by David Skinner

Outsourcing the kitchen sink

Oct 24, 2010
IT Strategy

Outsourcing wisdom used to be that you should not outsource anything that is “core” to your business, but given that these days most banks outsource cash management, train companies outsource ticket sales, law firms outsource legal work and governments outsource espionage and intelligence analysis, are there really any restrictions on what can be outsourced?

Suffolk Country Council recently announced that it was intending to outsource nearly all of its servicesin an attempt to slash 30 per cent off its annual budget. However, this is not a unique story since the Californian city of Maywood under bankruptcy pressure outsourced all its services including police and fire departments.

Is this a brave move and the beginning of total outsourcing in which an organisation becomes an enabler, rather than a provider of products and services or a risky experiment? Many organisations already outsource various services and multi-sourcing is nothing new. Isn’t this just an extension of that approach?

The perceived benefits are clear. It could reduce costs, it could help ensure best of breed when it comes to quality of services and availability of expertise. It could improve your organisation’s agility and ability to respond to changing market conditions. It may even provide a real competitive advantage.

But, what about the risks? There are risks with any outsourcing but some of these risks are amplified if you decide to try to outsource all, or the majority of, your functions.

1. What to outsource?At this stage it is unclear what services Suffolk will retain. It would seem that all of its services are up for grabs. If an organisation is keen to go down the total outsourcing route it will need to consider its outsourcing strategy very carefully. It may decide to retain services for various reasons, such as cost, control or risk. It may need to consider whether there are any legal restrictions which would prevent outsourcing or make it difficult in the extreme. It should also consider perception/reputation issues – are there any services that could be outsourced but would cause it a real publicity headache or adversely impact its business if it did so?

2. Cost.Cost reduction is often one of the key drivers for outsourcing and in many circumstances, particularly if moving to a shared services model or a model which involves technological innovation cost reductions can be achieved. But, as anyone who has ever considered outsourcing is told, it is not automatically cheaper to outsource than to do it yourself and it isn’t always easy to determine whether cost reductions will be achieved. When calculating the cost impact of outsourcing, there are certain hidden costs that must be factored in – including the cost of the retained function which manages and controls the service providers. In a multi-source or ‘total outsource’ regime the retained function cost would be greater than usual and could be considerable. The procurement and legal costs involved in the initial outsourcing, plus any retenders of the various services would also need to be considered.

3. Loss of control.Any outsourcing can cause a total or partial loss of domain expertise in the areas that are outsourced. This can cause problems if an organisation needs to take something back because of a supplier failure. The lack of internal expertise may make it practically impossible to in-source some functions which may reduce customer choice and leverage.

4. Who is responsible?Total outsourcing solution is likely to mean multi-sourcing. It is extremely unlikely that the customer will find one supplier that can meet all its needs. Where services overlap or are dependent on other services, there will be greater legal and contractual risks since there is no single point of responsibility for the customer – the danger is that the customer never knows who is responsible for a failure and even if it knows may not be able to prove it.  An organisation would need to consider carefully upfront its appetite for such risks and consider ways of mitigating such risks through appropriate contractual structures and governance mechanisms.

5. Loss of identity.Private sector companies in particular need to consider how much they can outsource without adversely impacting their corporate identity.  Can you really outsource areas such as HR strategy or key customer facing services without affecting who you are and what you stand for? In addition, the more that is outsourced the more difficult it will be to ensure that all of your myriad service providers promote and reflect your brand values and principles.

So, it will be interesting to gauge the success of Suffolk County Council’s foray into ‘total outsourcing’ and whether this is a model that will be implemented elsewhere in the public sector. The private sector will also be looking on with interest to see whether it can learn lessons on what (else) it can outsource to improve its efficiency and profitability in these cash-strapped times.

Tom Peters, the management guru once said “outsource everything but your soul”.

Perhaps this shows that, in these more secular times, even our souls are up for grabs, at the right price.

David Skinner is a partner in law firm Morrison & Foerster’s Global Sourcing Group