In 2013, the revenue of the global outsourcing market was $82.9 billion, up from 45.6 billion in 2000. The decision about whether to outsource or not is a fundamental one for most businesses. Firms need to be fully aware of the pros and cons and enter the agreement with their eyes wide open. Here Steve Young, CEO, Citisoft, provides a brief overview of some of the key points to consider.
More focus and agility
The biggest single advantage of outsourcing is that it gives the firm a greater ability to focus on where they compete. It concentrates the firm’s management, intellectual capacity, IT spend and all other assets on its core competencies and the primary goal of making the firm more competitive.
Allied to that factor is that outsourcing will generally make a firm a more agile. Management is much more attentive to its core competencies and the firm can react to changes in market conditions more readily.
Faster to market
Firms can also derive benefit from outsourcing if the outsourcer has capability or experience that the firm does not possess. If a firm wants to extend into a new market, for example, the third party might provide that capability much faster than if the firm was to establish its own operation.
Higher levels of investment
If a buyer contracts out a function to an outsourcer that supplies to most of the industry, then the third party’s investment in that function will be significantly higher than the investment that the firm would have made alone. The outsourcer’s competitive advantage is based upon delivering a good service on what is effectively your ‘commodity’, therefore their investment in the underlying infrastructure and technology will be continuous and substantial.
Risk and the supply chain
The biggest con associated with outsourcing is the risk, particularly where there isn’t a well-established supply-chain. The early adopters are usually ‘lift-outs’ (where their staff effectively leave the firm and go to work for the outsourcer) and these tend to be highly bespoke deals. Lift-outs don’t necessarily create a utility model; they generally create a back-office out of the first operation that is outsourced. In this way the operation may not be run on an industry-standard model and therefore be unsuitable as a commodity for other firms to use. This can be a significant problem and commonly arises in industries where they want commodity pricing but bespoke service.
The need for mobility
One of the dangers of a bespoke outsourced service is that it is much harder to move to another provider. The less common the operating model that an outsourcer is providing, the less mobility the firm will have concerning its outsourcing agreement. It is therefore much lower risk to be utilizing as standard an operating model as possible, as not only will it provide the most significant cost advantage but it also will facilitate the highest level of mobility between providers.
Outsourcing and responsibility
Most people forget the golden rule of outsourcing, which is that you can’t outsource responsibility. You can outsource the process, but ultimately you are still responsible for that business function. I perceive this to be a major threat, as most firms underestimate the amount of expertise that they need to retain in order to conduct effective oversight of their outsourcer.
Cultural impact
If a firm has never outsourced before, it is a massive statement of change that can have an immense impact on the culture of the firm. Of course, many people are often wary of a change culture, but it can be a truly positive experience. Outsourcing should be seen as a positive step.
But proper due diligence is key. You have to bring in experts or consultants who know the market, the suppliers and, most importantly, have been through the same outsourcing process before. In this way you will ensure that you make the best selection and that you enter into the agreement with your eyes open.
Compromise is key
Fundamental to that due diligence is your willingness to compromise. Understanding that a service provider may undertake a particular task differently from your firm is not necessarily a negative; there is usually a very good reason why the outsourcer works that way.
If you want to derive the maximum benefit from the arrangement, willingness to compromise among your operational team is a must.