Outsourcing has a vital role but has become a victim of its own success. Firms now risk costly mistakes by compulsively outsourcing functions without thinking through the implications for management. A new approach is needed.

The attractions of outsourcing are clear. It is virtually impossible to find a board of directors or government agency of any size that would deny that outsourcing is a vital part of successful operations.

Investors certainly agree. Firms that announce plans for outsourcing routinely see share price growth, and chief executives who outsource see their bonuses increase. Economists say savings and efficiencies from outsourcing have helped firms to control expenditure and maintain profitability despite cost pressures since the 2001 downturn. When you look at the evidence, there is no question, outsourcing has worked.

But this success is causing new challenges. High expectations are increasingly hard to meet. As more functions are outsourced, integrating and managing portfolios of service providers is becoming harder, and we are beginning to see service disruptions due to an inability to govern highly ‘multisourced’ environments.

Some firms are outsourcing just because everyone else is doing it, without a coherent plan or ability to manage a complex blend of internal and external resources. Such chaotic and compulsive outsourcing makes it harder, rather than easier, to respond to change. The right medicine used in the wrong way can make us sicker.

There are several myths about outsourcing that are causing problems.

The myths of sourcing independence and service autonomy mean some managers think of outsourcing as a discrete and autonomous procurement activity, as if one sourcing decision or relationship has no bearing on another. But business processes and technology services are usually interrelated. And outsourcing often brings an infusion of technology and process innovation, creating an environment where autonomous services simply do not exist.

Another myth is that outsourcing always delivers economies of scale – so buyers demand cut-rate prices even for highly-customised services. The truth is that service providers can only pass on cost savings if they can achieve economies of scale through standardised offerings. If you want a highly-customised solution you will pay premium prices in the future.

There is also the myth that outsourced services are ‘self-managing’. Buyers believe that once they sign a deal, the outsourcer and the contract itself will control the service. Most firms do not budget and plan adequately for the management of the relationship and the services provided. New skills, new processes and new metrics for performance management are necessary to ensure the services deliver rapid results.

Another difficulty is that many buyers assume that, once signed, their outsourcing contract remains set and that service-level agreements (SLAs), pricing structure and service options cannot alter.

All contracts can be renegotiated. Unfortunately many outsourcing contracts are inflexible. They are littered with terms and conditions that make it difficult, time-consuming and expensive to alter them. But the fact that business requirements change so quickly is one of the main reasons organisations have turned to outsourcing.

Contracts must adopt new pricing models and SLA structures to anticipate and accommodate change. They must be regularly reviewed, and they must be developed to foster mutually beneficial results and relationships between the parties.

Finally, and perhaps most painfully, is the myth of sourcing competency. Many firms believe they have the expertise to manage complex sourcing environments even when they have never done it before. They learn too late that managing external services requires vastly different skills than managing the same services in-house.

Debunking these myths, and building a successful sourcing operation, requires a new approach – multisourcing.

Multisourcing requires disciplined provisioning and blending of business and IT services from an optimal set of internal and external providers in the pursuit of business goals. Managers therefore need to develop a sourcing strategy tightly linked to the overall business strategy and constantly monitored by an effective company-wide governance system. If organisations are to continue to realise the benefits of outsourcing they need new approaches to sourcing strategy, governance, management, service provider selection and service measurement.