This will probably come as no surprise, but while I’ve been talking with people about outsourcing, the most common shared belief I’ve come across is that while it may reduce costs, it comes at the price of losing control. Also that when that happens, quality suffers.
It shouldn’t be a surprise at all that the cost element gets a mention. The starting point for such services is normally a drive to reduce the costs of either the finance function, the client accounting function or other services. Sometimes that’s the direct costs and sometimes it’s the opportunity costs of what otherwise stretched staff could be doing. In Guernsey, with its stretched labour force it can often be about dealing with bottlenecks and availability of skilled people at the right times. But what about the ‘losing control and quality’ side of that view?
The reasons for outsourcing are not only cost. With the right partner it can bring transparency, greater efficiency, standardisation and improved governance and controls. It can bring expertise when needed without paying for it all year round. Many companies may not realise it, but they manage an outsourced provider much more stringently than they would an in-house operation – and absolutely should demand that level of accountability and transparency.
It’s not a given that outsourcing is the right course for your business, but making a decision needs to properly weigh up the relevant factors. Here’s some food for thought for you in weighing up decisions if outsourcing is the right course for your business and whether your outsourcer is the right partner for you.
Lets run over those “Pro’s” in a bit more detail
Economies of scale: An outsourcing firm can probably carry on those activities on full time basis and most likely on a larger scale than their clients. They may have economies of scales and benefits in terms of lower base costs of business. Some extent of these benefits they can be passed to their clients.
Planning and Budgeting: You’ll normally be given a quote up front for the service. Knowing in advance reduces uncertainty allowing better anticipation of cash flow requirements.
The ‘lean business’ trend: If you’re the business that’s agile in your sector, the competitive advantage is real. There’s been a lot written about the advantages of being lean and responsive (and you can expect us to write more on that). Outsourcing can allow you to focus your resources and make demands of the supply chain while others take on the logistical elements on your behalf.
Elimination of limiting resources: Outsourcing organisation may have larger capacity which can be used in line with other activities of the business removing limiting factors on your business expansion.
More adaptable costs: The outsourcer may be ready to provide services based on variable charges hourly or per unit basis meaning you move from a fixed cost basis to a variable cost – letting you be more directly responsive to your customer demands or internal needs.
Experience and expertise: It is possible that outsourcing organisation has specialist knowledge, particular experience that is hard to otherwise engage in your business or already prepared systems, controls and processes to enable them to provide better quality services. The opportunity cost of developing these as opposed to buying them in factors in.
Focus on core activities: Outsourcing peripheral activities can reduce managerial workload allowing them to focus on core competencies and delegate areas on which they lack competencies and resources to some competent outsourcer. The result is two-fold. Better core competencies due to focus by your team and better peripheral activities due to competence and specialisms of your outsourcer.
And the “Con’s”
Loss of control: The outsourcing organisation may be geographically remote from business current location, frequent visits are not possible and communication and reporting not sufficient to exercise control. In a regulatory environment demonstrating oversight and strong control is a must! Any incompetency or even the scent of it identified by market can be threatening to the reputation of the business. Outsourcing is at its most effective as a value-add only if it improves cost, speed, quality – or ideally all three.
Lack of independence: You need to properly consider what you’ll be giving up. You might gain in the short term but because of loss of competency and resources in the business it could prove even more costly again should you decide to bring it back in house. If your outsourcer fails to deliver under the agreement, it will be difficult to setup activities immediately. Delays to setup activities again can damage reputation and cash flows. You need to be certain that your other party has what it takes and won’t let you down if you are going to outsource.
Employee morale: Lost overtime, possible redundancy, smaller work forces all impact on morale. It can seriously impact productivity in particular if there is little motivation regarding promotion and growth. You really need to know your own workforce and what they want to be doing, versus what they are doing, versus what you intend for them to do after such a decision is made.
Cost may exceed benefits: If outsourcing is going to make existing roles redundant, there are costs. The benefits to be received from outsourcing are future expectations which may not come true. Dependent on volumes, outsourcing may not be the right choice at all.
Reaction of owners: All businesses are different and have different priorities at different times. There’s been a lot of private equity buy-out’s in recent time for example and keen eyes on KPI’s will be order of the day. Owners may react positively or negatively depending on how they perceive the impact of outsourcing on their interest in the business. Sometimes these parties will feel that the business benefits from lower cost base and increased productivity with lower staff volumes. Other times they’ll feel a tighter grip on all factors is necessary.
Legislation and regulation: We all know in Guernsey where the buck stops on outsourced services in regulated business. You need to have a partner that can show compliance with the standards demanded. Who really knows right now how our relationships with foreign countries will be affected by impending constitutional upheaval. Other jurisdictions may protect some stakeholder rights by enforcing legislation e.g. imposing high duties to protect home industries or by imposing licensing requirements to business operating in particular industry requiring some activities or standards which are prerequisite to get a license.
Whether outsourcing is right for you is really a matter of what your business model is about and who your partner is, but there are preconceptions not all of which are correct.
We believe that with the advances coming in fintech and an ever increasing drive towards the ‘Now Economy’ in the B2C market; that the B2B market is going to follow suit. We can expect pressure to be put on the provider and for the same ‘move faster, think quicker, act now’ drive to follow right through the financial services sector. Agility and redefining what you want in a reactive way in response to your own customer will be the way of business in the future. We’re already looking at how best to be a part of the solution.