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"Inside Outsourcing: An Insider's Guide to Managing Strategic Outsourcing"

by Charles Gay and James Essinger

2000 Nicholas Brealey Publishing, London

245 pages


Review by Madanmohan Rao (madan@techsparks.com)

Based on insights and experience from the frontlines of outsourcing, this book is a useful guide to companies exploring outsourcing relationships with vendors. It provides detailed guidelines, practical advice, and concise checklists for managers to consider at each step of the outsourcing route. Pitfalls, lessons and roadmaps are illustrated.

Charles Gay is the managing director of London-based Shreeveport Management Consultancy (www.shreeveport.com), which handles outsourcing initiatives in the private and public sectors. James Essinger is a writer of books on business and popular science.

The material is divided into 10 chapters covering the basics and implementation of outsourcing, which numerous case studies such as EDS, Rolls Royce, Bethlehem Steel, Gillette and Dupont. A useful appendix discusses the results of a survey of outsourcing practices and outcomes in 500 UK organisations.

"During the 21st century, an organisation's ability to create and sustain outsourcing relationships will be essential to success. We believe that the particular beauty of outsourcing is its deep-down practicality. Ultimately, outsourcing is much more than a business tool, it's a new way of thinking about business," the authors begin.

The Harvard Business Review identified outsourcing as one of the most important management ideas of the last 75 years. The authors define outsourcing as "the transfer to a third party of the continuous management responsibility for the provision of a service governed by a service level agreement."

More than 90 per cent of US companies outsource one or more activities. According to IDC, outsourcing worldwide will grow from US$99 billion in 1998 to US$150 billion by 2003. In 1998 alone, US organisations spent US$51.5 billion on outsourcing, or 52 per cent of global outsourcing expenditure.

The fastest growing areas for outsourcing are human resource management, media management, IT, customer service and marketing. Outsourcing is growing rapidly in western Europe (UK, Germany, France, Italy), China, Taiwan and Australia.

A survey in the UK conducted by the Economist Intelligence Unit revealed that 80 per cent of the organisations cited a flexible organisation structure as key for future success, with many believing that their organisations will be substantially virtual by 2010. The US consultancy firm Warren Company reveals that there is a definite trend for outsourcing relationships to be increasingly collaborative.

Outsourcing can span a wide range of types: co-sourcing, sub-contracting, partnering, joint ventures, third-party contracts, benefit-based relationships, facilities management, managed services, management buyouts, and strategic insourcing.

The outsourcing of the full range of information services is now an established practice in the UK and globally as well, such as data centre operations, data services, software development and implementation, helpdesks, hardware support and maintenance, and database services.

Key objectives for a company to adopt outsourcing, according to the US-based Outsourcing Institute, include to reduce and control operating costs, improve company focus, gain access to worldclass capabilities, free up internal resources for other purposes, obtain resources not available internally, accelerate reengineering benefits, make capital funds available, share risks, and obtain a cash infusion.

Benefits derived can also include reduction in headcount and flexibility of service delivery. The authors stress that it is important for a company to understand the fundamental motivation behind its outsourcing, since different objectives lend themselves to different contracts, risk profiles, and timescales.

An outsourcing initiative must, above all, have the clear aim of generating real, measurable benefits for a business rather than simply offloading an area of responsibility, according to the authors. Lack of a clearly discernible direction with regard to outsourcing, hazy focus, and kneejerk reactions to business hassles are unfortunately practiced in many companies. Even companies with good motives during outsourcing may suffer from a lack of proper planning, or wrong choice of a service provider.

Thus a sizeable chunk of outsourcing initiatives have led to failure, dissatisfaction, lack of a collaborative relationship, management disputes, and lack of focus of outsourcing outcomes.

"There are many stepping stones on the way to the completion of a truly successful outsourcing initiative, and those stones are slippery," the author warn.

Clear understanding of company goals, strategic vision, properly structured contracts, ongoing management of vendor relationships, senior level support, open communication with affected stakeholders, careful handling of personnel issues, impacts, costs, risks, and justification of using external expertise all need to be managed with care. Financial and non-financial, tangible and intangible issues arise here.

In the 1990s, several IT services providers moved significantly up the value chain with multidimensional offerings, complex deals, attractive partnerships, and market growth prospects. Notable examples here include Dupont and CSC; Rolls Royce and EDS.

Outsourcing is no longer just tactical, rapid or short-term, but a strategic step. Suppliers or vendors are now more proactive, and are becoming innovators rather than mere providers of resources.

Organisation performance is determined by customer ownership, business processes and ancillary services. Core, non-core and mid-level functions need to be factored in for the outsourcing equation.

Ideally, the business case for outsourcing should include the following key sections: executive summary, strategic context, current conditions, options, benefits, costs, sensitivity analysis, risks, the final plan, and recommendations. Benchmarking of figures and performance must be carried out on an ongoing basis in order to make continuous improvements.

Objectives should be measurable and goals realistic. Communication about outsourcing must be delivered to all staff in such a way as to allay fear, uncertainty, doubt, and rumours. "The amount of communication required for senior managers, middle managers and staff is often underestimated. Outsourcing can often be a people-intensive process. Contract negotiation can take far longer than you estimate," the authors warn. They recommend the nomination of a service delivery manager (SDM) at the client end.

Transition plans and phased implementation during the onset of outsourcing should have due diligence planning, site liabilities, and employee contracts factored in. Supplier evaluation should be based on their financial health, client base, client references, business culture fit, experience, expertise, quality, staff training, payment terms, dispute resolution, escalation mechanism, periodic reviews and disaster recovery provisions.

Attention on the legal front must focus on documents like the MoU and the SLA, with respect to rights, obligations, powers, risks and rewards. The contract is an important risk management tool, helps client and vendor crystallise their understanding, and should serve as a written record even long after the individuals who negotiated the contract leave their respective organisations. Reporting, auditing, invoicing, payment terms, formats and frequencies need to be worked out here.

"Using legal advisors with experience of outsourcing is of critical importance here," according to the authors.

One chapter is devoted to human resource issues like cultural factors, legal rights of transferred employees (in Europe they are entitled to their original terms and conditions of service as per the Acquired Rights Directive), setting up a hotline to handle employee concerns, and dealing with stakeholders like unions, suppliers, media, investors and partners. Care should be taken to ensure that outsourcing does not lead to a feeling of disempowerment or political threat for employees and managers. Information about career prospects, pensions and new expectations should be communicated via meetings, noticeboards, and Intranets.

As the end of the contract period approaches, companies should re-evaluate factors like changing technologies, markets and competitor threats. Accordingly, contracts can be extended or transferred to another vendor.

The appendix provides an overview of outsourcing as practised by 500 UK organisations. For high-value services such as IT, service cost reduction was the primary benefit targeted. Fewer than half of the organisations involved in outsourcing actually measured the benefits they derived from it, via user satisfaction surveys, benchmarking and inspection -- all of which are important in a market of moving targets and expectations. The three most frequently mentioned fears in relation to outsourcing were loss of control, implications of job losses, and human resource issues.

"Respondents viewed outsourcing as a way of tapping into expertise that would be otherwise unavailable to them; this is particularly the case with respect to the outsourcing of IT services," the authors observe. The benefits fall into two categories: immediate gains (eg. service cost reduction, focus on core services thanks to an "eyes on, hands off" mode), and longer-term benefits (eg. flexibility, access to expertise, improved quality).

An interesting finding of the survey was that many companies discovered unexpected cascading benefits of outsourcing, such as catalysing change elsewhere in the organisation, fueling cultural change, stimulating critical business analysis, promoting internal competition and pride, and increasing comfort levels with further outsourcing.

"Outsourcing is here to stay. The survey indicates that it is well on its way to becoming a familiar corporate practice. The future of outsourcing is secure and over the next five years, companies are likely to outsource more, especially central, core services, and fuel existing growth in the outsourcing of IT services," the authors conclude.


Madanmohan Rao is the author of "The Asia-Pacific Internet Handbook" and can be reached at madan@techsparks.com

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