Advice on outsourcing

Citation

(2004), "Advice on outsourcing", International Journal of Productivity and Performance Management, Vol. 53 No. 7. https://doi.org/10.1108/ijppm.2004.07953gaf.007

Advice on outsourcing

Companies need to plan effectively if they are to maximise the benefits and minimise the risks of outsourcing, the head of outsourcing at Lloyds TSB has warned.

There are risks associated with the financial instability of suppliers, and with any contractual disputes and the plan must include an assessment of how one would deal with the failure of a critical customer service, said Sharon Harmer, head of smartsourcing and group outsourcing at Lloyds TSB.

In a presentation at the Outsource World conference in London earlier this year, she said, “One of the big risks is that supplier may not be financially stable for the terms of the contract.”

“I would suggest that you always include a review of the financial health of the supplier and ways in which you will get out of any outsourcing arrangement before you enter it.”

The user also needs to consider the mechanism for taking over the running of a critical service from the supplier in the event of an unforeseen disruption, such as the financial collapse of the supplier or a natural disaster, Harmer added.

In addition, though outsourcing often involves a transfer of staff to the outsourcing organisation, a business should ensure it retains sufficient staff to manage its outsourcing provider and monitor its performance, said Harmer, who is responsible for about £500m of expenditure on outsourcing services at Lloyds TSB.

“You can turn a bad deal around with good relationship management, and you can destroy a good deal with bad relationship management,” she said.

“Users also need to have realistic expectations about how much the supplier will be able to improve the quality of a service that was previously run in-house”, Harmer said.

“There is no point arguing for a service level of 99 per cent if you have not achieved that previously in-house. It will be extremely difficult for the supplier to do that,” she said. “You have to understand that under TUPE [transfer of undertakings – protection of employment] Regulations the same IT staff of today will be working for the supplier.”

Tips for successful outsourcing include:

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  Competitive advantage. Never outsource something that gives you a competitive advantage. Something critical to a business, such as cheque processing for a bank CAN be outsourced, if it does not give an edge over rivals.

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  Transparency. Confusion over the price charged for an outsourced service can breed mistrust between the supplier and the user. Make sure you understand how pricing is calculated. Consider using a benchmarking service to compare the performance and charges of your supplier with others.

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  Managing the supplier. Organisations typically invest between 3 per cent and 5 per cent of the contract value in managing the relationship with the supplier. Budget for this.

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  Contractual issues. Use external legal advisers to help draw up and flesh out the contract if possible, as they are likely to have greater experience in handling outsourcing contracts than your in-house lawyers.

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  Mergers and acquisitions. Think about the medium term status of your own organisation – being locked into a long-term contract may complicate future mergers and acquisitions.

All of this might be termed commonsense, but it is astonishing how often companies enter into outsourcing arrangements with blinkers on.