Maximizing the value of a co-sourcing relationship: for middle-market companies, getting the answers to a few key questions can go a long way toward ensuring a fruitful relationship.

• Author: Langer, Dan
• Position: Strategy

The thorny combination of an uncertain, if promising, economic recovery and growing regulatory demands is exerting contradictory pressures on companies. On one hand, organizations that pruned staff during the downturn now need to bolster their workforces by hiring external providers for access to deeper expertise at lower costs. On the other hand, new regulations from the major stock exchanges and the broad reach of The Sarbanes-Oxley Act demand that public companies and private entities, many of which are experiencing a regulatory trickledown effect, greatly strengthen their internal controls.

That demand can lessen the appeal of outsourcing, which has risks that tend to be more difficult to identify and mitigate. There is a solution to that dilemma, however: co-sourcing, which provides enterprises with flexible access to optimal expertise at an attractive cost without sapping the strength of internal controls.

As the hype over and use of outsourcing--the relinquishing of business processes or entire functions to external vendors--has grown in recent years, so, too, has the method's potential to fail to deliver on its value promise. This has motivated leading research and consulting firms to scrutinize outsourcing failures to identify common pitfalls.

Gartner Inc., for instance, recently listed mistakes that buyers of outsourcing services typically commit. The chief infractions included a short-term focus, poor communications with internal staff about the outsourcing engagement's objectives, failure to recognize the risk of the outsourcing relationship, and, most tellingly, insufficient resources.

Too many buyers of outsourcing services, Gartner reports, fail to plan for and budget sufficient internal resources to effectively manage the relationship as it progresses. Co-sourcing, because it does not farm out a company's control of key processes or functions, limits the likelihood of that happening. It also boosts an organization's resources and skills to address a pressing need without ceding control of the function to a third party.

Co-sourcing can provide flexible access to expertise, reduce new-hire and travel costs, help train staff, free up higher-level staff to tackle more strategic challenges and reduce external audit hours. Co-sourcing can also help reduce internal fears that often accompany full-blown outsourcing (such as, "They sent our help desk to India--are we next?"), and reduce the likelihood of internal resistance that...