The Theory & Practice of Outsourcing
Why companies are interested in information
outsourcing and how it can be made to work for the benefit of
companies and individual information developers.
Dave Griffiths Outsourcing Manager for Europe
Introduction
The paper examines how information developers can, and do, react
to the prospect of outsourcing. And by doing so, I hope to help
information developers to understand the process and take advantages
of the benefits it does offer them, whilst recognising that there
are some downsides to the process.
What is outsourcing?
Outsourcing can be defined as "the strategic use of outside
resources to perform activities traditionally handled by internal
staff and resources". Sometimes known also as "facilities
management", outsourcing is a strategy by which an organisation
contracts out major functions to specialised and efficient service
providers, who become valued business partners.
Companies have always hired contractors for particular types of
work, or to level-off peaks and troughs in their workload, and have
formed long-term relationships with firms whose capabilities
complement or supplement their own. However, the difference between
simply supplementing resources by "subcontracting" and actual
outsourcing, is that the latter involves substantial restructuring
of particular business activities including, often, the transfer of
staff from a host company to a specialist, usually smaller, company
with the required core competencies.
Why do companies outsource?
Here are some common reasons:
- Reduce and control operating costs
- Improve host company focus
- Gain access to world-class capabilities
- Free internal resources for other purposes
- A function is time-consuming to manage or is out of control
- Insufficient resources are available internally
- Share risks with a partner company
In the early days, cost or head count reduction were the most
common reasons to outsource. In today's world the drivers are often
more strategic, and focus on carrying out core value-adding
activities in-house where an organisation can best utilise its own
core competencies.
Main Factors influencing successful
outsourcing
The critical areas for a successful outsourcing programme as
identified in a recent survey (ref 1) are:
- Understanding company goals and objectives
- A strategic vision and plan
- Selecting the right vendor
- Ongoing management of the relationships
- A properly structured contract
- Open communication with affected individual/groups
- Senior executive support and involvement
- Careful attention to personnel issues
- Short-term financial justification
From this list, I would select open communication and
executive support as of paramount importance in a successful
outsourcing process and I would personally add to the list the need
for workable Service Level Agreement, which is openly available to
all staff involved.
Open Communication
Kudos believes that whatever the outcome of the outsourcing
arrangement, managing change is fundamental to the success of the
programme. Assessing stakeholder requirements is the first part of
this process, and having open channels of communication during this
time are vital. Everyone concerned should be involved in the
process. The Fujitsu case study will demonstrate how this can be
achieved in practice.
Executive Support
Strategic objectives, such as outsourcing initiatives, must come
from the top echelons of a company. Senior management must
articulate the goals and objectives of the outsourcing initiative
and communicate how the process will benefit the organisation.
Today's managers are looking ahead and recognising that the
responsibility for ensuring the success of their enterprise's
outsourcing initiatives doesn't stop when the ink has dried on the
contract. Unfortunately, this has not always been the case. A
combination of uncertainty combined with a lack of attention to
critical details has created a present day scenario where, according
to The Gartner Group (ref 2), 25% of outsourcing contracts will be
re-negotiated or cancelled within three years. Ongoing management of
the relationship is important. Senior management must stay involved
during the implementation of the contract. Not only should there be
a clearly defined escalation procedure, but senior management should
meet at appropriate intervals to discuss the outsourcing
relationship. Meetings should also be held at the operational level
to address the workings of the outsourcing contract in practice, to
identify and resolve any problems that have been encountered, and to
agree on changes to ensure continued satisfaction.
Contracts and Service Level
Agreements
There are several critical components of a good outsourcing
agreement. The emphasis from the outset should not be on who wins
the best deal, but rather on negotiating a reasonable contract for
both parties. As each aspect of the outsourcing relationship is
governed by the contract, both the outsourcing company and the
supplier need to reach complete consensus. Both parties need to
reach agreement on issue resolution.
The key document in outsourcing agreements is the Service Level
Agreement (SLA). It helps manage the strategic relationship between
the outsourcing company and the supplier and includes the
identification of responsibilities, which is key when processes
change. Successful outsourcing relationships focus on results. To be
meaningful, these results must be objective, measurable,
quantifiable, and comparable against pre-established criteria.
Kudos Outsourcing Methodology
Kudos uses a sequence of logical actions for the successful
implementation of an outsourcing agreement. There are four main
aspects to a typical Kudos outsourcing programme:
- Programme Implementation
- Service Implementation
- Final Agreement
- Programme Closure
Programme Implementation
At the start of any outsourcing programme, there are a variety of
ideas and opinions about the purpose and scope of the programme,
what the final result of the programme will be, and how the
programme will be carried out. The Programme Initiation Stage is
concerned with taking these ideas and intentions and documenting
them to form the basis of a draft contract
Service Implementation
Service Implementation covers the activities required to take
these ideas and intentions and develop them into a formal, planned
outsourcing programme and to make the transition to the outsourced
service:
- Defining the transition project
- Transferring staff
- Defining the Service Level Agreement (SLA)
- Defining service reporting
- Implementing and handing over the service
- Implementing service management procedures
During the hand–over phase it is imperative that continuity of
service is maintained at all times, that there is no reduction in
the quality of the delivery and that timescales and deadlines are
not compromised.
Final Agreement
The draft contract produced at the Initiation stage is generally
amended during negotiations and the final contract is produced on
completion of the negotiation cycle.
Programme Closure
In order to gain maximum benefit, the programme should go through
a formal close down. There is no point in continuing to argue lost
causes once irrevocable decisions have been taken. Staff and
companies alike need to accept the new situation and move forward.
However, there will be a lot of information generated during the
life of the programme, and this will have been stored with varying
degrees of formality by the team members. This information needs to
be formally filed away for future reference.
Staff reaction
Through experience Kudos have been able to understand the
reactions of staff faced with the proposition of being outsourced
and have therefore been able to assist information developers in
coping with the initial turmoil and subsequently seeing the benefits
of belonging to a specialist information development organisation.
Obviously, every single individual is different, but we do now
recognise three phases that many people go through.
Rejection: in some people the initial reaction is almost
as serious as in a redundancy situation. There is an element of
shock and horror at how their company (for whom they may have worked
for many years) can (a) do such a thing to them as an individual and
(b) even consider getting by without internal information
developers. There is a feeling of rejection, both as an individual
and as an information developer. There is often total lack of
understanding of how a host company can even consider such a
thing.
Self-interest: understandably many people's sole aim when
they finally come to terms with the fact that something is going to
change is to concentrate on looking after their own career
interests. This can apply at an individual level, where a person may
seek to get an improved personal deal with the new company or to try
and transfer to an alternative role in their original host company.
In a heavily unionised environment, the union may be asked to
negotiate terms with the new company or even to seek to prevent the
outsourcing from going ahead. Much of this is wasted effort,
particularly in Europe where European rules exist to safeguard the
rights of individuals who are transferring from one company to
another.
Join forces with the new company: in most successful
outsourcing arrangements, the majority of staff eventually come to
realise that their personal interests can best be served by
supporting the new company. They may then do everything they can as
an individual to help ensure that a reasonable Contract agreement is
reached with a workable Service Level Agreement, which gives the new
company an opportunity to succeed.
To reach this third phase takes time and patience on the part of
the company (such as Kudos) who are negotiating to complete the
outsourcing deal. Regular, open communication sessions are an
essential means of winning the confidence of new staff gained in
this way. This third phase of individual reaction has to be reached
if the outsourcing deal is to be a success for the new company and
the staff involved.
References
1 Survey of Current and Potential Outsourcing End-Users,
The Outsourcing Institute Membership, 1998)
2 Gartner Group Study and report 1997 |