Should you outsource?
If buying in business expertise and cutting costs sounds like a no-brainer for your business, how do you choose which functions to ‘palm off’?
With IT, accounts, HR, marketing and sales all prime candidates for cost savings through ‘palming off’, is it time you took a closer look at outsourcing?
“Outsourcing is not a religion. You don’t have to do it,” says chairman of the National Outsourcing Association (NOA) Martyn Hart. But with so many companies unable to maintain all of the traditional functions to a high standard, and adapt to growth, it’s become fashionable to turn to it.
According to research firm Ovum, the business process outsourcing market was worth £5.6bn in 2008 and is growing fast. “It’s a way of extending the business, covering areas you can’t,” says Hart.
And as soon as something becomes de rigueur, everyone wants a piece of it, which is why almost everyone can be your outsourced partner. Or so it might seem.
There are three main benefits of outsourcing, according to the advocates. First, there are the cost savings. Outsourcing often removes the need for a capital expenditure, or a full-time employee. Then comes increased efficiency, with a third party taking on the hassle associated with a particular function, freeing you and your staff up to focus on the core areas of your business. Finally, outsourcing gives you access to key expertise. The company you use should ideally be a specialist in its field, up-to-speed on the latest developments and be working with cutting-edge tools. Plus, it’s likely that there will be several people available capable of handling your needs, covering you at all times.
To decide if outsourcing’s for you, start with your business plan. “Understand your core competencies and see what’s left over,” says Hart. Is it accounts, IT, human resources, sales, logistics, marketing, or another area?
The chances are you’ve either been filling round holes with square pegs trying to multitask, or else hired for the company you were, not the one you’ve become. Andrew Shebbeare, co-founder of £8m-turnover digital marketing agency Essence, did just this. “We found it difficult to outsource our core services, such as application development,” he says. Instead, he shifted his IT needs to Google Apps.
Cutting the costs
So, how much can you expect to save by getting someone else to do your dirty work? According to Hart, there are two types of outsourcing: IT and business process outsourcing. IT is probably the most obvious. Hart says 25% cost savings are not unusual, although if you’re already doing it and switching, expect 5-10% at best. If you offshore, you might save 40%. But, he warns: “It’s fine for salespeople to dangle [the cost savings], but it depends on your circumstances.” In other words, the headline saving may be eaten into by the other costs that such a transaction might add – ones that weren’t budgeted for under the standard services.
Robert May, managing director of third-party IT provider Ramsac, makes a compelling case for cost reduction. “The average salary of a dedicated IT manager is approximately £40,000,” he says. “Take into account other needs, such as National Insurance at 12.5% (£5,000), yearly training (£3,000) and absence cover for sickness (five days), holiday (25 days) and training (10 days) per year, and the costs mount up.” He also throws in ad hoc IT support needs and office space for the IT manager, pushing the damage up to £56,000 a year.
In contrast, a typical small business would pay £750 a month for a monthly visit, unlimited remote support, and £80 for automated round-the-clock network monitoring.
Throw in some ad hoc work and May estimates the outsourcing cost will still come in under £20,000 a year – a 65% saving. The headline sum may seem high, but the entrepreneurs we spoke to generally agreed with May’s calculations. For example, Essence’s Shebbeare claims to have saved around £20,000 against a salary of £40,000 for an administrator.
Beyond cost, Duane Jackson, chief executive of accountancy software firm KashFlow, is also convinced by the efficiency promise of outsourcing. Following a 500% growth in customer numbers, his time management required re-appraisal. “To continue the momentum and enable further innovation, we looked at what we were spending our time on,” he explains. Work dedicated to the servers that deliver the company’s software solution was proving onerous. Although vital, this was not a core skill, so Jackson outsourced to Rackspace.
Rupert Crowfoot is managing director of physiotherapy clinic chain Six Physio. He switched from his software provider to Conosco to help cope with the 65,000 appointments it books for patients, with email confirmations and text messages, updating patient records and invoicing all critical.
“Technology is a great enabler, but it was disabling our business,” he explains. “When it went wrong, it stopped us delivering service to our patients.” Scaling up support, he says, is no longer an issue, adding: “Software as a Service or hosted solutions that are pay-as-you-go offer the ultimate flexibility, allowing you to add a new user as you take on additional staff.”
The shift to cloud computing has also been invaluable for small firms, says Deborah Risbridger of DRA Public Relations, who uses Extrinsica Office Anywhere’s solution. She employs PR consultants on flexible terms, where they can “work securely from wherever they want, but are restricted in their access to relevant areas of the corporate file system”.
KashFlow’s Jackson is considering outsourcing sales. There are just three months in which accountants are receptive to cold calls, because of accounting deadlines, with January deadlines among the worst. “If we outsource this function, then we only need to pay for the service as and when we need it, rather than having someone in the office that’s paid all year round.” Meanwhile, John Wyllie, founder of Kaizen Signs, didn’t take long to embrace factoring, selecting Bibby Financial Services for his credit control and the influx of cash based on invoices processed.
Choosing a partner
If you’re convinced of the need to outsource, you need a partner you can trust. “Look for suppliers that are culturally similar and not much bigger than you,” recommends Hart. The NOA has a database of consultants broken down by size, expertise and sector.
The same principle should be applied to offshoring too, with an added emphasis on the legal framework, adds Madu Ratnayake, general secretary of SLASSCOM, Sri Lanka’s body for outsourcing. “It is imperative that entrepreneurs look for synergies between suppliers and their own businesses,” he says. “If it’s finance and accounting, then they have to consider similar data protection laws and working practices.” Ratnayake points out that Sri Lanka has a large number of CIMA-qualified graduates and a legal system that mirrors the UK, unlike the US-friendly Philippines.
Jackson warns that it’s a mistake to view the arrangement as purely financial, stressing that an understanding of your business is vital. “This applies whether you’re outsourcing answering the telephones or human resources,” he says.
You also want to be able to build a long-term relationship, continues Hart. “It’s quite hard to go through the process, so you won’t change unless you’re really pissed off,” he says.
Experienced outsourcer Hector Proud, managing director of PR company Idea Generation, advises putting together a clear brief. He’d been through eight bad experiences in six years before outsourcing IT to Fifosys. So what’s Proud’s secret to a happy and successful outsourcing relationship? “Attention to detail, a certain amount of anal retentiveness, and a bit of healthy negotiation,” he replies.
Managing your outsourcing partner
- Set out a service level agreement (SLA) and update regularly. Put together key performance indicators (KPIs) relevant to the service and your needs
- Make points of contact available to all relevant staff
- Be careful with bonuses. Over-performance must be in areas of value to you
- Create a penalty points system for negotiation on payment
- Document a business continuity and disaster recovery plan
- Consider data protection, intellectual property and exit management for the end of a contract
Talking a good game
Kerry Hallard, MD of Buffalo Communications, the outsourcing specialist communications consultancy, explains how to avert a communications disaster
- Watertight PR and HR procedures: “Outsourcing isn’t just an IT issue or a money-saving procurement process. Viewing it first and foremost as a people issue and therefore involving HR and PR can be core to its success. Messages need to be tailored for every audience involved – staff, customers, prospects, partners, shareholders, local community – and then communicated in a timely and consistent manner. It is advisable to develop a communications plan with messages and timeline for each audience.”
- Appoint a communications champion: “With so much at stake, it’s crucial that communications pertaining to an outsourcing deal are agenda items for the board, just as contract terms are. Communications need to be a forethought not an afterthought. It’s strongly recommended that a communications expert is part of the inner circle in outsourcing decision making and implementation.”
- Be truthful: “The first rule in any PR (and crisis PR) procedure is that truthful information is portrayed in a clear and concise way. Cloaking outsourcing intentions in secrecy does more harm than good. Rumours about intentions can be hopelessly off the mark and can cause widespread unease about job security. Companies must actively and openly communicate with all target audiences as early as possible.”
- End-users and suppliers must coordinate their comms: “Well-oiled plans on the side of the supplier can be easily overturned by a lack of understanding by the end-user and vice versa. Both parties’ communications teams need to work closely together to ensure seamless dissemination of consistent messages to target audiences. The communications roles and responsibilities for each party need to be crystal clear.”
- Ongoing communications updates: “One-off communication is not an option. Companies need to operate an open door policy and ongoing communication with all involved is essential to voice concerns and address issues.”
- Clear media relations: “Clear communications with target media is vital. ‘No comment’ in a bad situation will not suffice – honesty will reflect well on your organisation and help build trust with the press. Outsourcing needn’t be a crisis situation, if media relations are managed from the outset. The first rule in any PR procedure is that information is portrayed in a clear and concise way and that it comes from the horse’s mouth.”