Outsourcing – Deciding Whether to Outsource
Outsourcing has evolved into a strategic option for businesses of all sizes. Often seen as a threat by employees and an opportunity by organisations, outsourcing is now standard practice in many organisations. Its focus has shifted from the simple shifting of a process to a locally-based third party organisation to the global activity of offshoring and the outsourcing of entire functional areas, such as human resources.
On the surface the benefits of outsourcing seem not only straightforward but also considerable. In addition to the driver of cost-savings, there are many other elements that lead to a consideration of outsourcing, in particular the need for flexibility as demand for products or services rises and falls, and ways of delivering them improve. Experience shows, however, that there are many pitfalls, dangers and costs.
The below checklist is for those who must address the decision of whether to outsource or not, and if so, what and how to outsource. Encompassed are the stages in the outsourcing process leading up to drawing up and testing a contract. The key areas to address are highlighted, but further legal advice should be sort for all contractual and employment law issues.
Increasingly, outsourcing is understood to mean the retention of responsibility for services by the organisation but devolution of the day-to-day delivery of those services to an external organisation, usually under a contract with agreed performance standards, costs and conditions.
In this checklist the organisation considering outsourcing some or part of its functions will be called the Organisation; the external organisation to take them on will be called the Agency.
- Establish the outsourcing project team
Treat the outsourcing proposal as a project. Apply the principles of project management, especially selecting a project leader and team, establishing terms of reference, a method of working and an action plan.
- Analyse your current position
Ideally, you should have carried out a radical review of the organisation’s processes – you don’t want to outsource an activity that might be better integrated with another you regard as “core”. Ensure you have assessed:
the advantage to be achieved by concentration on core services
minimum involvement required in things that don’t affect the customer
control required of non-diminishing, non-productive overheads
functions which are more viable through an external agency
a clear vision of where the business is heading.
- Pay attention to people
As soon as it becomes known that outsourcing is under consideration, people will suffer from anxiety and uncertainty. At best their working life will transfer from one employer to another, at worst their job could be lost. Keep people at the forefront of your thinking.
Someone, somewhere is probably doing the same thing in a better way, or in the same way at lower cost. Identify appropriate organisations to benchmark against and establish which activities they are outsourcing.
- Come to a decision
Decide which are your core areas – Tom Peters said: “‚Äö√Ñ¬∂do what you do best and outsource the rest”. The principal questions are:
what is core to the business and to the future of the business?
what can bring competitive advantage?
Then, decide whether outsourcing should become policy for organisation-wide application to non-core areas or if it is to be used as the need arises.
- Decide what to outsource
Logically, what to outsource follows from the decision process. If you focus on the core competencies of your organisation, on your uniqueness, then targets for outsourcing become those areas which make up the support, administration, routine and internal servicing of the organisation.
Areas which have traditionally been subject to outsourcing include legal services, transport, catering, printing, advertising, accounting, and, especially, auditing and security. More recently these have been joined by data processing, IT services, information processing, public relations, buildings management and training. Some large organisations have outsourced the entire human resource management function, including recruitment, assessment and selection of new staff, together with their continuing development.
- Tender the package
The tender is both an objective document detailing the services, activities and targets required, and a selling document which serves to attract potential suppliers. Outsourcing is not just a matter of getting rid of problem areas.
Once an attractive package has been defined, send an outline specification and request for information to those Agencies likely to be interested. The outline specification contains the broad intention of the outsourcing proposal and the time-scales the Organisation has in mind.
The request for information is a questionnaire-type eligibility test intended to establish the level of the Agency’s competence and interest. The second stage is the invitation to tender – a precise document which spells out exactly what Agencies are required to bid for.
- Choose a partner
The tender process should be used for the evaluation of facts, but choosing an outsourcing partner is much more than choosing a new supplier, because the process involves a customised service, agreement on service levels and a contract. At this stage the Organisation will be looking for an Agency with which it can share objectives and values, have regular senior management meetings, and disclose otherwise confidential information. Harmony of management styles is a key requisite for success. The Organisation will also look for:
a proven track record, a flexible approach and financial viability
experience in handling the sensitive issue of staff absorption
evidence of quality management
how important in turnover the contract is for the Agency.
- Meet the staff
If staff are to be transferred to the Agency it is essential that they are given the opportunity to meet with their prospective new employer before any contracts are signed. Allowing concerns to be aired and questions to be asked may help to reduce feelings of being “dumped” or cast aside. On the other hand, glaring conflicts in style and personalities may emerge which can have an important impact on the contractual stage. Many other issues involving terms and conditions of employment will need addressing, including those of appropriate compensation if Agency employment is not available or not required.
- Draw up the contract
If it is to be the project team that draws up the contract it will need to have a strong legal input. As a guide, the contract should cover:
measurable service levels that the Agency will provide, and checks and controls that these are met – perhaps via a liaison manager – and clauses including remedies or financial compensation if they are not
demarcation of service responsibilities and boundaries so that both Organisation and Agency are clear on who is doing what
who owns what in terms of equipment and hardware
the fate of the staff to be transferred and details of their terms and conditions of employment – in the short, medium and long term, and including pensions provisions
flexibility and allowance for change, for example if business volumes double or halves
a contract term, with a review date and provision for the outsourced function to revert to the Organisation
a pilot period before the contract becomes fully operational.
Legal advice should be sort for all contractual and employment law issues.
- Test the contract
Ensure that the contract will stand up to the rigours and complexities of the operation in action. A period of testing and trial is ideal for making adjustments before the contract becomes final and to examine the possibility and consequences of the partnership breaking down.
Managers should avoid
- letting the goal of cost savings dominate everything else
- thinking that outsourcing is the answer to all problems
- outsourcing core strategic, customer or financial management.
- that you are outsourcing the “doing” of an activity, not the responsibility for it
- to understand the scope of the services to be outsourced
- to have a clear vision of what outsourcing is to achieve