Out-Law / Your Daily Need-To-Know

How to develop an outsourcing strategy

Out-Law Analysis | 13 Oct 2009 | 10:51 am | 5 min. read

OPINION: Of all the stages in the outsourcing lifecycle, the initial strategic planning stage is among the most important. Outsourcing projects – large and small – are not generally planned with detail and underpinned by long-term strategies.

As outsourcing experts we always stress that planning and strategy are pivotal and will ultimately determine the overall success of an outsourcing.

In order to achieve a solid, realistic outsourcing strategy, an organisation must be able to analyse every aspect of its business, which is often a difficult task as it may require numerous areas of the business to work together, possibly for the first time.

The strategy setting process will ultimately change the roles of both management and employees alike, and will also come under great scrutiny. Therefore it is vital to ensure that all stakeholders – employees, clients, customers and suppliers – are included in the prerequisite due diligence process, which will set the components of the outsourcing and is vital for the development of the strategy.

Determining the objectives

Organisations which have a clear vision of their strategic and tactical objectives prior to entering an outsourcing agreement have a much better chance of ensuring that their outsourcing suppliers are able to meet those objectives.

They will also have the ability to clearly communicate those objectives to the service provider and to use them as a contractual basis of their relationship. They can also use the objectives as a management tool, so that both parties know the criteria set to keep the agreement on track.

While the objectives of outsourcing will vary from business to business, the most frequently cited include the following:

  • an increase in the customer’s ability to focus on strategic issues and the delivery of value added services to its clients;
  • an increase in the customer’s flexibility to plan workloads and to focus management efforts;
  • flexibility in business re-organisation – whether in the form of decentralisation, downsizing or simply better resource control;
  • a reduction in the number of non-core competencies which the customer has to sustain increased costs – in the form of greater costs predictability and the conversion of overheads and other previously fixed costs into variable costs; and
  • cost reduction through efficiencies and economies of scale on the part of the service provider.

Non-financial objectives are often stated to be as important as financial objectives in the decision to outsource, although in our experience financial objectives often assume a higher profile as negotiations proceed.

Assessing the risks

An important element of setting a strategy is assessing the potential risks to all parties involved.

Each outsourcing procurer has its own set of objectives, however each comes with its own set of risks – either specific to their organisation or market – but in our experience the following are common problem areas:

  • failure to obtain commitment to the customer’s vision or culture from the service provider;
  • the distraction of having to manage the relationship with the service provider – an organisation with its own goals and a different culture;
  • a perceived loss of control and a feeling of over-dependence on service providers – which can be particularly acute where there is a single, large service provider and few retained staff;
  • a feeling on the part of retained management staff that they have less influence on the development of strategy and policy and on the part of retained technical staff that they have become less skilled in their specialist field;
  • unanticipated expenditure – services that were assumed to be included in the service provider’s package appear as extras in its invoices and/or promised cost; and
  • savings turn out to be dependent on a high level of capital investment in new projects on the part of the customer.

Considering alternatives

The initial review of objectives and risks should also include the consideration of alternatives to outsourcing. Some organisations looking to outsource give their existing in-house departments the opportunity to put forward a competing bid, while others conclude that the benefits available from outsourcing could be obtained more economically by changes in internal processes, for example increased standardisation.

Even when it is decided that outsourcing is a viable solution, there may be steps that the customer could take prior to the procurement process that would put it in a better negotiating position. For example, if standardisation is implemented prior to outsourcing, the services for which bids are sought are more likely to be priced on a commodity basis.

Testing the market

Having determined the objectives required from an outsourcing, it is prudent to test whether those objectives are achievable in the marketplace. To do this, organisations either use consultants to tell them what is available or approach suppliers directly - or a combination of the two. The direct approach generally gives the customer an opportunity to test assumptions as well as refine objectives.

Market feedback is particularly important in view of an organisation’s increased willingness to consider ‘off-the-shelf’ outsourcing solutions, sometimes called COTS (commercial off-the-shelf) solutions. In contrast with the attitude prevalent a few years ago, when the outsourcing service provider was commissioned to automate the customers’ existing internal processes, outsourcing customers are now more likely to consider amending their internal processes to match a solution that is available in the market.

Planning internal change

Inevitably, any outsourcing will force some degree of internal change, therefore the outsourcing strategy has to be comprehensive in its detail as to how these internal changes will be implemented, and also what the implications will be.

The degree of change can be modest or very significant. For example, where a group whose members have each run their own bespoke HR processes decides that all HR will be sourced from a single service provider, each company will have to amend its processes to conform to those of the service provider.

Outsourcing transactions that involve this degree of change are often referred to as transformational, and one of the key lessons of transformational outsourcings is that internal change within the customer requires as much, or more, planning and effort as negotiation with the service provider.

Several studies of projects in the public and private sectors have shown the danger of trying to implement an ambitious new IT system when the users who are to operate that system are not organised in the way that was assumed by its designers.

A key element in any planning is an assessment of the degree of change required and the resources required to manage that change.

Understanding the starting point

Any organisation looking to outsource an internal function needs to understand that function fully before it can even consider the outsourcing of it.

At the very least, this means having a clear idea of the extent and capabilities of the internal function, the services that it supplies, the standards to which those services are supplied, the resources, including the staff, assets and contracts, it uses to produce the service and its running costs.

Assembling this information can often be one of the most difficult tasks in an outsourcing project, particularly where the internal function is widely distributed across the customer organisation.

In a second-generation outsourcing there is a similar problem as regards information about the incumbent service provider’s establishment. It is therefore important that the outsourcing organisation focuses on these issues during the planning period.

In assessing its starting position, it is particularly important for the customer to take a view as to the optimum treatment of employees, assets and third party contracts.

Planning the procurement

We have already indicated that the gathering of information, determining of policies and managing the transition of employees, assets and third party contracts are necessary components of a long-term strategy for any organisation looking to engage in an outsourcing contract.

The following procurement phase also contains time consuming tasks, such as service definition and contract negotiation. These tend to impose a heavy workload on the procurement team and are often difficult to reconcile with “business as usual.”

Therefore one further strategic consideration is to determine the way in which the procurement will be managed, establish the balance of internal and external resources and set a budget and project plan.

By Angela Cha, a partner with Pinsent Masons, the international law firm behind OUT-LAW.COM. This article first appeared at Executive View.

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