Alternatively, the manufacturer may opt to outsource B with the intention of saving money. “But if B was what I was actually good at, and I got rid of that, I would actually reduce the quality of my product,” highlights Bakhtiari.
While cost is still the primary motivator for outsourcing, more and more firms are also outsourcing to improve business outcomes. There’s a growing trend for firms to use outsourcing to access skills and quality they cannot deliver internally. Clients are looking to their suppliers to provide innovation and quality improvement, rather than just the lowest cost.
Driving competition
The trend is evident in the outsourcing of information technology, says Hamish Barney, a PhD student at the University of New South Wales who is researching IT outsourcing. “Usually the initial impetus [for outsourcing] is cost, but they often see the advantages later on of quality and access to resources that they would otherwise be hard-pressed to employ on their own,” he says.
Companies are becoming more sophisticated in their use of external providers, using several providers rather than outsourcing the entire IT function to a single provider. “That has a couple of advantages. It means you can select the outsourcer with the best resources and skills and the most experience in that particular area,” says Barney. “But also what they find is they can create competition and they can drive better deals so they can compare between the outsourcers much more easily.”
When weighing up whether to contract out a function, firms are increasingly taking account of the benefits beyond lowering costs, according to David Champeaux, principal at management consultancy McKinsey & Company in Sydney. A firm might, for instance, make 50% of the business case around cost savings and productivity gains, and 35% of the business case around higher flexibility or better business outcomes, such as decreasing time to market or increasing customer satisfaction.
“We are definitely seeing the impact of business outcomes being factored into the equation much more prominently,” says Champeaux. “Companies are actually saying ‘if I’m outsourcing not only for cost but also for access to skills and flexibility and capability, I’m getting a cost benefit and a business outcome benefit and I’m factoring that in’. They have a more sophisticated appreciation of the business case by factoring in the total cost, including something they ignored like hidden costs and netting off the negative impact on business outcomes against the productivity and cost gains.”
But firms continue to underestimate the cost of managing the outsourcing vendor and the contract. The firm outsourcing the work has to retain some expertise in the outsourced function so its staff can ensure the contract is being adhered to and required services are being delivered.
According to a Deloitte study, the in-house cost of managing a large and complex outsourcing contract is about 15% to 20% of the total contract value. “Larger complex contracts, particularly if they involve technology, can involve quite a lot of work from the company doing the outsourcing,” says Donal Graham, a Sydney-based partner at Deloitte who leads the firm’s shared services practice.
Outsourcing is also no panacea for inefficiency. Companies need to be clear on why they’re outsourcing, their objectives and exactly what they’re outsourcing. Rather than expecting that outsourcing an inefficient process will fix a problem, companies first need to understand why they’re inefficient, otherwise outsourcing could end up costing rather than saving money.
