25 July 2017
Outsourcing has been getting a good deal of adverse publicity lately. In my blog of 9 June I discussed the ‘gig economy’ and referred to Deliveroo and Uber as two major companies that are accused of stretching the definition of outsourcing to the extent that they have blurred the distinction between employees and outsourced suppliers. In the public sector, outsourcing by the NHS (especially of some of its core services) is provoking some politicians to use the term ‘privatisation’. In the private sector outsourcing has historically been associated with cheap products and substandard services. However, in an increasingly complex business world more companies (large and small) and public bodies are turning to outsourcing.
SMEs should be very familiar with the concept; although they may not recognise the terminology. For example most of them have always outsourced their year-end accounting function although they will not have described it as outsourcing. The same applies to legal services. Contrast this with large companies who have in-house legal teams and qualified accountants. But even very large organisations are increasingly outsourcing business processes and IT functions. The most frequently outsourced business functions, according to a recent EY survey are:
- Call centres and customer support
- Design and engineering
- Finance and accounting
- Legal services
To a lesser extent companies are outsourcing procurement, production, product development and sales.
Outsourcing of IT functions is very common, including the development and management of applications, infrastructure and data centre management, IT helplines and support.
About 42% of organisations that use outsourcing give cost-saving as the main reason, but other considerations include access to specific knowledge, expertise or tools. Outsourcing can cut the costs of hiring skilled operatives. It makes it possible to take on people with specific knowledge and relevant experience without having to take the risks of hiring employees, who then have to be inducted and trained – and who cannot be so easily dismissed if in the medium to long-term they prove not to be capable of fulfilling the role. There are other costs involved in employing people, especially those relating to contractual obligations and payroll administration, which are also avoided by outsourcing.
Without wishing to get involved in the politics of globalisation, it is fair to say that outsourcing offers the possibility of subcontracting tasks to another region where labour costs are lower. In practice, however, not many SMEs will consider outsourcing offshore as they fear the complexities of international trade. Nevertheless it is still possible for companies located in high-cost areas of the UK (especially the South East) to outsource tasks to other areas of the country.
There are risks associated with outsourcing, in particular:
- Dependence on an external supplier
- Loss of control
- Impact on quality
- Constraints on innovation
- Loss of confidentiality
Such risks are best dealt with by ensuring that the external supplier is fully informed of your business’s aims, objectives and ethics, and by entering into a knowledge-sharing partnership. Many organisations build the concept of innovation into their outsourcing contracts. It is also possible to make some outsourced tasks performance-related, for example basing the fee on the results obtained.
The organisations that are most inclined to use outsourcing are those where competition is tough and margins are small: in these cases the greatest pressure is on costs. The industries that outsource most are consumer products, automotive and telecommunications. Companies with comfortable margins are less likely to outsource and those who are innovative leaders and keen to protect their knowledge base outsource the least.
Recent trends in outsourcing show that payroll and HR services are rapidly rising. Cloud computing is another area of substantial growth. Also, larger companies are increasingly outsourcing data analysis because they do not have the skills or the computing power in house.
If you are interested in reviewing your company’s organisation to find out where you might reduce costs, improve quality, or enhance growth by appropriate outsourcing please do not hesitate to get in touch with me. At UHY we can provide certain outsourced functions ourselves; for others we can ‘signpost’ you to a relevant supplier.