Outsourcing processes or services or not – What are strategic risks that you have to consider ?

Author: Manu Steens

In this article I write my own opinion, not that of any organization.

Context

The economic and financial cycle waves often lead to savings. One of the methods one tries is outsourcing services. In addition to the question as to whether this is a saving, because people often intervene with other budgets, which means that one diverts a cost from one’s own personnel costs, there are a number of criteria that I think one should check off. This before deciding to outsource a task in the short or longer term. There are a number of strategic risks.

Concerns about outsourcing

The concerns are as follows:

  1. Is the service or process a core competence of the organization that one should keept in-house, even if it seems that this is an adverse cost? In my opinion, for many organizations since the information age came into being, ICT and all related processes are things that meet this. After all, one should not forget that Flanders is increasingly evolving into a knowledge society. And knowledge depends one-on-one on information and information systems. ICT outsourcing provides an extra link in the risk chain, and reduces the involvement of ICT professionals with your business. The fact that there is a contract almost always means that there are gaps in the service, for which one has to pay extra.
  2. Is it really less expensive to outsource the process, if one considers all in-house and out-house life cycle costs? After all, an organization often continues to pay for the risks associated with the process that you outsource. One therefore remains morally obliged to remain awake to the risks associated with the process. Outsourcing the service does not outsource liability for it as long as one does it in the name of one’s own organization. Further, a contract between the two parties does not guarantee the quality of the service at the same level. After all, another company often subscribes to different values. And a contract, as a legal binder, therefore has backdoors too easily.
  3. Is the process more expensive to carry out in-house, or can you redesign it to reduce costs sufficiently to adequately meet the costs saved in outsourcing? If one can redesign it but doesn’t, one loses skills because off the outsourcing, and the opportunities to improve in one’s own field through cross-pollination with related or other services.
  4. Is there an investment involved in outsourcing the service, and if so, can this cost be easily recouped with the savings? Conversely, if outsourcing meant liquidating equipment, would the proceeds of sale mean anything in the return on the investment of outsourcing? This is a purely financial criterion. If the CFO does not address this, it is a missed opportunity or an unnecessary risk that one runs, depending on the facts post-outsourcing.
  5. If outsourcing is disappointing, can you insource the service easily again in the future? Are the lost knowledge and skills therefore easy to reacquire? With the current ‘war for talent’, this is not obvious. And the people you relocated will not like you place them from one job to another on an ad hoc basis. People who are not permanently appointed will have found another job by now, perhaps even better paid. If insourcing is not successful, you made a strategic mistake from the start.
  6. Does management have enough time to foresee a transition to outsource it? But do they also have enough time to foresee to insource it again if the outsourcing is disappointing? Because such operations are not low-hanging fruit, and require efforts from top management. It should not be a light decision. After all, top management is responsible for picking the high-hanging fruit, not for picking the low-hanging fruit .
  7. Could renting equipment or asking the vendor of equipment for this service (such as software vendors) provide a lifecycle with a solution that is doable, other than outsourcing? For example, by training an AI to support a service with software. If this is possible, would this mean a positive influence of innovation and therefore efficiency? In the short term, or only in the long term?
  8. What if the contractor goes bankrupt, despite ‘good papers’ at the time of awarding the contract?

Conclusion

In my opinion, the answer to all these questions must be that outsourcing is the only meaningful answer, otherwise, when in doubt of an argument, it is better to keep the service in-house.

This does not alter the fact that outsourcing tasks can be useful. But especially when the viability of a new service has to be determined, and at a start-up, during the transition period in which the service has to prove itself. In this way, the new service can be optimized not only with cross-pollination with other own services, but also with the experiences of consultants, at the most important moments of the life cycle, namely the design and the teething problems period.

It is best not to outsource essential management needs of an organization. When you have them in the organization, you have unique assets in your hands. Outsourcing skills means that in the long run the cost of outsourcing will increase because one gets stuck by losing the skills.

Manu Steens

Manu works at the Flemish Government in risk management and Business Continuity Management. On this website, he shares his own opinions regarding these and related fields.

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