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Outsourcing is usually associated with businesses cutting costs as they struggle to stay afloat, such as when Pacific Brands cut 1850 local jobs and outsourced its manufacturing overseas.
But it can also prove a valuable tool for an expanding company to help it manage its growth.
Known as business process outsourcing, the practice involves a company paying another organisation to carry out a function for it. For instance, rather than having its own pay office, a firm might decide to outsource its payroll function to a specialist.
Services that are typically outsourced include IT software and hardware management, network and server management, property maintenance, transport and logistics, recruitment, training, payroll and document management. It’s likely that many small to medium enterprises are already outsourcing some business processes without ever considering it to be outsourcing, such as legal or accounting services.
David Fincher, a partner in Ernst & Young’s advisory practice, says that outsourcing can bring a range of benefits, including access to new talent, a broader skill base, access to new technology, added flexibility and allowing the company to focus on its core business.
“Organisations should focus on what they’re good at and what they need to be good at. Potentially anything else which isn’t core or differentiating for that organisation could be delivered by someone else,” he says.
An outsourcer will have far more ability to scale and to service a bigger organisation than an in-house operation will.
“If you are a growing business you don’t want your support functions, your non-core functions to grow at the same rate,” says Fincher.
“As you grow you want to take advantage of scale to increase the difference between your revenue and your support costs.”
Fincher says there is no “right or wrong answer” on when a company should consider outsourcing. “But you need to think about the benefits of outsourcing more broadly and the applicability of each of the benefits to your organisation,” he says.
Martin Conboy, president of the Australian Business Process Outsourcing Association, says SMEs can help improve their cash flow by outsourcing the chasing up of outstanding payments. “Other areas that are not core to an SME are marketing and online support, including IT, web design and SEO activities,” he says.
It’s best to consider outsourcing when the business is running smoothly and not to leave the decision until it’s really critical, says Conboy. For instance, with IT outsourcing, a company is better not to wait until its current IT systems are struggling with its workload and so have to make a rushed decision on outsourcing.
The first port of call for a business considering outsourcing should be a trusted advisor, such as an accountant, who will be able to steer them in the right direction, says Conboy.
Business process outsourcing has grown rapidly in recent years and is now seen as a normal part of a company’s operations rather than a radical alternative.
The International Data Corporation (IDC) forecasts global revenues for business process outsourcing to rise from $US147 billion in 2010 to $US191 billion in 2015.
While outsourcing has been increasingly adopted over the past 10 to 15 years, Australia lags behind the rest of the world a little. Just 34 per cent of local companies say outsourcing is a standard practice in their organisation, compared with 60 per cent globally, according to a Deloitte survey last year.
Donal Graham, a Sydney-based partner at Deloitte who leads the firm’s shared services practice, says growing businesses can make good use of outsourcing.
“Medium-sized business sometimes have quite a unique opportunity because if they’re a growing business they very often don’t necessarily have the fixed cost investments in infrastructure or people resources that larger businesses have,” says Graham. “We’ve certainly seen organisations that as they grow, rather than spending a lot of money building bigger technology systems, they’ll actually engage with an outsourcer to provide that.”
An outsourcing relationship is usually enshrined in a contract that will set out the service levels required and key performance indicators.
But Ernst & Young’s David Fincher says that rather than rely on the contract, the two parties should enter into their agreement in the spirit of partnership, rather than seeing it merely as a truncation.
“The contract cannot be the basis on which the relationship is established,” he says.
“The contract is just a legal construct. But if you try to manage a relationship through a contract I guarantee you’ll fail. It becomes the letter of the law rather than solving problems or providing opportunity jointly.”