Last reviewed 7 November 2018

Gudrun Limbrick considers if we are reaching the point where the savings made from outsourcing no longer outweigh the benefits of having in-house staff.

Outsourcing was one of the key business buzz words of the 1990s, and through the noughties has revolutionised the way public services operate. It was meant to relieve businesses of the mundanity of tasks which were not central to their primary business objectives, freeing them up to focus on making money. But are we now realising that outsourcing just means giving up control of the key ways in which the business functions?

Outsourcing was a simple enough idea and a formalisation of the way in which many businesses were already operating. Farms, for example, have for generations paid other individuals or companies to come in to take on roles that the farms do not have the resources or expertise to do themselves — tasks such as sheep-shearing, or harvesting, for example. In the 1990s, when outsourcing was gaining popularity, tasks such as human resources, transportation, IT and cleaning were given to other companies. Customer services also became a focus for outsourcing despite being a key contact point between company and customer.

The rise of austerity has tended to accelerate the growth of outsourcing with public sector companies, in particular, outsourcing core areas of business rather than simply those that are extraneous to key objectives. The idea that outsourcing is cheaper than keeping all elements of business in-house has been the driving force behind most decisions to outsource, be they in the private sector or the public sector.

The peak of public sector outsourcing seems to have been in 2010; since that time, there has been a decline. Research by the Association for Public Sector Excellence has found that around a third of local authorities took services previously outsourced back in-house in 2017. This move is probably being pushed forward apace by some high-profile outsourcing failures, one of the most damning of which was Carillion. The company, to which the Government had effectively outsourced many functions, collapsed in spectacular fashion in 2018. Its demise was described by the Parliamentary enquiry as "a story of recklessness, hubris and greed, its business model was a relentless dash for cash" and has doubtlessly cast a significant shadow over public service outsourcing.

Despite case studies such as Carillion, there are many things that are right about outsourcing, which include the following.

  • Enables a company to access expertise not available, or affordable, in-house.

  • Enables a company to access resources — including staff hours, technology, premises and equipment — not available or affordable in-house

  • Enables a company to take advantage of economies of scale achieved by the supply company.

  • Enables a company to re-focus in-house resources and staff on key business objectives.

  • May make financial savings possible if the supply company can do the work for less than it can be done in-house.

  • May enable a company to take advantage of cheaper costs in other areas or in other countries without having to move its own location.

This, however, is not a carte blanche list. Whether these factors apply in every case is very much based on the individual circumstances of the company concerned and what a supply company can bring to the table. The current decline in outsourcing suggests that the 1990s and noughties paradigm which saw all outsourcing as a “good thing” is now being looked at in greater detail and on a case-by-case basis.

What is wrong with outsourcing?

Despite it being a generally accepted truth, outsourcing is not necessarily cheaper than an in-house option. There are often forgotten costs, such as the VAT paid for the services the supply company provides. There is also the management cost of working with the supply company, particularly in times when there are problems to be resolved.

Unless the economies of scale a supply company can achieve from offering the same services to a number of different companies are significant, the only way a supply company can offer a cheaper service than that which can be supplied in-house is by paying less for the basic costs. For example, a cleaning company is unlikely to be able to achieve significant economies of scale, regardless of how many premises it cleans, as there are few resources needed which will be cheaper when bought in bulk. Thus, with the core costs being the pay given to cleaning staff, the only way a supply company can undercut an in-house service is by paying cleaning staff less. This is the way outsourcing customer call-handling services to Indian companies, for example, works. The potentially lower costs in India mean savings for the UK-based outsourcing company.

This leads to the common complaint that supply companies will potentially cut costs in order to improve their profit margin. This can mean lower pay for workers and lower standards for the outsourcing company. While outsourcing arguably frees up some management time in the outsourcing company, a poorly paid workforce that is not under the direct control of the outsourcing company can mean big problems. Driving up standards to an appropriate level is not easy in-house — it can be impossible in a supply company.

While, outsourcing can also be beneficial in terms of providing expertise not available in-house, such as in payroll services or IT, for example, the benefits that this brings to the company have to be outweighed against the loss of control an outsourcing company can experience once the task is no longer carried out under the company’s own roof.

How to create successful outsourcing

Outsourcing for outsourcing’s sake would appear to be on the wane and is rapidly gaining unpopularity in public services with the general public and the media. The dangers of simply offloading a task to the cheapest bidder are now too clear to all of us. This does not mean, however, that there is no place for outsourcing if it is done in the right way to make it effective. A critical element of this is to form a meaningful partnership between the outsourcing company and the supply company. This means developing an understanding of what each wants from the partnership and how both can work together to achieve these aspirations.

The seven keys to making outsourcing effective

  1. Ensure a shared ethos and way of working.

  2. Understand the aims and objectives of both parties.

  3. Develop a vision and a plan for the work which meets the aims and objectives of both parties.

  4. Share the management of the work rather than leave it to one party alone.

  5. Thoroughly research and monitor the costs of the arrangement.

  6. Set re-evaluation times at which both parties bring the flexibility to make any changes necessary.

  7. Set a contract which allows sufficient control for both parties and the flexibility to alter all working practices when and if needed.

Outsourcing is a word which is developing negative connotations. It suggests cheapness of service, a loss of control for the company and degrading of standards. We blame the uncleanliness of hospitals on outsourcing, the failure of our rubbish collection service and poor standards in prison. But these negative elements are not the fault of a service simply no longer being in-house, but a failure of the relationship between the outsourcer and the supply company and a focus on saving money. Effective outsourcing looks at more than simply costs reduction as its goal and is designed through partnership working.