What are your main reasons for outsourcing?

One of the first tasks facing the management team of an organization embarking on an outsourcing project is to establish what it wants from the arrangement. These days most managers are familiar with the three basic reasons for outsourcing put forward by the management gurus:

• the desire to concentrate on core activities;

• the need to improve the service; and

• the often pressing need to reduce the cost.

Virtually all the initial approaches to service providers concentrate on these three points and consequently receive little attention unless the potential client explains them in a convincing way. More importantly, an assumption that the reasons are well known and obvious may mean that the client management has failed to analyze its own special reasons early enough.

Well before anything is sent to potential service providers, the client must establish what it really wants to achieve. Getting each of the senior managers of the function and the senior users to document their aims in order of priority is an excellent way of doing this. Even if a re-engineering exercise has recently been carried out, it still worth going through this exercise as it reinforces the question ’What are we trying to achieve by considering this option?’

It really is beneficial for the client’s negotiators to be absolutely sure of the main reasons for considering outsourcing. If the key reason is to turn the service into something that better matches the perceived current and future needs of the users, then the negotiators are aware that a value added improved service is paramount and this could mean that the cost factor is significantly less important. It is conceivable that the comfort of knowing cost cutting is not the key aim may result in the opportunity for the service provider to maximize the client’s competitiveness by creating a ’Rolls Royce’ type service in the short term. Such an opportunity would certainly be lost if the service provider has any doubts about the client’s main aims. These doubts arise automatically in outsourcing because any experienced service provider will have numerous stories to tell of potential clients who claimed that their main aim was an improved service and then chose the provider submitting the lowest cost without considering the service quality. In a competitive tendering situation, therefore, the provider usually starts by looking for ways to keep the costs as low as possible.

If a significantly improved service is paramount, it will be essential to stress this aim at every opportunity when writing to or talking to the competing providers in order to overcome any latent scepticism. However, emphasizing the need for an improved service need not reduce the opportunity for maximizing cost savings. A balance can be obtained by making it very clear that cost will only play a part in the decision should two providers submit equally attractive service proposals. All very obvious points, but it is surprising how often the client fails to communicate the real reasons for outsourcing to the service providers.

It is possible that after a stringent internal review, management will decide that cutting cost is really the only issue. Decisions of this type have sometimes been made where organizations anticipate major short-term acquisitions or divestments. They conclude, therefore, that it makes little sense building for the future if the future is too uncertain to even make a guess at. In addition, they reason, if disruption is the only certainty in the near future, an organization with more specialists and the opportunity to use them over a wide range of clients is bound to be able to perform the service more cost effectively. In such circumstances the client is looking for a service provider who will probably carry on the function without making too many changes but who can make savings from better use of personnel.

Outsourcing service providers invariably claim that their sole aim is to add value by using the latest technology to dramatically improve each client’s service. Nevertheless, for the vast majority of providers in functions like IT and finance, there will be many occasions when just taking over the service without the need to make significant changes will be a very attractive option. Clearly this will be the case where the provider is struggling to find the specialist resources to bring about improvements for other clients and where it sees the opportunity to share the new client’s service with that provided for existing clients.

If the client is sure that its key reason for outsourcing is cost reduction then it will presumably want to limit the duration of the outsourcing contract. In such circumstances this ought to be made very clear to potential service providers from the beginning. In fact the fairest way for the client to deal with this type of arrangement is to provide a complete description of the function to be outsourced, including current costs, to a maximum of three service providers and see which one comes up with the best bid. Even then, the wise client will have made some preliminary overtures to establish a short list of potential service providers who are most likely to be attracted to such a deal at the time in question. A good way to establish this is to ask for permission to talk to some of their other local clients.