Outsourcing EN

What is Outsourcing?

One of the most simplified and thus most common definitions in business claims that any business is a transformation of resources into products (services). The word resources relates to, for example, money, technology, raw materials, and labourer skills. Obviously, no business has unlimited resources available, and thus it needs to be very cautious in its consideration of how to utilise these resources most effectively. From a process point of view, there exist primary processes, support processes and management processes in each different type of business. Outsourcing, or spin-offs too, are a part of the substitute for primary or support processes that supply products or services from external suppliers. In the case of primary processes, we can talk about the substitution choice of "make or buy". Outsourcing enables the company to concentrate its resources on processes that are crucial for its competitiveness.

Why is Outsourcing important?

The significance of outsourcing consists of two aspects: deciding upon as to which activities/processes are better to outsource, and the method of outsourcing. The decision-making process concerning outsourcing is in fact based upon a strategic investment decision, because this always concerns the manner of allocating the company's resources. If a decision concerning the outsourcing of an activity has been set, the company has to subsequently relocate all related resources elsewhere (sale or liquidation of the machines and equipment, transfer or lay off employees, etc.) If the company decides to further continue with the particular activity, then it must also continue with the allocation of its own resources, i.e. maintenance or capital investments into tangible assets, rewarding, hiring and training staff. However, when any process or activity is outsourced, the company must retain an idea of the final product as a whole (product architecture), and an understanding of the borders between the own processes and the purchased activities. Outsourced activities represent a higher risk for the company in comparison to their previous stature, in that the given cases would not have specifically set parameters. It is therefore important to select the supplier, a contract concerning supply maintenance (Service Level Agreement) and the manner of risk management.

What is the subject of an Outsourcing project?

An outsourcing projects is usually broken down into the following phases:

- Setting up outsourcing objectives. These objectives may be either strategic ones (reactions to industry trends), or tactical objectives i.e. an effort to increase the return on investment;

- Identification and selection of activities possible for outsourcing (multi-criteria assessment that covers cost comparisons, supply-side of relevant market offerings, risk management issues, etc.);

- Decisions on outsourcing alternatives - purchases from a supplier or alliance with an appropriate business partner;

- Definition of the supplied product / service parameters;

- Selection of the supplier / business partner;

- Contract / Service Level Agreement negotiation.

What is an Outsourcing project's deliverable?

The output of each phase is a document, that should be approved by the company's statutory or management bodies due to its awkward character. Each document must consist of a necessary analytical part, and a recommendation for alternatives of the next steps.

What benefits one can gain from an Outsourcing project?

Usually it is rather complicated to return from outsourcing to insourcing. Outsourcing has to be considered in a rational and thus structured way, so as to reveal any potential incorrect reasoning prior to the implementation of the next step.
Both extremes are risky:

- Activities are not outsourced, even if the company does not necessarily need to carry out them with the use of its own resources. This then creates a lower value for shareholders, and in the long run may have a negative impact on the company's competitiveness;

- Activities which are outsourced are not suitable for outsourcing, or an inappropriate alternative of the outsourcing was selected. This may hamper the ability of the company to serve its customers, increase costs or even negatively affect the safety of the employees at work.

A benefit of the outsourcing project is to aim to find a solution that fulfils the initially established outsourcing objectives.

Why engage a consultant?

The decision concerning outsourcing is usually based upon emotional influences - the company is typically split into passionate supporters and equally passionate opponents of outsourcing. For reaching a necessary logical decision, usually a third party who has no personal interest in the final result of the decision is required, and who then only just controls the fulfilment of the previously defined objectives. A consultant can very effectively contribute to the reduction of risks, which could end up resulting in extremes similar to those described above.

My own experience

- Design of a model for the evaluation of support processes as a basis for their spin-off for a large Czech mining company;
- Analysis of the Czech service suppliers' market in the energy sector for a foreign company.