Most outsourcing contracts describe the cost of the service delivered by the supplier, but there is a limited assessment of the costs still left inside the customer organization.
Moreover, often contracts that compare outsourcing vs. internal costs do not analyse the history of the development of costs, but just the costs to be replaced.
Studying the history of the internal costs and their relationship with organizational structure and strategy could actually give a fair view not only of the “instantaneous” costs, but also of the speed, acceleration, and level of absorption across time.
If you build this “history”, represented by a simple chart, and then compare it with the models (usually, financial plans) offered by different suppliers, you can also focus the negotiation on specific differences to be inserted in the contract- and maybe also assess the compatibility between their corporate culture and your own (outsourcing is a marriage, not a date).
This inclusion is quite important, because when outsourcing the contract to an external company, the costing model they offer is representative of their eCI (embedded Corporate Identity), and any discrepancies that are not managed usually result in additional costs- on either side (who bears them is then a matter of negotiating power).
We are coming again to the same point: you need to understand where you are before you can outsource.
Properly managed outsourcing relationships could add value to your company, as the supplier could add a new perspective on ways and means to deliver services- and improve delivery.
Whenever outsourcing, you should insert clauses to retain inside your company the knowledge required to develop your own business.
If Knowledge Management is introduced after outsourcing then probably the most effective way is to involve your outsourcing suppliers in the process, so that they can help you in identifying the knowledge boundaries.
The clear definition of where the outsourced activities are linked to the knowledge distribution inside your own company allows moving from a quantitative approach to outsourcing to a qualitative one, but built on reality, not expectations.
Quantitative analysis is able to assess the outsourced activities vs. previously agreed measures of compliance with already known activities, but gives limited indications on the evolution.
Deriving from the quantitative measures new KPI (Key Performance Indicators) that can be used to monitor the evolution of the outsourced activities is a useful exercise.
Anyway, such KPI exercise requires full co-operation from both parties: you can “slip” that requirement into the outsourcing contract, but without the full and willing compliance and understanding of the outsourcing supplier, you will be better off by focusing on just the quantitative measures.
A more detailed description of this decision support approach will be contained in the next issue of BFM, focused on Business Continuity Governance .
Sometimes, this structured quantitative and qualitative approach is not feasible, e.g. for lack of resources.
A typical example is when a first outsourcing company obtains an outsourcing contract that is actually a facilities management activity.
This being the case, probably your own current outsourcing/facilities management supplier will be unwilling to sustain the additional costs required to “map” the current status, understanding that you are scouting for a new supplier.
Manage your communication properly to ensure a smooth transition, e.g. by allowing the current supplier to provide a proposal for the new service, but based only on information about existing services that they released and shared with you (and therefore potentially with other prospective suppliers).
Whenever involved with customers that have de facto lost control of their own knowledge, we suggest to identify knowledge boundaries, as described in Issue01 of BFM , and then start developing a roadmap to “get back in control” (which, sometimes, could imply a whole programme of activities, not necessarily all visible to the outsourcing company, and involving also some crisis management).
Eventually, either the external supplier will accept the new structured approach, or their degree of freedom will be so limited that their own unwillingness to cooperate will become the main reason to replace them with another supplier that is able to co-manage a proactive outsourcing.
Every business relationship could turn sour, and also strategic outsourcing does not protect you from a failing supplier or a change of business strategy that makes the existing arrangements untenable.
For critical activities, we always suggest customers to keep at least an internal “knowledge presidium” (a subject matter expert) to keep abreast of the knowledge transferred to external suppliers.
Ideally, as discussed in the next issue of BFM on Business Continuity Governance , each business should define the minimal level of service required to pass through a time of crisis or to fill the void left by a failing supplier.
Some companies include in their own contracts redundant facilities, to ensure disaster recovery, as well as “on demand” contracts to cope with short-term business needs that cannot be managed by either internal resources or the existing suppliers.
Beware of using “on demand” external suppliers that are called only when there is a crisis: the risk is that they will optimize their own resources allocation- and have just “sandbagging” staff available, while waiting for the real experts to be released elsewhere.
In the end, all the processes suggested can be simplified by properly managing the outsourcing selection process.