Successful Outsourcing and Multi-Sourcing

Derek Parlour

• Publisher: Routledge
• Year: 2016
• Print ISBN: 9781472426468
• eBook ISBN: 9781317048602
• Topic: Business
• Subtopic: Business General
• Index: Business

There are books on outsourcing, but most are by academics or consultants. Few address multi-sourcing. The author of Successful Outsourcing and Multi-Sourcing, is a practitioner who headed an operation that handles over 500 million customer contacts a year with less than 30 staff, through both outsourcing and multi-sourcing. Multi-sourcing occurs where each individual function is contracted directly by the client rather than using a large system integrator or prime contractor. This approach lowers costs, reduces reliance on suppliers, speeds up change and generates a greater degree of innovation. The downside is it places much more of the risk on the client and needs specialist skills to run effectively. As well as a focus on multi-sourcing, the book addresses the question of why a business should outsource in the first place and how decisions to do this should be strategic, rather than it being something that happens by accident. Chapters then illuminate the benefits of single-sourcing; the benefits of multi-sourcing; how best to decide what outsourcing model to choose; how to transition to outsourcing; and what steps to take to maximise benefit and minimise risk. Downsides are clearly spelled out and alternatives to outsourcing are examined, including partial outsourcing and insourcing. This book serves as a valuable source of practical guidance for organisations looking at outsourcing strategy, outsourcing professionals, and those teaching or studying business topics.

PART I
What Do You Outsource and Why?

Nearly every company outsources to a degree. The question is: how far do you go? That is a strategic decision worthy of much thought and analysis and one not to be taken lightly.

Everyone has heard the horror stories about outsourcing. The poor services delivered, contracts going well over budget, huge IT developments never being delivered. It isn’t all good news, and even allowing for the tendency of the press to report the bad over the good, there is no denying that it doesn’t always work. However, it is a very widespread practice and is mostly successful.

A normal small company with less than ten people may not regard itself as outsourcing. However they are unlikely to clean their own offices, supply their own telecoms, support their software etc. They outsource these and, even at this level, outsourcing is growing.

Take the example of that small company, then move to National Rail Enquiries. This is a business running cutting-edge back office systems, a diverse selection of front-end customer-facing channels, B2B services and over 500 million contacts per year, plus passing on nearly £1 billion in sales leads to its shareholders. The demands of the National Rail Enquiries outsourcing model are constantly changing as customer needs change. However, the organisation employs less than 30 people. National Rail Enquiries outsources virtually everything and effectively operates as a procurement and contract management company whilst still controlling its overall strategy.

Many companies lie between these two examples, but why would you outsource in the first place? The outsourcing company is obviously charging a margin, so why not do it yourself and save the margin?

The answer lies in the outsourcer’s expertise and size, but also in your own strategy and core competencies. So what do you need to look for in outsourcing, and what are the factors to take into account?

This part of the book, detailing the factors involved, is long and detailed. I make no apology for this as there are a number of factors to take into account when making the decision to outsource, although they don’t all apply in all cases. Many of these factors have pluses and minuses, and you need to think these through before deciding on an outsourcing strategy or indeed whether outsourcing is for you at all. Suppliers equally need to understand the factors to enable them to meet clients’ needs and concerns.

So to start with, why would you outsource in the first place? What are the benefits and what are the limitations around those benefits? What does an outsourcer offer, what are the downsides and what factors need to be taken into account? The answer to these questions depends on what you are outsourcing and what your overall strategy is, but the headings can be broadly split into Technological, Human, Strategic and Financial.

I will cover these headings in the following four chapters. Whilst it is true that the application of these factors depends on what is being outsourced, who the outsourcer is and what the client strategy is, it is always a good idea to consider the decision in as wide a context as you can. Just because it doesn’t apply now, doesn’t mean it won’t apply in the future.

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Chapter 1
Technological Factors

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New Technology

Access to new technology is one of the desirable outcomes of outsourcing, and came sixth in a KPMG survey of Australian IT outsource contracts (Hurley and Schaumann 1997). In many cases it rates above cost.

Whilst it is a reasonably strong argument that a company with several clients will be able to afford, and have the expertise for, new technology (Hill 2000), it is also possible that, because they are working for several clients, the technology may not be ideal for the client’s requirements and there may be a need to compromise. A balancing act is involved that may depend on how specialised the client’s needs are. The impact of this factor varies with the complexity of the task. The technology requirements for simple tasks may naturally be lower and access to new technology may not be such an issue. However, in all cases this is something that needs consideration. Your current requirements may be for simple tasks but the opportunity to get access to technological advances without the capital outlay may bring about the opportunity for a change in approach and thinking.

This factor has particular resonance in these days of fast-moving technology, and is one of the factors behind the National Rail Enquiries outsourcing strategy. Many of the customers of National Rail Enquiries use the latest technology, so they need to meet their needs and have access to that technology at the customer-facing end of the business. On the back end of the business, they need to be able to meet the capacity requirements of an increasing appetite for information and the technology requirements for a wide variety of channels. We reached a decision that National Rail Enquiries needed to use third parties to get access to the technology in order to deliver what they wanted and what their customers need.

Avoiding Obsolescence

Following on from access to new technology comes the issue of obsolescence. This is a constant concern in IT and the increasing speed of change is only making this more of an issue, although the falling price of technology is a counterbalance to this. A survey of Spanish universities had 11.4 per cent citing the fear of obsolescence as a factor in outsourcing (Claver, Gonzalez, Gasco and Llopis 2002). There is a case for saying that outsourcing reduces this risk, in that it makes sense to have the supplier take the risk of obsolescence, although there is always a cost to this. However, yet again, the balancing act comes into play, as it may be better to have older technology that is specific to your needs than more up-to-date technology that isn’t. Also, using the latest technology isn’t always a good thing as it may not have been sufficiently tried and tested. The phrase “leading, not bleeding edge” was coined for this concern.

There is also a concern with outsourcing technology that it is difficult to keep technology up to date. It is easy at the start, but contractual requirements in this area are difficult to be specific with and therefore difficult to enforce. In long-term contracts, especially single-supplier ones, there is an obvious disincentive on the supplier to refresh technology, especially towards the end of the agreement. As highlighted above, this is difficult to hedge against; future technology is difficult to forecast, describe and price, and therefore difficult for the client to put in as a requirement and difficult for the supplier to cost. This is made worse by the length of the contract, since there is always an incentive to lengthen the contract where there is upfront capital spent by the supplier, so that the cost can be recovered without large annual charges to the client. The supplier is after an ongoing business relationship so there is a desire to keep up to date. Nonetheless, there has to be a balance between the factors of cost and ongoing efficiency which is, in any case, difficult to contract for.

Again this is a key driver for National Rail Enquiries. The fast-changing pace of technology means that they are always looking to upgrade both back-end and customer-facing systems. This makes obsolescence a real risk, but it isn’t simply a case of passing the risk onto a supplier. If all the risk is put onto the supplier then the cost of that risk will be reflected in the supplier costs. The right approach is more a case of picking suppliers who are geared up to mitigate obsolescence by their approach to development. Suppliers who are looking to the future are better placed to help you meet the risk of obsolescence than those who are less forward thinking.

Disaster Recovery and Business Continuity

Another advantage of outsourcing technology, again mainly down to economies of scale and the concentration of expertise, is disaster recovery and business continuity. As part of the specialised and focused nature of the outsourcer (as well as this not being just part of their business but the core of their business), disaster recovery and business continuity procedures and systems are likely to be better with an outsourcer than the client who may not have the same scale, technology or investment (Law 1999; Hill 2000). The value of this factor will depend on how essential the service is: can it be down for a week, or a day, or is it essential to have 100 per cent availability? It also depends on the vulnerability of the service and it’s susceptibility to denial of service attacks. Technology can help provide a resilient service with high availability if that is what you need.

In Chapter 12, which looks at the future of outsourcing, I discuss the changes that we have seen in the area of hosting that have greatly increased National Rail Enquiries’ disaster recovery and business continuity capacity. The technology of cloud hosting can help organisations in this area, without huge investment, and give them huge capacity and resilience.

Specialist Skills

Under the heading of technology also comes access to specialist skills. A large IT outsourcer may well have specialist programmers and people with specific software skills that the client may not be able to support (Kakabadse and Kakabadse 2000; Hurley 2001). A client organisation with in-house IT facilities can of course buy in contract skills, but this can be more expensive and there is a greater risk of a loss of continuity in the use of contract staff. Outside of IT outsourcing suppliers can provide specialist skills that are difficult for a client to gain access to directly. Catering is one example of this where the training given to the staff mean that they are not just skilled in cooking but specifically skilled in running a staff cafeteria.

There is also the business benefit of specialist skills. The relative cost to an organisation of having average skills as opposed to specialist skills can make the difference between success and failure. The issue of specialist skills is more of a benefit in the case of large one-time projects, where the benefit of specialist skills can be greater and the need for long-term expertise less of a problem. On the other hand, there is always the risk that the supplier will reallocate the best staff to newer and more lucrative contracts, if needed, to the detriment of the original client (Hirschheim and Lacity 2000). Outsourcers may not have the same business targets as their clients and will put the best resource where it will help them meet their needs, rather than those of the client. To some extent this can be offset contractually with a “key personnel” clause (see Chapter 11 on minimising downside and maximising upside) but ultimately this is difficult to control.

However, skills aren’t the only issue as an understanding of the client’s business is also an important factor. A highly skilled person with little business knowledge may not be as good as a less skilled one who knows your business (Lacity and Hirschheim 1993).

This is another key factor to the National Rail Enquiries sourcing strategy. The technology that they use at the back end and that customers use at the front end not only use more advanced technology but more varied technology. National Rail Enquiries couldn’t possibly hope to effectively maintain the specialist skills needed for these new technologies themselves, and so they turn to outsourcers. As well as reducing the cost of acquiring the specialist skills outsourcing also reduces the cost of getting rid of them. As technology moves on some lines become obsolete, but the cost to the client of losing the specialist skills that they have required just involves not renewing a service contract, rather than the whole process of redundancy and the issues surrounding it.

Implementation and Transition

In the area of technology implementation is key. Poor implementation can affect the life of a contract, as it impacts on effectiveness and benefit realisation, and it is an area where trust can be lost that is difficult to get back.

It is also an area where there are common failures and it needs to be planned carefully by both the supplier and the client. Generally speaking, the supplier selected should have substantial implementation experience and the client may wish to pay the supplier to take on most of the implementation work, although the client needs to retain a degree of control over this process (Law 1999). Whilst the supplier may have some expertise in this area, it is not one to be left to the supplier completely as they may not possess the industry knowledge that the client does. Moreover the client should not leave its business in the hands of a new supplier – or any supplier, for that matter.

The issues around implementation and control (referred to throughout this book but particularly in Chapter 10 on a suggested sourcing framework) demonstrate that there are many factors to be taken into account (Useem and Harder 2000). Sometimes they seem contradictory but it depends on the weight they are given. That will depend on circumstances.

Summary

A great deal of outsourcing today involves IT. In these areas it is obvious that the technological factors underlying the outsourcing decision are key. However, technology is playing a bigger part in more and more services so this chapter shouldn’t be ignored, even if the service being outsourced isn’t IT.

For example if the service being outsourced is courier services, the level of IT behind that service is important. Outsourcing a courier service can give you access to new technology, such as online tracking, that you may not have had access to before. It may also be that access to that technology is very cheap if the courier firm uses it across all its clients, and that the incremental cost to the outsourcer is negligible.

The catering industry also provides examples of this. You wouldn’t normally associate catering with supplying better technology, but modern catering operations use a good deal of technology. Menus are planned ahead and the systems take the menu, break it down into the ingredients and place the orders for the food based on the menus. They also cost the menus and work out sale prices and portion sizes in order to meet gross margin targets. All this means that there is much more science in the ordering and costing process with the subsequent impact on cost control and margins. The benefit of these better controls ultimately helps the client.

In short, technology is all around us, so think about this area when outsourcing as you may find that it impacts on the most unlikely services.

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Chapter 2
Human Factors

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Clients are human, outsourcers are human and the customers are human. You ignore this area at your peril.

It is an area where legislation pays a particularly important part and has huge potential for public relations and political damage. Ask any company that has offshored a service about how the existing staff and wider stakeholder community react. Buying materials and components from overseas doesn’t seem to make an impact on people’s thinking, but outsource a service to an overseas company and you are likely to see concern about local jobs being lost and a perceived impact on service quality.

This chapter covers the human factors in outsourcing. This is a big area encompassing staffing, stakeholder and control issues.

Legislation Around the Transfer of Staff from One Employer to Another

In the UK legislation creates issues around staff. The Transfer of Undertakings (Protection of Employment) Regulations 2006 (TUPE) relates to the rights of staff when work is transferred between employers. It has had huge impacts on the outsourcing industry in the UK and is something that both clients and suppliers need to take into account when agreeing contracts. Clear statements as to whether TUPE applies and where the liability lies are essential. Although legislation places the liability on the supplier the client needs to understand the TUPE impact and may wish to use the contract to place liability where it is best controlled.

This isn’t just a UK issue. TUPE, under other names and forms, also exists in other countries. For example the EU has the overriding legislation called the Acquired Rights Directive.

TUPE may mean that members of staff have to be transferred to the new contractor and this may negate some of the benefits of specialist skills that you expect to get from an outsourcer.

Whilst this isn’t usually looked on as a strategic issue the legal terms need to be properly thought through to negate problems both in cost and human terms.

Quality of Staff

There is some argument that outsourcers can recruit and retain better quality staff. Mediocrity is not something that businesses strive for and in some areas can cause significant problems (Hurley 2001). The difference between just any performer and having someone at the top levels of performance can easily be the difference between a profitable and a loss-making business line.

Outsourcers can retain staff because of the specialised nature of their business. They can offer better career paths with a higher concentration of staff in the same business areas, as opposed to the client organisation where the number of people in the same...

Table of contents

• Cover Page
• Half Title page
• Title Page
• Copyright Page
• Contents
• List of Figures
• About the Author
• Foreword
• Acknowledgements
• Part I What Do You Outsource and Why?
• Part II What Are the Problems with Outsourcing, Why Does it Sometimes Go Wrong and What Can You Do to Mitigate Risk?
• Part III Models of Outsourcing
• Bibliography
• Index