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Outsourcing is not dead or dying – it just needs to be done properly

The collapse of Carillion and the profit warning at Capita have created a false sense of fear about the stability of the outsourcing sector

Several headline stories have drawn comparisons between Capita’s write-downs, losses and fundraising and the collapse of Carillion. They have even predicted the demise of outsourcing – but the wrong conclusions have been being drawn.

Even Gill Pimmer’s article in the Financial Times on 23 April arrived at conclusions that are a little odd – Capita to compete with consultancies, such as Accenture? 

While it is true that Capita needs better focus, needs to stop acquisition-led growth and chasing contracts with slim margins, most of the recent press coverage does not address the underlying issues as to why Capita and Carillion have not performed. But take a closer look at Capita’s “new” strategy outlined in its rights issue and you will see some of the problems for organisations such as these.

Conclusions from Capita rights issue document 

  • Capita has become too complex.

This is true of many outsourcing suppliers that have forgotten the basic principles for why client organisations outsource: to reduce cost and have access to improved skills and technology. To provide these, outsourcers need to achieve economies of scale and have a robust HR and technology infrastructure (see below).

  • Cost overruns due to poor contract management and associated penalties.

Many outsourcing service providers have contracts in place that lack serious rigour in areas such as scope and timescales, and have misunderstood penalties. This appears to be a widespread issue, which all clients and suppliers should consider and resolve.

  • Failure to keep up with longer-term trends.

But why did the client outsource? For improved technology and, in many cases, “innovation”. However, many outsourcing organisations do not heed their own requirements in these areas.

  • Capita quoted a low level of operational, technological and commercial integration.

But this is the basis on which to achieve economies of scale and is also the failing of a number of business process outsourcing (BPO) organisations.

  • Capita developed a large amount of bespoke software for clients.

Why, as a client, would you allow this to happen? Capita is an outsourcer, it does outsourcing (including software maintenance), while software is developed by a software development company. They have different skills, controls and cost bases.

  • Need for increased investment to upgrade Capita’s enterprise-wide tools.

Again, an outsourcing organisation needs to keep its own house in order to deliver.

  • It should also be noted that Capita is creating a sixth division (the FT article misses this).

These are essentially non-core businesses, absorbing management time and money.

Other points are made, but these are true of many enterprises and are not specifically outsourcing-related: Capita’s lack of strategy, inadequate risk management (taking on too many high-risk contracts), and financing by debt.

Lessons for successful outsourcing

  • Operational, technological and commercial integration are essential for economies of scale, to achieve financial and operational requirements, both for the client and the supplier.
  • Outsourcing suppliers need to understand and apply market and technology changes to themselves as well as their clients.
  • Outsourcing organisations should have simpler structures, including focused and funded (to have the right tools) internal HR and technology functions.
  • Contracts and liabilities are important and require focus. It is important to have a balance between what the client requires and what is realistically deliverable. Also, ensure that liabilities and penalties are fully understood by both parties. 
  • Outsourcing service providers should provide outsourcing services, separated organisations should do software development and any other non-core functions.

 All of the above points could, and should, have been applied within Carillion. 

As Capita’s rights issue indicates, these matters will take time to resolve (a multi-year transformation programme), but they are resolvable. Outsourcing is not dead or dying – it just needs to be done properly.

Bob Fawthrop is a seasoned outsourcing industry veteran and owner of Bob Fawthrop Associates.

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