Problems with outsourcing (article)


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If you think outsourcing will cure all your problems, then this free article by Derek Stockley about the hidden problems of outsourcing might save you some anguish and unanticipated costs.

Taking the buzz out of outsourcing

This week I want to again relay my concern about poorly targeted outsourcing. I have previously highlighted the pitfalls of outsourcing (see The rise and fall of the best practice method).

Definition

Definition - Outsourcing involves an organisation determining that certain activities (that are not core operations) can be separated and given to another organisation to provide on the original organisation’s behalf. It is more than sourcing specific products or labour. Outsourcing involves contracting out the management and accountability for a major, but non-core activity. Examples include catering, payroll, human resources, information technology, etc.

Good outsourcing example

Outsourcing canteen services makes sense. Expert catering companies should be able to provide a better, more comprehensive service by taking advantage of economies of scale. Running multiple sites with bulk purchasing power and the ability to move staff between sites should be more efficient and effective than a small, one site, inhouse operation. As an additional benefit, catering staff can be offered variety and better promotional prospects, leading to higher staff performance.

Outsourcing example of hidden costs

A story I heard recently only reinforced my concern about outsourcing.

Training staff wanted to add four pages (Word documents) to a computer system they operated. Information Technology services (IT) had been outsourced. The request was outside the IT service contract specification, so the training staff were quoted $1000 to complete the task. They declined. The time taken to quote the job would have been as long as the job took. An in-house team would have easily completed it.

This outcome is an absurd waste of time for both parties. Precious time was wasted and the 'no action' decision did nothing for the underlying bottom line.

The cost to the business is hidden. Outsourcing requires contract management activity for both parties - an additional cost. Instead of getting on with business, both parties have to go through a process - an additional opportunity cost. Most importantly, the required action was not taken. In this case, the four pages would have provided valuable information for the users of the computer system, potentially avoiding errors and minimising end user frustration.

I will state it again - the cost to the business is hidden. These hidden costs can far outweigh the savings that are often quoted - yes, actual costs may have been "reduced by 10%", but what use is that if actual productivity has been reduced by 20%, but no-one knows because the productivity loss cannot be measured. In Australia, we need to increase productivity, not reduce it.

Successful outsourcing can be achieved, but you have to outsource the right things. Contract management has to be minimised, but at the same time, the contract has to be very carefully framed to avoid the hidden pitfalls.

Conclusion

Outsourcing can have benefits, but it has to be well structured and carefully designed. The impact of potential hidden costs has to be considered.

Related articles

'Outsourcing' can be one of the words used in Buzzword Bingo.

The rise and fall of the best practice method - although this article is primarily about best practice (including a definition), outsourcing is also featured.

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