The Business Case for Outsourcing

Outsourcing is on the rise across a broad range of services, activities and processes  including financial services, security services, human resources and sales/marketing, to name but a few. It is an everyday fact of life for businesses everywhere and Ireland is no different.

Upsides

There are a number of key benefits to be gained by companies outsourcing services, processes and/or activities to a third party provider.  It allows companies to:-

1. Access to the specialist expertise of a third party;
2. Concentrate on what they do best themselves;
3. Share risk;
4. Reduce operating costs;
5. Increase productivity; and
6. Gain competitive advantage.

For the most part, the advantages of outsourcing are obvious however the effect of outsourcing on businesses in practice can sometimes exceed from expectations. It is important to note however that the motives for and the advantages of outsourcing do not necessarily correlate. Take for example, cost saving. Cost saving is the most common motive for outsourcing but satisfaction with outsourcing relationships appears to be based much less on cost and more on factors relating to quality of service. The following graph illustrates common motives for outsourcing[1]:-   

Downsides

It is important to be aware of the potential downsides to outsourcing agreements. Among these are:-

1. Potential loss of security and confidentiality;
2. Loss of managerial control;
3. Hidden costs;
4. Redundancy; and
5. Dependency on a third party regarding delivery, quality and customer focus.

Arguably, the most compelling potential disadvantage of outsourcing to a business is its dependency on an independent third party. The financial stability of the supplier is crucial and particularly so when set against an economic background such as the current one. Obviously, depending on the value of the commercial deal between the partners, a failure to deliver and comply with service level requirements can have a resounding negative financial impact on the customer.

Pitfalls

While most outsourcing arrangements tend to be largely successful, there are instances where a customer may not realise the benefits and advantages of outsourcing for one reason or another. A Deloitte survey showed the factors that led to organisations being less than satisfied with their outsourcing arrangements were (a) the underestimation by the vendor/service provider of the scope and effort of the arrangement and (b) the failure to comply with service level requirements. The circumstances that caused organisations to be least happy with their outsourcing arrangements are set out in the graph below:- [2]  So, how does an organisation ensure it is prepared to enter into an outsourcing agreement in an effort to avoid falling foul of these common pitfalls? In our experience, the following steps are crucial to ensure that an organisation avails of the potential  advantages attributable to outsourcing and an ultimately enjoys a successful outsourcing arrangement with their service provider:-

1. Determine your objectives;
2. Make outsourcing part of your overall business strategy;
3. Evaluate and/or quantify your outsourcing initiative;
4. Select your business partner via some form of tender process;
5. Appoint a leader to represent the organisation in contract negotiations and to drive the deal to completion;
6. Communicate early with employees who may be affected by the process;
7. Obtain experienced advisors to negotiate the deal; and
8. Proactively manage the relationship after the outsourcing arrangement has been implemented.

 

Conclusion

Outsourcing has in the past met with its fair share of cynicism. Concerns over security and loss of control are often seen as reasons to avoid outsourcing arrangements. In addition, a focus on cost saving alone has often led to strained relationships between customers and service providers instead of creating a true business partnership. In recent times however, the change in the economic climate has also led to a change in thinking. Organisations have become more creative in their business strategies often turning towards innovative outsourcing arrangements in an effort to drive their business forward. Crucial to the success of outsourcing arrangements is a collaborative approach by both parties. These types of partnerships should be based not only on the sharing of risks but also the sharing of rewards with results being measured in terms of improved business performance. With this principle in place, outsourcing can deliver real benefits for businesses and has become a real alternative for businesses in Ireland. For more information on this topic please contact Clair Hayes at chayes@mcdowellpurcell.ie

• Outsourcing- The Big Issues, by Feilim O' Caoimh, Partner at McDowell Purcell Solicitors.
• Outsourcing Agreements- Under the Bonnet, by Elizabeth McCann, Solicitor at McDowell Purcell Solicitors.
• The Risks in Winning Contracts Involving TUPE, by Julie O' Neill, Associate At McDowell Purcell Solicitors.

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