Anybody looking for evidence of the rapid development of the phenomenon known as outsourcing need look no further than Consignia, the postal services group formerly known as the Post Office. Not only has it caused consternation among trade unionists with its plan to seek partners for various parts of its fleet of 40,000 vehicles, it is also reportedly considering outsourcing letter sorting in the wake of a review by consultants from KPMG.
After all, one might expect the Post Office – even in its new commercial format – to be focused on such vital matters as sorting post and then delivering it. But in the early years of the 21st century “being vital” is not enough to guarantee a department stays in-house. Indeed, it could almost be argued that the more important the function is, the greater the need to ensure that it is carried out by the best people possible.
It is all a long way from the early days of outsourcing, when the trend for “contracting-out” such support services as catering, security and cleaning helped make big businesses out of the likes of Compass and Rentokil-Initial.
But, just as the extent of outsourcing has changed, so has the language.
Splitting corporate activities into what is “core” and “non-core” has become “a bit old-fashioned”, says Glen Peters, a partner with PricewaterhouseCoopers which, with other organisations of its type, has been one of the main beneficiaries of outsourcing’s move up the business agenda. Taking over such far-reaching business functions as finance and accounting, property management and even human resources is currently giving the firm’s business process outsourcing division annual worldwide revenues of about $500m, up from the $218m it reported for the year to the end of 2000.
According to Peters, the competition among businesses is so intense that “if there’s any activity that you do that somebody else could do better or cheaper, you should be thinking about it (outsourcing)”.
Moreover, while he acknowledges that cost will always be a factor in deciding whether or not to outsource, he also insists that it should not be the main driver. Instead, he is one of many who prefer to see outsourcing arrangements as partnerships rather than strictly enforced contracts where there is constant reference to the service level agreements (SLAs) used to govern suppliers’ activities.
There is a general view that the best SLAs are never opened. But creating this situation requires a great deal of effort and pre-planning. As well as settling all the legal issues upfront, customers and outsourcing providers should take the time to get to know each other and build a relationship.
One approach is to start an outsourcing arrangement on a small scale at first and then develop it as the parties become more comfortable with each other.
Mark Booty, sales and marketing director with DeTeWe, the German company that in the UK supplies voice and data telecommunications services via Energis, adds that an SLA alone does not ensure the success of an outsourcing contract.
“Managed service is a mixture of SLAs and CRM (customer relationship management),” he says, stressing that the customer in question is not the finance or IT director, but the person using the technology. “You have to manage expectations and look at relationships,” he adds. “It’s not about the service contract, it’s about service provision.”
The history of outsourcing is littered with agreements that have turned sour. But proponents stress that a market that the industry analyst IDC expects to enjoy worldwide revenues of $177bn by 2004 is maturing and learning from past mistakes.
One of the key lessons is that – although outsourcing a part of the business frees up management time to focus on more important or central matters – taking such a step should not involve the company paying no attention to the outsourced operation at all. “It’s very important for the outsourcing organisation to have an internal relationship manager, somebody who understands everything that goes on,” explains Karen Hautz, e-services manager with Microgen, a company that offers electronic billing services to a range of organisations, including Hanson’s Pioneer Concrete operation and cosmetics group Coty Beauty.
“The key is transparency. If you outsource a service, you need them to report back. The same rigour should apply as if the function is kept in-house,” she adds.
Among Microgen’s customers is Bernard Group, a company providing logistics services to a range of organisations, including various chemical companies.
As a company that obtains about 70% of its business from companies outsourcing to it some or all of their shipping and related tasks, it has experience of both sides of the practice.
Derrick Lello, logistics services director with the company, agrees with the need for openness. Pointing out that Bernard Group often does not use its own vehicles to transport customers’ goods, he says: “We’re very open about bringing in other companies to carry out tasks. We’re trying to build partnerships rather than just have a contract.”
It is because of this need to invest in management as well as technology that service providers should not look to make a quick return any more than companies doing the outsourcing should be motivated purely by quick cost savings.
But, for all these challenges, there is no sign that outsourcing is going away. In fact, as the figures show, it is becoming more wide-ranging.
Moreover, now that companies are moving away from thinking in terms of core versus non-core activities, just about every function appears capable of being outsourced. Investment banks have outsourced their information technology to firms such as Accenture, oil companies and other big organisations have transferred all their finance functions to the likes of PwC and Andersen, while car manufacturers are increasingly assemblers rather than true “makers” of cars and so on. In addition, just as manufacturers have long looked to save costs by using overseas factories, so many users of IT are adopting “offshore outsourcing” through using overseas software specialists in such countries as India.
Another area that is expected to grow particularly fast is rather more basic – property management. Already prevalent in the US, it is now spreading into Europe. Big companies such as BT have already seen the appeal of seeking to abandon owning and maintaining their properties in favour of leasing them from management companies that deal with all the maintenance and related issues.
However, there have historically been problems with maintaining consistent service levels across different parts of the world. It is for this reason that European property consultancy FPD Savills has joined with Trammell Crow of the US to form Trammell Crow Savills and provide a global property service to international companies.
According to Neil Usher, business and services development director with TCS, the appeal lies in the fact that it relieves “hard-pressed managers” from having to deal with the specifics of finding and managing properties in several different countries at once. There is also a cost-saving angle since a company with a portfolio of properties will have stronger bargaining power with other service providers. Furthermore, companies using the service have greater flexibility in that they can more easily scale up or down their operations according to their need.
Such adaptability is certainly appealing in volatile times like the present.
And it is an important factor in the move towards the much talked-about “virtual corporation”. In a new book, The Atomic Corporation (Capstone, #18.99), consultants Roger Camrass and Martin Farncombe adapt the theme to suggest that today’s large organisations will devolve into small units, or atoms, of 100 people or so that can be much more responsive to change.
Business will be carried out through an ever-changing web of “business-to-business connections”, or “molecules”.
To some extent, this is already happening. Regardless of whether it goes any further, it is clear that this shift from companies controlling everything required to produce their goods to being in some cases little more than guardians of the brand is not without risks.
Providers of outsourcing services constantly claim that employees transferred to them from the company whose operation is being outsourced are typically happier and more motivated because they are moving to an organisation where their skill is core. But there is also the possibility that such workers might be disgruntled by the upheaval, especially if it involves changes in their working conditions.
More importantly, though, companies going a long way down the outsourcing route are often placing their futures in the hands of people with whom they have little direct connection. If, for example, a utility company seeking to widen its customer base employs a direct selling organisation to “doorstep” would-be customers, it risks a serious loss of reputation if the sales people take an inappropriate approach.
As Bernard’s Lello acknowledges, “We understand that if we mess up, it doesn’t reflect on us, it reflects on the client.” And he knows the ramifications of that.
Cambridge-based Frontier Developments has appointed Alex Bevis as its next finance chief
Some of the UK’s top companies are failing to adequately report poor performance and sometimes obscure their true profit figures
Chartered accountant Colin Adams rebuilt the AIM listed company’s finance team and helped turn the business around after a challenging period