Continuum Briefing. The Benefits and Risks of Outsourcing

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1 Continuum Briefing The Benefits and Risks of Outsourcing History The classic view of organisational management developed between 1900 and According to this view, the ideal model for an organisation was of a fully integrated unit that owned and controlled every aspect of its work. In the 1950s, some organisations began to diversify their interests. They wanted to expand and take advantage of economies of scale. But they were unwilling to consider any form of management control other than the classic centralised approach. The result was an increase in levels of management. To control these levels from a central point, organisations had to introduce complex and ponderous management processes. As the 20th century progressed, these unwieldy organisations struggled to compete in the fast-moving global market. They were unable to react quickly to events and opportunities because they lacked flexibility. In response, some leaders identified the core processes of their organisations and concentrated on these. They asked external companies to handle all other processes. Thus the idea of outsourcing was born. In the late 1980s, it became a recognised business strategy. In accordance with the strategy, leaders entered contracts with outsourcing companies. These companies handled ancillary services that were important but not related directly to an organisation s core business. One of the most popular outsourced ancillary services was, and remains, customer service. Organisations that outsourced became more flexible. They also cut costs. Now, in the 21 st century, many organisations dismiss the idea of exercising total direct control over every aspect of their work. Instead, they aim to create strategic partnerships with service providers. The centralised approach still has its supporters. But self-sufficient organisations often find it hard to cope with today s business environment. Definition Professor Robert Handfield, an expert in supply chain management, describes outsourcing as a business strategy that uses external resources to do jobs traditionally performed internally. This sounds similar to contracting, a process that s been around for many years. But there s a major difference between contracting and outsourcing.

2 When an organisation contracts out work, it asks a service provider to do a specific task for a limited time. The organisation doesn t change its business practices. When it outsources work, an organisation enters a long-term contract with a service provider, sometimes for ten or more years. Because of the length and nature of the contract, the organisation significantly changes the way it does its business. Such changes may involve releasing money, facilities, employees and time. An organisation then focuses on what it does best. By so doing, it can achieve a vital competitive advantage. As Graeme Martin, Heather Alexander and Martin Reddington say in their book Technology, Outsourcing and Transforming HR, organisations that outsource can make their work simpler and keep in-house the most vital aspects of their business. At the same time, their outsourced work can remain successful and become cheaper. General Benefits The business services company, PriceWaterhouseCoopers commissioned a report called Key Trends in Human Capital. The report lists five major benefits that companies believe they have achieved as a result of outsourcing. 74% of the companies surveyed said outsourcing has saved them money 33% said they have gained strategic flexibility 28% said they were able to focus more on core competencies 27% said outsourcing allowed them to focus on business continuity 25% said outsourcing had enhanced service quality Money Clearly, one of the major drivers of outsourcing is money. In a global market, where service providers can achieve international economies of scale, outsourcing can cut an organisation s operating costs. Strategic Flexibility Strategic flexibility is also an important driver. It refers to the ability of an organisation to respond to challenges and opportunities. When an organisation outsources its administrative functions, for instance, it can pay greater attention to its strategic goals. Spending time on in-house ancillary services drains resources and is time-consuming. Core Competencies and Business Continuity Focusing on core competencies and business continuity is critical in many industry environments. Success depends on a competitive advantage. Outsourcing non-core work can allow an organisation to exploit this advantage to the full.

3 For example, by outsourcing aspects of its business, an organisation can use a greater number of in-house staff on its projects. Speeding up project delivery and quality in this way can improve an organisation s reputation and boost its profits. Service Quality As well as offering good value, a service provider may have highly qualified and experienced professionals. These are the very people an organisation can find it difficult to recruit and retain in-house. By using an outsourcing company, an organisation can gain the benefits of best practice, creative problem solving, and the most recent industry knowledge. This means that an organisation acquires a first-class service with a pre-arranged and therefore predictable cost. Benefits of Outsourcing HR and Training and Development (T & D) Good examples of popular outsourcing are non-profit centres within organisations. Two areas that fit this description are HR and T & D. HR The Chartered Institute of Personnel and Development (CIPD) has looked at HR and T & D outsourcing in detail. For HR work, CIPD says that outsourcing frees up an organisation s staff so they can spend time developing employee performance. Other outsourcing benefits include: Access to the latest HR IT Better management data Access to levels of experience that may not be available in-house Greater response speeds Enhanced flexibility T & D When it comes to T & D, Debbie Friedman makes a useful point in her book, Demystifying Outsourcing: The Trainer s Guide to Working with Vendors and Consultants. She says most leaders appreciate that only knowledgeable employees can react promptly to changes in business. Outsourced training can ensure employees acquire this knowledge quickly. CIPD raises some additional benefits. Its research shows that outsourcing T & D can save around 20% for each employee compared to in-house training. Outsourcing also enables organisations to: Access practical skills and expertise Keep a close eye on costs

4 Manage training programmes more effectively Gain flexibility and choice Access the latest ideas Use best practice General Risks The PriceWaterhouseCoopers report, Key Trends in Human Capital, lists five major risks that companies feel may accompany outsourcing. 39% were concerned that an outsourcing culture might dissuade the right people from applying for in-house jobs 31% said they were worried about the possibility of poor service from service providers 30% expressed concern about the cultural differences that may exist between their companies and the service providers employees 29% felt that outsourcing might make it hard to retain employees based in other countries 23% noted the possible effects on contracts and service quality of increases in wages in service provider countries However, these are potential risks, not actual problems. Any organisation that considers outsourcing must run a risk analysis and address such issues in advance. One of the most important aspects of preventing risk in this instance is to choose the right service provider. Organisations should, for example, check references. It s also vital to establish and maintain open communication with service providers. With this in mind, an organisation needs to know precisely who, on the service provider s side, is managing the partnership arrangement. An organisation needs to be confident this person can resolve problems and answer enquiries without delay. An organisation should also talk to potential service providers about its aims and strategic vision. It needs to be sure service providers understand what it is trying to achieve. In practical terms, it s possible to resolve many of these issues with a service level agreement. The service level agreement can define performance standards and penalties for non-compliance. It can also highlight any legal requirements. Risks of Outsourcing HR and T & D CIPD recognises a number of risks associated with outsourcing HR and T & D. HR For HR, CIPD stresses that outsourcing does not mean an organisation no longer has to manage its employees. Responsibility for this function remains with the

5 employer. Retaining an HR presence in-house, and liaising regularly with the HR service provider, helps to avoid problems arising. Furthermore, outsourcing is a long-term commitment. A contract may last up to ten years. It s therefore important that an organisation ensures an HR outsourcing contract allows for future changes of business strategy and changes in the size of the organisation. The other risk for HR is that an organisation fails to check the service provider s procedures. These procedures must match an organisation s expectations. A service level agreement can minimise or eliminate this problem. T & D For T & D, CIPD cautions organisations to choose their service providers with care. The risks are that the providers lack experience, have a poor quality system, and do not measure training and development outcomes. An organisation should clarify these issues and resolve any problems to its satisfaction before signing a contract with an outsourcing company. Related Terms Downsizing. Downsizing refers to a reduction of employee numbers. Reasons for the reduction include cost cutting and attempts to improve efficiency. Downsizing doesn t necessarily go hand-in-hand with outsourcing. But it s possible an organisation may cut employee numbers when it outsources some of its work. Business Process Re-engineering. This describes the process of making an organisation up to date and efficient. The process involves the study of procedures and workflows, and aims to improve an organisation s performance. Outsourcing may well be one of the recommendations such a study makes. For more information or to speak to one of our consultants: Visit Phone 0044 (0)

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