This article explains common outsourcing drivers, the Why of outsourcing?.
There are many reasons why organisations outsource and to understand these better let’s take a look at the drivers for outsourcing. Numerous lists exist; the one below explains the most common drivers:
Concentrate on Core Business – This is where the organisation has decided that a third party would better provide a particular non-core service. This could be particularly relevant where companies have laid off resources. Rather than build a new function the resources from a service provider can be utilised. Outsourcing non-core services enables the management of the business to focus time, resource and investment into core activities.
Benefit from Best Practice – The outsourcer should have well defined, efficient processes to deliver service, for example conforming to ISO/CMM standards. This is particularly relevant where the client organization does not consider its own processes to be of best practice standard and it may not be consider worth investing in their improvement.
Reduce Costs –There are a number of ways this can be achieved. Offshoring work is a common strategy. Using labour from less expensive regions (referred to as labour arbitrage) has delivered significant cost reductions. Establishing centralized shared service activities is another approach used to reduce costs.
Cost Certainty –This is especially true where fixed price, outcome-based agreements are implemented. The pandemic highlighted how commercially inflexible some contracts are, so this is a key area to get right going forward.
Improve Quality and Performance – This should be achieved by adopting well defined, industry processes and quality standards e.g. ITIL or PRINCE2.
Access Skilled Resources – It is in the interest of the outsourcer to ensure they have employees who are fully trained in the latest technologies and thinking, as this is a key part of their bid response and a key marketing tool. For many client organisations this provides them with access to skilled resources which they may find difficult to recruit themselves for a variety of reasons.
Manage Capacity – One of the key benefits of outsourcing is to overcome the issues of peaks and troughs in workload. Given that the client undertakes effective portfolio / demand planning, the outsourcer can flex their resources to meet varying demand.
Reduce Time To Market – For many organisations time to market is critical. Outsource service providers will often have the scale that enables them to ‘ramp up’ more quickly than the client organization. The client can shape an outsourcing deal to ensure that the time factor is built into the commercial model and outcome based payments are used.
Risk Reduction – It can be the case that well-trained teams of outsource professionals who have delivered the same or similar services a number of times will be a less risky approach to delivering a required outcome. Compared to in-house resources, who would be less likely to be trained in leading technologies and methods and not be faced with significant commercial drivers. Using outsourcing to transfer a risk is a common tactic in the management of risk.
Ability To Benchmark Against Market Leaders –As the service becomes more standardised and best practice implemented, benchmarking against the market becomes more achievable. This may be important for a business that is in a highly competitive market and that needs to ensure it is matching its competitor’s operational performance.
Increase Resilience –Moving to a world class outsource provider, the resilience of the service can be improved over in-house provision. This will have been tested to the limits during the global pandemic and one to discuss with service providers as to how they manage through the period of great uncertainty.
The drivers for outsourcing can be a combination of any of the above. It is important to rank in order of importance to ensure a clear focus for your benefits case. The success of any outsourcing arrangement is greatly improved where the client organization has established at the beginning of the process the outsourcing drivers. This advantage though needs to be driven home by ensuring that the drivers are regularly and routinely communicated through the life cycle of the arrangement to all stakeholders. Reviews of arrangements need to be undertaken and the ongoing alignment with original drivers for the arrangement should be a key element of the review.
Questions for Outsourcing Decision Makers
- How do I prioritize and rank the outsourcing drivers listed in the article to ensure a clear focus for a benefits case and align an outsourcing strategy with the organization’s long-term objectives?
- What strategies are in place to communicate and reinforce the identified outsourcing drivers to all stakeholders throughout the entire outsourcing lifecycle, ensuring ongoing alignment and successful delivery of expected outcomes?
- How do I strike a balance between cost reduction and other strategic drivers such as access to skilled resources, improved quality, and increased resilience when evaluating potential outsourcing opportunities?
If you want to discuss these questions, or any other outsourcing challenges please do email us at experiencematters@ascea.co.uk and we can set up a call with you.