Excerpt – Business: The Ultimate Resource. Deciding Whether to Outsource

Use this checklist to look at the pros and cons of outsourcing and decide if it’s right for your organization.

Business: The Ultimate Resource
Introduction by Daniel Goleman
Published by Perseus Publishing
August 2002; 0-7382-0242-8

Deciding Whether to Outsource

Definition
Outsourcing is increasingly understood to mean the retention of responsibility for services by an organization while the day-to-day performance of those services is devolved to an external organization, usually under a contract with agreed standards, costs, and conditions.

In this checklist the organization considering outsourcing some or part of its functions will be called the “Organization”; the external organization designated to take them on will be called the “Agency.”

Advantages
The Organization generally makes the decision to outsource for a number of reasons, including:

• cost and efficiency savings
• greater financial flexibility through reduced overhead
• operational flexibility and control through contractual relationships
• a wish or need to focus on core activities
• access to better management skills for non-core activities
• staffing flexibility

Disadvantages
Outsourcing can:

• reduce corporate robustness by changing support functions;
• require considerable care in coordinating information flow with the Agency;
• reduce the Organization’s learning capacity by depleting its skill base;
• impair the Organization’s ability to integrate processes;
• compromise the Organization’s control over the functions that are outsourced;
• damage morale and motivation as jobs appear to be lost;
• increase employees’ insecurity, whether staff remain in the Organization or are hired by the Agency.

Action Checklist
1. Create a Project Team
Treat the outsourcing proposal like a project. Select a project leader and team, establish terms of reference, a method of working, and an action plan.

2. Analyze Your Current Position
Ideally you should have conducted a radical review of the Organization’s processes — you don’t want to outsource a function that might be better integrated with one of your core activities. Maintaining a clear vision of where the business is going, make sure you evaluate:

• what advantages you can gain by concentrating on care services;
• the minimum corporate involvement necessary to perform functions that don’t affect the customer;
• how much control you require over nondiminishing, nonproductive overheads;
• which functions are more viable operated by an external agency.

3. Pay Attention to People
As the contract stage approaches, your staff will suffer from anxiety and uncertainty. At best their working life will be transferred from one employer to another, at worst their job could be lost. Keep your people’s welfare at the forefront of your thinking.

4. Benchmark
Someone somewhere is probably doing the same thing that you are in a better way, or in the same way at lower cost. Identify appropriate organizations to benchmark against, and establish which activities they are outsourcing.

5. Come to a Decision
Identify your core areas — Tom Peters says, “Do what you do best and outsource the rest.” The principal questions are:

• What is core to the business and to the future of the business?
• What can bring competitive advantage?

Then decide whether outsourcing should become Organization-wide policy for non-core areas or whether it should be used only as the need arises.

6. Decide What to Outsource
Logically, what to outsource follows from the decision process. If you focus on the core competencies of the Organization, on your uniqueness, then targets for outsourcing become the support, administration, routine, and internal services of the company.

Areas that have traditionally been subject to outsourcing include legal services, transportation, catering, printing, advertising, accounting, and, especially, auditing and security. More recently these have been joined by data processing, IT services, information processing, public relations, buildings management, and training.

7. Tender the Package
The tender is an objective document detailing the services, activities, and targets required as well as a selling document designed to attract Agencies that can add to the Organization’s capability. Outsourcing is not just a matter of getting rid of problem areas.

Once you have defined an attractive package, send an outline specification and request for information to the Agencies that are likeliest to be interested. The outline specification should contain the broad intention of the outsourcing proposal and the timescales the Organization has in mind.

The request for information is a questionnaire type eligibility test intended to establish the Agency’s competence and interest. The second stage is the invitation to tender, a precise document that spells out exactly what Agencies are required to bid for.

8. Choose a Partner
The tender process should be used to evaluate facts, but choosing an outsourcing partner is much more than choosing a supplier, because the process involves a customized service, agreement on service levels, and a contract. At this stage the Organization is looking for an Agency with which it can agree on objectives and values, hold regular senior management meetings, and share otherwise confidential information. Harmony of management styles is a key requisite for success.

9. Introduce Your Staff to the Agency
Members of your staff scheduled for transfer to the Agency should meet their new management before any contracts are signed. Allowing employees to air their concerns may help to reduce the feeling they are being dumped or cast aside. On the other hand, glaring conflicts in style and personalities may emerge that could affect the contractual stage. Address other issues of terms and conditions of employment including appropriate compensation if Agency employment is not available or not required. 

10. Draw up the Contract
If the project team draws up the contract, provide appropriate legal input.  The contract should spell out: 

• the minimum service levels that the Agency will provide, checks and controls that these are met and medics or financial compensation if they are not;
• the demarcation of service responsibilities and boundaries so that both Organization and Agency are clear on who is doing what;
• who owns what in terms of equipment and hardware;
• the fate of the staff to be outsourced and details of their terms and conditions of employment;
• flexibility and allowance for change, for example, if the volume of business changes radically;
• a contract term with a review date and a provision for the outsourced function to revert to the Organization;
• a trial period before the contract becomes binding.

11. Test the Contract
Make certain that the contract will stand up to the rigors and complexities of actual operation. A trial period is ideal for making adjustments before the contract becomes final and for judging the likelihood of the partnership breaking down. 

Dos and Don’ts for Deciding Whether to Outsource

Do

• Have a clear vision of what outsourcing should achieve.
• Understand the scope of the services to be outsourced.
• Outsource the performance of a function, not the responsibility for it.

Don’t

• Don’t outsource strategic, customer, or financial management.
• Don’t let the goal of cost savings dominate everything else.
• Don’t think that outsourcing is the answer to every problem.

Thought Starters

• Have you defined the core areas in which you need to excel?
• Do routine and support functions consume an ever larger slice of overhead?
• Will outsourcing be an extension of your organization’s operations or an innovation?

From Business: The Ultimate Resource Copyright 2002 – Bloomsbury Publishing Plc. All Rights Reserved. This [excerpt] may not be reproduced, copied or distributed in whole or in part, in any manner, or by any means, without the prior written permission of Perseus Publishing, Cambridge, MA