Outsourcing is the contracting out of a company’s value-adding activities to supplier companies. Outsourcing represents the shortening of the value chain and/or the reduction of the company’s depth of performance. By contracting qualified and specialised sub-suppliers for components and services, companies are often able to reduce their production, development and overhead service costs. By concentrating on their core activities, companies can make the most of cost benefits and improve their own operational and strategic market position.

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Decision

Like all complicated issues, outsourcing involves both advantages and disadvantages. There is no perfect general solution that always leads to success. Instead, you need to weigh up all the advantages and disadvantages within the context of your organisation and your needs and requirements on the basis of each individual project. It is far too often the case that outsourcing is considered to be the same as offshoring. Offshoring, however, is just one specific type of outsourcing. Outsourcing extends over a much wider range of activities and covers every task or service performed by third parties for an organisation. If an organisation decides to contract a project manager to oversee the running of a project, for example, this position is “outsourced”.

Make or buy?

As is also the case when deciding whether to “make or buy”, one of the key questions involved in the decision to outsource is whether it is better for a company to use its own resources to execute projects or to use external resources instead. Companies can only answer this question by identifying their own individual advantages and disadvantages and factoring these into the decision-making process.

Advantages

Outsourcing generally offers you the following advantages:

  • ‘Visible’ costs: Payments made to external service providers are always more visible and easier to post to specific projects than those that are buried deep in operational budgets.
  • You only pay for what you need: Given that outsourcing is normally based on specific agreements, you only pay for what you really need. The usual benefits for permanent employees (training, holiday and sick leave, etc.) do not apply.
  • Access to experts and specialists: For some organisations, outsourcing is the only affordable way to access experts and specialists in certain subject areas. Being able to only use the expertise required when it is really needed can be an extremely economical solution, even if the hourly rates charged by these experts initially seem to be exorbitant compared to the pay rates of your own staff.
  • Better accountability: The expectation and requirement that external service provides will take responsibility for the implementation of a project is often much more substantial than can be demanded from internal staff. Being able to contractually bind a provider to achieve a certain level of performance has a number of major benefits, especially in periods close to deadlines.
  • Flexible staff numbers: Using outsourcing enables you to increase or decrease the number of staff provided for the task in question according to requirements and without having to worry about lay-offs, employment contracts and similar issues. A contractual relationship with external service providers can be extremely profitable, especially in the case of urgent and short-term projects.

Positive side effects

Alongside the hard facts, outsourcing development or project management responsibilities always involves the following positive side effects:

  • Perseverance: When working on projects, external service providers put a great deal of effort into remaining focused and completing the work assigned to them in such a manner that they are not only paid for their work but also receive a good reference.
  • Openness: External service providers are generally more committed to identifying opportunities and problems, which internal members of staff tend to avoid addressing for political reasons. External service providers focus on their obligation to complete the work assigned to them by their client and have a vested interest in supporting their client to the best of their ability.
  • New ideas and a wide range of experience: External service providers have normally worked in different sectors and environments. They can use the experience gained in these different areas in your project and provide new ideas to help to advance projects that companies may have been working on for so long that they are now blind to the problems and opportunities they entail.
  • Cost effectiveness and productivity: The fact that external service providers are paid for successfully completing the project that they were contracted to complete means that they tend to remain concentrated and focus on the essential aspects of the work assigned to them. As a result, they do not waste their time and effort on tasks that do not help to advance your project.

Transfer of knowledge

Companies that commission the services of external service providers should also consider how this affects the transfer of knowledge. The fact that their projects are not executed by their permanent employees may result in a loss of important knowledge the moment the project is concluded and the external service providers leave the company. It is important that the findings, techniques, architectures, etc. Obtained and acquired during a project remain at your company after the project has been completed because they may also be important following the end of the project lifecycle.

Decision-making process

You should be sure to consider the following three questions when working out whether to decide in favour of or against outsourcing:

  • Does your organisation have the required staff with the right skills needed to complete the project? If this is not the case, you need to make the essential decision as to whether you would rather employ an additional member of staff for the project or outsource the project.
  • Does the market currently provide you with easy and sufficient access to trained candidates who could be employed in a permanent position specifically for the completion of your project?
  • Does the necessary recruitment process for permanent employees (publishing a job advertisement, evaluating profiles, conducting interviews and complying with periods of notice) give you enough time to start the project on schedule?
  • Does your organisation have the financial resources required to employ more full-time staff? Although assigning the project to a third party may seem like an expensive option in the short term, it may actually cost less than having more full-time staff on your payroll in the long run. This is particularly the case when you consider the overall costs of permanent staff (basic salary, income tax, health insurance, holiday and sickness leave and other benefits) throughout the entire duration of their employment. Although you initially pay more for an external service provider, this expenditure stops the moment the project is completed.
  • Does your organisation have a portfolio of projects that justifies a commitment to employing full-time staff? If your organisation is not one of the largest in its field, the chances are that you only have a few projects. Furthermore, it is most probably the case that your new projects can be most efficiently executed by staff with specific expertise in the area concerned. Contracting service providers that offer special expertise for specific projects may be a more efficient solution when it comes to ensuring that you always have the right individuals for your relevant projects without having to maintain an employee base of all-rounders.

Tips for successful outsourcing

Here are some tips that you should bear in mind when you decide to outsource a project:

  • Work together with the service provider to develop the “statement of work”. This should be a joint effort to ensure that both parties fully understand which tasks need to be completed, how they should be carried out, the protocols that need to be followed, the time frame for completion and so on.
  • Record your expectations in writing. Do not assume that the external service provider already knows your corporate culture, work ethic and code of conduct. Stipulate where the work should be carried out, working hours (where applicable), rules for the use of your hardware and facilities, etc.
  • Request project documentation. Specify what type of project documentation should be produced and maintained throughout the course of the entire project. This can include work schedules, regular meetings, progress reports, change logs, etc.
  • Consider providing incentives for early completion of the project. If you offer an external service provider the prospect of receiving a bonus for completing the project ahead of schedule, you encourage both concentration and commitment. Such incentives are typically based on the increased value or savings achieved by the organisation as a result of quicker completion of the project by the provider. Be sure to quantify the criteria for being granted such a bonus in your agreement. You should also ensure that the incentive offered is lucrative enough that the provider actually wants to be granted it. Do not base your bonus on an all-or-nothing concept but instead weight it according to what has been achieved. A bonus of 10% of the savings made by your company is typically a good incentive. A bonus for the early performance of services can also be based on an additional ROI achieved for your company.

Conclusion

When it comes to outsourcing, there are both advantages and disadvantages. The decision as to whether or not you should use outsourcing is not always an easy one to make. Outsourcing can without a doubt be a profitable option when done correctly. A cautious approach, the right preparation and continuous checking are the cornerstones of your outsourcing success.