Guide

Outsourcing

Outsourcing considerations

Like other business decisions, outsourcing requires careful planning and consideration. You shouldn't rush into outsourcing without carefully examining a wide range of possible issues.

Most of the complexities associated with outsourcing fall into five broad categories:

  • productivity - eg it can fluctuate and doesn’t always match that of internal staff
  • communication - eg problems cause errors, delays and lower productivity
  • culture - eg lack of cross-cultural understanding can lead to miscommunication
  • organisational readiness - eg weaknesses in own internal systems, processes etc
  • costs - including labour, overheads, travel, management required, etc

Cost savings are one of the most common reasons companies outsource. However, the total cost of outsourcing isn't always easy to work out. Make sure that you fully consider all costs, and reflect on other key areas, before outsourcing business-critical functions.

Avoid outsourcing pitfalls

To avoid common outsourcing pitfalls, consider the following:

  • What are your core strengths and what are secondary? What processes are you thinking of outsourcing and why? Is the function a key task which your business needs to control directly to ensure its future competitiveness?
  • What are the costs of doing it in-house? Include hidden costs such as office space and staff costs. Also, what are the costs of not outsourcing? Will your business suffer if it doesn't invest in the expertise or the facilities that an outsourcing partner might provide?
  • Check the return on investment (ROI) - ask potential service providers for help, as many offer an ROI calculator.
  • Would it be helpful to use a consultant to help you find a service provider?
  • Are you prepared to spend the time and energy required to manage the outsourcing relationship?

Be sure that you are ready to outsource, and clear on the benefits of doing so, before you take the plunge.

Mitigate outsourcing risks

Outsourcing benefits go hand in hand with risks. Not all will be avoidable, but there is a way of mitigating their impact.

Before agreeing an outsourcing contract, you need to plan what you will do if problems arise. For example, if the provider you’ve chosen isn’t able to complete the tasks, you may want to consider having other service providers that you can turn to relatively quickly or taking the outsourced processes back in-house.

It is important that the contract between you and the outsourcing company sets out the circumstances in which you can make such changes. If not, the outsourcing company could claim compensation. See service level agreements.

How common is outsourcing?

In 2018, the global outsourcing market amounted to $85.6 billion. However, it's been estimated that as many as 50 per cent of outsourcing deals end badly. This isn't a reason to reject outsourcing. It simply proves how important it is to carefully choose an outsourcing partner and manage your supplier relationship.