Frequently Asked Questions

"Outsourcing": Threat to Your Employment?

"Outsourcing" does not mean the automatic loss of your job. It may improve an employee’s career opportunities by opening the door to new environments for providing service. Indeed, with the technical training that an outsourcing service provider gives its new employees, being "outsourced" can be a ticket to personal growth, improved opportunities for lifestyle change (e.g., telecommuting, or flex time), and backup to avoid being burned out as the only, "indispensable" employee supporting a business operation. For the employee, the challenges create opportunities. But, because the external service provider will be held accountable for agreed service levels, the employee will also be guided by new measurements and standards of performance.

"Outsourcing": Same Threat to Your Job as in a Merger?

Employees in a company or department that is being targeted for outsourcing normally feel threatened by the uncertainty. This is similar to the fear, uncertainty and doubt experienced by employees in a merger. Yet the outsourcing decision is quite different. Indeed, in an outsourcing, management elects to maintain and effectively deploy all useful resources. External services providers typically do not want to hire someone just to fire them later. By hiring an employee whose job is being outsourced, the outsourcer (external service provider) assumes many responsibilities. Such responsibilities generate high costs in recruitment, training, transitioning in and transitioning out (including outplacement and severance, if applicable), pensions, labor law compliance and other legal and economic obligations. So the outsourcer will normally plan to maintain certain employment levels and efficiently use all personnel whose jobs are being outsourced.

The threat is not the same as in a merger. In a merger, attrition and job terminations are generally one of the compelling reasons to marry the two companies. So your job is more at risk in a merger than in an outsourcing.

Can We Avoid Outsourcing?

Yes. When a work group – however large and complex – has been mismanaged through neglect, lack of vision and poor processes, outsourcing might not be the only answer. Improvement of business processes before outsourcing can avoid those outsourcings that occur based solely on "cost savings." But even good management and leadership cannot escape the compelling advantages of certain types of "strategic outsourcing" that adds a strategic benefit beyond mere cost savings.

Should Service Level Agreements Be Used only for Outsourcing?

No. In fact, today’s well-managed businesses often establish "service level" commitments from internal "in-house" staff. Indeed, some information technology departments propose "service level agreements" as a means of setting realistic expectations for business users. Studies have found that frequently, an in-house service department may suffer from criticism by frustrated in-house clients. After going through the process of asking what the in-house clients expect, and showing the costs of fulfilling those expectations, the in-house staff can compare itself to the "best of breed." The process of defining internal service levels will help harmonize expectations of users and reduce stress by in-house service providers.

Should We Adopt "Charge-back" Accounting?

In cost accounting as in process control, success depends on transparency of cost and function. By identifying and allocating the costs of the different elements of service, management can decide whether in-house clients are abusing in-house staff and other resources.

For example, a marketing department might want to design a number of new data bases and new data capture mechanisms for measuring the effectiveness of a proposed marketing campaign. By adopting "work orders" and accounting for changes made, the information technology department can show the true amount of services delivered. Not only is this information useful for allocating expenses (and thereby limiting costs to those departments with sufficient budgets), but also for identifying bottlenecks in the process of production. If the marketing department lacked sufficient budgetary resources to engage the IT department in extensive changes on the marketing data base, and if the marketing department demanded that the changes be done at the same time as the financial statements must be prepared, the marketing department can be identified as a bottleneck in cost and priority.

When Should We Outsource a Function?

Within a globally competitive environment, outsourcing could be useful, or it could unbalance a well-managed organization. The key is to find and maintain one’s balance.

Rebalancing involves a candid reassessment of organizational strengths, weaknesses and the threats from the marketplace. Confronting this constant challenge, management must determine what functions fit within the core competencies of the organization, retain those and seek ways to minimize investment and risk in areas that do not add as much value to shareholders – and other stakeholders – as the core competencies.

What Alternatives Exist?

Outsourcing is one of a wide range of possible management strategies. Considering "in-house" strategies include:

• Inaction: Do nothing. We’re doing a great job already.
   
• Cuts Projects: Eliminate wasteful projects (especially those that require an excessive investment).
    
• Cut Jobs: Eliminate jobs. Load more work onto existing staff.
   
• Reallocate Resources: Shuffle personnel to new, more effective tasks. (Training may be required. Transitions could be bumpy.)
    
• "Strategic" initiatives include:
    
• Competitive Departments: Make each department into a separate cost-center and allow it to compete for customers both in-house and in the market. General Motors follows this practice.
    
• Shared Services Subsidiaries: Form an alliance of similarly situated customers of the same service, and transfer the "generic" workload to a jointly owned "shared services subsidiary." (This "shared services" subsidiary might compete in the market as well.) This requires some submission of control and political alliances with outsiders. Experience proves that a jointly managed subsidiary, without independent management of its own, can lose its way and flounder. In this case, outsourcing has been shown as an effective alternative to a failed experiment.
    
• Joint Ventures with Services Providers: A joint venture involves a sharing of risk and rewards. (Outsourcing involves shared responsibilities and possibly shared risks, and rarely involves shared rewards). Joining forces with a services provider can be useful where the functions performed by the joint venture do not require you to promote, directly or indirectly, the cannibalization of your own core business. The services provider, as your joint venturer, will undoubtedly expect a rate of return on its investment by selling the joint services to others – including your competitors – in the marketplace.
    
• Other Paradigms: Organizational management includes a panoply of other paradigms for speed, skill, technological competency and other goals. The authors of this Website would be pleased to explore such other paradigms with you, and to receive your comments on the effectiveness of outsourcing in relation to other possible paradigms.