Outsourcing

Outsourcing service provision and manufacturing is now a well established practice but attracts adverse and, on occasions, hostile reaction. Trade Unions, for understandable reasons, see outsourcing as undermining their members’ interests and threatening jobs. The logic is flawed because a driver is greater efficiency, lower costs, investment and the injection of expertise that may be lacking in the organisation who are considering outsourcing.

Councils, government departments and many private sector organisations must lower their cost base and increase efficiency. This is no longer an option. In the private sector it may be a matter of survival. When the accusation that the outsourcer will reduce the headcount is made, that may be the outcome of the outsourcing. If nothing was done then the headcount would probably reduce anyway.

Without question some outsourcing has failed to deliver the benefits that were claimed when contracts were signed. There are many examples where contracts have been terminated and the services brought back in-house. This must be balanced with situations where the contract obligations have all been met and, in some cases exceeded.

Outsourcing requires a process of discipline and accountability. It may begin with soft market testing, to obtain a view on the appetite that the market has for the specific outsourcing. In some market sectors outsourcing is a mature market and the appetite will be very high. There is a high level of skill in discussing with potential suppliers their interest and avoiding any obligations or the release of sensitive information that could, later, jeopardise the procurement process.

One of the greatest threats to an outsourcing exercise is the in-house resources that are available to tackle work packages. The greatest problem is usually in writing output based specifications. When this has to be expanded to writing the KPI’s and other criteria for measuring performance, the task gets more difficult, not forgetting that service managers may never have written specifications. The task increases in complexity when the contractual detail associated with service performance needs to be linked to service credits, liquidated damages, termination and material default.

There is a significant commercial task to be undertaken to expose the business risks and to apportion the risks to the party best placed to manage them. An example is Pensions. The usual argument is associated with transferring, say, a fully funded scheme and getting back at the end of the contract period (say 15 years) a fully paid up scheme. This is a complex area and will require actuarial input. Another complex are is the detail of TUPE, particularly with the terms and conditions of employment going forward. Identifying the people who are subject to TUPE needs to consider contractors who may have been providing services for a number of years. They may have to be included.

The in-house outsourcing project team will require a variety of skills, including, commercial, financial, legal, operational, health and safety, audit and strategy. There must be regular project reviews, linked to the pre-qualification and tender submission requirements. The task for procurement is liaising on all facets of this documentation, including the evaluation criteria.

Clients in the private sector do not have the constraints that are present in the public sector who must comply with EU Procurement Regulations. The relatively new Remedies Directive is forecast to heighten the number of appeals against contract award.

If we concentrate on the savings that can be made on current costs by engaging with an expert outsourcer, they may be between 10% and 25%.