BFM2013_2_02_What is outsourcing

Over the years, as the “outsourcing” concept (including the use of software solutions covering different vertical processes, e.g. ERP or CRM) was considered quite appealing and easy to explain, the meaning of the word has been bent and shaped in many ways, both from suppliers and customers.

Some activities often called “outsourcing”:

facilities management
the delivery of a service from a supplier, usually using a mix of your own and their resources, and with an high degree of control on the results, the process to achieve them, and the resources required; the main difference vs. typical body-rental agreements is that a common management team is designed, with a set of service level targets agreed to
joint venture
the delivery of services and products using resources from both companies, but under the management control of a new structure; the revenue is usually generated by a short-term transfer of the existing customer’s budget, eventually to be offset by the delivery the services to third parties; there are two main risks: 1.under-documented existing level of services; 2.constant struggles between partners over business priorities
shared services
usually it is a hybrid, but under the control of the customer, with neither external management or market; the risk is that of a company internal spin-off, with all the disadvantages of a joint-venture but without the same structural independence
outsourcing
the focus is on the outputs, with a clear definition of the inputs, but with a general framework for the service level agreement (SLA) and any additional activities.

All these approaches contain the same risk: transferring a vertical process usually results in loss of knowledge, as operational knowledge ceases to be thesaurised inside the customer organisation.

Obviously, sometimes this is an intended consequence, e.g. for companies that want to expand into new markets they have no operational knowledge of, like cash-based businesses (retailers, insurance companies, etc) entering the retail banking industry to convert their own cash-flow into an additional revenue stream.

As described in the previous issue , this risk can be easily managed by adopting a thesaurisation process that is more common sense than rocket science, i.e. by identifying “knowledge snippets”.

What you outsource is the production of a set of knowledge snippets whose “how” (i.e. the production method) you do not need to keep inside the company.

More on this aspects will be hinted at in the “Strategy and outsourcing” section, and in the next issue of BFM (focused on “Business Continuity Governance”).