Menu Close

Outsourcing Considerations for Organizational Design

Ready to learn more?

We have a library of information and educational programs.  Contact us to discuss your learning needs.

You can download a pdf copy of the whitepaper here.

Executive Summary

This white paper examines the organizational design and ecosystem implications of outsourcing.  A model for examining business impact is describes, and a template for assessing benefits, and risks is provided.  Organizational implications are explored and described.  Implications associated with the other six disciplines are also explored, and these include decision rights, processes, systems, tools, people, and incentives.

Elusive Promises

Likely that most people reading this white paper have experienced both sides of outsourcing.  Outsourcing has its positives and negatives.  It is common to walk away from an outsourcing initiative after a few years and be left wondering:  where were the effectiveness and efficiency gains?  Over the past few decades, there are common experiences that have developed around outsourcing.

Benefits Sold Issues Experienced
Cost advantages Cost advantages erode over time as servicing needs change and contracts are renegotiated
Improved focus on core Restricted organizational capabilities and slower adaptability
Savings on infrastructure New requirements to integrate systems and perform on-going interfacing and configuration management
Access to specialists and deeper skillsets Lack of Flexibility
Faster and more responsive service Process Tax for Customers and/or Employees

In order to improve the ability to realize the benefits and to simultaneously reduce the risks of experiencing the issues, there are a core set of items that need to be put in place.  Those include organizational structure, decision rights, processes, systems, and people.

Effect on the Business Ecosystem

From a business standpoint the premise of outsourcing is straightforward.  Outsourcing is pursued when the business believes that it can obtain products and/or services more effectively and efficiently through an external transaction versus doing it themselves internally.   Much like any other change that a company might make to its organization, an outsourcing strategy will have an effect on its business.  To understand the impact, start with diagraming the changes to organizational capabilities.  Outsourcing any function effects organizational capabilities.  The question is: How?

Useful Template

To understand what’s going to change, use a template like the one shown below.  Be realistic, not everything is going to be retained or improved.  Be sure to identify what’s at risk.  Below is a lite example for payroll; the scan template can be used for any business capability/function.

Outsourcing Capability Scan
Capability/Function to be Outsourced:  Payroll Processing
Business Rationale:

  • Saves $X per year
  • Supplier able to scale more quickly
  • Access/use of modern systems
  • Up-to-date compliance (e.g. time & attendance rules, withholding, etc)
Retained Performance Improved Performance At-Risk
·  < 8 hr. response time for employees

·  Weekly payroll in all locations

· 5-day holdback

· Transaction load per payroll headcount

· Lower cost per employee

· Issue tracking and reporting for trending

· Number of incentive plans are too high for the outsourcer

· Incentive plan flexibility

 

Mitigation Approaches
· Incentive plan rationalization for cutover

· Negotiate higher level service level requirements on incentive plan collaboration and adoption

·Keep a small internal payroll team to work incentives only, but operate on the outsourcers system; or, co-locate a small team from the vendor to do the same

Organizational Implications

The value chain function being outsourced will drive the organizational implications.  Direct value chain functions will have a more direct impact on business performance, and they will receive a larger-degree of focus and attention.  For example, outsourcing marketing has a more dramatic impact on business performance than outsourcing payroll might.  Marketing directly impacts customer traffic; whereas, payroll affects employees, who then affect business performance.  The marketing function has a direct impact where payroll has an indirect impact.

All functions outsourced have new implications to organizational structure.  The figure shown here illustrates some of the commonly experienced needs.  The function being outsourced inevitably ends up having a point-of-contact (POC) role in both organizations.  These individuals/teams are responsible for managing the relationship and working with each other on a day-to-day basis.  The work that is performed is governed by a contract/service level agreement (SLA).  Putting in place the SLA requires the active involvement of legal support; additionally, there are on-going needs for legal support as the business situations change.  Depending on the type of function being outsourced, there may be a call center that’s used.  Depicted above is a situation where it’s an employee call center (e.g. payroll outsourcing,) but it can also be a call center that addresses customers.  A customer call center would be in-scope if outsourcing included aftermarket support.  Irrespective of the function being outsourced, the organizational implications shown above will need to be addressed.

Other Implications

There are seven disciplines that work together affecting business performance.  Organizational design/structure is one of the seven.  When considering outsourcing, all seven disciplines should be examined for implications.  Along with the organizational implications highlighted in the previous section, there are other implications in almost every other discipline.

  1. Organizational Structure
  2. Decision Rights
  3. Process Design
  4. Systems
  5. Tools
  6. People
  7. Incentives

Decision Rights should focus on key decisions that will impact the performance of the outsourced production and/or servicing.  These will be decisions that address capital and operational expenditures, along with the allocation of people resources.  It is important to identify the decisions and the deciders up-front.  Often, the level of decision will have different deciders, with levels that require SLA and contract negotiations being retained at a higher level in the organization.  Clarity is essential to ensuring proper operation of the relationship.

Process Design will need to be accomplished in at least two major areas.  The first, which is the most obvious to people, is how the production and/or services will be performed.  Almost all process-level attention is given to this area.  The second, which is equally important, is the management cadence that will govern the relationship.  The process for business reviews, SLA reviews, key performance indicators (KPIs,) and escalation/response mechanisms should be defined prior to going live with an outsourcer.

Systems considerations in outsourcing tend to go hand-in-hand with process work around production and service.  Any point where there is a system that needs to be shared, integrated, or interfaced will need to be planned and designed.  In addition, each of the interfaces should receive both a plan and funding for regular review and updating.  When either party goes through systems changes, it will potentially impact the other.  Interface configurations become an ongoing need.

Tools is probably the one discipline that is most often overlooked, at least explicitly and formally.  In an outsourcing situation, the tools that are most commonly needed are those that enable the day-to-day management.  They are the tools that the POCs will utilized to manage performance and relationship.  At a minimum the tools should include all software, applications, equipment, reports, and metrics that will be required.

People considerations include the new roles required by the structure.  Also in-scope are internal displacements caused by the outsourced arrangement.  More important that either of these two people implications are the implications to the rest of the internal employee group.  Often overlooked are the training and communications needs of the employees so that they can effectively use and interact with the outsourcer.  The new outsourced arrangement is hardly ever seamless, and there are almost always changes in process and workflow.  Employees should be made aware so they can engage in the most product manner possible.

Incentives impact is also two-fold, at a minimum.  The first incentives consideration is for those who will be managing the outsourced operation in an on-going manner.  Should the company provide incentives to ensure that they derive the benefits defined and avoid the risks?  (Worthwhile for sure.)  The second incentives consideration is regarding the ability of the company to provide and define incentives that will impact their own business performance.  If the outsourcer will provide production and/or servicing that impacts the company’s own production and servicing, the company will want to retain some influence and control over these.  In the special case of payroll outsourcing, one should be extra cautious because it places additional risk on a company’s ability to define, manage, and pay incentives for their own employees.


For further reading on this subject, pick up Dr. Albrecht’s book:

Organizational Design that Sticks!

You can order it through major booksellers, and online through our website.


How We’re Better

Our Principal Consultants are skilled in 7 disciplines, and they lead the front-end of our engagements.  Once diagnosed, we select the team that has the right mix of background to help you solve the identified root causes.  Because we believe in capability-building, team selection includes your internal resources where it makes sense for you.  We work alongside you and partner with your internal talent.  Alonos consultants help your organization become competent, elevating your success and improving performance.

Since our Principal Consultants have depth of skill in all 7 disciplines, we are the easiest firm to do business with.  If you have a manager who believes they have an organizational structure problem, we will begin our discussions at that point.  This ensures that your business partner is heard and understood from the beginning, and then we will work through the diagnosis together.  We can engage from any of the 7 disciplines.  We will work with you on a holistic solution that drives improved business performance.


Contact Us

Our offices are based in Dallas, Texas.  We operate a network of qualified consultants globally to meet your needs wherever you do business.

Email:                                                                                     Phone:

information@alonos.com                                                    +1 (469) 573.1002


About the Author

Dr. Dale J. Albrecht is an Executive Partner and Principal Consultant for Alonos.  He is the author of the book “Organizational Design that Sticks!”  He is also an active member, advisor, and author for the Forbes HR Council and an Adjunct Professor for both the University of Texas at Dallas and Texas Woman’s University.  Dr. Albrecht is an active member of the National Association of Corporate Directors (NACD).

Dr. Albrecht has fulfilled roles in Performance Consulting, Organizational Design & Effectiveness, Project Management, Engineering, Technical Operations, Human Resources Leadership, Education, and Change Management.  He has worked in several industries including retail, manufacturing, telecommunications, medical devices, construction, and Department of Defense.  He has considerable experience consulting with most corporate functional areas including supply chain, engineering, software development, sales, marketing, human resources, information technology, and service/support.

Dr. Albrecht completed his terminal degree in Business Administration with Swiss Management Center University in Zug, Switzerland.  He holds a Master’s in Business Administration from Columbia Southern University.  He has a Bachelor’s of Science Degree in Workforce Education & Development from Southern Illinois University at Carbondale, where he graduated Summa Cum Laude and a member of the Golden Key National Honor Society.  He holds a certificate in Organizational Development from DePaul University.  He is a certified Senior Professional in Human Resources, a SHRM-Senior Certified Professional, an appointed Six Sigma Master Black Belt.  He also holds a certificate in Project Planning, Analysis and Control from George Washington University.

Executive Summary

This white paper examines the organizational design and ecosystem implications of outsourcing.  A model for examining business impact is describes, and a template for assessing benefits, and risks is provided.  Organizational implications are explored and described.  Implications associated with the other six disciplines are also explored, and these include decision rights, processes, systems, tools, people, and incentives.

Elusive Promises

Likely that most people reading this white paper have experienced both sides of outsourcing.  Outsourcing has its positives and negatives.  It is common to walk away from an outsourcing initiative after a few years and be left wondering:  where were the effectiveness and efficiency gains?  Over the past few decades, there are common experiences that have developed around outsourcing.

(There is a table here that is visible only on larger display devices.  The table provides information about "benefits" versus "issues experienced."  Suggest viewing the pdf on tablets and phones, click the link above.)

In order to improve the ability to realize the benefits and to simultaneously reduce the risks of experiencing the issues, there are a core set of items that need to be put in place.  Those include organizational structure, decision rights, processes, systems, and people.

Effect on the Business Ecosystem

From a business standpoint the premise of outsourcing is straightforward.  Outsourcing is pursued when the business believes that it can obtain products and/or services more effectively and efficiently through an external transaction versus doing it themselves internally.   Much like any other change that a company might make to its organization, an outsourcing strategy will have an effect on its business.  To understand the impact, start with diagraming the changes to organizational capabilities.  Outsourcing any function effects organizational capabilities.  The question is: How?

Useful Template

To understand what’s going to change, use a template like the one shown below.  Be realistic, not everything is going to be retained or improved.  Be sure to identify what’s at risk.  Below is a lite example for payroll; the scan template can be used for any business capability/function.

(There is a template here that is visible only on larger display devices.  The template provides a suggestion about the content of an "outsourcing capability scan."  Suggest viewing the pdf on tablets and phones, click the link above.)

Organizational Implications

The value chain function being outsourced will drive the organizational implications.  Direct value chain functions will have a more direct impact on business performance, and they will receive a larger-degree of focus and attention.  For example, outsourcing marketing has a more dramatic impact on business performance than outsourcing payroll might.  Marketing directly impacts customer traffic; whereas, payroll affects employees, who then affect business performance.  The marketing function has a direct impact where payroll has an indirect impact.

All functions outsourced have new implications to organizational structure.  The figure shown here illustrates some of the commonly experienced needs.  The function being outsourced inevitably ends up having a point-of-contact (POC) role in both organizations.  These individuals/teams are responsible for managing the relationship and working with each other on a day-to-day basis.  The work that is performed is governed by a contract/service level agreement (SLA).  Putting in place the SLA requires the active involvement of legal support; additionally, there are on-going needs for legal support as the business situations change.  Depending on the type of function being outsourced, there may be a call center that’s used.  Depicted above is a situation where it’s an employee call center (e.g. payroll outsourcing,) but it can also be a call center that addresses customers.  A customer call center would be in-scope if outsourcing included aftermarket support.  Irrespective of the function being outsourced, the organizational implications shown above will need to be addressed.

Other Implications

There are seven disciplines that work together affecting business performance.  Organizational design/structure is one of the seven.  When considering outsourcing, all seven disciplines should be examined for implications.  Along with the organizational implications highlighted in the previous section, there are other implications in almost every other discipline.

  1. Organizational Structure
  2. Decision Rights
  3. Process Design
  4. Systems
  5. Tools
  6. People
  7. Incentives

Decision Rights should focus on key decisions that will impact the performance of the outsourced production and/or servicing.  These will be decisions that address capital and operational expenditures, along with the allocation of people resources.  It is important to identify the decisions and the deciders up-front.  Often, the level of decision will have different deciders, with levels that require SLA and contract negotiations being retained at a higher level in the organization.  Clarity is essential to ensuring proper operation of the relationship.

Process Design will need to be accomplished in at least two major areas.  The first, which is the most obvious to people, is how the production and/or services will be performed.  Almost all process-level attention is given to this area.  The second, which is equally important, is the management cadence that will govern the relationship.  The process for business reviews, SLA reviews, key performance indicators (KPIs,) and escalation/response mechanisms should be defined prior to going live with an outsourcer.

Systems considerations in outsourcing tend to go hand-in-hand with process work around production and service.  Any point where there is a system that needs to be shared, integrated, or interfaced will need to be planned and designed.  In addition, each of the interfaces should receive both a plan and funding for regular review and updating.  When either party goes through systems changes, it will potentially impact the other.  Interface configurations become an ongoing need.

Tools is probably the one discipline that is most often overlooked, at least explicitly and formally.  In an outsourcing situation, the tools that are most commonly needed are those that enable the day-to-day management.  They are the tools that the POCs will utilized to manage performance and relationship.  At a minimum the tools should include all software, applications, equipment, reports, and metrics that will be required.

People considerations include the new roles required by the structure.  Also in-scope are internal displacements caused by the outsourced arrangement.  More important that either of these two people implications are the implications to the rest of the internal employee group.  Often overlooked are the training and communications needs of the employees so that they can effectively use and interact with the outsourcer.  The new outsourced arrangement is hardly ever seamless, and there are almost always changes in process and workflow.  Employees should be made aware so they can engage in the most product manner possible.

Incentives impact is also two-fold, at a minimum.  The first incentives consideration is for those who will be managing the outsourced operation in an on-going manner.  Should the company provide incentives to ensure that they derive the benefits defined and avoid the risks?  (Worthwhile for sure.)  The second incentives consideration is regarding the ability of the company to provide and define incentives that will impact their own business performance.  If the outsourcer will provide production and/or servicing that impacts the company’s own production and servicing, the company will want to retain some influence and control over these.  In the special case of payroll outsourcing, one should be extra cautious because it places additional risk on a company’s ability to define, manage, and pay incentives for their own employees.


For further reading on this subject, pick up Dr. Albrecht’s book:

Organizational Design that Sticks!

You can order it through major booksellers, and online through our website.


How We’re Better

Our Principal Consultants are skilled in 7 disciplines, and they lead the front-end of our engagements.  Once diagnosed, we select the team that has the right mix of background to help you solve the identified root causes.  Because we believe in capability-building, team selection includes your internal resources where it makes sense for you.  We work alongside you and partner with your internal talent.  Alonos consultants help your organization become competent, elevating your success and improving performance.

Since our Principal Consultants have depth of skill in all 7 disciplines, we are the easiest firm to do business with.  If you have a manager who believes they have an organizational structure problem, we will begin our discussions at that point.  This ensures that your business partner is heard and understood from the beginning, and then we will work through the diagnosis together.  We can engage from any of the 7 disciplines.  We will work with you on a holistic solution that drives improved business performance.


Contact Us

Our offices are based in Dallas, Texas.  We operate a network of qualified consultants globally to meet your needs wherever you do business.

Email:                                                                                     Phone:

information@alonos.com                                                    +1 (469) 573.1002


About the Author

Dr. Dale J. Albrecht is an Executive Partner and Principal Consultant for Alonos.  He is the author of the book “Organizational Design that Sticks!”  He is also an active member, advisor, and author for the Forbes HR Council and an Adjunct Professor for both the University of Texas at Dallas and Texas Woman’s University.  Dr. Albrecht is an active member of the National Association of Corporate Directors (NACD).

Dr. Albrecht has fulfilled roles in Performance Consulting, Organizational Design & Effectiveness, Project Management, Engineering, Technical Operations, Human Resources Leadership, Education, and Change Management.  He has worked in several industries including retail, manufacturing, telecommunications, medical devices, construction, and Department of Defense.  He has considerable experience consulting with most corporate functional areas including supply chain, engineering, software development, sales, marketing, human resources, information technology, and service/support.

Dr. Albrecht completed his terminal degree in Business Administration with Swiss Management Center University in Zug, Switzerland.  He holds a Master’s in Business Administration from Columbia Southern University.  He has a Bachelor’s of Science Degree in Workforce Education & Development from Southern Illinois University at Carbondale, where he graduated Summa Cum Laude and a member of the Golden Key National Honor Society.  He holds a certificate in Organizational Development from DePaul University.  He is a certified Senior Professional in Human Resources, a SHRM-Senior Certified Professional, an appointed Six Sigma Master Black Belt.  He also holds a certificate in Project Planning, Analysis and Control from George Washington University.