BFM2013_2_03_Controlling the process

Outsourcing is quite often considered a financial decision (converting a fixed cost and the related investments and maintenance into variable costs), but quite often the decision-making process does not subject the decision to the same level of scrutiny of a financing decision.

Knowing the content of the outsourced services and processes is required not only to ensure a successful outsourcing, but also to avoid signing a contract that could result in substantial financial penalties… to obtain the same or a lower level of services!

“Outsourcing” comes in many forms and shapes- and my favourite example is what happened when in UK tax offices where given in outsourcing through a “leaseback”.

It is still a popular idea: sell your buildings, get the tax revenue, pay a fee to rent them back.

The idea? As a State, you get immediate cash, plus taxable income from what you pay to the new owner, while cutting down the costs by removing the need to carry out maintenance and “manage” buildings.

Nice idea, but… the company was revealed to be based offshore (goodbye taxation), and eventually said that it needed more income to cover the costs- or otherwise those buildings would be sold.

Can you imagine how it ended?

When outsourcing services that are delivered without technology, customers analyse all the details, sometimes up to a full due diligence.

Which details? How many people are involved, how many events, what are the qualifications of the people involved, the time and materials required, processes, etc.

Usually the quantitative analysis is less well developed when technology is involved, e.g. almost no company checks if every software component or database is properly documented, assuming that if it is working, there is obviously everything needed to make it working.

Controlling the process of outsourcing implies:

  • being able to transfer knowledge to the new organisation
  • identifying why you are outsourcing the service.

Cutting costs is the classical motivation for outsourcing, but “cutting costs” has different dimensions:

  • are you planning to reduce existing costs?
  • do you want to avoid required investments or regulatory hurdles implied in keeping the service in-house?
  • does the company need to expand, but your do not see how you could manage the expansion?
  • etc, etc.

Outsourcing requires a clear definition of the boundaries of the contract, as you can outsource the execution of activities, but you cannot outsource the responsibility of either the activity or the definition of its boundaries.

As previously hinted, some companies outsource complete processes that are not relevant to their own core business, keeping control only of core processes and communication with the outsourced ones.

These companies retain in house the knowledge required to oversee the outsourcing supplier(s), to the degree of detail required to ensure that the SLAs (Service Level Agreements) are respected and that the processes not outsourced are still working properly.

Unfortunately, most companies usually carry out different rounds of outsourcing, constantly enlarging the boundaries of the outsourced activities, but without updating accordingly the knowledge required to retain control.

Retaining the capability to dialogue with the outsourcing supplier is useful also when the customer wants to be able to manage the evolution of the SLAs according to business needs.

Therefore, selecting the right outsourcing supplier requires a clear understanding of what are the real capabilities of your own company to retain the knowledge required to manage the relationship.

Outsourcing suppliers that originate from the same market of their customers (usually as a shared supplier between customers) are able to fill the void left by the loss of knowledge inside the customers, at a price: it becomes like any other utility, and you risk losing influence on the content (and degrees of freedom) of the services delivered.

While apparently a larger, generalist outsourcing supplier could seem to be the best choice, in our experience understanding the mix of skills available inside the outsourcing supplier is the major factor enabling a successful outsourcing.

The most critical requirement is: the supplier must have internal resources that understand your own business, to deliver “backbone” services- otherwise, the supplier will outsource to a third party outside your own control.