Outsourcing in Small Business

December 2005

Outsourcing is a practice that is becoming increasingly popular with today's businesses: over 50% of UK businesses currently outsource. With the pressure to become more efficient and competitive, businesses - both small and large - have turned to outsourcing as the solution.

However, outsourcing can prove costly to a business if they do not implement the practice effectively. Consequently, businesses must constantly assess the effectiveness of outsourcing contracts and address any issues immediately.

To some businesses, outsourcing may be a practice that has so far been overlooked. However, after reading the article it may give a business inspiration for rethinking how they will operate in the future.

Outsourcing is the delegation of a business process to an external service provider. The service provider will then be responsible for the day-to-day running and maintenance of the delegated process.

Take the IT giant Microsoft for example - the complete process of manufacturing their products is outsourced to other businesses.  Fees are involved (as you would expect) which will vary depending on the service required.

To optimise efficiency, it is good practise to liaise closely with the service provider on a regular basis. This will prevent issues arising due to the lack of understanding and communication between the two parties.

What Isn't Outsourcing?

Outsourcing should not be seen as a short-term solution to a problem or need. To be truly effective, businesses should consider outsourcing as a long-term solution whereby building a continued business relationship with the service provider will offer long-term benefits to your customers.  

Outsourcing should also not be seen purely as a cost saving approach - this is not always the case.

What do Businesses Outsource?

Basically, anything that you may consider a business 'process' can be outsourced. Below are a few examples where outsourcing can be introduced:

• Marketing
• Web design & maintenance
• Web hosting
• IT maintenance
• Manufacturing
• Accounts
• Recruitment
• Switch board (telephone answering)
• Logistics
• Distribution (i.e. of newsletters, mail shots)
• Editing (i.e. of articles, newsletters)

Why Outsource?

There are many reasons why a business may consider outsourcing including:

• The lack of existing skills to complete a process
• To replace a poor internal service (may not be connected to lack of skills)
• Resources are not available in-house to complete the process
• The process is difficult to manage (in general or due to business growth)
• The process may be performed better/cheaper by other services
• You require your employees' time elsewhere in the business

Advantages of Outsourcing

Outsourcing has many advantages including:

• Allows a business to focus on core activities
• Streamlines a business' operations
• Gives you access to professional capabilities
• Shares the risk
• Piece of mind that the process is in good hands (reliability)
• Do not have to worry about continually introducing new technologies
• Improves service quality
• Frees up human resources
• Frees up cash flow
• Increases the control of your business
• Makes the business more flexible to change (i.e. demand)

Disadvantages of Outsourcing

However, outsourcing does have its disadvantages:

• The fear of the service provider ceasing to trade (bankruptcy, etc)
• You may lose control of the process
• Creates potential redundancies
• Other companies may also be using the service provider. Therefore in some cases, the best interests of the service provider may be diluted with other users
• You may lose focus of the customer and concentrate on the product (the outsourced process)
• The loss of talent generated internally
• Employees may react badly to outsourcing and consequently their quality of work may suffer

Many of the disadvantages can be avoided if you research the service provider and you do not regard outsourcing simply as a money saving scheme - this is not always the case.

Consequently, you should be certain that you have a valid reason for outsourcing and that you intend to liaise regularly with the service provider to avoid losing all control of the process.

However, the disadvantages are valid reasons why not to outsource - it is therefore a common case of weighing up the pros and the cons for your particular situation.

Who Should I Outsource to?

Many businesses choose an outsourcing partner (service provider) on instincts, without initially matching their needs with the partner's capabilities. 

The two most important factors in a successful outsourcing relationship are trust and security - without these the relationship is destined for failure. It is therefore important that you take the time and effort required to find the perfect partner.

Firstly, acquire a list of potential partners. You should then find out if their service (capabilities) can cater for your needs. Speak to an employee of the service provider, as their service may extend from what it initially suggests on their web site or information supplements - there could also be hidden terms and conditions that may affect your decision.

Find out who their current/past clients (if at all) are so that you can obtain references on their service quality.

Finally - and arguably most importantly - ensure that the service provider has long-term financial stability. Obtain a company report or bank reference to solidify your perception.

Once you are happy with your choice of partner, revise their contract to ensure that they are liable to live up to expectations (service quality). Find out the procedure for negotiating any issues and how much control you will have over the process - contracts are a grey area where businesses slip up when outsourcing.

You should also clarify the costs - are there any hidden extras, bonuses or penalties?

Terminating Outsourcing Contracts

Contracts are usually up for renewal after an agreed time, commonly 1 year. However, the occasional relationship may not work out and one of the parties may want to terminate the contract with immediate effect.

The contract can only be terminated if a party has a legitimate reason and is not simply requesting on the basis of "I don't need you anymore". For example, a breach of contract is an acceptable reason for termination. In some cases, if stated by the contract, the offending party has up to 30 days to rectify any issues on their side, before the other party has a legal right to terminate the contract.

Nevertheless, should you want to terminate the contract or the service provider is requesting termination (on unlawful grounds) you should contact a solicitor for advice.

To avoid any disputes, you should build exit strategies into the contract highlighting on what grounds a party can terminate the contract (on 'friendly' terms).
 

Source: bizhelp24