Should we be outsourcing?

Jodie Humphries

If managed efficiently, outsourcing can provide significant successes for the development of your business. Outsourcing generally begins with processes that are clearly identified as non-core to a company's business - typically transactional processes.

Outsourcing allows you to concentrate on what you do best, save money, be more flexible and manage growth effectively. It also allows your business to gain access to outside expertise and technologies.

If managed successfully, outsourcing can help your business reduce its costs and make effective use of the knowledge and technical resources of another organisation. However, you will need to consider carefully whether the benefits of outsourcing a function outweigh the costs. The process will have to be properly managed and monitored.

When looking at outsourcing, you should also ask yourself:

• Are you prepared to spend the time and energy required to manage the outsourcing relationship?

• Are your expectations realistic?

• Is the function a key task which your business needs to control directly to ensure its future competitiveness?

Finally, weigh up the risks of outsourcing against those of keeping the processes in-house.

What can you outsource?

• IT functions - you can outsource most IT functions, from network management to project work, website development and data warehousing. You may benefit from the latest technology and software upgrades without having to invest in expensive systems or keep up with industry trends.

• Business processes and HR - outsourcing activities such as recruitment, payroll and secretarial services gives you access to specialist skills, but you only pay when you need to use them.

• Finance - you already outsource auditing, so why not do the same with your entire accounting function, including bookkeeping, tax management and invoicing?

• Sales and marketing - many organisations use a consultant or an agency to handle marketing communications - smaller businesses, or those in specialised markets, can also outsource sales to specialist agencies.

• Health and safety - there are consultants who specialise in health and safety compliance tasks. They may be able to ensure you meet all the requirements, including those for complex risks, more cost-effectively than you can.

You could also outsource non-business-critical tasks such as cleaning, catering and facilities management as well as deliveries, installation or after-sales service.

Turning to outsourcing

Companies have reduced their spend on IT services and business transformation by almost one fifth by turning to outsourcing, according to a recent survey.

Businesses canvassed by outsourcing advisory firm TPI have saved about US$50 billion by turning to third parties to help deliver their IT services and improve business processes.

The firm surveyed 120 companies it had advised on sourcing over the last five years. TPI found its clients saved on average more than 33 percent. After one-time and ongoing management expenses, the savings averaged more than 17 percent.

According to TPI chairman and CEO Michael Connors, the majority of businesses, (60 percent), said that reducing costs was "their number one reason for implementing sourcing strategies".

Last year Europe became the world's highest spender on outsourcing, with companies based in Europe spending more on IT outsourcing than those based in any other region of the world.

In 2010, UK companies are expected to increase the amount they spend on outsourcing back-office functions, such as HR and finance.

Outsourcing takes the lead in Europe

At the end of 2009, Europe overtook North America as the region that spends the most money on outsourcing in the world.

The report by outsourcing advisory firm TPI looked at how much was being spent on outsourcing by G2000 companies; those rated as the most successful companies in the world by Forbes magazine.

It found that, by the end of the third quarter of 2009, G2000 companies headquartered in Europe were spending more on outsourcing deals overall than G2000 firms with headquarters in the US and Canada.

At the end of Q3 09 European G2000 companies were engaged in outsourcing deals with a total annual contract value (ACV) of US$30.6 billion, compared to the US$28.4 billion ACV of active outsourcing deals at US and Canadian G2000 companies, the TPI Momentum Market Trends and Insights report said.

At the end of 2008 it was G2000 companies based in the US and Canada that were spending more on outsourcing than their counterparts in other regions, holding deals with an overall ACV of US$29.6 billion, compared to the US$28.7 billion ACV of deals held by G2000 firms based in Europe.

While at the beginning of 2010, for the first time, France, Germany and Sweden all spent more on outsourcing than the UK in the first quarter of this year as contract renegotiation's surged, according to TPI.

The UK spent less than €800 million, 50 percent less than last year, compared with more than €1 billion in Germany and €2 billion in France as a result of a massive SNCF deal.

TPI said one mega-deal in Sweden meant the country doubled its total value of outsourcing contracts. It would not name the customer, but Swedish engineering company ABB recently signed a big deal with IBM.

The future of outsourcing

This year looks set to see outsourcing feature regularly in the IT headlines. The market is likely to consolidate as outsourcing companies buy smaller rivals. A rapid return to growth for outsourcing deals is likely and cloud computing could mature to the mainstream. Experts predict a wave of acquisitions as outsourcing suppliers consolidate.

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