Outsourcing Steps to Take

Steps to Take in Establishing an Outsourcing Relationship

Step 1:

The first step in considering outsourcing arrangements is to determine the company's core processes - its distinctive competencies and customer values - and non-core processes. Who are our customers? What is the product/service/expertise we bring to them? What do they really need? Are they willing to pay premium prices for it? What is a support function versus a primary function?

Step 2:

The second step is to evaluate non-core activities as candidates for outsourcing using a sequential self-diagnostic similar to the one below:

Do we really want to produce the good or service internally for the long run? If we do, are we willing to make the back-up investments necessary to sustain a best-in-world position? If so, can we objectively evaluate inefficiencies at all levels? Can we maintain improvements? Can we maintain the operation while advancing our core business? Is it critical to defending our core business? Do we have commitment throughout the company?

If not.

Can we license technology or buy know-how that will let us be the best on a continuing basis? If not.
Can we buy the item as an off-the-shelf product or service from a best-in-world supplier? Is this a viable long-term option as volume and complexity grow? If not.
Can we establish a joint development project with a knowledgeable supplier that ultimately will give us the capability to be best at this activity? If not.
Can we enter into a long-term development or purchase agreement that gives us a secure source of supply and a proprietary interest in knowledge or other property of vital interest to the supplier and us? If not.
Can we acquire and manage a best-in-world supplier to advantage? If not, can we set up a joint venture or partnership that avoids the shortcomings we see in each of the above? If so.
Can we establish controls and incentives that reduce total transaction costs below those of producing internally?

If the analysis points toward the outsourcing of one or more processes, the next step is to evaluate potential suppliers using a checklist like the one below:

Skills base: What is the scope of the supplier's services? What are the skill and experience levels of the supplier's management team? Does the provider have administrative skills as well as operational expertise to manage our processes more effectively?

Experience: What experience has the supplier had in outsourcing work that has similar duration, complexity, technical scope and geographic extent?
Controls: What reporting and control mechanisms does the supplier use? What flexibility does it have in customizing reports? What happens to the data if the provider goes out of business for any reason?

Geographic scope: Is on-site support needed? If so, does the supplier, including its own subcontractors and partners, have staff now in the places where coverage is needed? Or is the provider willing to set up and manage a location near you given sufficient volume to justify the expense (this could reduce cost savings)? Can the outsourcer handle disaster contingencies?
Price: What is the cost compared to owning the process on a function-by-function basis? Be sure to look at the long term and include "fixed" cost components like facilities and management as savings.

People: What arrangements or recommendations will be made for current staff? What is tone and tenor of relationship with outsourcer? Do they have your business problem in hand, offering to customize the solution to your needs or are they trying to sell you an off-the-shelf answer?

Once an outsourcing partner has been selected, the parties establish mutual goals and strategies for outsourcing that will drive the relationship. Then a contract is written and negotiated that spells out goals, benchmarks, incentives, monitoring and communication procedures, etc.

The last step to starting an outsourcing arrangement is to manage change in the buyer/client company including human resource issues, transfer of assets to the supplier, and instituting procedures for monitoring of the outsourced activity.

For personnel management, the question of outsourcing is a difficult one. Often driven from the top down, outsourcing is usually feared by lower level managers concerned about losing their jobs.

In fact, employees can benefit from the decision to outsource. Key personnel may be retained to manage and monitor the outsourcing supplier, and for these employees, the outsourcing relationship provides a positive injection of new knowledge.

Others may be hired by the supplier and continue careers in their field. But instead of working in a non-core function for their old company, they have the chance to work for a world-class company focused solely on their area of expertise, with even greater opportunity for career training, job security and advancement.

In some cases, however, there is substantial outplacement. Fortunately major outsourcing providers and other consultants now have significant expertise to counsel companies through the transition.

The use of outsourcing as a management tool has revolutionized business by shifting the focus from managing resources to delivering results. Outsourcing is no longer seen as merely a means of reducing and controlling costs, but as a powerful strategic weapon. According to the Outsourcing Institute, 75% of the projected increase in outsourcing expenditures represent current users expanding into new functional areas. Clearly, initial outsourcing ventures are yielding benefits; and once management embraces it, outsourcing tends to spread through an organization.