The reason for concern

The reason why managers must now strive to be competitive in everything is quite simple. In recent times it has been proved that if the circumstances are right, it is possible to obtain substantial service improvements and cost savings from both core and non-core functions by involving external specialists on a continuous basis. Furthermore, it is possible to take action that will enable an organization to obtain even greater improvements and savings in the years ahead whilst passing much of the worry and responsibility to a third party.

In June 1995 an article appeared in the Harvard Business Review in which the Head of IT at BP Exploration claimed that by outsourcing almost all his IT function to specialist IT companies, he had achieved considerable benefits. Amongst the benefits claimed was a much improved service, a 30–40 per cent reduction in costs and a guarantee of further improvements and savings in the future. Later the Finance Director of BP Exploration went into print to say that he had just completed a four year contract for the outsourcing of his finance function and had signed a further five year contract with the same service provider. He went on to say that over the nine years of the two contracts, BP Explorations business will have grown by 50 per cent, although his costs will have reduced by 50 per cent and yet he now has a far better service.

Ever since the 1989 decision by Eastman Kodak to outsource most of its IT operations there has been a gradual increase in articles and PR releases which appear to indicate that a level of service improvements and cost savings might be possible from outsourcing that would be very difficult to obtain from an internal service. The BP Exploration articles added further weight to the outsourcing argument by suggesting that continuous improvements to the service were also a realistic target for some client organizations. After the first of these articles, there was a very noticeable decline in the number of managers claiming that outsourcing a function like IT was simply an admission of failure.

Certainly, BP Exploration’s competitors were left in no doubt that to get back on a competitive footing regarding IT and finance, they had to look for equally innovative solutions. Recently, a number of these competitors have done just that. In most cases the dominant factor has been the involvement of external specialists in both IT and finance.

Apart from BP Exploration there are many other examples of both client and service provider jointly claiming dramatic success from an outsourcing arrangement. The logic of outsourcing a non-core function to an external specialist in a relevant field has to be theoretically sound. Why should an organization insist on employing the members of its non-core finance function when it has long ago outsourced functions like Security, Catering and Cleaning and would no longer even consider taking them back inhouse?

Given its proven potential, it is now clearly illogical to embark on a major performance improvement project without including outsourcing as one of the main options. The prospect that competitors could achieve continuous improvements and savings by taking such action is perhaps the key cause for concern when considering the entire subject of competitiveness. Clearly, not all the competition will take the action necessary to maximize competitiveness but most organizations would be in difficulty even if only a small percentage of their competitors obtained such an advantage.

But does this mean that all organizations should outsource their non-core functions? Are dramatic savings and service improvements open to all? Is outsourcing always the answer?

The short answer to this last question is No! Outsourcing does not always work, in fact there are many examples of abject failure. Indeed, the failure rate may be even greater than is normally experienced for internal projects. Nevertheless, the potential rewards are such that failure to consider the outsourcing option is no longer just a management misdemeanour, it’s a very serious crime. Consider this: if you succeed with an internal project, how long will it be before a further project will be necessary – six months, a year or two years? If you successfully outsource to a provider who is motivated and skilful enough to make continuous improvements, then you will have to be careful in managing the relationship, but you can do so in the knowledge that the very best efforts are being made on your behalf for many years ahead.

Contrary to one common theory, outsourcing is not just something that only major prestigious organizations can benefit from. Many major client organizations have been very unsuccessful in their efforts to outsource, whereas some small organizations with as few as five employees have been very successful in outsourcing functions.

It is distinctly possible for most client organizations, large and small, to gain great benefit from outsourcing at least some of their non-core functions. In order to do so they will need to work hard at understanding what is possible and it may be necessary for them to seek out or create the ideal providers.

In order to understand how this could be done and to illustrate why some deals succeed and some fail, it is necessary to examine the various issues, trends, successes, risks and failures taking place in the market. This is attempted in the following chapters.