Maximising benefits and minimising costs with outsourcing is possible with a little co-operation, trust and attention. By Patrick Fernandez
Outsourcing continues to find growing acceptance among organisations seeking to improve their operations. An external agent, as opposed to in-house staff, is contracted to be responsible for all or part of a function. Some argue that outsourcing is nothing new, as organisations have long contracted external parties for the supply of physical goods and raw materials. However, more often than not this is because in-house production is impractical or near impossible and there is no choice but to buy in such products as motor vehicles and office furniture. Outsourcing, as it has come to be known, is associated more with services which, in most cases, could feasibly be undertaken internally.
Historically, most organisations provided their own office cleaning, building maintenance and accounting services. This has changed in the past decade and now there is an expanding market for outsourced services. Management visionary Peter Drucker said in 1995: “In 10 to 15 years organisations may be outsourcing all work that is support rather than revenue producing.”
Much of the early interest in outsourcing arose from the need to make significant cost savings in a short time. However, savings depend on several factors, including the competitiveness of the external market, the design of the specifications, the method of awarding contracts, and the nature of the relationship over the life of the contract.
Managers who accommodate these factors can influence the outcome of outsourcing. Indeed, the difficulties reported are often attributable to weaknesses in decision-making processes and poor implementation of the outsourcing strategy. Simon Domberger, in his book The Contracting Organisation: A Strategic Guide to Outsourcing, stresses the importance of actively managing all aspects of outsourcing: first because services lend themselves to differentiation across buyers; and second, unlike spot transactions, outsourcing involves the flow of goods or services over extended periods. This can result in changing requirements or varying performance over the duration of the contract, both of which need the purchaser’s attention.
Evaluating the results of outsourcing is often difficult, relying more on perceived results than on direct measures. A study of more than 7500 outsourcing initiatives by government agencies in Australia, over the four years to 1998, showed that cost savings varied from 46% for cleaning to 0.7% for corporate support services.
In general, savings decrease as the degree of competition decreases. Open tendering a highly competitive process is the most common method of awarding contracts and is associated with greater cost savings than other methods. Fixed-price contracts, which are easier to compare and therefore more competitive, also achieve greater cost savings than variable price contracts.
A criticism sometimes levelled at outsourcing is that cost saving is achieved at the expense of contract performance. However, this is not borne out by experience. On average, the contract performance improves gradually, as the level of cost savings increases.
When outsourcing is not accompanied by a reliable method of measuring and reporting contract performance, the quality of outcomes is significantly lower.
Alan Shepherd writes that two of the main challenges facing buyers are: reduced awareness about delivery of the service after it has been outsourced, and ensuring that improvements in price or performance over time do not accrue only to the supplier. Co-operation, trust, information exchange and flexibility all serve to mitigate these effects and minimise the level of conflict in the contractual relationships. These attributes were significant in 80% of the surveyed contracts.
CTC Consultants. Government Outsourcing: What has been learnt? Sydney, 1999.
Domberger, Simon. The Contracting Organisation: A Strategic Guide to Outsourcing. OUP. Oxford, 1998.
Drucker, Peter. “The Network Society”. Wall Street Journal, March 29, 1995.
Shepherd, Alan. “Outsourcing IT in a Changing World”, European Management Journal, 16(6) 1999.
How not to
How not to manage cultural differences
They are still laughing about this at IBM. Apparently the computer giant decided to have some parts manufactured in Japan in a trial project. The specifications set out that IBM would accept only three defective parts per 10,000.
When the delivery came in, there was an accompanying letter. “We, Japanese people, had a hard time understanding North American business practice. But the three defective parts per 10,000 have been separately manufactured and included in the consignment. Hope this pleases you.”
How not to serve the customer
An especially brilliant exercise in customer service was completed by the Fox and Goose pub in Birmingham. Between 1975 and late 1977, it followed all the best principles of management by not serving any beer at all. By way of joyous resumption of imbibing, a special celebration was organised to mark the conclusion of the drayman’s strike (the reason for the lack of beer). Two minutes before opening time on the great day, the power was cut. All the electrically operated beer pumps were put out of action.
How not to predict the future
As one wag commented, predictions are difficult, “especially when they are about the future”. Not that this stops the “experts”. According to the book The Fortune Sellers, the “forecasting track records for all types of experts are universally poor, whether we consider scientifically oriented professionals, such as economists, demographers, meteorologists; and seismologists, or psychic and astrological forecasters”. The stockmarket crash of 1987 was an excellent example. Almost no one predicted it; almost everyone said after it happened that it was predictable. One exception was a US market forecaster who used a system derived from Aztec astrology. For a short time he enjoyed great popularity until he failed to predict the next big market development.
What not to put on a desk calendar
The following are examples of how not to reflect on the profound mysteries of the human condition. They come from an American newspaper competition:
- Democracy is a beautiful thing, except for that part about letting just any old yokel vote.
- Home is where the house is.
- Often, when I am reading a good book, I stop and thank my teacher. That is, I used to, until she got an unlisted number.
- As you make your way through this hectic world of ours, set aside a few minutes each day. At the end of the year, you’ll have a couple of days saved up.
- Give me the strength to change the things I can, the grace to accept the things I cannot, and a great big bag of money.
- Once, I wept for I had no shoes. Then I came upon a man who had no feet. So I took his shoes. I mean, it’s not like he really needed them, right?
How not to communicate with employees
A few choice delicacies from the sweets trolley of managerial communication, the basic ingredients being brilliant insights into people, processes and systems:
- A memo came from senior management: “This is to inform you that a memo will be issued today regarding the subject mentioned above.” (Microsoft, legal affairs division)
- One day my boss asked me to submit a status report to him concerning a project I was working on. I asked him if tomorrow would be soon enough. He said: “If I wanted it tomorrow, I would have waited until tomorrow to ask for it!” (New business manager, Hallmark Greeting Cards)
How not to run a legal system
The following candid letter appeared in the Jakarta Post in Indonesia:
Law practitioners should be involved in any hearing in the House of Representatives to ensure that the law fulfils its purpose.
It is absurd that judges should be subject to “tour of duty” programs while court clerks, who manage the administration of lawsuits, stay in the same position for years, even until retirement.
The lucrative Jakarta courts have been much desired by court clerks. Some clerks in Jakarta have worked for 20 years in these courts, while their colleagues in the provinces must do with only their salaries. The former live quite affluent lives because they have the opportunity to distribute law cases, arrange execution salaries and so on.
To use plain, everyday language, they are referred to as “rich clerks of the court”.
It is high time the minister of justice took corrective action on the matter and gave a fair chance to court clerks in the provinces.
Yours sincerely (sic) etc.
What was the writer complaining about? That Jakarta-based court clerks have more opportunities to take bribes than their provincial counterparts.