Outsourcing: A question of trust

It pays to get a specialist to do it even if you have to pay a lot. In day to day life, be it engaging the services of an auto mechanic or a barber, this is one maxim we follow without hesitation. Business used to be different, but no longer. Recent statistics peg the value of sales generated through outsourcing at more than $250 billion.

Before going into the pros and cons, it is necessary to clearly understand outsourcing as different from a normal contract for goods or services. In a normal contract involving purchase of goods or services, the supplier is given strict instructions. He is informed as to what the buyer needs and how he is to deliver those services. There is not much scope for innovation on the supplier’s part, as he has to stick to the buyer’s specifications. In an outsourcing arrangement the ‘control of the process’ is vested with the supplier. The buyer specifies the end result desired by him, but how to achieve it becomes the prerogative and responsibility of the supplier.

For example, let’s take a transcription supply agreement. If the buyer, along with his transcription requirements, also specifies the minimum infrastructure, number of qualified personnel etc to be available with the supplier, then it is not true outsourcing but more of a service contract. On the other hand, in an outsourcing arrangement, the buyer merely specifies the quantum of work to be completed in a specified time along with the desired degree of accuracy, leaving it to the supplier to decide how to go about it.

A considerable amount of planning is needed if the outsourcing arrangement is to be a success. The desired result of the outsourced service and acceptable performance levels need to be clearly specified. Quite often, this area is not addressed properly and becomes a bone of contention later on. The buyer feels that the supplier is not providing something, which he had assumed, was part of the agreement or providing services neither asked for nor needed and charging for it. The supplier, on the other hand, feels that the buyer is asking for more than what was agreed on and unwilling to pay for it.

There are a few areas of concern, which normally deter firms from outsourcing their needs. One is the cost factor. On the face of it, outsourcing costs frequently appear exorbitant (and occasionally are). One common mistake made while calculating the costs is that buyers normally compare outsourcing charges with the salaries of an equivalent number of employees. Each employee, however, means substantial additional costs like workstations, costs of space, chair, table, computer etc, health benefits, infrastructure like conference rooms and so on. When all the cost factors are accounted for, more often than not, the charges start looking reasonable. Moreover, you will be able to use the latest technology without fresh investments.

Loss of control and inability to closely monitor is another reason that makes many hands-on managers queasy at the prospect of outsourcing key services. The point to note here is that effective outsourcing should negate the need for close monitoring, which is likely to turn into an interference. An effective way of evaluating whether the laid down performance parameters are being met is by utilizing the services of an expert who is an outsider. Certain other tools are also available to analyze the success of the program. The Barrier/Lever analysis helps in identifying the most common objections that crop up. Another tool is the yield/loss analysis that helps in identifying key strengths and weaknesses.

Pricing is another area where due diligence must be paid by both, the supplier and the buyer. You can accomplish this through various systems, all of which have their accompanying pros and cons. There is the cost plus system where the supplier is given costs plus a predetermined profit margin. Many buyers prefer a fixed price in order to ensure that costs do not fluctuate wildly and they remain in control. However, such systems suffer form the fact that they are not flexible enough to accommodate changes in technology, business objectives etc. Further, outsourcing must be seen as a dynamic process wherein the prospects of the supplier are closely tied to that of the buyer. It is therefore, necessary to have a system that rewards superior performance and encourages higher levels of achievement. A variable, performance-based pricing system would be most suitable. Such a system should include incentives or bonuses for superior/ahead-of-time performances. Ideally, it should also have penalties for below par efforts. Buyers and suppliers should refrain from clubbing together prices for various services even if offered by the same firm. Buyers should know how much they are paying for the individual services. This knowledge is important to make the right decisions.

Advancements in automation technology have often induced managers to try automated answering systems as a replacement for services that are mostly outsourced. As of now, however, nothing has been found which is an effective replacement for live conversation. Automated responses tend to evoke discomfort and annoyance and are more likely to be counter-productive.

Specialization seems to have become the norm in current business. Outsourcing follows as a corollary. Initial reluctance to outsource on the part of managers is understandable. However, these are likely to be overcome in the long run as the benefits become apparent. Further, industry norms will evolve and suppliers will become more professional in their approach. The key phrase for the future will be "Don’t do it, get it done". Just make sure that you get it done right.