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Outsourcing - overview
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 required to oversee the arrangement should not be underestimated. The following sets out, by way of example, six typical phases of an outsourcing life cycle:
analyse requirements
scope project
procurement process
selection and contract
delivery and contract management
contract end/renewal
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 it 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 assessed
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 should not be left until the moment when one party has or is about to terminate the contract. An exit management plan or strategy agreed in advance is 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 extend the contract in order to negotiate an exit management plan that addresses:
licensing issues
the transfer of intellectual property rights
concerns regarding TUPE
shared resources
premises liability issues, and
necessary information for a smooth handover
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