Return to Home Page 1997 Outsourcing by Paul Herbig Abstract O U T S O U R C I N G Outsourcing refers to the business trend carried out here in the United States and around the world. Outsourcing is the process through which organizations are reforming themselves and more important they are changing and modifying the way they do business. The results have been great and levels of excellence and profitability have been derived from these intensive efforts. In brief, outsourcing has become the most powerful tool able to reshape today’s’s organizations. In the past, outsourcing was considered to be as an alternative to lower costs. But today, this idea has changed, and outsourcing is now viewed as a management tool for business expansion. What companies try to do when employing outsourcing is to invest in the right things and not to invest in everything for companies to grow. Companies growing as a result of outsourcing based this growth on excellence, specialization, and expertise. This growth is primarily focused in those segments that contribute the most to the success of a company. Frank Casale, executive director, The Outsourcing Institute, defines “Strategic Outsourcing” as “the new frontier for today’s industry and, like all frontiers, there are people and organizations that have taken the initiative to trail blaze a path for others to follow. These industry leaders are a key component in the overall momentum that outsourcing as a corporate tool has taken on.” Outsourcing has been adopted by all kind of organizations. It does not matter if the firm is to large or too small to go behind outsourcing. More and more companies are pursuing outsourcing to deliver all type of capabilities of a large firm without the expense of getting and operating each resource that is required. Some big enterprises such as Nike and some government entities like the city of Houston using outsourcing have revealed incredible results in the way of competitive advantage, cost structures, as well as in terms of market value. Outsourcing has become a very important process to follow by government officials in order to reduce costs and improve public service at the same time. As mentioned earlier, those companies using outsourcing gain competitive advantage over its competitors. Today, companies have arrived to the conclusion that by producing and marketing high quality products is not enough for a company to succeed. Now companies are more aware of the importance of focusing in service logistics outsourcing that is becoming as important as product quality. THE FIVE MOST IMPORTANT REASONS FOR OUTSOURCING 1. Reduce or control operating costs.- This becomes the most important tactical reason for outsourcing. Reduction and control of operating costs represent short term benefits of outsourcing. A 9% reduction in costs through outsourcing was registered by those companies employing this process. 2. Availability of capital funds.- Outsourcing helps a company to primarily invest its capital funds in core business functions. Outsourcing has also the capability to improve exclusive financial measurements of the firm by discarding the need to show a return on equity from capital investment in non-core areas. 3. Cash infusion.- Outsourcing is capable of involving the transference of assets from the customer to the provider. All these assets used in the present operation including facilities, equipment, vehicles and licences have a value and are sold to the provider as part of the transaction which results in a cash payment. 4. Resources not available internally.- Companies proceed to outsource since they do not have access to the resources that are required within the firm. As a case in point, if a certain company is trying to expand its operations to a new geographical area, outsourcing becomes the best alternative to build the required capability from the ground up. 5. Function difficult to manage or out of control.- Outsourcing represents really an option to manage these kind of problems. But, outsourcing does not perform well a s knee-jerk reaction by those organizations that are in trouble. All market leaders from all type of firms are employing outsourcing in order to build and maintain competitive advantage. THE TOP STRATEGIC REASONS FOR OUTSOURCING 1. Improve business focus.- Outsourcing allows firms to focus on broader business issues and an expert outside of the firm takes care of the operational details. The reason why many companies use outsourcing is because a lot of “how’ type of issues are siphoning off great amount of resources and attention from management. 2. Access to world -class capabilities.- The specialization of outsourcing providers is to gather extensive worldwide , world class resources in order to meet the needs for their customers. Outsourcing providers are able to offer technology, tool, and techniques that the firm may not actually possess. They are also willing to provide their customers with better career opportunities for personnel, more structured methodologies, documentation as well as procedures. 3. Accelerated reengineering benefits.- Outsourcing is a by product of business process reengineering that is another powerful management toll. This process permits a company come up with anticipated benefits of reengineering by having an outside organization. 4. Shared risks.- When an organization makes an investment, it carries with itself a series of risks. When companies follow the outsourcing approach, they become more flexible, dynamic and prepared to adapt to any change opportunity. 5. Free resources for other purposes.- Any organization has limited resources that they can make use of. Outsourcing allows firms to distribute its resources more efficiently to those activities giving the greater return when serving the customer. HOW TO PUT OUTSOURCING INTO ACTION: THE ARTHUR ANDERSEN OUTSOURCING FRAMEWORK The Arthur Andersen Outsourcing framework provides outsourcing users with a methodology to identify outsourcing opportunities and handle their implementation. Ron Stratton, director of Contract Finance and Accounting Services, refers to the outsourcing framework as “a systematic methodology for approaching outsourcing as a corporate strategy, not as a piecemeal, reactionary effort delegated too low in the organization to be effective.” Identify core competencies The Arthur Andersen Outsourcing Framework begins asking questions like: “Where do we gain a competitive advantage?” And “Where should our management focus its efforts?” The most important and first step that a company should follow is to identify its core competencies. In order for a company to succeed, it should be able to increase its investments in the areas of core competencies. Any organization should have the capability to identify and understand its core competencies whether it outsources or not because it has become a must in today’s increasingly changing world. Evaluate opportunities The next step to follow is to determine what is the best sourcing option for non-core parts of the operations of a firm. Companies should analyze and fully understand their basic outsourcing objectives before starting discussion with the potential suppliers. Some of the functions that should be taken into consideration when using outsourcing are quality versus cost and strategy versus risk. According to Arthur Andersen’s Ron Sttraton, “If the function is of high quality and low cost, it would be a low priority for outsourcing. Conversely, a low-quality and high-cost function would dictate a high priority for outsourcing.” It is also important to mention that outsourcing has a different meaning to different people. Outsourcing for the employee means to work for a company capable of providing high support and attention to the business function. To the middle manager, the term of outsourcing means to improve the cost efficiency of a business process. Finally, outsourcing for the top manager means a better return on investment (ROI) with a balanced risk. Select supplier The Arthur Andersen Outsourcing Framework refers to the selection of the right supplier as a matter of “determining the extent of control needed, setting supplier requirements, evaluating proposals, and making the final selection.” Shaw, Pittman, Potts & Trowbridge, a large law firm with offices in Washington, D.C., New York, and Virginia has carefully carried this consideration. Shaw Pittman has been using outsourcing since 1980 and has been able to build a globally recognized practice representing public sector and corporate clients getting technology and some other outsourcing services. The partners of this organization, Robert Zahler and Harry Glasspiegel, follow an “interdisciplinary practice,” emphasizing primarily on computer software licensing, systems integration, intellectual property and long-term outsourcing relationships. Zahler says,” We learned quickly that the sellers of outsourcing services possessed knowledge, experience, methodologies that customers-regardless of their size sophistication- simply did not possess.” “We learned the fundamental of the outsourcing business in representing clients in multiple transaction with the leading vendors. We have applied those lessons learned in assisting our clients and their service providers craft mutually beneficial relationships.” Glasspiegel and Zahler, emphasize knowledge of the marketplace and a carefully evaluation methodology as two key successful elements for outsourcing. Transition Processes The transition also constitutes a critical factor that should be carefully analyzed and managed by the outsourcer as well as the provider. Some of the essential questions that Arthur Andersen’s Stratton asks are: “Have we planned a transition for out people?” “How do we shift operations to the supplier?” And “How will outsourced processes interface with other processes?” Grover Gray, director of human resources for Arthur Andersen’s Contract Services, recommends the best five practices that should be followed to get an answer for all questions mentioned earlier: -- Early and frequently describes Human Resources role in the outsourcing approach. -- Every human resource issue should be identified before a final outsourcing determination is communicated to the employees. -- It is essential that both the client and outsource provider work together during the outsourcing transition. -- The human resource team of the client should enthusiastically participate when the transition process is taking place. -- The human resources role of the client must continue after the official transition date. Monitor and evaluate performance The final point emphasized by Andersen Outsourcing Framework is the monitoring and evaluation of the performance of the outsourcer by the organization. This must result is a correct investment in the business of outsourcing by the outsourcing supplier. Regular reports inform the company about the actual performance of the activity and quality within the outsourced process. These reports are able to monitor progress of the established goals and identify the operations by both companies required to accomplish these goals. They are able to answer questions such as : How do we know it is working? Does it meet our goals? Are we really getting improvement in outsourced areas? Should we renew the contract? Are changes required? A usual misperception is that by using outsourcing services you can relax yourself completely of any commitment of resources to that service. The reality is that you will be still required to invest in management of the relationship from the beginning to the end of the contract. STRUCTURING AN EVALUATION THE NINE STEP PROCESS OF HOWARD ANDERSON Step One: State the problem Company perspective: “While we see that most of the largest companies have now committed to doing some outsourcing, we have no assurance that a bigger commitment is either correct or appropriate for us. At the present time, we are only ‘interested in being interested and willing to listen.’” Action items: The company has to call a meeting and have an informal discussion about what areas need a closer look. Discuss and list how top competitors have used it. Step Two: Pick Three Areas To Investigate Company Perspective: “We only want to consider outsourcing in those areas where we are unhappy with our present situation. Our unhappiness may be due to costs, trends lines, relative position within our industry or current service levels.” It is hard to see everything all at once. The company should focus on specific areas that need the most attention. What the company really wants is to maximize itself and minimize it’s costs. OVERCOMING INTERNAL RESISTANCE First-time problems should be handled by a consultant but problems that reoccur should be brought inside to see what is going on. Most of the companies go through three phases which are known as: Denial, Grudging Acceptance for the Other Guy, and Trial. In the Denial phase companies believe that only those that have serious problems go to outsourcing. They believe that they do not need it until they can see how well it works for companies that are now running successfully. In the Grudging Acceptance for the Other Guy phase they are obligated to look at certain areas of the company until management admits that outsourcing makes sense. They really don’t believe in the concept and no analysis is further done. In the last phase known as Trial, this is a time period that helps the company determine where else outsourcing is needed. They could at least let it sink in and allow them to get comfortable with the idea of outsourcing. NEW AREAS FOR OUTSOURCING “Outsourcing of customer service and sales coverage is a real trend in the 1990s. We have found that almost half (44%) of the companies outsource portions of their customer service to outside firms.” Companies are outsourcing everything from handling 800-numbers product inquiries, to providing billing information, technical help-desk functions and complete business-to-business account management. Step Three: Do CEO Analysis Company Perspective: “Some decisions deserve CEO attention, many do not. We don’t want our CEO involved in every outsourcing decision but we do not want an understanding of strategic direction.” There are certain questions that every CEO should be asking. For instance, How are we doing within our industry? For companies of our size? Are we gaining market share? How are our profits doing versus our three major competitors? Where could we put the least amount of effort, money and people and get the most rapid improvement? The CEO’s main priority is continuous improvement . Step Four: Build A Set of Metrics. Corporate Assessment: “Let’s pick a limited number of metrics to help us with the evaluation. Certainly, financial metrics will be included, but traditional Internal Rate of Return (IRR) will not help us in the absence of others. Which other metrics make sense for this activity?” Action items: They have to build the metric set so that at the end users of that service can quantify their qualitative input. Step Five: Assess Risk. Corporate Assessment: “Moving any function outside of our immediate control represents some level of risk on a sale of 1 (no risk) to 5 (extreme risk) where does this operation fall? Are these companies in the industry whose reputation and financial strength can mitigate the level of risk? Who are they? The companies have to be fully aware that there are a lot of risks involved and they must be prepared for them. The more the company climbs up the ladder the more risk that is involved. Step Six: Get Your Divisional Managers To Buy Into The Process. Corporate Assessment: “In the end, our divisional general managers and profit centers are the key to our company. While upper management may set direction and strategy, it is the line managers who run the company day-to-day, and any solution that fails to recognize this is doomed.” The divisional general managers are the ones that are mostly affected by outsourcing. They are under a lot of pressure because they are the ones that have to make their numbers, invest in the next generation of product and hire more staff. They have a lot of work to do and most of the time they feel overloaded with pressure and information. Divisional managers have a lot of tasks to perform one of them is to investigate new options, such as outsourcing, but this is a difficult task since they are known as control freaks. They like to have control over every area of their operation. EVALUATING THE BENEFITS Divisional general managers must manage well both the ups and downs, and any solutions that can be potentially important advantages like outsourcing. It should not only be fully investigated, but it should also be implemented. One of the main advantages of outsourcing is that it can take a capital expense and turn it into a variable. For example, instead of purchasing computers or big expensive trucks, the division can purchase a service level and be charged on a transaction basis, this gives up capital that can be put into areas of core competency. Step Seven: Reach Tentative Conclusions. Corporate Assessment: “In some areas we are ahead of our competition, in some areas we are behind, and in many others we just don’t know. Divisional general managers are always unhappy with any sort of shared service or allocated expense. If we can show a demonstrated 10% to 15% savings and an increase in performance, we know they are interested. Further. To move to the platform we want (such as guaranteed two-day delivery or client/server computing) from the platform we are at (one-week delivery or main frame computing) will probably cost us more over a three-to-five year period. By instituting outsourcing-type solutions, perhaps they could be self-liquidating.” Step Eight: Implement your Solutions. There are some highly attractive areas for the company to consider outsourcing. Should they do it to the whole company, or just start with one particular division? Should they do several functions or just one? After all the questions and the mount of time they have spent analyzing the problem, the company wants to make it work now. Step Nine: Make It Work. Corporate Assessment: “We went through the entire exercise and finally picked a vendor that we were comfortable with and that offered us an attractive price as well as increased performance. We wrote a contract that was fair and flexible and tied up all the loose ends. These are all the nine processes that take place in order for outsourcing to be evaluated, recognized, and implemented by the company. INNOVATORS IN OUTSOURCING Outsourcing has been defined as the assignment of specific work to a third party for a specific amount of time with an agreed-upon price and service level (Anderson, 1995). More and more companies in the United States have taken part of at least one business outsourcing function. Outsourcing varies from company to company because of its size and purpose. For instance, some functions can be easy and straightforward, and then there are those that take up more time and are very complex. Above all outsourcing is an effective management tool. It may not be for every company but its evaluation is usually right. “The goal of a corporation is to take assets(land, resources, market position, intellectual assets) and turn them from their natural state into a state that speeds financial return to the owner of those assets.”(Anderson, 1995). Corporations have hundreds of tasks now a days and it is becoming harder to keep track of every department. Companies live by Total Quality Management and won’t settle for any less. This of course makes things harder because company standards are higher and it is sometimes difficult to stay on top. It is difficult to determine what part of the company needs to be outsourced. For example, “General Motors makes cars--that is its strength and what it does best. IBM makes computers--that is its strength and what it does best. Outsourcing companies like ARAMARK manage services--that is our strength and what we do best.” said Joseph Newbauer; Chairman and CEO of ARAMARK, a world leader in a range of managed service partnerships. You just can’t overlook any part of the company, it doesn’t matter how small a part it is. At the end it’s contribution to the company is essential. These are the problems with outsourcing, deciding what to outsource because not every department needs it. It also can not be seen as a problem solver because it is not always going to be the answer. It is important for companies to decide what are the most important functions and which are the ones they should first approach? In order for companies to implement outsourcing a lot of careful planning should be done and every other alternative should also be taken into consideration before making any final decisions. If they jump the barrel too fast, it is most likely that they will fall just as fast. The goal is to make the company work more efficiently, lower it’s costs, and make it profitable. “The real key to long-term sustainable advantage is the ability to react to the market and turn on a dime. When a company finds itself in the position that it is both robbing the core of scarce resources and has become slow to react, this should send a signal, a wake-up call, to management that they have a major business problem- and one that may be solved by a technology based outsourcing solution.” There are a lot of questions that company’s should ask themselves like what the quality performance measurements are? Are you looking at system availability? Companies must also take in mind their budget because they can be costly. Vendor Strategy ‘The outsourcing vendor starts from a different perspective. It begins by looking at the job and asking the questions, “How can I deliver the agreed-upon service level? What resources do I need, and when do I need them? What level of supervision does this job require? What are the best practices in the industry?” “Companies will go through a transition to a new software suite once, but a good outsource vendor will have helped dozens of clients manage such projects. These outsource vendors will have helped built up both economies of scale and an experience base that just make much more sense than a company reinventing the technology training and support process with in itself,” says Timothy C. Preheim, Chairman, Productivity Piont International, a provider of software training solutions to the corporate market. Preheims point is that every time a new software suite some out, a typical company has to start from ground zero, whereas training providers manage the risk of new technologies for their clients (Anderson, 1995). All of this takes a lot of time because solutions are not always easy to find especially when the problems are part of such large companies. Where to Begin It is very difficult to determine where the company should begin. This is one of their biggest problems because the management department does not voluntarily suggest that they are ready for outsourcing. This can complicate things because both managers and employees feel threatened. What the company is trying to do is see the costs of several activities and then decide if they can find a firm outside the company that can provide them with this service much faster and at a lower price. Most of the functions that are targeted for outsourcing are cost centers rather than profit centers. Their service is sold to the rest of the corporation- the price of these services are put together on an overhead cost and the benefits may not be accommodated to any one group or division. They must carefully revise the problem, measure it, and try to work it out as best as possible. Keeping an Eye on Costs Everyone uses computers now a days and portable laptop computers have become very popular. Companies spend thousands of dollars because many mobile professionals have more than one computer. This may be a function where an outsourcing evaluation is definitely overdue. Every company wants to be up to the minute with the best technology and this can become extremely expensive to American industries. Everybody loves it, we not only have computers at work but we also have them at home. Computers just like cellular phones have become a necessity to many people. What companies have to do is to not loose track of what expenses they have that are necessary in order to operate successfully. THE FUTURE OF OUTSOURCING Outsourcing is not a concept that will remain forever. However, outsourcing is still working because it means excellence and this is what sophisticated customers are looking for. In fact, “Competition, or the simultaneous cooperation and competition between companies, will continue to be a major trend in the outsourcing world,” says Sam Albert, president, Sam Albert Associates, Scarsdale, NY. Outsourcing is the 90s way of doing business. Where will outsourcing take us? It is hard to predict right now but it is a new trend that has helped out a lot of companies. It may not always be successful for every company because no one can assure the company that it will turn its expense functions into a profit center. Outsourcing can be seen as a breakthrough in management art and help establish concepts where they watch out for one another. Outsourcing vendors have expertise methodology, skills and experience which they share these advantages with their clients at a fair price. One thing they do not do is sign exclusive agreements with any company. Companies have to look carefully and analysis what part of the company needs to be outsourced. Once they identify it, they should make arrangements as to how it will be implemented. Obviously not everything should be outsourced but those functions that can should be handled by experts who know how to do the job right, on time, and at a good price. Outsourcing may not last forever but in the mean time it is here to stay. C O N C L U S I O N Outsourcing is an strategic process of adding value to the business able to convert an in house cost center into service operation focused primarily on the customer. Outsoursing is more than a way to cut costs; outsourcing has been defined as a powerful tool for business growth. This business growth experience by companies following this approach of outsourcing based their growth not on investing in everything but on investing exclusively in the right things. Growth should be focused on those specialized areas that contribute the most to a company success. Outsourcing has actually adopted by a great number of organizations of all sizes. These companies using outsourcing are in advantage over its competitors because of all of the benefits that are gotten from using outsourcing. The most important reasons for using outsourcing, as well as the top strategic reasons for outsourcing have been discussed throughout the paper. Companies ready to put outsourcing into action can follow the Arthur Andersen Outsourcing Framework which provide outsourcers users with a methodology to identify outsourcing opportunities and handle their implementation. Outsourcing providers have in fact become a very significant delivery channel for a great number of goods and services. Companies using outsourcing will be in a good position of getting competitive advantage and survive in this business environment which any time is getting harder to enter. BIBLIOGRAPHY Anderson, Howard. “Innovators in Outsourcing.” 1995. Wood, Lisa. “Outsourcing. How Industry Leaders Are Reshaping the American Corporation.” 1995.