Jean Roberts

Note: The term ‘Board’ includes Board of Directors and Committee or Board of Management

Introduction and overview of the outsourcing process

Organisations have traditionally sought certain types of expertise from ‘outside’, particularly for one-off, specialised projects (eg installing a computer network, interior design of offices, investment advice) or for administrative functions (eg payroll, accounts, printing, event management). Outsourcing is often referred to as ‘contracting in’ while the opposite function, that of tendering, is often referred to as ‘contracting out’.

Specialised projects and administrative functions usually support the provision of services to service-users and members of nonprofit organizations (or customers and clients of commercial enterprises) in that they contribute to the preparation of a service or product rather than delivery of a service or product. ‘Preparation’ means the process of getting the service or product ready for delivery: ‘delivery’ means the process of putting the service or product into the possession or experience of the user or buyer.

Examples of services include counselling sessions, transitional accommodation, employment support, investment advice: examples of products include publications, packaged goods, clothing, spare parts.

Outsourcing involves two parties:

• the tenderer – ie the party that will provide the expertise, knowledge, equipment, etc, and/or perform a function in return for payment, and
• the outsourcer – ie the party that will pay to receive the expertise and/or function and integrate it into their organisation’s performance

The usual procedure is for the outsourcer to determine their need or opportunity, prepare a tender brief setting out the nature, scope and specification of their requirement and then arrange to receive an offer from people interested, capable and willing to meet the specifications and satisfy the requirement. Such an offer may be referred to as a bid, quote, estimate, tender response or proposal.

When the offers from a number of tenderers has been assessed by the outsourcer against a pre-determined set of criteria (which would have been included in the tender brief), a short-list may be agreed upon for interview and subsequent negotiation with the preferred supplier – followed by the signing of a contract. The successful tenderer becomes the supplier to the outsourcer: the outsourcer becomes the client of the supplier.

Documentation

There are by now a number of documents that are critical to the success of the outsourcing project:

For the outsourcer:

1. the working papers they have developed, and from which they prepared the tender brief
2. record of the assessment procedure and process to ensure compliance with transparency, confidentiality, quality standards and industry codes
3. the tender document, complete with project plan to satisfactorily meet the specifications and comply with the assessment criteria, and
4. the contract with the successful tenderer.

For the successful tenderer:

1. the working papers they have developed, and from which they prepared their tender response
2. the tender brief, complete with specifications and assessment criteria
3. the tender document, complete with project plan to satisfactorily meet the specifications and comply with the assessment criteria, and
4. the contract with the outsourcer.

When the contract period commences, the critical function is that of project management, ie a designated person in the successful tenderer’s organisation, and a designated person in the outsourcing organisation. Together, they ensure that the contract is undertaken and completed to the agreed specifications and schedule.

Remember – a ‘successful tender’ is one that not only wins the contract, but also fulfils the specifications, terms and conditions of the contract to the satisfaction of the client.

The starting point for the outsourcer is to identify their organisation’s core competencies (those in which they have some sort of competitive advantage) which must remain in-house – and decide whether to outsource any or all non-core competencies. The decision to outsource begins with the recognition of a need or an opportunity. In the flowchart in this Unit, the ‘need or opportunity’ is referred to as ‘the catalyst’.

Organisations need to focus their internal resources on sustaining and advancing their uniqueness (eg a particular competency, their knowledge base, a specific procedure, a product or component), then outsource those functions that are peripheral to the maintenance or development of their uniqueness.

Internal staff then oversee and manage outsourcing relationships and contracts. One organisation can outsource their non-core competencies, while at the same time tendering to supply their own core competencies to other organisations: one organisation can be both tenderer and outsourcer at the same time – but on separate contracts.

‘Uniqueness’ is often described as an organisation’s competitive advantage, winning edge or point of difference. The intellectual property or intellectual capital related to uniqueness must be protected at all costs, and should never be the subject of outsourcing.

Benefits of outsourcing

Outsourcing can bring real benefits to an organisation. Some examples are:

• the opportunity to access state-of-the-art equipment, processes or knowledge without the cost of buying, developing or leasing same, eg machinery, software, research capacity, printing machines
• traditional working hours are expanded when work is performed off-site by specialists
• specialists can reduce costs related to time, due to their expertise, expertness and creativity related to their capability or capacity being purchased by the outsourcer, or
• services are purchased only as needed.

Checklist to guide decisions about outsourcing

1. Ensure a thorough analysis and comparison of competencies and direct service or product activities
2. Carry out a thorough assessment of likely associated risk, including both the potential for risk and the problems and costs associated with managing or avoiding such risk
3. Establish a set of criteria to assess each competency or special project for outsourcing
4. Strategically select which competencies or special projects could be considered for outsourcing
5. Prepare a detailed specification of your requirements, and draft and detail the terms and conditions of contract
6. Prepare your assessment criteria, quality standards of performance, and procedure to select your preferred tenderer (ie potential supplier)
7. Carry out your selection and appointment process, which may include a detailed negotiation process prior to finalizing the contract
8. Be sure each party fully understands and accepts the parameters and components of the contract
9. Ensure mutual and documented agreement on anticipated outcomes, time schedule and terms of payment
   • retain in-house any stage, function or responsibility where insufficient resources exist to outsource, or where the nature and extent of associated risk must or can only be controlled in-house
   • if you cannot outsource the risk, you would need to be convinced that you should outsource the competency or activity
10. Consider short and long-term costs and benefits, both internal and external.

Risk analysis

It is critical to undertake a thorough risk analysis prior to commencing any outsourcing activity, and this checklist is offered as a guide:

1. Identify potential risk – real and imagined
2. Choose potential suppliers carefully, and be sure to ask for references and client lists
3. Check the supplier’s reputation and professional or trade credentials
4. Make sure the culture of the supplier fits the culture of your organisation
5. Be willing to accept that you may not know exactly who does the job or when or how, so be prepared to monitor process and progress through your own project manager
6. Establish reporting criteria and design methods and proformas to receive information throughout the contract period that will effectively and efficiently monitor progress in line with the agreed specifications, schedule and budget, including dissemination of key data regarding the project’s status
7. Calculate the real and total cost of retaining a competency or project in-house as a basis for comparison to evaluate the cost of outsourcing
8. Consider the level of expertise, experience and speed of the likely supplier in comparison with retaining the competency in-house
9. Consider factors that could influence pricing
10. Ask if the supplier will share the financial risk by negotiating payment terms and conditions
11. The lower the fixed return for the supplier, the greater the perceived risk by the supplier
12. Allow sufficient time to assess progress and outcomes, and be wary of added costs over and above the terms and conditions of contract
13. Anticipate variations and agree on a procedure to deal with them when negotiating the contract
14. Where the contract is ongoing or of a considerable duration, be sure that your people gain as much benefit as possible from having the supplier ‘in-house’ or ‘on-site’.