Understand why you are outsourcing to get maximum benefit from the contract

Cost cuts are a clear driver but issues such as improved quality are also key, as Jonathan Reuvid, editor of the book Managing...

Cost cuts are a clear driver but issues such as improved quality are also key, as Jonathan Reuvid, editor of the book Managing Business Support Services, explains

Whether setting up outsourcing relationships in the UK or overseas, the management of support services by specialist providers makes a big difference to the cost and effectiveness of business operations. As services increasingly bundle skills in technology, transformation and outsourcing to achieve change, the issue is no longer whether to outsource, but what, why, where, when and how.

A survey conducted by Capgemini and IDC found that the top three reasons why companies outsource are:

  • To focus on core business
  • To reduce costs
  • To adapt to market conditions.

Cost is always a factor in the decision-making process, but when asked their reasons for outsourcing, assuming that cost was equal, executives responded differently. The top three reasons for outsourcing then became:

  • The ability to focus on core business
  • To improve adaptability to market conditions
  • The ability to bring about a business transformation.

The bottom line of many surveys on outsourcing is that there are three clusters of reasons driving the outsourcing decision: reducing cost, improving operational performance and developing capability.

The range of outsourcing arrangements has evolved to match these needs. The level of value created by outsourcing is different in each case and the relationship and governance issues vary significantly.

Traditional outsourcing is about doing the same task at lower cost, or doing it better for the same money. It is about sweating assets. The outsourcing supplier achieves this through economies of scale, spreading resources and assets, and by applying best practice tools and processes.

Typically non-core IT systems are outsourced purely with cost reduction in mind. Justifying a cost-reduction outsourcing stance is easy when savings can be demonstrated.

The rise of offshore outsourcing locations that have a low-cost, highly skilled labour force has given greater scope for organisations to benefit from using outsourcing to reduce costs. But there are other initiatives being offered by outsourcing suppliers, such as grid computing and helpdesks, that offer other means to reduce costs.

Outsourcing to solve a problem allows organisations to gain control, in terms of cost and operations, of troublesome business or IT functions. Typically, these services are considered for business areas that are unable to meet service demands, causing workload backlogs and potentially creating complications for budget plans.

Justifying this outsourcing approach is usually a combination of tangible benefits, such as cost control and measurable improvements in service quality, and intangible benefits, such as customer satisfaction through stability of service.

Finally there is "transformational" outsourcing to bring about a step-change in an organisation. It focuses on three main areas: technology, business and finance.

The headline attractions of such an approach can be compelling, particularly as the outsourcing supplier bears a large element of the risk. However, it can be a difficult path to tread, particularly as the supplier is invited to become integrated into the fabric of the organisation.

Order the book Managing Business Support Services (ISBN 1 9050 5011 9) online:

www.kogan-page.co.uk

This was last published in April 2005

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