One of the most important skills a business leader can develop is being able to identify what to undertake in-house and what to outsource. It is the simple question of leverage – if you can get non-core functions converted into a business process with KPIs, then it can be potentially outsourced.
What outsourcing delivers
Outsourcing can deliver a number of key benefits to any business:
- It allows you, a CEO or senior manager, to concentrate on where you can add value to your business and strategic management. This is critical to ensure that you review your business model to take advantage of the opportunities and mitigate the threats.
- If you can’t realise savings in the order of 50 percent of the direct cost of performing the same function internally, then you should go back to your service provider and get them to review their proposal. Despite all the benefits of strategic focus, cost reduction is real, necessary and an essential component of any successful outsourcing strategy.
- Accessing the best technology in a field can be a major benefit of outsourcing. It’s not that a lot of technology is expensive; it’s just that selecting the right solution, implementing it effectively and managing training and redundancy takes time. An outsourcing service provider has been through the process many times and generally can provide better technology in a shorter time-frame. All this translates into lower risk and lower cost. In network administration, for example, access to good diagnostic tools can determine the difference between quick resolution and prolonged downtime.
- Outsourcing also allows you to eliminate single point dependency in your business. In the non-enterprise sphere, this often means that you liberate your business from being held hostage to an individual with considerable internal expertise. In the payroll area, there are many organisations where major risks are experienced every time the payroll manager is on annual leave or sick during a payday.
- Knowledge management can be an essential benefit. There is nothing impossible or insurmountable about all the occupational health and safety obligations throughout Australia. It’s simply a huge impost on any business to try and keep up with all the aspects of the legislation regulations in every state. Accessing specific knowledge is a far more effective option, being more compliant, cheaper and lower risk.
Despite the advantages, outsourcing involves some risks. After all, there is no benefit to outsourcing if it places your business under unnecessary pressure.
Outsourcing will change your business. Done well, it will improve your agility and flexibility. Done poorly, someone will end up with egg on their face – and it may be you.
Activities you can outsource
Any function or process is a potential candidate for outsourcing. Typical examples include:
- IT functions.You can outsource most IT functions, from network management to project work, software development, website development, search engine optimisation and data warehousing. You may benefit from the latest technology, superior knowledge and software upgrades without having to invest in expensive systems or keep up with industry trends.
- Payroll processes and HR. Outsourcing activities such as payroll management, human resource consultancy, superannuation administration and recruitment provides access to specialist skills, workflow technology and eliminates single point dependency.
- Finance. You already outsource auditing, so why not do the same with your entire accounting function, including bookkeeping, tax management and invoicing? The critical issue is to ensure that you are in control of the process and that there is a separation between the auditing and processing functions.
- Sales and marketing. Many organisations use a consultant or an agency to handle marketing communications – smaller businesses, or those in specialised markets, can also outsource sales to specialist agencies.
- Health and safety. There are consultants who specialise in health and safety compliance tasks. They may be able to ensure you meet all the requirements, including complex risks, more cost-effectively than you can manage in-house.
Consider conducting a telesales campaign, the marketing objective may be to drive traffic to the website and deliver qualified leads to the sales team. The qualified leads could be passed to an in-house sales force or an outsourced telesales organisation. Decisions to outsource in this scenario may be clear-cut. Telemarketing, by its very nature, offers very specific and measurable KPIs and a firm specialising in delivering a program as outlined above gives the business owner or manager a clear pathway for going to an outsourced solution.
There are few limiting factors to proceed, as there is no asset or resource-base to shut down as part of the decision-making. Moreover, a contractual arrangement would be results-based. For any organisation, however, a framework should be in place to enable decision-making.
- Work out what is a core competency of your business. What gives you a competitive edge and makes you better than the competition? Whatever that is, focus on that competency – outsource it and you do not succeed. Everything else you do is a potential candidate for outsourcing. Dell, for example, considers its core competency to be understanding its customers. This has led to outsourcing assembly, product innovation, application software, HRM and payroll.
- Having worked out what you can outsource, look at the systems currently in place. Make sure that they are logical, have good controls and integrity. Even if you don’t have the best and latest technology, make sure that you optimised your company’s current logical systems before considering outsourcing. If you currently have a mess, and you outsource it, you will only get an outsourced mess.
- Work out what your objective is – is it to save money, access technology, eliminate single-point dependency or is it to free resources in order to focus on core strategic competency? Whatever the single or multiple objectives, if you don’t know what you are trying to achieve then you can’t achieve it. What will the payoff be: increased efficiency, improved customer service, decreased expenses and improved profits? Make sure that you develop some KPIs so you can evaluate the extent to which you are realising your objectives.
- Have a look around in the market and investigate what service providers are able to provide. Get a feel for the range of services available and use information to develop a specification of your requirements. Unless you are a large corporate, don’t conduct a formal tendering process. Service providers can interpret you as rigid and inflexible and you will pay more and probably end up with a sub-optimal outcome. Rather, invite the service provider to respond to the specification you have put together.
- Forward your specifications to a select number of service providers and measure the time it takes them to provide a proposal to you. An unresponsive sales team is probably a reflection of a service provider who is not client-centred or has poor management controls. Either way, you do not want to do business with them. Don’t be afraid to talk to service providers, as the time you invest upfront will ensure that you get someone who understands your objectives and the context.
- Evaluate the proposals submitted and check whether:
- The proposals provided actually address issues raised in specifications. There’s no point outsourcing it if it doesn’t solve your problem.
- The service provider has experience in your industry dealing with issues you want to solve.
- The consultants are willing to understand your needs and propose an effective solution rather than just selling their service.
- There is a cost saving – a realisation in the order of 50 percent cost savings is essential to getting full value out of the exercise. However, don’t let price be the determining factor. Select a service that isn’t too cheap or overpriced.
- The solution proposed is innovative and scalable using an appropriate level of technology.
- The risks are with the service provider and not with you as the client.
- The implementation plan is credible and has the appropriate controls in place. If a service provider can’t get implementation right then there is little chance they can get the service delivery right. You could end up with scrambled egg on more than just your breakfast plate.
- Make sure that you research your service provider. Rigorously check with referees on how the service provider manages things when they go wrong. It’s easy to manage during the good times. It’s when things go wrong that the service provider shows its true worth.
- Once you have selected a service provider and embarked upon implementation, treat them as a partner rather than a supplier. Tell them where you can or can’t realise objectives. Get their input on how to optimise the results.
- Monitor performance through KPIs. While you may have outsourced the process, you continue to have full responsibility for the outcomes and must take ownership and control.
Successful outsourcing is about getting the process right at each stage, and the formation of sustainable partnerships. Every business has limited resources, and managers have limited time and attention. Outsourcing non-core functions enables management to focus on strategic growth in your business. Outsourcing providers can be beneficial in that they manage risk for you with their expertise, provide access to technology and ensure savings to your business.
Dean Morelli is Managing Director of Aussiepay, Australia’s largest privately-owned provider of managed payroll services. For 19 years, Aussiepay has been managing payroll for clients ranging in size from less than 10 employees to 15,000 employees.