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.

The economic and financial cycle waves often lead to savings. One of the methods that is being tried 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 a cost is diverted from one’s own personnel costs, there are a number of criteria that I think should all be checked off. This before deciding to outsource a task in the short or longer term. There are a number of strategic risks involved.

The concerns are as follows:

  1. Is the service or process a core competence of the organization that should be kept 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, it should not be forgotten 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 has been outsourced. 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 it is done in the name of one’s own organization. Further, a contract between the two parties does not mean that the quality of the service is guaranteed 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 it be redesigned 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 the service be easily insourced 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 people who have been relocated will not like to be placed 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, a strategic mistake has been made 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’ when the contract was awarded?

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. Since 2012, he has been working at the Crisis Centre of the Flemish Government (CCVO), where he has progressed in BCM, risk management, and crisis management. Since August 2021, he has been a knowledge worker for the CCVO. As of January 2024, he works at the Department of Chancellery and Foreign Affairs of the Flemish Government. Here, he combines BCM, risk management, and crisis management to create a tailored form of resilience management to meet the needs of the Flemish Government.

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