Why outsourcing could help you manage growth
How to get the most from your outsourcing suppliers
Gone are the days when a business would have a department for everything. Outsourcing is now both possible and the norm for companies of all sizes. From small-scale operations with just a few staff to multinational businesses, there are a host of services that can be outsourced to third parties. From payroll and accounts to IT and fleet management, there’s virtually nothing that the market doesn’t have an answer for.
However, it’s crucial to strike the right deal with the right outsourcing partner. Outsource your payroll, for example, to the wrong supplier and you could end up with a staff revolt. Choose the wrong IT company and your operations could grind to a halt. You need to be clear in your thinking and approach, know what you want and how you plan to get it.
Plan of action
Before outsourcing anything, carefully consider why you’re doing it and how it will fit into your growth strategy. There are two main reasons to take a function out of house: it’s cheaper and more efficient to do so, or the service will add a new dimension to your business, which will improve either internal operations or your offering to clients.
It’s common for businesses to focus on the former, but all too many rush in and regret it later. Cashflow problems cause many companies to start manically slashing costs, and outsourcing is seen as being cheaper than staff. But this can lead to problems further down the line, particularly because many suppliers offer three to five-year contracts as standard, loaded with terms and conditions heavily weighted in their favour. Peter Lunio, a business adviser at Baker Tilly, has observed the approach many entrepreneurs take to suppliers.
“Entrepreneurs usually get involved in contract negotiations, but often they don’t have much experience of doing this,” he explains. “These deals are often several years in duration and can be a significant barrier to growth if you don’t get the details right from the outset. I would advise entrepreneurs not to bet their businesses on such agreements.”
As Lunio suggests, entrepreneurs always want to be involved in pulling the outsourcing deal together, – and so you should be, it’s your business. But remember that the guy selling the contract has done it many times before and has you at a disadvantage. So here’s some advice to help you turn the tables:
Write your own contract You might require legal help to do this, but if you’re going to enter a long-term deal involving substantial sums, it’s worth the cost. Some suppliers might be wary of this, but respectable ones should be prepared to negotiate if the deal is worth it. Either way, it will start the negotiations in a place where you are comfortable. Juan Crosby is a solicitor at CMS Cameron McKenna and specialises in outsourcing. He says: “Entrepreneurs should certainly have a very close read of any contract, as they are often drafted in a very self-serving way. You should get advice if you are uncertain about anything, and get a lawyer to draft an agreement if the contract is for a service that is particularly critical to your business.”
There’s so much competition around, you should be able to get the right deal to suit your business. Compare quotes and details and push for the best agreement you can. However, Lunio warns cost isn’t everything and that entrepreneurs should also be concerned that a supplier must be able to get a decent margin. “Entrepreneurs don’t always recognise that the supplier needs to make money and that they will find ways to bring it out during the course of the contract,” he says. So, if you hammer a supplier over cost from the outset, they will look to claw it back over the long-term through penalty payments or additional work, for instance. Instead, look to build a relationship where both parties get fair value.
Ask for a trial period – Some services naturally lend themselves to this, particularly for new or innovative services, whereas more traditional products normally don’t. Outsourcing contracts are often long term, so your supplier should be prepared to put in some legwork at the outset to secure such a deal.
Ensure there’s a benchmark for service – Once a deal is in place, you need to be sure that your business is getting value for money. If, for instance, you’re outsourcing your customer service, you want to be sure that there are obligations on your supplier to deliver the standard of service your clients and customers expect. Incentives can work, too, but be careful not to set up a structure that distorts their purpose. The wording of the agreement needs to be clear and unambiguous, as Crosby explains. “Say you were looking to run a global call centre for IT systems,” he says. “This might imply that it needs to be open 24 hours a day, but it’s ambiguous unless it’s clearly specified.”
Have a break and review
Sometimes things just don’t work out or need to be modified. You should avoid rigid contracts and ensure there’s a period during which amendments can take place. Once the contract’s up and running, you’ll be able to see how the supplier is working and any necessary changes will be more apparent. Don’t accept the salesman’s patter and ensure there’s a formal review with the option to terminate.
Understand your own obligations
If you are outsourcing accounts payable or payroll, you will have a responsibility to provide your supplier with the data and information they need. Understanding what, how, when, where and to whom this information needs to go is, therefore, critical. You might be outsourcing a job, but responsibilities still remain in-house. “Entrepreneurs often underestimate the amount of time it will require to maintain the relationship with a supplier,” says Lunio. “What you need to do is set up a structure in your own organisation to maintain the contract.”
Build in clear exit provisions
Particularly in the current climate, you need to be able to get out of a contract if your supplier is about to go under or if they can’t sustain the deal – or you might just feel their services are no longer required. So, make sure these provisions are clear and easy to execute. However, this should simply be a safeguard that you should avoid using unless you have to. “You need to be sure that your supplier can do what it says it can do – in the current economic climate there’s much more focus on this,” says Crosby. “You always need to carry out some form of due diligence on your supplier.”
Prepare for a handover
One tactic a supplier may use to prevent losing your business is to place obstacles in your way if you want to switch to another outsourcing company. Consider everything this might involve and build into the contract that they must fully comply with any handover. If you’re outsourcing your IT, for example, you might want to bring in another supplier who can potentially take all or part of that role from them. Unless IT is your forté, you could end up being held to ransom by your former supplier – a situation worth avoiding.