Idea 36 - Outsourcing
In 2003,
Procter &: Gamble caused a few jaws to drop by outsourcing its IT functions
to Hewlett-Packard, its human resources department to IBM and its facilities
management to Jones Lang LaSalle. It reasoned that specialists in each process
would be able to beef up efficiency and service. Not only has it not been
disappointed, but it has been pleasantly surprised at the scale of the
improvement. So far, the exercise has been a classic example of why management
reaches for outsourcing.
Not all outsourcing fits that description, by any means.
Many who have tried it say it is very difficult to pull off, and the failure
rate remains high - anything from 40-70%, depending on whom you ask. A series
of very visible outsourcing calamities at big companies like Dell and Lehman
Brothers (which re-insourced helpdesks) and JP Morgan (which clawed back its IT
functions) raised doubts over whether the practice had a future at all. Certain
British government agencies have had a similarly dismal record with third-party
IT projects. Yet outsourcing volumes keep growing, along with the categories of
work involved.
It may be hard to do but it's not a complicated idea.
Outsourcing is farming· out a particular function, perhaps an entire process,
to a third party. If you pay someone to come in and water the plants in the
reception area that's outsourcing, even if it's at the easy end of the
implementation scale. In concept, outsourcing has been around nearly as long as
manufacturing. Contracting with a parts supplier to make components for you is
outsourcing, strictly speaking, but that's not what people really mean by it.
Instead, they are talking about contracting out services and processes.
It all began to gather steam in the 1980s and early 1990s.
Michael Porter's value chain analysis was gaining a following at the time, and
there were the first stirrings of a strategic return to the core. What is our
core business, and where do we add value, management asked itself. The logic
was that if you didn't have superior skills in a function and it didn't add
value, why do it? Someone else could do it better and, probably, cheaper.
Running the
canteen Computer bureau had been an early form of outsourcing
provider for those who couldn't afford computing power or time, and IT remains
one of the most outsourced functions to this day. The next candidates were
services like managing the company's buildings and facilities, or running the
canteen. It became standard practice for the outsourcer to take on at least
some of the existing staff from those departments and, if there were any assets
involved, to acquire those too and pay for them.
Firms gradually developed enough confidence in the concept,
and the providers, to begin handing over entire business processes, starting
with payroll, data entry and insurance claims. This was 'business process
outsourcing', or BPO to its friends. IT outsourcing (ITO) is a subset of BPO.
The principle widened to include processes like billing, purchasing and finance
- what Indian contractors call 'non-voice' work. Along a separate trajectory,
it spread, notoriously, to customer relations management and technical support
via call centers that were often located in other countries.
Some call this 'offshoring' though purists insist that the
word means relocating part of your business abroad, not relinquishing
ownership. Paying a call center in Calcutta to deal with your customers is
merely offshore outsourcing. Either way, it is a sensitive issue, both
politically and for the people who lose their jobs - unlike domestic
outsourcing, they can't cross the street for a job with the new service
provider.
BPO is largely concerned with carrying out routine
processes, albeit in some curious niches. One London outsourcing provider
handles employees' expense claims over the Internet. So-called 'knowledge
process outsourcing' - yes, KPO - farms out brainpower, in the shape of
research, analysis and technical skills.
What benefits do companies expect! For those feeling the
pinch, the asset sales and payroll cuts can be enough to prompt the switch,
though outsourcing experts will tell you that this is a bad reason. None the
less, outsourcing does lower costs, either because the provider has better
economies of scale or, if the outsourced work goes offshore, through lower labor
costs. Other compelling motives may include getting work done more efficiently
or effectively and tighter budget control through more predictable costs.
Maintaining quality and security of information are
perennial concerns for many companies, and the cost savings are not as dramatic
as some anticipate, which is why they need a properly thought-out business case
to justify the change. Whatever price the contract may specify, specialists say
users should add 10% to set up the arrangement and manage it, and anything up
to 65% if the work is going offshore, thanks to travel costs and the
complexities of cultural alignment. Other costs may include benchmarking and
analysis to check that this really is the right choice, and redundancies. The
transition period - 'the valley of despair' to some insiders - can last from a
few months to a couple of years and is often marked by a drop in productivity
as things settle down.
Polarizing
market among suppliers of outsourcing services, the market is
polarizing, as markets do, into a small number of big full-service providers at
home and abroad, and a raft of smaller specialist suppliers. In time, it may
evolve to provide a la carte menus of services, easier to access than today's
offerings.
While India dominates the offshore market, particularly in
software work, other popular destinations include Ireland, the Philippines,
Russia, Poland and the Czech Republic. Yet there is already a reverse flow,
with small providers popping up in rural America.
The iron rule is never to outsource strategy. That apart, is
anything else beyond outsourcing's reach? Possibly not. Outsourcing's most
useful contribution to the practice of management may be that it is embedding a
discipline of looking at absolutely everything in the business and asking:
'Should we really be doing this?'
Reference: 50 Management Ideas You Really Need to Know
Book by Edward Russell-Walling
Comments