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For expanding businesses outgrowing current resources, or small businesses without the expertise to manage critical processes, Rebecca Spicer explores the benefits, key considerations, trends and pitfalls of outsourcing.

Active ImageEvery business needs a smooth and efficient process to deliver core products and services. Can every part of that process be managed in-house, or would it be smoother and more efficient if some aspects were outsourced? The decision to outsource has to take many factors into account, and the agreement that will be the foundation of the working relationship is crucial to success.

It can be argued that by managing the likes of accounts, recruitment, or payroll in-house, the business reduces risk and maintains control. However, if more time, money and resources are being put into managing processes rather than on the core business, outsourcing could be worth considering.

Put simply, outsourcing means getting a third party to carry out work for your business on a contract basis. The work outsourced is usually not your core business, it tends to be work that happens irregularly or is outside the skill-set of your current staff, such as IT, public relations or training.

According to the Outsourcing survey conducted by CPA Australia in May last year, one in three small businesses currently outsource some business functions and, interestingly, one in three small businesses reported that they offer or provide outsourcing services to other small businesses. The survey found the most common reasons for deciding to outsource were the opportunity to use new technology, staff inadequacies, recommendations from others, and as part of future growth strategies.

While cost reduction has traditionally been the major benefit of outsourcing, the profile and incidence of outsourcing have since changed, bringing more diverse benefits for those involved. According to the CPA report, “These benefits range from the businesses being able to access specialist skills and innovative products, to improving credibility with clients.”

Outsourcing Advantages

John Paddick, CEO of UCMS—a national provider of outsourced white-collar clerical activities—says it can simply come down to economies of scale. “Businesses can leverage the IT or telephony or other organisational infrastructure of a processing company which they wouldn’t be able to do on their own,” he explains. Another issue is seasonal variations in volume, such as the Christmas period for some industries. Marketing and public relations (PR) is another example. There are times when you will be releasing a new product or need to ramp up awareness of your brand, but may not need a full-time marketing professional on staff.

Sharon Williams, managing director of Taurus Marketing, says outsourcing marketing and PR provides flexibility. “Using an agency means a business has the flexibility to ‘turn on the tap’ when it needs experts. A company can choose to turn up or down the volume on its marketing activities without having to make major recruitment and budgetary decisions.”

Another key advantage, she says, is objective, independent advice for clients. “Professional PR or marketers act as an informed ally to balance marketing and public relations debates. Unlike internal staff, they can operate as an objective third party and ask the straight-shooting questions.”

In the current economic climate, competition for skilled staff is rife—another reason SMEs might outsource to a human resources or recruitment specialist. “There’s a shortage of skills, a shortage of talent, so how is a small business going to compete with the big end of town to get that talent in their business,” asks John Belchamber, professional services manager at Nayler Business Solutions. About a year ago, after recognising a real need, Nayler starting offering complete HR management services to the SME sector. “Seventy-five percent of Australians are employed by small to medium business, and so logically it means they are the ones with the biggest human capital issues, but they’re also the ones with the least financial ability to employ an HR manager.”

Andrew Lewis, director of Red Packet Consulting, suggests outsourcing can be beneficial when businesses are at a stage where they’ve plateaued or aren’t doing so well and need external advice. While small business owners tend to want to do things themselves, there are benefits in getting a third-party perspective when you’re tempted to stay working in the business rather than on it, he says.

Outsourcing has the potential to improve quality of work, provide a balance between supply and demand, and to maintain a level of service. It can also provide a catalyst for redesign of processes and transformation of skills.

Outsourcing Options

The range of processes you might consider outsourcing is exhaustive. As well as those already mentioned, there’s financial advice, document management, serviced offices, advertising, call centre services, field sales, logistics, warehousing, and distribution, right down to contracting someone to clean your office. But essentially, “Any business process that is not core and does not add value to your business and can be executed more efficiently by a computer process or more cost effectively by [other] labour could be, should be, would be outsourced,” explains Martin Conboy, founder of FooBoo (front office outsourcing, back office outsourcing) Online, a brokerage service for outsource buyers and suppliers in the Asia-Pacific region.

In recent years outsourcing has also become known as business process outsourcing (BPO). While these terms are often used interchangeably, Paddick believes there’s a distinction. “In our particular view of the world, outsourcing often has features of a single function,” he says. “So a small business may outsource their payroll, they may outsource their distribution, collections or call centre, but they often do so with different providers who they perceive to be experts in that particular function. From our perspective, that’s an old model.”

Paddick’s view of BPO means the question put to a client is not what function he’s seeking to replace or improve, but what’s the business process? “For example, if it were processing loan applications for a small regional bank, a business owner may in the past have issued tenders for call centres. I would say, forget about the solution, what you’re actually asking for is loan application processing—that’s the business process—and if you think about that process it will involve an element of telephone but also an element of form processing, document management, fulfilment. Let’s look at all those functions as they cross and fulfil that business process and redesign it for a much more efficient and effective delivery across the whole of them, rather than as separate little functions.”

Another, perhaps more effective solution for SMEs, he suggests, is shared services. Several businesses in the one area might be doing the same thing, competing with each other, but none are big enough to get any economies of scale or efficiency across processes they don’t compete with. “So why don’t they all get together and create a shared infrastructure around some non-competitive elements,” Paddick says.

Before a business owner gets to the stage of looking for an outsource service provider, Conboy says you need to understand why you are outsourcing. “You need to define what the opportunity is: why am I doing this and what’s our objective?” Then you need to consider that by taking some processes out of your organisation, staff may not understand and there could be resistance. “So internal readiness
is important,” he warns. “You’ve got to make sure everyone knows you’re doing this as an organisation and you’ve got to sell it to your employees. Half the battle, as most people know, is getting your own team onside.”

The transition period will also need to be carefully managed. You’ll need to plan how to move the process, previously completed in-house, outside the business. You also need to address how to ensure the outsourcer is going to do the work exactly the way you want it done, and how to make it a seamless process and manage the risk involved.

Outsourcing also means the process becomes part of the supply chain and needs to be managed accordingly. Communication with your supplier is key. “You’ve got to have really strong relationships with your service providers,” explains Conboy. “These people are intricately involved in your business and you need to spend time with them making sure they understand what you’re all about, and to make sure they’re doing your job properly.”

Choosing Outsourcing Services

Active ImageAccording to CPA’s survey, small businesses are most likely to seek advice from their accountants, peers in business, and friends and family when considering and arranging to outsource. Conboy agrees. “Small businesses are often members of industry associations, or [clubs],” he says. “So the first place you’d start would naturally be your own network. Then obviously, for small business, a very easy place to look is the internet and local business directories. It also depends on the service you’re looking to have conducted, but another good place for SMEs would be their own accounting firm.”

There are several important factors when selecting outsource service providers, including proven competencies, price, commitment to quality, references and reputation, scope of resources, flexible contract terms, cultural fit and geographic location.

And you have to do your due diligence in the market, Paddick says. “Ask who does the end-to-end stuff; who does the consultancy, who manages the transition and delivers it for you? Then ask, who’s big enough to offer benefits but small enough so that you still stay important to them?”
Conboy suggests an analytical approach. “You’ve got to make sure you get people who are professionally certified, and there’s all sorts of accreditation that goes with that, so you need to check, set benchmarks, and look for ROI [return on investment] targets.”

Belchamber says when it comes to services like HR, business owners need to not only meet with the salesperson but also the consultant who is going to be working with the business. “Spend time with them, get to know them and pick their brains, and make sure the consultant is doing the same thing the other way around. You’ve got to think to yourself, would I recruit this person?”

When going through the procurement process, Nick Abrahams, partner at Deacons law firm, advises maintaining several competitive bidders until the end to ensure there’s competitive tension. “Once a vendor feels they’re the only one, you will lose that tension and that negotiation capability,” he says.

“The other most important thing is, don’t start the project until you’ve signed the agreement. Once the project is started you’re actually wedded to that particular vendor, and so, again, there’s no competitive tension to get them to negotiate properly and it’s also quite risky.”

Once you’ve decided on a service provider a contract will need to be signed between the two parties. Abrahams suggests the following key points should be included in an outsource agreement:

• Scope—get the scope of work clearly defined. If projects aren’t clearly defined at the time when agreements are entered into, the vendor will do some more work to scope out what needs to be done and then give the client a scope document. Don’t enter into a full outsource arrangement until that scoping has been done because this is what will determine the price.

• Liability—if something goes wrong in the outsourced process, the contract should dictate to what extent the vendor is liable. Areas include liability for intellectual property infringement, death, personal injury, property damage, and also breaches of confidentiality and privacy. The vendor is generally allowed to cap its liability and will most likely want to limit it to the amount of fees being paid. Both parties will need to come to an agreement on what the liability is capped at.

• IP ownership—as the customer you will want an unfettered right to use all the intellectual property created by the vendor when doing your job, and have the IP assigned to you. However, the vendors will argue their major asset is the knowledge they gain from doing various jobs, so they may not want to do this. It really depends on the situation as to what’s the most appropriate remedy, but as the customer you want to make sure you’re getting an unfettered right to use all the intellectual property you need.

• Termination rights—you need to set out what the vendor’s obligations are in relation to disengagement, your ability to use IP beyond the agreement, and if the vendor will make its people available to the new outsourcer.

• Service levels—service levels are essential in an outsource agreement. These stipulate your expectations from the outsourcer.You need to be monitoring what they are doing, and the outsourcer needs to have some sort of scorecard. Fewer service levels are better, allowing you to focus on the key issues you’re wanting to achieve.

“The key issue about any outsource arrangement is the service being outsourced must be equal to, or better than, what’s currently being provided,” Abrahams says of the last point covered above. “In terms of what to do if service levels are breached, often people want to put very large sticks in the agreement so that the vendor gets a big spanking if they don’t hit the service levels. My approach to that is, you don’t want a vendor who is doing business that is unprofitable because that’s not going to improve the relationship. What I tend to focus on is, you can have service credits, so if the service levels are breached then there will be a credit given up to a certain percentage of the service fees for that particular month.”

While businesses can enter into these agreements on their own, Abrahams recommends getting legal advice early on. Your accountant is also a good source of advice on contract negotiation, service level agreements, and tender preparation. “You want to get someone who knows about outsourcing and approaches it not in an adversarial way, it’s really about getting a meeting of minds as to what each party expects and then you put that down in writing.”

He suggests putting together a one-page document setting out the objectives or fundamental principles upon which you and the outsourcer agree to engage. “Pin this up on the wall, and put your 100-page outsource agreement in a draw and hopefully never look at it again.” Abrahams has drafted a set of objectives where the parties insisted that the first point be ‘no bullshit’. “It’s as fundamental as that,” he says.

Calculating Return on Investment (ROI)

While the business owner will need to do some calculations in-house to gauge the financial rewards of using an outsourced arrangement, Paddick says the adv
antage for clients is that the onus is really on the outsource service provider to continually prove those benefits. “It’s critical that we need to not only be able to help people come to that conclusion of relative benefits, there’s also a requirement to tailor the solution for that particular business.”

Belchamber agrees. “We have to prove to the owner that we’re giving them a return on their investment. If you think about the recruitment issue, which is one small piece of the HR pie, if you look at the actual cost of making an error on recruitment there’s research that says making a mistake recruiting someone can cost anywhere between 25 and 250 percent of their salary. We have a tool to calculate that with the client so they can understand it—it’s a quantifiable figure—and it’s our responsibility to show how we’re doing that. They wouldn’t let us back in again if we weren’t showing them the return.”

Calculating your ROI will also depend on the process you have outsourced. Lewis says that while Red Packet is constantly mentoring clients through the consultation phase and measurements are put in place to show improvement, the success of his service is largely dependent on the client’s willpower to implement the recommended changes. “In the branding program there are measures you can use, but the best measures really are internal, how do you feel about it, and externally, what is the response? What you really want to do is get conversion of people’s feelings into intent to purchase and, unless you take out formal research, the only real measure you have is how that contributes to bottom line turnover.”

Outsourcing Internet Site

Firmbuilder.com is a great resource for anyone wanting to find out more about outsourcing for the first time or, for businesses already using outsourcing, to keep up with current trends. The site is packed with articles and information compiled by the International Association of Outsourcing Professionals on the practicalities of outsourcing, as well as information about processes and industries.

Offshore Outsourcing

While there is much media hype around Australian jobs being sent offshore, Martin Conboy, founder of FooBoo (front office outsourcing, back office outsourcing) Online, argues that most of what we hear is urban myth. “Quite often, the feeling with the bigger companies is people go offshore for the price but, amazingly, they actually stay for the quality. If we’re talking about voice, front office-type services, everyone working in these organisations, bar none, has a university degree. So they’re highly educated and they’re highly stimulated by being proactive and making change and suggesting things.”

Conboy admits cost reduction is often the major driver in taking certain business processes offshore, but in the current economic climate he says it’s not always about price. “A number of businesses are struggling in a skills-short market to get people to actually do the work, so quite often what they’re looking for is what we call equivalency, and that is actually someone just to do the work. If they get a price advantage, that’s a bonus.

“We live in a global village. It’s all very well saying jobs are going to go offshore, but if you’re a small business person and you can’t even get the work done because you can’t get the staff, then forget price, forget people going offshore, just staying in business is the challenge.”

He believes workforces supported by technology now enable business processes to be performed seamlessly across geographic and corporate boundaries. “The internet has changed everything in the way we work. Anything that can now be shipped down a telephone line now makes it easier to outsource overseas.”

While India is the most popular offshoring destination, Malaysia, China, and the Philippines are other popular choices. Conboy believes the trend to offshore is increasing. “Basically the US and Europe have already gone down this path. Australia is following and the first ones to go will be the big companies and then SMEs will follow.”

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