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PART 2
Key procurement issues
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CHAPTER 4
Outsourcing
Objectives of this chapter
• To discuss the concept of outsourcing
• To highlight the basics of a best practice approach to outsourcing, including outsourcing
methodologies
• To outline the pitfalls of outsourcing
• To outline the use of service level agreements (SLAs)
List of Cases, Research Boxes and Figures in this chapter
Mini Case Studies
• Vita phone
• Goodyear
• Accenture
• Roadchef Motorway Services
Best Practice Boxes
• Dun & Bradstreet Global Outsourcing Survey
Figures
• Figure 4.1 Three main players involved in SLAs (Source: Crocker after Hiles, 1993)
• Figure 4.2 The outsourcing process (Source: Lonsdale and Cox, 1998)
Teaching Notes
The Outsourcing Institute has defined outsourcing as: ‘The strategic use of outside resources to
perform activities traditionally handled by internal staff and resources’.
So, outsourcing is not a synonym for procurement. It is concerned with the external provision of
functional activity, and therefore outsourcing decisions are strategic in nature.
Instructor’s Manual
As such they are not taken at the operational level, but involve top management, and the
consideration of a number of decisions such as:
• Do we have candidate functions for outsourcing?
• How do we select?
• How do we assess ourselves?
• Who are the potential providers?
• How do we assess them?
• What sort of relationship will we form?
• How will we manage it?
• How do we ensure efficiency?
Accordingly, this chapter includes several models which provide structured outsourcing
methodologies, including:
• Lonsdale and Cox
• McIvor
• Galetto, Pignatelli and Varetto
If companies pursue an outsourcing strategy whilst following one of these structured
approaches, research has shown that they are more likely to achieve their original objectives.
Therefore, students should be made familiar with the key reasons for outsourcing which are
included below:
• External supplier has better capability.
• External supplier has greater or more appropriate capacity.
• Freeing resources for other purposes.
• Reduction in operating costs.
• Infusion of cash by selling asset to provider.
• Reducing or spreading risk.
• Lack of internal resource.
• Desire to focus more tightly on core business.
• Economies of scale.
Unfortunately, rarely is there a clear organisational focus for determining which activities are
‘core competences’ or for determining strategic impact.
The most important contributors to successful outsourcing are:
• Activity well defined.
• Roles and responsibilities of all parties clear.
Instructor’s Manual
• Good relationship with supplier.
• High quality of supplier.
• Effective contract management/monitoring.
Finally, therefore it is essential to advise students of an effective post-contract approach.
It is essential that both the client and the external provider under consideration have a clear and
shared understanding not only of the specification but also of goals and objectives, and that this
understanding is translated into a workable strategic plan.
Following the careful and rigorous procedures necessary for appointment of an external
provider, there will need to be a well-designed and mutually acceptable contract, and an open
and continuous working relationship underpinned by senior management support from both
organisations.
In order to ensure compliance and lack of ambiguity, it is essential to negotiate service level
agreements (SLAS).
Service level agreements
Service level agreements may be entered into between a client and a supplier of services. They
may be defined as an agreement between customer and service provider in which quantified
elements of the service provision are determined. Most services are built up from a number of
individual components, and a complete service level agreement (SLA) will cover these in some
detail. Examples are:
• Time of provision and of each type of service.
• Points of service delivery.
• Nominated service provider.
• Responsiveness.
• Documentation.
• Emergency arrangements.
• Hotline support.
• Dispute procedures.
• Training and staff development.
Of paramount importance is the safeguarding of quality by ensuring satisfactory provisions for
supplier selection and maintenance of quality standards whilst producing year on year total costs
of ownership reduction.