Smarter outsourcing

For many, outsourcing is a way to cut back on costs whilst still maintaining, or in some cases improving, service quality. Obviously as the benefits of outsourcing have become understood it has significantly increased in popularity over the past decade.
    
Outsourcing is not just found in the realm of the private sector. Public sector organisations have, over the years, implemented outsourcing strategies in various different forms. However, not all of them have been successful, leading to calls by some that it won’t work in the public sector. But one of the main reasons for unsuccessful outsourcing projects often boils down to a lack of best practice from start to finish.

Spending cuts
But why re-concentrate on efforts to outsource within the public sector? Simply we are facing some of the most aggressive public sector spending cuts and efficiency targets in recent history. Towards the end of last year the government announced a savings target of £35bn, with a lot of emphasis placed on reducing the multibillion pound IT bill. Combine this with a predicted £50bn cut in public spending, as well as ever encroaching costly carbon reduction commitments and it is easy to see why public sector managers may be turning to outsourcing to cut costs.
    
However, clearly outsourcing is not just about cutting costs. The public and private sector have always benefited from using third party suppliers for a variety of reasons apart from cost cutting. Suppliers tend to be experts in the field they operate in, whether this is in finance, accounts, HR, innovation or IT. End users should be looking to improve their service by taking advantage of a supplier’s expertise; it shouldn’t be seen as a way to save pennies; it should be seen as an opportunity to improve your organisational effectiveness too.
    
It is true that programmes associated with outsourcing, have had a murky past within the public sector. Massive IT deals have ended up costing tax payers more money, rather than relieving pressure on public sector coffers and improving quality. However, outsourcing has matured within some government organisations over recent years, with shared services proving to be mostly successful, especially within the NHS, and the procurement procedures for outsourcing seem to be improving too.
    
But there is still work to be done. Success in outsourcing primarily lies in the initial procurement stages. All too often, outsourcing relationships go sour because of contract disputes and service metrics that should have been addressed before any form of work commenced.
    
The first rule of thumb is: know your own organisation. The public sector has a reputation of outsourcing a mess. Although there is a danger that all you will get in return is a more expensive mess, it is possible to outsource a problem and get the supplier to “fix” it for you. But you will pay for that, and it’s a case of balancing off the three options:

1.Do nothing, i.e. the results and costs of carrying on (often not feasible)
2.Outsource the “mess” as soon as you can (especially if time is of the essence)
3.Try to make your operation ready for outsourcing (which in the public sector can take time and be more expensive).

Sometimes shared services is the first step of option three. If you are considering outsourcing a problem, then make sure that you choose a supplier that is an expert in that problem area, then they can help with standardised solutions. If they are not (and maybe your operation is unique) then you’re probably looking at business transformational outsourcing, which is possible.

Internal analysis
In the NOA Lifecycle model the next step after Strategy is Reassess. This is because outsourcing is not a fix all strategy and uniquely in NOA’s model we believe that organisations should first look to improve their processes internally. It is essential that management teams do a thorough examination of their own processes and infrastructure and analyse which ones are working efficiently and which ones could be streamlined and improved by an expert partner.
    
If after an internal review outsourcing is shown as being a viable option, then managers need to go through a thorough procurement process.
    
The procurement process can be greatly assisted by well-placed advisory firms such as Alsbridge, Equaterra, Everest and Gartner. Consultancies tend to know which suppliers can meet your set of criteria and often if they carry out benchmarking in your area, they can advise on the average price end users can expect to pay. However, regardless of whether an advisory firm is used or not, organisations must realise that the procurement process is crucial to the success of an outsourcing strategy.
    
Choosing the appropriate supplier is critical. Company culture is first. Understanding and matching your working methods and expectations is directly linked to the success of an outsourcing deal. If two organisations don’t gel then there is little likelihood the partnership will last. Similar working ethics, visions and expectation will ensure that the outsourcing relationship runs far more smoothly and ultimately the provider will be easier to manage. Other features to look for include relevant experience, a good track record, a realistic cost proposal and a reliable infrastructure.
    
Despite economic instability and hefty cost cutting targets, public sector procurement teams must steer clear of adopting a ‘cost is king’ approach to sourcing a supplier. Just going for the best price may mean complications in the future, which could lead to more expense in the long run. The public sector is in a position of power when it comes to putting contracts out to tender, however it must not abuse this power by nailing suppliers to the wall. Suppliers will inevitably drop their price to an unprofitable level just to win the business and then make up the money with a host of change requests, something that will more than annoy management, taxpayers and destroy relationships.
    
With further predicted budget cuts, outsourcing will almost certainly increase in 2010 and 2011. We may find that if demand exceeds supply, end users will need to make their project attractive to ensure they get the correct supplier interest and maintain it.
    
Public sector organisations need to be absolutely clear in identifying what credentials they are looking for within a potential supplier and what they hope to achieve from the outsourcing relationship. Again, rational thinking needs to come into place here. There is no point in setting unrealistic targets and metrics, the supplier won’t reach them and the relationship will breakdown. Thrashing out, with the supplier, exactly what can be achieved within a particular time frame is essential. Once metrics are established Service Level Agreements (SLAs) can be set to ensure that the targets are met.

Open communciation
Throughout the procurement stage, one simple rule should be adhered to; always have a clear stream of honest communication. This is one area where the public sector has fallen short. The British Council has been on the receiving end of a furious backlash from the public and unions after it emerged that approximately 100 jobs were to be outsourced to India. Although this was a very brave move at a time when protectionist views are rife within the media and public, the British Council should have started communicating their strategy long before the story was covered.
    
Public sector management should note that HR and communications teams need to be involved from the outset of an outsourcing strategy. Outsourcing is a decision that primarily affects the people within the organisation, no matter how small or large that organisation is. If rumors of a potential outsourcing project leak out, staff often automatically assume the worst; job losses. This situation can be lethal for an organisation, especially during a time when job security is continuously scrutinised not only internally, but within the media and general public.
    
The decision to outsource must be communicated effectively to the whole organisation, with potential implications made crystal clear. Unions and key media must be kept in the loop from the outset. This will give management the opportunity to discuss the reasoning behind the decision. A Union will also feel as though its members are being taken seriously and therefore respond receptively rather than lash out in the media.
    
Once contracts have been signed and an arrangement is underway, executives must keep their finger on the pulse. Clear communication is paramount. Whether this is careful communication of objectives to everyone involved, to regular structured meetings between your business and the supplier, regular communication is vital to the success of outsourcing.
    
Details on the level and type of communication should be incorporated into the contract. It is also important to have one person (or a small team) within the organisation responsible for managing the relationship – if there are too many people directly involved, responsibilities become blurred, which can have an effect on the efficiency of the operation.
    
Clear lines of communication and good account management are pivotal factors in successful outsourcing. Managing the relationship as honestly as it was formed is key here. Devoting time and money to relationship management will result in a better outsourcing experience for everyone.

Shared services

Of course, these brief best practice guidelines are primarily geared for organisations looking to use third party suppliers, although they can be employed in any strategic outsourcing situation. Shared services has been, on the whole, quite a successful method for cutting costs and the public sector has matured in its use of this strategy.
    
Essentially, shared services are the consolidation of repeated departments (e.g. an HR department in a number of borough councils) into a single hub that then services the organisation or group of organisations as a whole.
    
Local government departments are now starting to take advantage of this tactic and public sector managers are realising the benefits associated with shared services. Hampshire County Council’s Integra project has highlighted the benefits that the sharing of waste management services can bring. Previously, Hampshire’s borough councils had their own waste management objectives and were using a variety of suppliers. The Integra project brought the boroughs together and they collaborated in core refuse and recycling services, peripheral services and contract procurement. This collaboration resulted in all parties involved benefiting from economies of scale, sharing of best practice and a uniform service for the county’s residents. This is a good example of where shared services have been successfully implemented; however, there are some pitfalls which managers need to watch out for.
    
Loss of control is usually the main hurdle for managerial staff involved in a shared services deal. Boundaries must be in place to make sure all parties are working to the same standards. This will help to make council managers feel comfortable with relinquishing day-to-day control of their systems. Before any transition begins the councils involved need to thrash out exactly how processes should be done, who should oversee them and what happens if there is a problem. Regulatory compliance must also be considered.
    
The scope of shared service centres can be huge and different compliance issues can arise, particularly in the areas of council member’s responsibilities. The resulting shared service centre must therefore adhere to the same objectives and regulations as the organisations they are providing services for. A continuous review of standards and good communication between the centre and the organisation is imperative to ensure regulation and service is up to scratch. Of course internal politics is always going to be an issue, but these can usually be ironed out with good working practices and effective relationship management, if a council changes colour however, then it might not be so simple.
    
Public sector outsourcing has become common practice and has matured. However, mistakes are very costly, especially with large contracts. Management teams must follow best practice. Outsourcing does give organisations an opportunity to make savings whilst delivering quality service and value for (taxpayers’) money. It just needs to be done well.
    
A guide like this can only starch the surface, so it’s a good idea to do some peer-to-peer networking, with independent associations such as the NOA. We are always at hand to offer advice, networking with other users in the same boat, keeping up to date with the latest in outsourcing, shared serves and even in-sourcing, plus we now have a fully accredited set of qualifications in outsourcing with the University of Middlesex.

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