Why do some outsourcing initiatives fail?

Unfortunately 3PL relationships are always not successful. According to a recent Warehousing Education and Research Council (WERC) survey, 55% of logistics outsourcing alliances are terminated after 3-5 years. The most often cited reasons for failure include:

LACK OF CLEAR OUTSOURCING STRATEGY. Specifically, many companies fail to identify the advantages, challenges, cost benefits and organisational impacts of outsourcing.

ABSENCE OF A SCIENTIFIC SELECTION PROCESS. Inability to document expectations, processes to be outsourced, current performance standards and costing information in clear terms are critical, yet are often overlooked in the selection process.

INEFFICIENT COSTING METHODOLOGY. Collecting detailed data on the true costs of receiving, storage, pick-n pack, value-added processing, special packaging, staging and despatch is a challenging, yet fundamental task to performance assessment for an organisation. Whilst Activity Based Costing (ABC) enables organisations to accurately align and establish ‘in-house' costs, many organisations rely on less detailed and therefore less accurate methods to track outsourcing costs.

UNCLEAR LEGAL DOCUMENTATION. Many companies overlook critical areas when they define their contractual relationships. The aim of a legal document is to clearly articulate what is agreed and what is disagreed to avoid ambiguity in the relationship. All to often, in the absence of clarity, confusion prevails and confusion leads to inefficiency and inefficiency leads to a breakdown in the relationship.

LACK OF PROJECT IMPLEMENTATION STRATEGY. Lack of project implementation strategy will negate advantages of outsourcing. Many organizations believe that Project Management is the responsibility of the 3PL. Lack of project management skills and dedicated resources (from both organizations), unrealistic timelines and expectations are commonly cited as reasons for failure in 30% of all outsourcing implementations.

ABSENCE OF SPECIFIC PERFORMANCE MEASUREMENT SYSTEM. Absence of an efficient performance measurement system is a direct contributor to the failure of outsourcing initiatives. Despite the fact that logistics competency is commonly viewed as a competitive differentiator and a key strategic resource for any firm, most firms do not comprehensively measure, and more importantly, fail to realise their productivity and service potential available from performance measurement.