The Essentials of Outsourcing

Given the recent economic uncertainty, many companies are still cautious to commit resources. It can be challenging to invest in the latest systems, equipment or specialist resources in order to effectively manage all aspects of a business. In uncertain times, many organisations face reduced workforces, outdated technology and shrunken facilities, due to limited investment capacity.  Yet it’s important for businesses to continue to develop for the future, or risk being left behind by the competition.

One method of mitigating risk while growing an organisation is to outsource a business function to a  specialist supplier with management expertise, economies of scale and new technologies.

What is outsourcing?

Outsourcing is the ‘contracting out’ of a business function, such as the management of the vehicle fleet, to a third party, without your business losing the overall control. The appointed third-party organisation takes control of the function and becomes responsible for its success within the parameters set out by the business.

Outsourcing allows you to concentrate on what you do best and, at the same time, save money, be more flexible and manage growth effectively. It also allows your business to gain access to outside management expertise and technologies for a relatively low cost.

The outsourcing process should be properly managed and monitored internally, and should be seen as a replacement of a function rather than a replacement for internal staff.

This guide shows you how to decide if outsourcing is right for your business, how to find the right partner(s) and how to achieve the best results from the process.

Human Resources Concept

Why should I outsource?

The benefits of outsourcing can be substantial. To make the most of the potentially significant gains for your business, you need to consider the following:

outsource lightbulb
  • Cost savings. The lowering of the overall cost of the service to the business. It can also give your business the edge when adapting to changing market conditions.

  • Cost restructuring. Operating leverage is a measure that compares fixed costs to variable costs. Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and also makes variable costs more predictable.

  • Redirection of internal overhead. Outsourcing should free up your business to focus on its core services. This will benefit your organisation by allowing your staff to concentrate on their main tasks and on future strategy, becoming contract managers rather than administrators.

  • Improve quality. Achieve a step change in quality through contracting out the service with service-level agreements.

  • Knowledge. Access to intellectual property and wider experience and knowledge.

  • Contract. Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

  • Operational expertise. Access to operational best practice that would be too difficult or time consuming to develop in-house. The outsourcing company you choose should be a specialist in the process or service you ask them to provide.

  • Staffing issues. Access to a larger talent pool and a sustainable source of skills.

  • Capacity management. An improved method of capacity management of services and technology, where the risk in providing excess capacity is borne by the supplier.

  • Catalyst for change. An organisation can use an outsourcing agreement as a catalyst for major step change that cannot be achieved alone. The outsourcer becomes a change agent in the process.

  • Risk management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

Essentials of Outsourcing-cover

Download your PDF Guide and Checklist

To assist employers, we have produced a PDF download of our guide to outsourcing.

Consider your options

It may be tempting to rush into outsourcing, but take the time to think through what you need, set the terms of the partnership and find the right service provider. Consider the following:

1. What are your core strengths and which processes are you thinking of outsourcing? Why?

2. Have you calculated the costs of doing the function in-house? Include hidden costs such as office space and staff costs.

3. Check the return on investment (ROI) – ask potential service providers for help, as many offer an ROI calculator.

4. What are the costs of not outsourcing? Will your business suffer because it cannot afford to invest in the expertise, technology or the facilities that an outsourcing partner might provide?

5. Have you checked that any potential supplier is capable of limiting your costs? Ensure they’re not solely interested in gaining your business, only to increase your costs over time.

6. When looking at outsourcing, you should also ask yourself:

  • Am I prepared to spend the time and energy required to manage the outsourcing relationship?
  • Are my expectations of the benefits/costs realistic?
  • Is the function a key task that my business needs to control directly to ensure its future competitiveness?

7. Finally, weigh up the risks of outsourcing against those of keeping the processes in-house.

Activities you can outsource

Many businesses now outsource some of their non-strategic activities, or more complex tasks, in order to access industry best practice and cutting-edge technology. This enables the business to benefit from the outsourcing company’s economies of scale and highly trained staff, while it concentrates on core business activities.

Processes companies consider outsourcing include:

Vehicle fleet management

IT functions

Business processes and HR

Finance (including payroll)

Sales and marketing

Health and safety

How much of a function you choose to outsource is up to you. Though one factor to consider is that however experienced an ‘in-house’ department is, it is still removed from the organisation’s core business. Whereas, with a specialist provider, it is their absolute focus.

This means that any changes in the industry (new developments, innovative ideas etc.) can be assessed and implemented quickly and without fuss.

Of course, somebody within your company will need to work with your chosen provider at a strategic level. They will ensure there are easy-to-use systems that provide you with meaningful, easily accessible management information that enhances your ability to make good decisions.

Your partner also needs to demonstrate openness in everything they do – if you’re going to outsource a part of your business, you have to know you can trust them completely.

Choosing an outsourcing partner

Remember that outsourcing means partnering with a supplier for your mutual benefit. Choosing a company to trust with your outsource requirement is very different from choosing a supplier. You’re embarking on a long-term relationship; take your time to make the right choice.

Some of the areas to consider regarding the potential service provider are:

  • Service level agreements

    Service-level agreements (SLAs) are contractual obligations, which normally form a contract. SLAs can be used in any supplier contract where a business’ ability to meet its customer requirements is dependent on the supplier.

  • See them at work

    If possible, visit each service provider. Look at the environment in which their people work and enquire about staff retention and turnover. Check their IT systems and equipment, management and quality assurance procedures. See what access you would have to their systems and whether they operate in real time. Try them out with a small trial to see how they perform and how they would deal with the additional volume.

  • Financial stability

    This relationship is for the long term, so make sure that your potential partner is financially stable. If it is a limited company, get copies of recent accounts, obtain bankers’ references and consider getting a report from a credit agency.

  • Account management

    Account management is critical to the relationship. How will your account be managed and how good – and available – is your account manager?

  • Customer references

    Find out who the provider’s existing customers are, and obtain references from those in a similar sector to you.

SLAs cover all aspects of the outsourced work – they define the service that the supplier must provide, the level of service to be delivered and set out responsibilities and priorities. If your business needs change, you may require different criteria. Therefore, the SLA should be updated regularly to take into account technology changes.

How to make outsourcing work for you

Many businesses now outsource some of their non-strategic activities, or more complex tasks, in order to access industry best practice and cutting-edge technology. This enables the business to benefit from the outsourcing company’s economies of scale and highly trained staff, while it concentrates on core business activities.

Processes companies consider outsourcing include:

  • Get prospective partners to sign a non-disclosure agreement at the start of your discussions so you can share information with confidence.

  • Remember that although the supplier takes responsibility for the process, you still need to actively manage the relationship.

  • Take your time making decisions and make sure you are clear about the terms on which you and the supplier are working together.

  • Make the effort to establish a good relationship – this calls for flexibility and regular communication on a number of levels and across a number of functional departments.

  • Nominate a member of staff to take responsibility as a liaison and for contract management (relationship manager).

  • Set expectations up front and ensure that there is no mismatch between you and your partner.

  • Don’t just choose an outsourcing supplier on the cheapest price. The supplier might look to increase their margin over time.

  • Establish regular communication within your company – staff may have concerns about their own jobs, so keep them informed.

  • Attempt to form a partnership with your supplier for several years because it is more likely to yield the best results. Switching suppliers can be a lengthy process, so it pays to commit to building a long-term relationship from the outset.

  • Aim for a smooth transition/migration. Even with good planning, it’s a learning curve for both parties. Use the experience as an opportunity to modify the SLAs for the future.

  • Measure success. There should be financial benefits as a result of the new arrangement but other reasons for outsourcing could be a little harder to quantify, such as generating a higher profile for your business, improving credibility, improved processing capability, fewer defects or greater speed to market. Include these  factors in your assessment, consider how you’ll measure them and how often.

  • Plan a clear exit strategy. All outsourcing contracts should contain an exit strategy. Does the outsourcing company wish to tie you into a contract that can run for many years or is it confident of its ability to deliver and, therefore, approach contractual issues with flexibility in mind?

  • The contract should also include clauses covering:

    • Dispute procedures
    • Who has responsibility for what – and the lines of reporting