What is outsourcing?
Outsourcing is the business practice of hiring a third-party company to perform services that were traditionally performed in-house by the company's own employees and staff.
These tasks are often a business’s secondary functions: tasks that must be fulfilled in order for a company to focus on its central activity. Outsourcing is a practice usually undertaken by companies as an efficiency measure (cost-cutting, access to skills, productivity, focus management attention on more profitable activities, minimise in-house investments etc.). As such, outsourcing can be an effective tool if leveraged correctly.
The term ‘outsourcing’ is sometimes obscured and wrapped in a negative connotation, as it has been closely related to a flight of jobs, loss of control, lack of accountability, lower service levels etc. These negative connotations are often based on a lack of understanding of how outsourcing can be a useful business tool and can be used for the benefit of the company, its employees and its shareholders.
But, like any tool, you need to keep in mind how this tool can be used and what risks you will need to manage to gain most benefit.
Common Areas of Confusion
It’s worth taking a moment to understand some of the common areas of confusion
- Outsourcing is a belief strategy – you will sometimes hear commentators talk in terms of whether they believe in outsourcing or not. Our view is that it’s just one of the business tools at your disposal, not a generic panacea to address all challenges. Like with any tool, it comes with benefits, limitations and risk.
Belief should not be a consideration. Instead, any outsourcing arrangements should be driven by a clear set of objectives and a sound business case that demonstrates that this is the best solution for achieving your objectives. This should include the management and mitigation of the risks involved.
- Outsourcing vs offshoring – some commentators confuse outsourcing with offshoring. Whilst the two are related and can go together, you can also do either separately. Many companies outsource activities within their national boundaries and many will offshore work to their in-house delivery centres in lower cost offshore locations. And of course companies also outsource work to offshore locations.
- Flight of jobs – if you link it back to your objectives, then the flight of jobs happens because the current operation is not efficient enough. It may be that you are able to find efficiencies in a number of ways, and outsourcing is just one. The movement of jobs is a matter of finding the most efficient route for achieving your objectives. So outsourcing is not the driver for the flight of jobs, because in-house or outsourced, the jobs still need to move to the most efficient location for your objectives.
- Outsourcing vs out–tasking – You sometimes see companies pass on work to a third party, but precisely define how the work should be done (at a task level) and how many staff (sometimes even who the staff should be) are needed. In this situation, the service levels are measured in terms of the inputs provided (e.g. you will always have five full time employees available to answer calls).
Whilst we accept that there is a graduation in the level of outsourcing vs out-tasking, such level of specificity is closer to out-tasking. In an outsourcing relationship, the client company should define the outcome that is required (e.g. 99% of calls answered within 30 seconds) and allow the outsourcing provider to decide how best to achieve that outcome (people, Bots, automation, process improvements etc.). The key here is that the client company defines ‘what’ is needed and the outsource provider decides ‘how’ it is delivered.
- Loss of control – maintaining control is a complex and fine balance in most outsourcing relationships, so should be carefully considered in defining the constructs of a contract. This should not be seen in absolute terms but, instead, considered in terms of what the level of control is that you will need under different circumstances. At eXceeding we have developed a list of key areas of controls that should be considered by clients as part of their contract and commercial considerations. Control should therefore be seen as a matter for careful consideration and planning.
- It’s only for reducing costs – in the current business environment, very few projects will be considered unless they demonstrably reduce costs. At eXceeding we see lower cost almost in terms of table stakes. An outsourcing arrangement can deliver so much more; reduction in capital requirements, variability of cost, access to skills, process efficiencies, catalyst for change, acceleration of innovation etc.
Defining a clear set of objectives will enable bidding suppliers to develop a solution that, not only saves money, but also delivers other efficiencies or benefits that the client company cannot deliver by itself. At eXceeding we have developed tools to help clients establish these additional objectives or benefits that they can get from the market. This also requires the client company to look at a business case beyond just a financial analysis.
- Outsourcers just pay people less for doing the same job – This can sometimes be a facet of an out-tasking arrangement but, for the managed outsourcing services, it rarely delivers benefits for either party beyond the short-term. Outsources have to hire the skills from the same market as the client company and in some cases have to do a harder ‘sell’ to attract those skills. They therefore have to treat their employees in line with the market norm. In fact, their employees generate revenue so those employees that worked in the back office suddenly become valuable as front office employees. We believe that a number of controls can be placed to make sure that employees continue to be treated in line with market norm.
- You will never get the promised benefits – Military leaders will often cite that “No battle plan ever survives contact with the opposition.” Outsourcing is not just about an RFP or legal contracting process, it’s a fine balance of benefits, risks, contingencies, controls, planning, relationships and assumptions.
In most cases, both parties are entering into an arrangement with the best of intentions - benefits get reduced when ‘events’ happen and are not managed effectively. This is where a realistic business case becomes key; to make sure that you have considered all aspects and taken your own realistic views on the benefits you can expect to get. Additionally, Suppliers negotiate these arrangements every day and therefore have expert dedicated teams to make sure that they have adequate contractual mitigations in place when things don’t work out. As the client, you should consider carefully if you might also need access to similar experience.
In summary, at eXceeding we take a pragmatic and commercial view of outsourcing. Whilst we would advise that outsourcing is not a panacea for all business issues, companies should realistically consider where and how outsourcing might be one of the solutions to the business challenges that they are trying to address.
A sound view of your objectives (the business challenges) combined with a clear and commercially sound business case (more than just the financial analysis), supported by a realistic view of the risks and mitigations needed can prove to be a valuable option for many businesses.