UK: Smart (Out) Sourcing Will Always Be Good Business

Last Updated: 22 September 2010
Article by Wayne Lawrence

The current economic climate in the UK certainly presents some significant challenges for businesses and the public sector. For businesses there is the ever continuing pressure on margins. For the public sector there is the challenge of delivering public services when faced with significant cuts in funding.

It is clear that given these challenges businesses and the public sector alike must become ever more efficient in order to deliver what their customer/the tax payer wants – "more for less".

Amidst those challenges there are also some great opportunities for business. The Conservative – Liberal Democrat Coalition Government have made it clear that given the need for dramatic cuts in public spending the question of what services ought or need to be provided by the public sector is on the agenda – the clear inference being that the role of the state in the direct provision of public services will shrink with the private sector taking on a significantly wider and potentially deeper role in the delivery of "public" services in the UK.

Given these circumstances there is a good future for businesses that embrace opportunities for Smart[Out]Sourcing in order to improve their own operational efficiency and/or potentially a new/growing market for the provision of services to the public sector in the UK.

For any business considering exploring outsourcing part of its business or support functions there are a number of key strategic and commercial considerations that ought to be considered and that underpin the likelihood that the relevant project will deliver the desired outcomes for the business. These include the following.

Project Initiation

It is critical to the success of any project that the customer evaluates the business case for the project.

The business case needs to identify the overall scope and business objectives of the project. This may include objectives on improved efficiency and/or reduced costs and/or wider objectives on business transformation that would perhaps require significant capital investment by a business if it were to seek to procure the relevant infrastructure and skills internally within its business.

The business case should also consider the scope of the project and what elements of the current business processes ought to be outsourced or retained within the business. It should also involve some initial consideration on the risks that could impact on the success of the project.

Procurement/Engaging with the Market

There are obviously different issues and constraints facing the private sector and the public sector (eg procurement rules) when seeking to embark on a procurement process for outsourcing services. Having said that there are some common themes in terms of being prepared for the engagement with the market that can have a significant bearing on the costs involved in the procurement process and the overall success of the outsourcing arrangement through the life of the contract.

As indicated, one of the key outputs from the business case should be a clear understanding of the business objectives and business requirements related to the project. This need not be a detailed 100 page tome. It is preferable that it is focussed on the business' desired outputs (ie the output based specification) but contains sufficient detail so that it effectively conveys the customer's requirements to the market.

This document can be used to assist the customer when engaging with potential suppliers by ensuring the customer retains an understanding on the baseline of its requirements and any movements from this proposed by potential suppliers.

One key message I always deliver to clients when they are proposing to engage with potential outsourcing partners is that – "the business should be clear on what it wants to buy and should be certain on what it can afford to pay."

The Beginning, the Middle and the End

There are a raft of significant "second–order" commercial and operational considerations that require to be addressed in any outsourcing project. Time does not permit consideration of those issues in this article.

It is however worth emphasising one or two strategic thoughts that will underpin the achievement of the business objectives from any outsourcing project.

The Beginning – Many significant outsourcing projects involve detailed transition planning to ensure a smooth handover of service delivery to the outsource service provider – this can involve staff transfers (which can be a very sensitive area), asset transfers and the transfer of existing support contracts. This process should not be taken lightly by either the customer or the supplier as a bad start can result in a long-term hangover that endures through the duration of the contract.

The Middle – I have already highlighted the importance of having a well documented output based specification of the customer's requirements. This is the backbone of any outsourcing arrangement.

In addition to this it is important that the outsourcing contract contains mechanisms that (1) support the delivery of the customer's business requirements (including service levels or key performance indicators, contract management meetings and governance and reporting mechanisms) and (2) allow the customer to effect changes to the customer's requirements (they will not remain static for the duration of the contract) and the scope of the services without being exposed to over zealous charges relating to the proposed change. Benchmarking and pricing transparency mechanisms can assist the customer in achieving this.

The End – Like all (good) things an outsourcing arrangement must inevitably come to an end. This is an area where it can (perhaps understandably) often be difficult to get clients to focus their attention at the beginning of the new relationship.

Whilst it is accepted that many outsource service providers approach contract handover in a professional manner it should be remembered that on termination there is inevitably some hardening of the commercial approach from service providers on what they are obliged to do contractually. It is therefore important that any outsourcing contracts contain robust provisions on exit management and handover assistance to ensure the smooth transition of the relevant service either back in-house or to a new service provider and to protect the customer from any "gaming" on exit which could potentially erode the value derived by the business from the outsourcing arrangement.

This article has touched on some key issues relating to outsourcing. There is an underlying message for any organisations contemplating looking into outsourcing part of its business operations – if you do it right and invest appropriate time and effort into the process this will improve greatly the prospects that the outsourcing project will deliver the desired business outcomes.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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