Last reviewed 16 September 2020
Laura King explores how to create the foundation for any outsourcing deal.
Outsourcing is a relatively common practice, and at some point, many organisations will look to contract out some of their business functions or services to a third-party provider. However, it is not without its pitfalls, and depending on where you look, failure rates of up to 70% can be quoted.
One way outsourcing can go wrong is by rushing into a deal without fully exploring the business case and rationale for outsourcing in the first place. In this vein, having a clear understanding of what is needed and why, supported by a well-managed process is absolutely critical.
There are many reasons for deciding to outsource. These might include the following.
Access to expertise — the outsourcing organisation has specialist skills and is able to offer the very latest in technologies, solutions and thinking.
Ability to focus on core functions — outsourcing non-core functions will allow the organisation to concentrate on what it does best.
Reduced costs — for example by taking advantage of economies of scale.
More flexibility — as companies expand (or contract) and change with market conditions, an outsourcing arrangement can offer the agility needed.
What are the benefits?
The first step when considering outsourcing is to be very clear about what is needed, why, and the overall outcomes of any contract. To do this, a business case needs to be put together demonstrating the benefits expected, as well as an outline of what any deal might look like. For example:
Which parts of the business are to be outsourced?
What does the structure of the deal look like?
Is the organisation looking for one, or multiple vendors?
It is also a good idea at this stage to look outside the organisation to see what is working well elsewhere. Benchmarking and an analysis of best in industry examples will provide a realistic idea of what could be expected.
What are the risks and costs?
During this preparation stage, the risks of outsourcing also need to be considered and mitigated against. Some of the risks of outsourcing include:
a reduction in control
instability and loss of morale in the organisation
impact on productivity.
There are also many hidden costs to managing the outsourcing process which will need to be factored into the business case. These might include things such as transitioning work and knowledge to any incoming vendor, costs associated with staff changes, and ongoing costs to manage the contract once it is in place.
Who needs to be involved?
It can be a good idea to bring on board expertise early on in the decision-making, and an outsourcing consultant can help manage some of the complexities of the process.; however, be careful when choosing a consultant, and take recommendations. A good consultant will be just as happy to help the organisation take the decision to not outsource, as to agree that outsourcing is the way forward.
It can be controversial at this point as to whether or not internal staff should be brought in on discussions. Although it can be a difficult time, it is generally considered better to bring key people in on the conversations early. Most importantly, this will mean that you have a full picture of the impact of any outsourcing deal. Ask any hard questions early, and make sure all the risks and impacts are thrashed out. The clearer you are now on how the contract will impact the business — including aspects such as HR and tax — the easier it will be further down the line.
As part of this stage of work, you also need to be clear as to what the current situation looks like. Be prepared that some preparation might be needed to get the business ready for any outsourcing arrangement. If this work needs to be done — start early. If for any reason the outsourcing deal does not happen, the business will still be better off.
The project team
Outsourcing is essentially a project and needs to be run like one with a project plan, communication plan and clear project governance. Make sure the work is properly resourced with people who have the time, expertise and authority to move the process forward.
Writing the tender and evaluation
If a convincing business case is put together and the decision is taken to go ahead with outsourcing, then the next stage will be dictated by the organisation’s procurement process. Different organisations will have their own arrangements, but, there will be some things that all organisations should do.
Be clear on how you want to approach the tendering process — is there flexibility for vendors to offer suggestions, or does the tender need to be relatively prescriptive?
Write a clear tender that includes as much information as possible.
When thinking about performance standards and service levels, consider what the future might hold, as well as whether an outcomes-orientated contract would be beneficial.
Be aware that managing vendors, reviewing tenders and evaluating returns is a time-consuming process. Make sure that the people on the team have the time to dedicate to the project.
Ensure that when evaluating tenders, there is a clear framework and scoring card. Any decision made needs to be reasoned, have a clear audit trail and be justifiable.
Once tenders are in, evaluate them against the business plan and original objectives — do they still meet the criteria first outlined?
Consider asking internal teams to submit a tender. It might be that in-house capabilities are actually sufficient, but that internal priorities have reduced the effectiveness of the team.
Once a couple of suppliers have been shortlisted, it is likely that there will be a phase of negotiations.
Making sure that you are clear from the outset about what you want and what your priorities are will make this phase significantly easier. It will also help ensure that you lead the negotiations, rather than being led by the vendor. At all times keep senior management in the loop — ultimately they’ll be required to sign off any deal, so it’s important they know where discussions are headed.
Managing the transition
Once a deal has been signed, there will be a transition phase whereby services, knowledge and assets are transferred to the new provider. Keep in mind that this is a time when the new provider will be trying to integrate new services and keep all the plates spinning — it’s not uncommon for performance levels to drop.
Managing expectations, a clear governance structure and regular communication is absolutely critical at this stage. A good contract will help, but the relative performance of many contracts can lie in the relationships between the respective managers on both sides of the agreement. Developing a truly collaborative, trusting relationship will be fundamental to both tackling problems early on, and establishing a good base for the future.
An outsourcing contract should be treated like a project, with assigned resources and a clear structure.
There should be a clear business case outlining why outsourcing is the right move.
Setting out the objectives, outcomes and priorities for the organisation at the beginning of the process will help keep the evaluation and negotiation of any deal on track.
Good relationship management is key — this will be tested early on in the transition phase, when it will be crucial to build good collaborative relationships.