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Outsourcing - White Paper


 

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

 

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* An interview with US Director of Outsourcing
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