Many organisations are realising that there may be advantages in concentrating on essential core activities and using external organisations to provide (usually generic) support services. This briefing outlines some of the key issues to be addressed when considering outsourcing and when evaluating outsourcing suppliers and contractors.
Outsourcing may be used to tap into expertise and experience not available in-house (technical or managerial) or simply to identify and then reduce the costs of support services.
When thinking of whether to outsource it is necessary to consider such issues as:
- The relative costs of outsourced and in-house provision
- The space that might be saved
- The expertise on either side
- The time any activity will take to come on-stream
- The culture change that might be necessary
- The risk of losing in-house expertise and capability
According to the Gartner Group, 35% of IT budgets and 80% of business processes will be outsourced by 2003.
The first step is to understand the needs of the service and draw up a clear requirements specification. The group that does this must include representatives of the key user communities and not just the previous in-house service provider. Preparing the requirements specification may need a structured approach to getting, testing and validating users’ views.
This group should work to a steering group of the senior management of the organisation to ensure they are ‘signed up’ and understand the issues involved.
From the requirements specification and the discussions with potential outsourcers, will come a “managed services contract” which defines the responsibilities of both parties. This may include, as appropriate:
- Service definitions
- Staffing levels and qualification levels
- Communication processes
- Completion times
- Problem reporting and escalation
- Penalties for non-delivery
- Review process and schedule
- Criteria and process for early termination
- Penalties for poor performance
- Incentives for good performance / service improvement
- Procedures for handling changes to the service, initiated by either party
Choosing an outsourcing supplier is broadly like choosing any other supplier. Choose someone you can work with and whose track record is secure. It is wise to consider the use of an independent consultant in the selection process. The supplier is likely to have considerably more experience than you in the negotiation/contract setting process so it is wise to balance this with some expertise on your side.
The process of implementing the agreement is important. There should be an agreed implementation plan with firm review dates and processes. At the end, assuming all goes well, implementation is “signed off” and the agreement formally begins.
Best Practices in Outsourcing
The following table is reproduced with permission from the joint working paper on Socially Responsible Enterprise Restructuring of the International Labour Office and the European Baha’i Business Forum
- Do not outsource only for immediate cost reduction; outsourcing is about longer-term competitiveness
- Adhere to the best practices and approaches to downsizing outlined in Chapter 4 (of the working paper)
- Do not forget the human element; inform and consult workers’ representatives; keep workers informed about intentions to outsource. Do not let rumours start; maintain clear and open communications
- Differentiate carefully between core and non-core business and avoid outsourcing activities that may become core activities
- Use outsourcing as a way to improve business focus
- Plan the outsourcing process carefully in order to avoid losing core talent and expertise
- Clarify the contract terms and expectations surrounding outsourcing and make sure all partners understand their role and commitments
- Develop a partnership with the sub-contractor; appoint an in-house contract manager to supervise the outsourcing strategy and monitor the relationship
- Help the new firm get established and ensure that you are not the only customer of the outsourcing company
Managed Service Provision
A Managed Service Provider runs specific functions, usually IT, for an organisation that requires specialist knowledge or expertise. The term ‘managed services’ is being used to apply to a range of IT-related services. Commonly these relate to the Internet/WWW. So internet security, website or web application hosting, and network systems management are prime contenders.
Internet security services provide a good illustration of the approach. Internet security is a complex and ever-changing area. Few organisations have enough internal expertise to keep up with new hacking techniques and new viruses. Considering the vulnerability of organisations to the risks involved using someone else to provide that constantly refreshed expertise makes sense. Thus, a managed service may provide any or all of:
- monitoring and management of firewalls;
- intrusion detection systems;
- virus checking and management;
- website design and hosting;
- ecommerce capability; etc.
The company can be assured that these task are being carried out by fully-trained, competent staff and that someone else has the task of ensuring 24 hour cover, covering sickness and holidays, etc.
Managed service providers typically provide their services on a subscription basis, over a one/two year contract period. The decision as to whether or not to use managed services is a ‘standard’ outsourcing decision. The standard challenges associated with outsourcing also exist and outsourcing critical functions can result in a loss of control.
Out-tasking – The Outsourcing Alternative
Out-tasking is best described by using an example.
Outsourcing has hit the enterprise security market. This is an area of specialist knowledge and it makes sense to hire specialists to address information security challenges. However, outsourcing may not always be the soundest approach to security. It can leave an organisation overly dependent on the managed security service provider to meet security needs and this can often mean that risks are not reviewed regularly.
Senior managers should remember that outsourcing the work does not remove responsibility. An alternative is emerging, which can be more efficient than ‘standard’ outsourcing. It is known as ‘out-tasking’.
Out-tasking is the farming out of discrete, specialised security tasks, rather than security as a whole area. Such tasks could be, for example, intrusion detection system monitoring, forensic investigations, or periodic vulnerability assessments. In contrast to outsourcing, out-tasking forces an organisation to hold itself accountable for its own security, no matter which functions are performed by staff and which are provided through a managed security service. By choosing out-tasking rather than outsourcing, the organisation makes a conscious decision to retain control over the security programme. This correctly recognises that the company itself is responsible for its assets.
Out-tasking makes the company decide which tasks are better handled in-house, and which outside. This may encourage more careful thought about overall security strategy. The out-tasking acts as a ‘strategic catalyst’. Using this mixed mode approach, the client retains responsibility for strategy and selectively outsources components of an overall process following an analysis of need and capability. Such an approach can apply to many other areas where it may be an appropriate variation on the outsourcing theme.
Transformational Outsourcing
In the past, companies have outsourced non-core activities, leaving them free to concentrate on their core activities and the underlying business processes. Under a newer transformational outsourcing arrangement, a service provider takes on responsibility for business critical systems and services. This usually means also that instead of having several outsourcing arrangements for separate systems/services, clients are combining several projects into one, large contract with a single supplier. Such deals are being driven by the current economic climate and the need for cost cutting above all else. However, there are other benefits to an arrangement that spreads investment more evenly over the timespan of the contract avoiding the difficult peaks that would otherwise exist.
Transformation outsourcing builds a new business model to gain competitive advantage in times of relative uncertainty.
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