Outsourcing: be clear, be organised

Outsourcing works best when the company thoroughly understands what it is buying and why it is buying it.

Outsourcing works best when the company thoroughly understands what it is buying and why it is buying it.

The underlying economic reasons for outsourcing a business function have long seemed compelling. By outsourcing, so the theory goes, companies gain access to the specialised knowledge of their suppliers, and are able to concentrate on their own core business. There is increased flexibility in their procurement and consumption of services. They gain access to better quality services from a specialist supplier forced to compete on the open market. And, of course, they expect to make significant cost savings in the process.

So what went wrong for the organisations that responded to last month's Deloitte Consulting survey on outsourcing user satisfaction? (Computer Weekly, 26 April). The survey portrayed outsourcing not as a business enhancement tool, but as something that could create long-term structural weaknesses in the user company.

It suggested that incumbent suppliers were prone to become complacent, that economy of scale advantages were in some cases illusory and that the user's need to manage its suppliers was much greater than first anticipated.

A lack of price transparency in many contracts, together with hidden costs masquerading as "incidental" services provided by suppliers, led the survey to question whether the potential for cost savings via outsourcing has been overstated.

However, a careful reading of the Deloitte survey does not lead one to conclude that outsourcing as a business phenomenon is a failure. One statistic given, for example, is that 38% of the participants who decided to outsource in anticipation of cost savings found that they paid additional or hidden costs for services they believed were included in their contracts.

But the survey does not reveal whether the value of these additional costs was £1 or £1m. It must therefore follow that the remaining 62% of survey participants did not pay any additional costs.

Similar analysis can be performed on many of the statistics in the Deloitte survey, which dilutes its rather apocalyptic tone.

The survey contains much that is good sense and its emphasis on the complexities and pitfalls of the outsourcing process is timely. Many of its themes chime with what we have observed as lawyers on a range of outsourcing transactions.

First and foremost, outsourcing works best when the user company thoroughly understands what it is buying and why it is buying it. It is tempting, but always perilous, for a company to attempt to outsource its problems.

If the problem was a flaw in the firm's own systems or processes to begin with, then simply switching to an external supplier will not solve matters. The decision to outsource should be part of a thought-through solution, not seen as the solution itself.

Secondly, the importance of an effective outsourcing contract should never be underestimated. The role of those of us who work as advisers in this field - lawyers, consultants, change managers and others - is to ensure that our clients enter into clearly defined and mutually advantageous arrangements, where every party's entitlements and obligations are understood by all concerned.

In this way outsourcing can continue to deliver real business benefits to suppliers and customers alike, as long as users are clear about their motives for outsourcing and suppliers are clear that they can provide a genuine business benefit.

If all concerned act with that level of clarity, we will help ensure that the reports of outsourcing's impending demise will prove to have been much exaggerated.

Simon Phillips and Mark Leach are partners with international law firm Bird & Bird.

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