Outsourcing is when you contract out a business function - a particular task, role or process - to a third party over a substantial period of time. This third-party organisation takes control of the function and becomes responsible for its success.


9 min read

1. Overview

Outsourcing may save you money, help you be more flexible and manage growth effectively. It also allows your business to gain access to outside expertise and technologies.

However, you will need to consider carefully whether the benefits of outsourcing a function outweigh the costs. The process will have to be properly managed and monitored. Remember - anything done on behalf of your business will reflect directly on it.

This guide shows you how to decide if outsourcing is right for your business, how to find the right partners and how to get the best from the process.

2. Should I outsource?

The benefits of outsourcing can be substantial. As well as cost savings, there are other gains your business could make. To help you make the decision, consider the following questions:

  • Will outsourcing free up your business to focus on its strengths? This might benefit your business by allowing your staff to concentrate on their main tasks and on the future strategy.
  • Will it improve your efficiency or customer service? Choose an outsourcing company that specialises in the process or service you want them to carry out for you.
  • Will your business gain a competitive advantage? Outsourcing can bring flexibility to a business, turning fixed costs into variable costs and freeing up capital. It can also give your business the edge when adapting to changing market conditions.

Consider your options

It may be tempting to rush into outsourcing, but take the time to think through what you need, set the terms and find the right service provider. Consider the following:

  • What are your core strengths and what are secondary? What processes are you thinking of outsourcing and why?
  • What are the costs of doing it in-house? Include hidden costs such as office space and staff costs.
  • Check the return on investment (ROI) - ask potential service providers for help, as many offer an ROI calculator.
  • Would it be helpful to usea consultant to help you find a service provider?
  • What are the costs of not outsourcing? Will your business suffer because it cannot afford to invest in the expertise or the facilities that an outsourcing partner might provide?

When looking at outsourcing, you should also ask yourself:

  • Are you prepared to spend the time and energy required to manage the outsourcing relationship?
  • Are your expectations realistic?
  • Is the function a key task which your business needs to control directly to ensure its future competitiveness?

Finally, weigh up the risks of outsourcing against those of keeping the processes in-house.

3. Activities you can outsource

Many businesses now outsource many of their non-strategic activities or more complex tasks in order to access industry best practice and cutting-edge technology.

This enables the business to benefit from the outsourcing company's economies of scale and investment in highly trained staff while it concentrates on core business activities.

Processes you could consider outsourcing include:

  • IT functions - you can outsource most IT functions, from network management to project work, website development and data warehousing. You may benefit from the latest technology and software upgrades without having to invest in expensive systems or keep up with industry trends.
  • Business processes and HR - outsourcing activities such as recruitment, payroll and secretarial services gives you access to specialist skills, but you only pay when you need to use them.
  • Finance - you already outsource auditing, so why not do the same with your entire accounting function, including bookkeeping, tax management and invoicing?
  • Sales and marketing - many organisations use a consultant or an agency to handle marketing communications. Smaller businesses, or those in specialised markets, can also outsource sales to specialist agencies.
  • Health and safety - there are consultants who specialise in health and safety compliance tasks. They may be able to ensure you meet all the requirements, including those for complex risks, more cost-effectively than you can.

You could also outsource non-business-critical tasks such as cleaning, catering and facilities management as well as deliveries, installation or after-sales service.

4. Potential pitfalls of delegating direct control

Many businesses are wary of outsourcing. They're concerned about handing over key business functions to an external organisation over which they have no direct control. Other pitfalls may include:

  • service delivery falling below expectation
  • confidentiality and security not being respected
  • the outsourcing contract proving too rigid to accommodate change
  • management changes at the outsourcing company leading to friction
  • the outsourcing company going out of business
  • failure to provide sufficient management resources in-house to safeguard the success of the outsourced business processes

When you plan to outsource tasks, you also need to plan what you will do if any problems arise. Consider:

  • having other service providers that you can turn to relatively quickly
  • how you might take the outsourced processes back in-house

It is important that the contract between you and the outsourcing company sets out the circumstances in which you can make such changes. If not, the outsourcing company could claim compensation.

It's been estimated that as many as 50 per cent of outsourcing deals end badly. This isn't a reason to reject outsourcing, but proves how important it is to choose very carefully who you work with and how you manage the outsourcing relationship.

5. Choose an outsourcing partner

Outsourcing is about creating a successful partnership.

Choosing a company to outsource to is very different from choosing an ordinary supplier. You're embarking on a long-term relationship, so take time to look in detail at potential service providers.

Track record

Ask yourself:

  • Does the provider have a track record of service commitment?
  • Has it been recognised within its own industry?
  • Does it track customer satisfaction levels?
  • Is the business expanding?
  • How good are the service level agreements it offers?

Relationship management

Relationship management is critical to your business. How will your relationship be managed and how good - and available - is your relationship manager?

If you choose to outsource to a company outside the UK, remember that distance and time zone differences will make control more difficult. Language barriers and different business cultures can also present problems and you will need to allow for exchange rate fluctuations in your costings.

Customer references

Find out:

  • who the provider's existing customers are
  • how satisfied their customers are
  • what the provider's strengths are
  • how they deal with problems

To answer these queries, try to speak to several existing customers with an industry profile similar to yours.

See them at work

Visit each potential service provider. Look at the working environment and ask about staff retention and turnover. Check their IT systems and equipment, management processes and quality assurance procedures.

Financial stability

Check that your potential provider is financially stable. If it is a limited company, get copies of its recent accounts, ask for banker's references and consider getting a report from a credit checking agency.

Ask your potential service provider if they plan to subcontract any of your work and apply the same checks to any subcontractors.

6. Service level agreements

A service level agreement (SLA) sets out what services the supplier is to provide and to what standards. The service level agreement forms part of the contract between you and your outsourcing partner.

SLAs are complex documents that should be well defined. It may be worthwhile getting advice from a service management consultant or a commercial lawyer. You must be involved in drawing up the SLA together with the supplier.

Typical SLAs include:

  • the services provided
  • the standards of service
  • the delivery timetable
  • responsibilities of supplier and customer
  • provisions for legal and regulatory compliance
  • mechanisms for monitoring and reporting of services
  • payment terms
  • how disputes will be resolved
  • confidentiality and non-disclosure provisions
  • termination conditions

If service providers fail to meet agreed levels of service, SLAs usually provide for compensation, commonly in the form of rebates on monthly service charges. Identify the most critical components of the deal, apply the strictest penalties to these and build periodic performance reviews into the SLA.

You should aim to build flexibility into the SLA, so that it can be adapted as your business needs change or new technologies evolve

All outsourcing contracts should contain an exit strategy.

When entering an outsourcing contract you should ensure that you're interpreting the contract in the same way as the outsourcing company. This is a long-term partnership and misunderstandings could cause difficulties.

7. E-outsourcing

Electronic outsourcing (e-outsourcing) refers to services that are delivered electronically, usually over the internet. These range from conventional business functions, such as bookkeeping, to technical and IT services, such as website hosting.

The benefits of e-outsourcing

E-outsourcing delivers a range of benefits, including:

  • Reduced costs - you pay for services only when you use them, with little or no investment in new equipment, staff or training.
  • Greater efficiency - you don't need a complex IT network or a specialist IT department.
  • Commercial advantage - you can work closely with business partners and customers. It also enables staff to work remotely and have access to high-performance software at affordable rates.
  • Better use of people - staff can concentrate on business-critical and value-added operations.

Implementing an e-outsourcing solution

Choosing and using an e-outsourcing solution needs careful consideration:

  • Do the research - does it make sense for your business? Will it give you access to new markets or technologies? Do your competitors outsource any of their processes - if so, what?
  • Identify the advantages - will you save time and money, improve your e-commerce capabilities or gain a competitive advantage?
  • Perform a cost/benefit analysis - what will it cost and how long will it take to pay for itself?
  • Assess the suppliers - draw up a supplier shortlist and ask them questions about cost, deliverables, security, ownership of data, and termination clauses.
  • Try before you buy - if you take advantage of low cost/no cost trials, make sure you are protected against damage to your data.
  • Assess the impact across your business - how will e-outsourcing affect other areas of your business? What processes will you need to modify?
  • Create an implementation schedule - think about running your conventional system alongside the e-outsourcing solution until you are happy with it - keep staff, customers, suppliers and business partners fully informed.
  • Regularly review your arrangements - ensure that e-outsourcing delivers what was promised.

8. Tips on how to make outsourcing work for you

When outsourcing:

  • remember that although the supplier takes responsibility for the process, you still need to actively manage the relationship
  • take your time making decisions and make sure you are clear about the terms on which you and the supplier are working together
  • make the effort to establish a good relationship - this calls for constant communication and flexibility
  • nominate a member of staff to take responsibility for liaison

It's equally important to establish effective and regular communication within your business. Staff may have particular concerns about their own jobs, so keep them informed.

If staff are being transferred to the outsourcing provider under the arrangement, as sometimes happens, you will need to consider the relevant employment legislation.

You are likely to get the best results if you can stay with your supplier for several years. Switching suppliers can be disruptive, so it pays to commit to building a long-term relationship from the outset.

You may need to renegotiate the contract before the end of the term. A flexible contract benefits both parties, allowing the supplier to innovate and you to react to changing circumstances.

Measure success

There should be financial benefits, but other reasons for outsourcing are harder to quantify. These could include improving customer service, reducing errors or increasing speed to market. Include these factors in your assessment and consider how you'll measure them.

Plan a clear exit strategy

The relationship might end prematurely or may simply have run its course.

Either way, make sure that your service level agreement contains a clear exit strategy. It should:

  • detail how the outsourced functions should be brought back in-house
  • clarify who owns what assets
  • specify when compensation is due, and how much

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