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Home > Performance Management Best Practice > Reducing Costs and Improving Efficiency by Outsourcing and Selecting Suppliers

Performance Management Best Practice

Reducing Costs and Improving Efficiency by Outsourcing and Selecting Suppliers

by Paul Davies

Executive Summary

  • Start outsourcing by constructing the exit clause; this will tell you and your outsource partner what you are focused on and will save you time and expense if things go wrong.

  • Focus on the downsides first and understand the management changes required, the communication strategy, the training needs, and your regular engagement with the outsourcer.

  • Outsourcing is a process, not an event. What and how you outsource will change over time.

  • Outsource chore and focus on core. Keep value creation for your clients in-house.

  • In general, outsource a process as is. Let your outsource partner reengineer processes.

  • Do not manage your outsource partner; rather, monitor, review, and reassess.

  • Choose a partner, not a supplier—one that you can work with through good and difficult times.

  • The lowest-priced outsourcer will usually be the most expensive in the long term.

  • Outsourcing can not only save money and increase efficiency, but can also reju-venate your business by refocusing your attention on what makes you great.

Introduction

As a tool for the CFO, outsourcing has an important role to play in reducing costs and improving efficiency. It is important, however, to bear in mind that in addition to the direct and indirect benefits of outsourcing, there are also direct and indirect disadvantages. Outsourcing isn’t the answer on its own, and it has to be part of a holistic analysis to be successful.

Start with the Exit Clause

Without putting a damper on the idea, whenever you contemplate outsourcing always consider how you will exit. This may seem curious, but over the years I have found it to be absolutely essential. If outsourcing does not deliver what you expected, if your strategy changes, if the outsource partner decides on a different business model, or if the whole market turns in a different direction—all of which can happen—you need to be able to regain control of what is often a vital, if not mission-critical, process. In such circumstances, you will need to be able to take it back yourself or pass it to another outsourcing company.

Think carefully about this because what you take back won’t be what you outsourced. There may well be new IT systems being used, and certainly the processes won’t be as you left them. If you haven’t an exit agreement, working out who owns the intellectual property underlying the new processes is very difficult and is just one example of the problems that can occur.

The moment to decide how you want to be able to exit is before it becomes a necessity and, preferably, when you are negotiating the contract. If this sounds obvious, many companies fail to do so and suffer as a result.

Understanding your exit strategy will also tell you a great deal about what you want from the outsourcing process. You may be rightly seduced by the idea of not having to spend management time on human resource back-office processing, or by the advantages of not having to worry about expense account processing. If at this same moment you think rationally about what would prompt you to exit from the contract, you will understand most clearly what your business drivers for outsourcing are. If, for example, you put in the exit clause that you have the power to terminate if the proposed savings are not realized, you know what your real objective is. It may be that you insist on a range of triggers and if, for example, you focus on service levels and your end clients’ satisfaction with your overall service, you have the same knowledge about your objectives and, more importantly, so does the outsource provider.

In short, brainstorm why you might want to get out of the contract—preferably together with the company that you intend to outsource to—and you will find that not only do you have the comfort of being able to get out of the contract effectively, but that you are also much less likely to have to do so. You will have a much better sense of the advantages and disadvantages of working with your outsourcing partner—and that company will better understand you.

Disadvantages As a Pointer to the Benefits

Let us continue by considering the disadvantages of outsourcing, and, by doing so—paradoxically perhaps—you will better understand what you have to do to be successful. You will discover, despite your efforts to communicate, that your current employees do not fully understand why you are taking the outsourcing route. They will probably be fearful that their roles are next, and this can harm performance. In addition, you will lose the sense of immediate control that you had and, instead of going down to the relevant office, you have to go through a process to achieve something that was very simple. You may find that your outsource partner doesn’t give you the service you thought you were buying and, without proper review processes, correcting this can waste time and effort. You may find that the insights that cross-departmental meetings and discussions bring are no longer informed by the different perspective that the outsourced department brought. Some of the drawbacks will be relatively obvious, but others will come into your perspective just at the wrong moment, such as when you can’t make sense of some information just prior to a board meeting.

These disadvantages point up how your approach to outsourcing must be holistic and built on solid communications.

One area that nearly always gets less attention than it needs is training. It is a significant extra cost that rarely makes itself known until after the deal is signed off. Typically, you will focus on the training of the staff of the outsourcing company, only to discover that your own people have largely been ignored. There will have been a communication to your existing staff about what is going on, but very little to show them how to get, for example, HR support now that it has been outsourced beyond a telephone number.

To get the best out of the new arrangements, you have to train your staff how to deal with accounts payable now that it is remote. Your managers have to move beyond control and micromanagement into monitoring. That can be very difficult to achieve.

You will have noted the focus on communication—and this, as in any serious business reengineering, has to be well thought through and effective. The best way to achieve this is to ensure that there is a feedback mechanism both on the information and the quality of the way it is presented, not to say its timeliness.

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Further reading

Books:

  • Benn, I., and J. Pearcy. Strategic Outsourcing: Exploiting the Skills of Third Parties. London: Management Consultancies Association, 2002.
  • Halvey, J. K., and B. M. Melby. Business Process Outsourcing: Process, Strategies, and Contracts. Hoboken, NJ: Wiley, 2000.

Reports:

Websites:

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