, we like to work under the assumption that process improvement and outsourcing go hand in hand. Outsourcing simply does not return the anticipated savings without some level of process characterization and improvement, unless perhaps your organization is performing the outsourced process in the lowest quartile for your business segment.

"People often look at outsourcing as quality- and process-neutral, yet hope for big savings. Our contention is that it rarely ends up neutral, but will end up more on either the good or bad side of the equation."

So, outsourcing without process improvement can lead to an undesired outcome, yet the problem that many companies have is that process improvement can be time-consuming and involve a long-term investment in training and culture change.

Is IT outsourcing losing its luster? Read more here.

According to Baker, however, there are alternatives: "Since Sigma is focused on the improvement and design of effective process, it is possible for companies that wish to address immediate needs to apply that expertise through specialist consulting companies that can 'suitcase' that expertise on-site. My company, Alpine Business Technologies, is one such, but there are others.

"Once the engagement is over, the consultant leaves and the company can go ahead and use the new process without investing so heavily in a full-blown Sigma culture. The virtue of this approach is that other parts of the company see how an outsourcing engagement was planned and supported, with the appropriate focus on supporting processes, their integration, tracking and adjustment. They see how the customer experience was measured and improved."

Ultimately, though, the question most often asked by companies is where to apply outsourcing for a maximum return. Baker said, "In many cases, the answer might be that outsourcing of the entire end-to-end process may actually be more expensive than just doing the work internally, and may not yield better quality.

"However, in a significant number of cases, it is likely that a judicious application of outsourcing or out-tasking, in combination with improvement of the internal processes integrating with or supporting the outsource partner, can increase the process efficiency in a measurable way. A side benefit here is that you know the actual costs and quality output of the operation as a result of the process examination. Since you now know what it should cost, supplier negotiation is more effective."

Outsourcing has been portrayed as an-all-or-nothing proposition. However, as my conversation with Ed Baker demonstrates, outsourcing is merely one arrow in the quiver for companies that wish to improve business and instill customer confidence, not just reduce the cost of operations. Application of specific quality methods to targeted processes can be an effective way of integrating outsourcing into business processes to achieve cost reduction and quality improvements.

Mike Jude is a business analyst who focuses on the application of decision modeling to complex business decisions. He is the co-author, with Martha Young, of The Case for Virtual Business Processes. He can be reached at mjude@novaamber.com.