A Study Of Performance Measurement In The Outsourcing Decision

Ronan McIvor, Anthony Wall, Paul Humphreys, Alan McKittrick

• Publisher: CIMA Publishing
• Year: 2009
• eBook ISBN: 9781856178570
• Topic: Business
• Subtopic: Accounting
• Index: Business

Outsourcing is a key issue for many organisations having moved from the contracting out of peripheral activities such as cleaning to more critical areas such as design and marketing. This report is for managers and people in finance and accounting functions and takes a practical approach in developing a framework and then applying this framework in an actual organisation which makes it easier for practitioners to understand.• This report provides a framework which incorporates both qualitative and quantitative performance measures that can be used in the outsourcing process• This research is of value to commercial and public sector organisations as well as academics as it provides insights for organisations considering outsourcing that will enable them to assess service levels throughout the contract

Chapter 1. Introduction

Outsourcing is increasingly being employed to achieve performance improvements across the entire business. However, many organisations have had mixed results with outsourcing. Indeed, many organisations have failed to achieve the desired benefits associated with outsourcing and experienced the consequences of outsourcing failure. This research project examines the issue of performance measurement in the outsourcing decision and has the following objectives:

■ To review the relevant literature on outsourcing, with particular emphasis on how companies benchmark internal performance with that of potential suppliers.

■ To determine how a service organisation assesses the costs associated with the outsourcing decision.

■ To determine how performance measures can be employed to evaluate the outsourcing decision and assess the performance of the service provider throughout the contract once a process is outsourced.

The research is positioned in the business process outsourcing (BPO) area. The analysis undertaken focused on performance measurement in the outsourcing process both at the corporate strategy and process level. Analysis at the process level is important as organisations increasingly outsource complex processes that extend across a range of business functions including finance, human resource management and information technology. The research was undertaken with a UK financial services organisation over a 4 year period. An action research methodology was applied to the research, which involved the research team engaging directly with the organisation during the evaluation and management phases of the outsourcing process. The research focused on a number of processes that this organisation had outsourced and examined how performance measurement considerations could be better integrated into the outsourcing process.

The book is structured as follows. An in-depth review of the literature in the area of outsourcing and performance measurement is presented. This review identifies a number of weaknesses in both the literature and practice. The next chapter includes an overview of an outsourcing framework, which was developed to overcome these weaknesses. In particular, this framework employs a number of tools and techniques that allows organisations to integrate performance measurement considerations into the outsourcing process. The framework provides guidelines on deciding whether outsourcing is appropriate, and if so, how the outsourcing process should be managed in order to improve performance. Case illustrations from the financial services organisation that participated in the research are introduced at various stages in order to illustrate this outsourcing framework in practice. An evaluation of the utility of the framework in practice is presented. Finally, in the concluding chapter management implications are presented.

Chapter 2. Literature Review

Outsourcing has increasingly become a vital tool for the implementation of business strategy in many organisations. Competition continues to increase and organisations are being continuously forced to find ways to improve business performance and to obtain competitive advantage. Increasingly, organisations are looking beyond the traditional boundaries of the firm to obtain performance improvement. The growing prevalence of outsourcing service providers is shaping the development of competitive strategies as well. The BPO phenomenon has grown as organisations have been transferring responsibility for entire functions such as human resource management, finance and information services to service providers – sometimes referred to as ‘unbundling’ (Hagel and Singer, 1999). According to Nelson Hall, the BPO tracking company, the global business process outsourcing market was worth $48.4 billion for the first three quarters of 2006, representing a rise of 34% from the same period in 2005 (Nelson Hall, 2006). Information technology and human resources are particular growth areas for outsourcing. Outsourcing has grown in reaction to the need for organisations to be more flexible and responsive to customer requirements. The outcome of increased outsourcing has been the restructuring of organisations from hierarchies performing the majority of business processes to more network-oriented structures working with specialist suppliers (McIvor, 2005). Gottfredson et al. (2005) suggested that competitive advantage from a capability perspective is no longer concerned with a company’s ownership of capabilities but more exactly about its ability to control critical capabilities, whether owned or outsourced.

Outsourcing has become increasingly complex with both strategic and operational implications. In addition, there are many possible types of outsourcing arrangements, all of which redefine the boundaries of the firm, are dynamic in nature and subject to change over time. Therefore, performance measurement within the outsourcing process has become increasingly complex. Perhaps unsurprisingly, many firms lack a detailed understanding of outsourcing, particularly with regard to the potential benefits and risks. Outsourcing involves the sourcing of goods and services previously produced internally within an organisation from external suppliers. The term outsourcing can cover many areas, including the outsourcing of manufacturing as well as services. Outsourcing can involve the transfer of an entire business process to a supplier. Alternatively, outsourcing may lead to the transfer of some activities associated with the process whilst some are kept in-house. Outsourcing can also involve the transfer of both people and physical assets to the supplier. Organisations have always employed external product and service providers to carry out a range of business activities such as security, distribution, accounting and information technology. However, many organisations are increasingly outsourcing a wider range of activities and a greater level of the value associated with these activities. In effect, organisations are no longer outsourcing peripheral activities alone but extending the scope of outsourcing to encompass more critical activities that impact upon competitive position. Also, the recent movement of many service-related activities such as after-sales support and direct marketing offshore to developing economies has become increasingly prevalent. Outsourcing is not just a straightforward financial or purchasing decision. In many cases, outsourcing is a major strategic decision as organisations increasingly focus on a limited number of core competencies. Indeed, there is evidence to suggest that well-defined outsourcing strategies can enhance the overall strategy of the organisation (Gottfredson et al., 2005).

The evaluation and management of the outsourcing process involves a number of important elements. A starting point in the evaluation process involves analysing whether outsourcing a process is appropriate for the organisation. This involves considering issues such as the capability of the organisation in the process relative to competitors, the importance of the process to competitive advantage, the capability of suppliers to provide the process, the level of risk in the supply market, potential workforce resistance and the impact upon employee morale (McIvor, 2005). Where the decision to outsource has been made, a number of important issues have to be considered including supplier selection, contract negotiation and the transitioning of assets to the supplier. Also, significant attention should be given to managing the relationship with the supplier to ensure that outsourcing meets its intended objectives. The evaluation and management of the outsourcing process has become increasingly complex. For example, contracts are more complex as agreements become more sophisticated in terms of measurement procedures, the financial management of transferred assets and the inclusion of clauses associated with bringing the process back in-house (Quelin and Duhamel, 2003). Also, the presence of political influences on the decision-making process, such as the vested interests of the functions under scrutiny to keep the relevant activities in-house, can prevent the choice of the most appropriate sourcing option for the organisation. The strategic nature of the decision means that it not only involves input from operational management, but also from senior management. Considerable care and effort has to be given to evaluating and managing the outsourcing process. Outsourcing decisions are extremely costly and difficult to reverse. For example, in a study of outsourcing, Barthelemy and Geyer (2000) found that in the event of outsourcing not meeting its intended objectives, it can take an average of 8–9 months to switch to another service provider or bring the process back in-house at the end of the contract.

2.1. The Development of Outsourcing

Outsourcing has become a vital ingredient of corporate restructuring initiatives. Much of the early literature and studies on outsourcing have focused on manufacturing (Higgins, 1955; Culliton, 1956). Historically, manufacturing outsourcing – often referred to as the make-or-buy decision – has been more prevalent. In the 1980s and 1990s a considerable amount of attention was given to manufacturing outsourcing and the implications for the long-term competitiveness of both organisations and economies (Bettis et al., 1992; Venkatesan, 1992; Welch and Nayak, 1992). Outsourcing in manufacturing became very prominent in the 1980s, in part as a result of the rise of ‘lean production’, a paradigm developed from analysis of Japanese production and supply systems (Womack et al., 1990). Outsourcing in this context involved the development of longer-term supplier relationships, which were characterised by collaboration and joint problem solving in a range of areas. Adopting collaborative supplier relationships were viewed as means of reducing the risks associated with outsourcing in cases where the requirements of the buyer were not standardised and the transaction involved frequent changes.

More recently, a similar process of outsourcing has been occurring in the area of business services (Sako, 2006; McIvor, 2007). For example, an insurance company can now outsource its claims handling process to a service provider that manages the contact centre and related back-office infrastructure. Business services are services that are provided to other businesses, rather than directly to the public (Abramovsky et al., 2004). Examples of business services include computer services, professional services (legal, accountancy, market research, technical, engineering, advertising, human resources and consultancy), research and development (R&D), recruitment agencies and call centres. Between 1984 and 2001 the growth in the business services sector accounted for around one-third of the total output growth in the UK economy. Outsourcing and offshoring in this area has grown as the services sector has developed. There are a number of drivers of the trend towards outsourcing and offshoring.

2.1.1. Developments in Information and Communication Technologies

The advent of relatively cheap and reliable telecommunications and information technology has facilitated the trend towards outsourcing. The increasing importance of innovative ICTs for economies and societies has been attracting considerable attention both from academia and practitioners. In the last number of decades ICTs have deeply affected the way business is performed and the way in which organisations compete (Porter, 2001). Developments in ICTs have enabled organisations to transfer responsibility for processes to service providers both locally and offshore. Using the analogy of Evans and Wurster (1999), it is now possible for organisations to separate the information element from the physical elements in service processes. Processes such as market research, customer service and product support are highly information intensive and can be sourced from service providers both locally and offshore. For example, offshore service providers can now offer IT-enabled customer support processes to customers anywhere in the world regardless of their physical location. Separating the information element from the physical element of business processes allows an organisation to fundamentally re-think and re-engineer its operations in ways that reduce ...

Table of contents

• Cover image
• Table of Contents
• Copyright Page
• Executive Summary
• Acknowledgements
• Chapter 1. Introduction
• Chapter 2. Literature Review
• Chapter 3. Background to the Development of the Outsourcing Framework
• Chapter 4. Practical Application of the Outsourcing Framework
• Chapter 5. The Outsourcing Framework in Action at the Financial Services Organisation
• Chapter 6. Evaluation of the Outsourcing Framework
• Chapter 7. Conclusion and Management Implications
• References
• Appendix 1. Sample Workflow Chart for the Mortgages Process
• Appendix 2. Workflow Chart for the Encoding Sub-Process
• Appendix 3. Sample of Key Performance Indicators in the Cheque Clearing SLA
• Appendix 4. Performance of the Debit In-Clearing Sub-Process
• Index