Outsourcing

Outsourcing is the transfer of internal functions to an external entity specialising in that operation. Outsourcing may be in the same country or another country ie offshore. Functions to be outsourced may include:

• services eg facilities management

• manufacturing eg parts

• production eg catering

Business may choose to outsource for a variety of reasons eg:

• to reduce costs

• to improve performance

• to improve the quality of service

• to access skills or technology

It is essential that the business is clear on the strategic objectives to be achieved by the outsourcing and how to assess the benefits and value of the outsourcing arrangement.

The outsourcing life cycle

The outsourcing arrangement may last for a short period or for several years. The amount of management time to oversee the arrangement should not be underestimated. The outsourcing lifecycle may be broken down into 7 phases:

• indentifying the functions and strategy for outsourcing

• selection of the outsourcing provider

• contract negotiations

• set up and implementation

• contract management and oversight

• change control

• exit and termination

Service level agreement

A key area of an outsourcing agreement will be the service level agreement (SLA). Adequate time should be allowed for negotiating the SLA which will usually be a schedule to the main agreement. When negotiating the SLA is essential to pin down:

• the scope of the services to be provided

• the service levels, response times and resolution times

• escalation procedures to resolve problems

• how the service levels will be objectively accessed

• the remedy should the service levels not be achieved

• the price for the services

• ways to identify improvements to the service levels.

Exit and transition

An outsourcing arrangement may come to an end for a variety of reasons including:

• expiration of the term of the agreement

• breach

• insolvency

• convenience

• changed circumstances or priorities

• force majeure

Each of these needs careful consideration at the negotiation stage of the contract and not left until the moment when one party has or is about to terminate the contract. An exit management plan or strategy agreed in advance it the best way to ensure the smooth transition form one provider to another.

If an exit management plan is absent or deficient, the risks in moving to a new provider may outweigh the risk of remaining with the old supplier. It may be necessary to extent the contract in order to negotiate an exit management plan that addresses:

• licensing issues

• the transfer of IPRs

• TUPE concerns

• shared resources

• premises liability issues, and

• necessary information for a smooth handover.