Myths and Realities of Outsourcing

Outsourcing has been written about in someyou keep things in-house. Sometimes this is not a
management journals as if it was a 'must do' process.problem, but with critical business functions it can be.
There has been much hype about the need to focusThe extent to which you will experience strengths or
on core competencies, the drives for cost reduction,weaknesses of outsourcing depends upon having a
the ability to access top quality staff and the latestclear understanding of what you want to achieve, a
technology, and therefore gain competitive edge. Wegood contract, and an awareness of the
refer to these as the myths of outsourcing to highlightcircumstances that will influence success.
the need for a critical stance. Outsourcing can workInfluencing circumstances
for some, but not for all. So is outsourcing a case ofThere are of course many factors that will influence
turning lead into gold, or actually a case of giving awaythe potential success or failure on an outsourcing
the jewel in your crown?strategy. Large companies can have more bargaining
To assess this we will briefly look at each of the keypower with the suppliers, but they may be less able to
potential benefits.make use of a supplier's economies of scale. Small
1. Cost reduction - there is very mixed evidenceenterprises may experience relationship difficulties as
regarding cost reduction. There are examples ofthey have less to bargain with and are possibly less
increased costs, and one study showed 40% ofexperienced in relationship management. The function
respondents classed cost-savings as 'mediocre'. Theyou are considering outsourcing will also influence, for
problems with this become clear if you bear in mindexample, there is evidence that IS managers perceive
that economies of scale are not always possible,a high success with outsourcing systems operations
systems cannot always be shared, and of course, theand telecommunications, but not with outsourcing
supplier has to make money on your contract. It hasapplications development, end-user support, or
been suggested that only if your existing activity wasmanagement. The environment within which the
very badly managed, and overstaffed, will outsourcingbusiness operates will also influence results, a more
benefit you financially. In most of these cases, gettingdynamic environment can make planning for the future
to grips with the in-house function would offer similardifficult. Experience in outsourcing, your own and that
savings.of your supplier, will increase the potential of success.
2. Focus on core competencies - there are problemsOutsourcing processes tend to improve as the vendor
with this concept because many managers havegains an understanding of your own company.
trouble deciding what a core competence actually is,Increasingly now, the key factors will be how the
and furthermore, much of the time saved on managingoutsourcing lifecycle is managed, and how effectively
the activity is re-invested in managing the outsourcingyour enterprise is organized to negotiate and manage
supplier.the contracts and relationships. Very different skills are
3. Access to highly trained staff - although this canneeded of the managers in charge, and a clear
happen, there have been complaints that suppliers dounderstanding of how the organizational structure will
not always staff a client function well, and in somelook after outsourcing is required (Gartner Group).
cases will actually remove the better client staff fromOutsourcing is most likely to be beneficial when the
the activity.function concerned is of low competitive advantage
4. Performance improvement - some have managedand likely to remain so. Similarly, if your internal
to achieve this, but again there is evidence of difficultcapability is weak, and hard to improve outsourcing
or even serious service-level problems.may be an option. However it will be important to
It could be argued that outsourcing remains popularassess and understand why the function is weak to
because of the perception that so many companiesenable you to manage the outsourcing process.
are doing it, therefore it must work. There is evidenceAnother aspect to consider is how inter-dependent the
that companies can be over-optimistic regarding thefunction is with other aspects of the business,
benefits of outsourcing, or misunderstand the potentialsometimes outsourcing one part of a process can
of the internal function. Others may outsource forlead to problems because of the complexity of the
political reasons, it can be a useful way to get rid of anlinkages.
enemy, or a headache. These are often the contractsMaking a decision regarding whether to outsource or
that fail, although thankfully guidelines are becomingremain in-house is difficult. It has been suggested you
clearer regarding how best to gain benefit fromshould consider whether the Internal capability of the
outsourcing. As with many processes, one of the bestenterprise to perform is weak, moderate or strong,
ways to ensure success is to be aware of potentialand whether the potential for an activity to yield
strengths and weaknesses.competitive advantage is weak or strong. Based on
Strengths and Weaknessesthat you can make decisions about whether you
Just considering whether to outsource at all can be anshould outsource, get in a bit of additional capability,
impetus to improve a function and increase yourpartner with someone else or carry on in-house.
understanding and control of it. If you can control the(see 'Linking Outsourcing to Business Strategy' Richard
costs of the function, and have an understanding ofC. Insinga and Michael J. Werle, Academy of
where it fits into your business, you can make anManagement Executive, Vol 14-4 November 2000)
informed decision about whether to outsource and areThere is an increase in more partnership based or
far more likely to achieve cost control and othercollaborative relationships between larger enterprises
benefits. There are some good examples whereand outsourcing vendors, and these should be
access to high quality management skills, andconsidered where possible.
advanced new technology, can happen, particularlyManagement tips - how to increase the chance of
with suppliers who have more experience in your area.success
Some companies have found an improvement inThere are many sources of information now regarding
service quality, especially when the supplier has learnthow to improve the chances of an outsourcing
your business and really understands your specificcontract leading to successful outcomes. These
needs. This can take time and demands a solidinclude outsourcing consultancies, practitioner and
relationship between the parties. There are of courseacademic literature, and websites such as The
situations where economies of scale can be found,Outsourcing Institute. I will briefly summarise the
and where outsourcing can increase the futuresuggestions.o Consider carefully what you want to
flexibility of your enterprise.achieve and why you are thinking of outsourcingo Do
Some of the problems surrounding outsourcing areget your own operations in order first, do not
due to the 'hidden' costs that occur at each phase ofoutsource a problem or something you don't
the lifecycle, it takes time and skill to developunderstand.o Do invest in a good contract that can
benchmarks, negotiate with suppliers and develop aminimise risk yet maximise flexibilityo Do invest in
solid contract. The transition can involve a lot ofdeveloping your internal management to ensure they
disruption, a slow down in reaction time, prolongedhave the skills to manage contracts and supplier
supplier learning, and much time invested in managingrelationships.o Set clear benchmarks and realistic
relationships. The time and effort spent on supplierexpectationso Do not focus on price alone.o Consider
relationships can vary - a recent survey showed thatthe potential advantages and disadvantages of shorter
some senior managers suggested the relationship wascontracts and multiple suppliers.o Plan to manage, set
adversarial, with almost continual fighting overup clear structures and monitor and evaluate
objectives and contract interpretation. These costsperformance.o Consider also how you can retain and
tend to increase the more suppliers or vendors youdevelop knowledgeo Do communicate fully with all
have to deal with, but experience in outsourcing canstaff and ensure the transition is managed with tact
reduce these, and they will be a smaller percentage ofand consideration.
larger contracts. There are also issues regarding theMore on this in our chapter on outsourcing in the book:
level of control you have over the activity, in theory,Taplin, Ruth (ed) (2007) Outsourcing and Human
using the market as you do when outsourcing, canResource Management: An International Survey.
never give as much control as using 'hierarchy', whenRoutledge.