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Will Hutton

Will Hutton

Principal, Hertford College, Oxford University and chair of the Big Innovation Centre

Wednesday 07 Dec 2011
Outsourcing – why and how you should lose non-core activity

Outsourcing – why and how you should lose non-core activity

Why outsource anything at all? Surely you can run it as well as any other party, and they only want to make a profit by providing to you? If these statements are true, then why should anyone do anything with a supplier?

Surely you can find your own way to get rubbish to the tip; in fact, why not write your own email application or hire a few carpenters to make desks instead of buying them? All of these ideas are clearly nonsense, but they are all examples of where you have decided to buy in a skill rather than developing it yourself - so we ALL outsource things today, even the most fervently control-freakish conspiracy theorists among us.

The only question really is where you draw the line on outsourcing, and how much management time you want to spend on things that are not your company's primary reason for existing. If complexity, change or strategic decision-making in your industry are high, then you clearly need to focus time, effort and thinking on the core business. The same applies if you have removed management layers to the point of having loads of stretch in your senior team. And who hasn't nowadays? To my mind, outsourcing stuff that isn't critical to the running of your business is a must.

Those areas where we see the best case to outsource include those where there are:-

  • high fixed costs of entry (any complex software question)
  • differences in the quality of output that drive a massive difference to total process cost. For example, if a small set of inaccuracies drive a massive incremental, often hidden, cost to your business
  • large experience curves on learning, where you are likely to be sub-scale and not gain the benefits of culture and management skills
  • items where it is easy to move to a place of clearly lower cost structure (sometimes offshore or near shore, including Scotland, or a blend of both)

How to outsource:-

  • Have a really clear understanding of the real reasons you want to outsource, be it sometimes to help growth, sometimes to move away from a single point of failure in your own organisation, sometimes to lower costs
  • Choose those areas where there is a clear outsourced market and parameters are understood
  • Choose a vendor you feel you can work with over the longer term, as there will always be times of 'give and take', and this is difficult to achieve when vendors and buyers treat each other at arm's length
  • Do not leave the decision-making solely to purchasing; get involved and spend the time to understand the vendors. Very few proposals are really comparable. We often see buying decisions made solely on cost, which by its very nature leaves massive value opportunities for the buyer ignored, unaddressed and therefore unrealised. The buyer is then often underwhelmed in the subsequent delivery
  • Do not leave contracting solely to the lawyers, as often the legal fees can run in excess of the actual costs of the move, which can also feel uncomfortable for the buyer

We see many successful areas of outsourcing around HR (and other functions too), so if you venture into this area, it need not be as painful as you think, if you start off in the right way, with clear thinking and planning.

Nick Laird, chief Commercial Officer, Ceridian UK