Of all the business models that have become popular in recent decades, the use of outsourcing or shared services is perhaps the most pervasive, and one that is clearly here to stay. Though there is no standard definition of outsourcing, the following description captures the essence as well as the diversity of arrangements that fall under this heading:

“The transfer of internal, organizational provision to an outside, independent provider. The nature of transfer and complexity of provision is, in practice, varied capturing approaches from simple sub-contracting through to joint venture partnerships” (Taylor, 2010)

Even by 2012, it was reported: “In today’s business environment, nine out of every ten  enterprises have shared services and 97 percent manage outsourcing relationships (Hfs-PWC, 2012). A KPMG survey conducted in 2014 found that 72% of companies worldwide were planning to increase their use of outsourcing in coming years, with 96% already outsourcing some activities (KPMG, 2014), and more recent survey data indicate that firms continue to increase their use of outsourcing (e.g. Deloitte, 2016). However, there is still considerable potential for growth: even in relation to IT, the function most commonly outsourced, it is estimated that around 75% of services remain in-house (EY, 2013).

The popularity of outsourcing and shared service initiatives reflects their ability to deliver numerous benefits to organizations and to help them achieve their core business goals most efficiently and cost-effectively. Despite a continued trend in the use of outsourcing and shared services, there are however also high rates of failure for these types of initiatives, and a reverse trend in recent years of “back-sourcing” previously outsourced activities. Since it is estimated that the average company now spends around 70% of its revenue on external suppliers (Kemp, 2014) this indicates that outsourcing and the use of shared services is currently a high risk, as well as a high stakes, strategy for many organizations.

Recent Developments and Trends in Outsourcing

A steady increase in outsourcing continues with high percentages of organizations using this approach. There was a reported steady increase in revenue from the global outsourced services industry from US$45.6 billion in 2000 to US$99.1 billion in 2012. Since then, there have been fluctuations but a recent upturn, with the overall market value estimated at around $US88.9 billion in 2015 (Statista.com, 2016).

IT and business processes account for the majority of outsourced activities. Around 43% of the U.S. IT sector is estimated to be outsourced to offshore companies, along with 38% of all R&D, 26% of distribution and 12% of call center work (Selvaggio, 2014).

Developments in IT are a key driver in the expansion of outsourcing. Advances in IT are helping to overcome the impact of any barriers to outsourcing presented by communication problems or data security concerns. Deloitte (2014) reports that developments in technology are reducing, though not completely, removing the importance of location when selecting service providers and are leading to an overall increase in outsourcing.

Shared services first developed in the 1980s and the increasing use of shared services over time has been driven by factors that include the popularity of process improvement methodologies such as Six Sigma, successive waves of mergers and acquisitions, and economic pressures to cut costs.

Global or regional business services model is now adopted by 76% of companies. (SSON, 2014). Many firms are now using outsourcing or shared services as a key component of their global business services strategies. These models are largely enabled by the expansion of shared service organizations into Global Business Services (GBS) and advances in technology that facilitate the use of integrated business services models and help to overcome data security concerns about cross-border service delivery.

Outsourcing of high value business activities reflects the increasing uptake of GBS by shared service organizations, which often include the provision of business analysis and strategic insights that draw on the massive volumes of “big data” now being processed and often stored in the cloud.

“Near-sourcing” and “Back-sourcing” have been a response solution to problems with offshore outsourcing. Some sources estimate that as many as 50% of firms and 34% of U.S. companies have been taking back work from offshore locations and either conducting this in-house (back-sourcing) or outsourcing to local providers (near-sourcing).

Own In-House Off-shore centres are being established by large companies to take advantage of lower labour costs and provide access to scarce talent and skills while reducing risks and maintaining greater control over operations (Cap Gemini, 2015).

New centres are emerging in countries such as Romania, Mexico and Brazil while countries such as India, Poland, the Philippines and China continue to increase in popularity. The factors influencing choice of offshore outsourcing destination include labour costs, tax considerations, volatility of local currency, proximity and time zone.

Strategic Outsourcing. Reflecting the growing complexity of outsourcing models, many firms have now established a vendor management office; this also facilitates a more strategic, organizational-wide approach to outsourcing (Overby, 2015).

Reasons for and Benefits of using Outsourcing and Shared Services

Cost reduction remains the main reason for and requirement of outsourcing. One study estimates that firms can typically achieve cost savings of 20% to 50% on business processes that are outsourced or included in shared services (Hfs-PWC, 2012).

Longer term cost savings have become more important than immediate cost reductions. The focus is now on longer term cost savings: for example, 65% of respondents to an Investment Management Outsourcing Survey (IMP Consulting, 2015) cited “long-term savings in staff and infrastructure” as one of the main reasons for outsourcing.

Quality and Performance Have Become More Important while reducing costs is no longer a sufficient reason for organizations to outsource or use shared services. It is generally assumed and expected that these strategies will result in reduced costs, and firms now look for benefits over and above this (Murphy, 2013).

Enhanced customer service is also a goal. Improved services and customer focus can be achieved by outsourcing within markets where customers are located, and using providers who understand their language, culture and preferences (Occam Design, 2015).

Gains in strategic performance and competitiveness can improve overall performance by being better able to focus attention and in-house resources on their core business areas while outsourcing support services to providers specialized in these areas.

Increased flexibility, speed and agility helps firms respond more quickly to new opportunities or market changes, by leveraging supply chain activities (E2Open, 2015), or relying on the outsourcing firm to quickly scale production up or down by acquiring or downsizing the necessary resources (Anderson & Weitz, 1986; Roodhooft & Warlop, 1999).

Challenges and Risks of Outsourcing and Shared Services 

Unacceptable results: Based on qualitative research cited in Saether & Gottschalk (2015), 70% of client companies had bad experiences of outsourcing, and 25% had moved the outsourced activities back into the organization.

Client Difficulties and Weaknesses: Though supply side problems contribute to outsourcing difficulties and failures, client difficulties and weaknesses are also emerging as major factors that reduce the potential benefits of outsourcing.

Failure to prepare the organization: Internal conflicts and problems of low morale often arise when work previously conducted in-house is outsourced or moved to shared-service centres.

Risk of outsourcing: A survey reported on by Edwin & Awele (2015) identified loss of expertise and difficulty of maintaining confidentiality of business information, often leading to low morale among employees.

Complexity: As outsourcing requirements become progressively more complex, the range of risks and challenges also expands, along with the opportunities for greater business benefits.

Shared Services Risks: The implementation and use of shared services also introduces a whole new range of risks for organizations, including reduced operational flexibility resulting from over-standardisation of systems and processes.

Models of Outsourcing and Shared Services

The types of benefits that can be achieved from outsourcing or shared services depend largely on the particular approach or model that is adopted. At one end of the outsourcing continuum, more traditional, transactional outsourcing arrangements can be found which are mainly concerned with cost reduction and the provision of support services. In between, a wide range of outsourcing options is available – with the main variables being numbers and locations of service providers used, and the extent to which the arrangement is transactional or relationship-based.

The “Art” and “Science” of Outsourcing and Shared Services

The Art and Science of Transformation® approach to outsourcing and shared services, we believe is essential to maximize the success of these types of initiatives and mitigate the risks and challenges. As in the case of other forms of organizational transformation, we contend that it is crucial to achieve the right balance of “art” and “science” when developing and implementing outsourcing and shared services initiatives. The “science” is defined as the tools and techniques involved in outsourcing, and the “art” as the softer, but no less important, people-related aspects of change. This is also a holistic approach that acknowledges the interrelationships between the organizational components of strategy, people, culture, systems and processes.