Outsourcing feels like it’s been around forever. And doubtless, as an adjunct to business operations, it has. But, as a widely-used business strategy, it really only dates to the 1980s.
Since then, outsourcing has become a vital option for large and small business, and for many public services too.
So, what is outsourcing, why do organisations use it as much as they do, and what are the risks?
What is Outsourcing?
As big ideas go, outsourcing is simple. It’s getting goods and services that you need from an external supplier, rather than producing them within your business.
For example, your business needs to clean its buildings, run a data centre, and manufacture widgets. You could hire cleaning and janitorial staff, build and operate a data centre, and run a factory.
Or, you could contract with a cleaning company, have an operating agreement for a part of a stand-alone data centre, and buy-in manufactured widgets to your precise specifications. These are examples of outsourcing.
Where the company to whom you are outsourcing your goods and services provision is in another country, we can also refer to this as ‘off-shoring’… For obvious reasons.
What Services can we Outsource?
The market for outsourcing is now huge and mature. So, there’s pretty much nothing that you cannot outsource. In the late 1980s and 1990s, many Governments sought to outsource statutory responsibilities (at both central and local government level). Here in the UK, that was one of the drivers behind Compulsory Competitive Tendering (CCT) and the Private Finance Initiative (PFI).
So, if you want to run a prison or an office canteen, if you want to run an IT service or a rail service, or if you need a call centre or road maintenance… there will be a specialist company that will take on your outsourced contract. In the commercial world, commonly outsourced services include:
- Staff and HR services
- IT, telecoms, and data services
- Logistics – distribution and warehousing
- Call centres
- R&D, industrial design, and prototyping
- Marketing and design services
A Zoo of TLAs
As a 1980s/1990s business fad, outsourcing naturally spawned a load of three-letter acronyms. Here are some:
- BPO: Business Process Outsourcing
- KPO: Knowledge Process Outsourcing
- EPO: Engineering Process Outsourcing
- ITO: Information Technology Outsourcing
- DPO: Data Process Outsourcing
- LPO: Legal Process Outsourcing
- RPO: Recruitment Process Outsourcing
Why is Outsourcing so Popular?
As with every business strategy, there are pros and cons. But when a strategy becomes popular (as outsourcing did in the 1990s) and stays popular, then, for most organisations, there is a net gain. Let’s look at the benefits of outsourcing, its disadvantages, and some key considerations for getting it right.
Benefits of Outsourcing
Guess what is the biggest benefit that drove the majority of outsourcing…
Did you guess it?
Cost-saving. You can save money if the outsourcing company can do one or more of:
- Hiring lower-skilled employees
- Paying employees less
- Access less-stringent labour laws or other regulations
- No redundancy liability when you no longer need the staff
- Gain economies of scale (the one they present publicly, for some reason!)
But there are other benefits:
- Lower risk from potentially bad hires
- Flexibility to scale up and reduce provision at short notice, with fewer costs
- Access to a wider pool of talent
- Ease of setting up in alternate time-zones for 24 hour service
- Obviating the need for capital
This access to off-balance-sheet capital was a primary driver for the UK Government’s extensive use of the Private Finance Initiative in the 1990s
Disadvantages of Outsourcing
There’s always a price to pay, and the primary one is the loss of an element of control over the services or access to the goods that the outsourcing supplier provides. If it’s a core function for your organisation, this presents a significant risk. While there are ways to mitigate the risk (see the section below, on important considerations), this will always give pause for thought. And the decision will often characterise a company’s approach in contrast to some of its competitors.
Other potential downsides include:
- Communication challenges
- First and foremost, don’t underestimate the challenge of communicating via a contractual relationship
- Communication is necessarily less direct – people don’t work for you and neither do they share completely your organisation’s goals
- There may be distance and time zone challenges
- And maybe also challenges of language and culture
- Moving to outsourcing can have an adverse impact on your organisation’s culture
…particularly in the months and even years ahead of and following implementation
- In addition to the pain for workers, whom you may need to lay-off, the transition can be disruptive and brings risks of errors and omissions
- The transition also involves substantial time and cost – not least in the due diligence process
Advisors like consultants, accountants, and lawyers, however, thrive on outsourcing initiatives!
Important Considerations with Outsourcing
Above all, getting outsourcing right depends on the quality of the contract that you draw up. And, related to this are:
- the specification against which the outsourcing provider has tendered their bid
- the Service Level Agreement within the contract
Put at its simplest, there will always be a tension between the aim of making cost savings and the desire to maintain quality. Get this balance wrong, and your outsourcing initiative can become an operational, legal, and public relations disaster!
How Many Outsourcing Providers?
There’s one other consideration I want to put into your mind, if you are mulling over an outsourcing strategy.
If you plan to outsource more than one single product or service that your organisation uses, you may have a choice, between:
- Multiple specialist outsourcing providers
- A few large portfolio providers
There are pros and cons with each approach, of course. And that would take me beyond the scope of this article. Suffice to say: caveat emptor. Do your homework, because the future of your business may depend on the decisions you make.
What is Your experience of Outsourcing?
We’d love to hear your experiences, ideas, and questions. Please leave them in the comments below.