Outsourcing—Is it Right for Your Organization?

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CIDM

December 2001


Outsourcing—Is it Right for Your Organization?


CIDMIconNewsletter Reviewed by Bill Hackos, Vice President, Comtech Services, Inc.

What do we mean by outsourcing? The obvious answer is having some service performed by an agent outside of your organization. Peter Bendor-Samuel has written a how-to book on the subject titled Turning Lead into Gold: The Demystification of Outsourcing. Although the book is about outsourcing in general, it provides many tips relevant to your publications department.

Bendor-Samuel points out that outsourcing is only one of two different forms of outside services: contracting and outsourcing. The difference is based on the relationship between you, as the buyer, and the supplier.

When to Contract

We’re all familiar with contracting. Most information-development departments use contractors. In the familiar contracting arrangement, the department acquires outside help by using contracting agencies. Writers acquired in this way are employed by the contracting agency but are ordinarily managed by people within the information-development department. Contractors are usually paid based on time and materials for their work. They may or may not work on the information-development site and may or may not use the department’s equipment and space. But in most respects, the management of contractors is nearly indistinguishable from the management of direct employees.

We value contracting because it gives us flexibility. We can easily hire contractors for short time periods without having to go through a time-consuming hiring process. We don’t need to develop a statement of work, RFQ, or complex contract to get the contractor started. Usually contractors are paid by the hour. We may be able to hire contractors when we’re unable to add direct employees. In some companies, contractors are not considered part of the headcount. We can make use of the contracting agency to find a contractor with the skills and experience we need.

However, there are negatives to using contractors. Labor and tax laws put restrictions on the use of contractors. Contractors cannot be used just to replace direct employees. Most companies place limits on the length of time, usually about a year, that a contractor can be employed. Contractors often cannot attend regular staff meetings. Some companies require contractors to work with their own equipment at their own site. As a result of these restrictions, the experience or expertise that contractors acquire on the job is lost when they leave. Contractors must be managed just like direct employees but, because of the restrictions, you may find it more time consuming to manage contractors than direct employees.

Contracting is most successful when contractors handle only a minor portion of the information-development function. Departments that have tried to use contracting exclusively or for most of their information-development needs have often been unsuccessful.

The major difference between outsourcing and contracting is related to management. In a true outsourcing arrangement, the outsourcing supplier takes full responsibility for managing the service being outsourced. To arrange to have a supplier outsource a service for you, you must develop a clear statement of work, usually in the form of a Request for Proposal or Request for Quotation, and you must obtain bids from several suppliers. The important question is: why would you want to outsource some or all of your information development in the face of considerable up-front work?

When to Outsource

You should engage an outsourcing supplier only when the supplier can perform the service better than your own people. For example, the supplier may be more efficient and, therefore, less costly than your own organization. The supplier may have expertise that your department lacks and would be costly to develop in-house. You may decide to outsource a function that you’ve tried and failed to handle well in-house.

At present, we have found that companies under pressure to maintain the price of their stock have elected to outsource information development as an artificial way to reduce their headcount. Presumably, the lowered direct labor costs will convince investors that companies are saving money and improving profitability. But, unless the outsourcing is less expensive or contributes to increasing revenues, it produces no real value. It may even raise costs, lower profits, and ultimately have a negative effect on your company’s long-term success.

In general, you should consider outsourcing only those functions that are not “core” to the company. Core processes are the lifeblood of any company and should be maintained internally. For a software manufacturer, core processes might be software development, possibly sales, or maybe services related to software, such as installation, consulting, and training. Where does information development fall? Is it a core function in your company? Does the quality of your software documentation increase sales? Do your customers know your company by the quality of the documentation? If so, you may not want to outsource. However, if documentation is a vital but not core function, then outsourcing may be an option.

Leveraging-The Key to Successful Outsourcing

The key to successful outsourcing is leveraging. Outsourcing is of no value unless it improves your company’s bottom line. For example, for most companies, payroll is a vital but not core function. Payroll is commonly outsourced. So are accounting, janitorial services, security services, and many other non-core functions.

Outsourcing is successful when it can be leveraged by economies of scale, expertise, flexibility, or management. For example, you may have a small payroll, making it inefficient for you to maintain your own payroll staff. You may want to outsource payroll to one of the large payroll-service companies that maintains huge numbers of payroll accounts and has the expertise to handle special payroll problems like tax and legal issues.

You may want to learn more about the skills and attitudes of your customer base. You could outsource the study to a consulting group and not have to train your own people in user and task analysis.

Your company might be more comfortable managing professionals rather than uneducated labor. You might want to outsource your cafeteria or your janitorial services. Nonetheless, if the supplier can’t do a better and more efficient job performing a service than you can, you should not outsource.

Outsourcing Information Development

Suppose you’ve decided that some or all of your information-development functions are candidates for outsourcing. You must first determine that information-development is not a core function. You must evaluate the cost of your information-development function so that you can compare internal costs to quotes offered by suppliers. Next, you must develop a statement of work.

  • Exactly what do you expect from your supplier?
  • What schedules must they meet?
  • What quality standards are required?

You must put all of this in your RFQ. The RFQ will be instrumental in determining the success of your outsourcing venture.

If you’ve decided to go ahead, you must find outsource suppliers that can meet your requirements. Don’t be tempted by friends or suppliers whose primary asset is that they’re local. Look at their management. Consider their financial status. You don’t want to lose your supplier mid-project. Insist on references. Make sure you check these references. Make sure you have more than one viable candidate.

Finally, you’re ready to send out your RFQ. When the proposals come back, carefully review the management aspects of the proposals. Look at how the suppliers intend to handle quality control. Look at the cost proposal. Is it less than you could do the work for? Don’t just pick the lowest bidder. Be certain that the supplier can produce what they say they can. Beware of consortiums that are created just to bid on your outsourcing. You want to pick a supplier from a stable company with a good track record. Don’t be concerned about how much profit the supplier will make on you project. What counts is how much you can save compared to doing it in-house. You will get much better service from a supplier who is making a comfortable profit than one you have forced to eek out a minimal margin.

Once you have decided on a supplier, you should create a contract with the help of your legal team. It should contain the statement of work, quality expectations, schedule expectations, guidelines for measuring success, and procedures for handling problems and disputes. Make sure that the pricing structure is fair and explicit. Because most disputes don’t involve contract issues, the contract should be made as flexible as possible. Write the initial contract for a short time with the expectation of renewal. Some of the best contracts for outsourcing involve reward and penalty provisions. Reward the supplier for on-time delivery and high quality. Bendor-Samuel has many case studies in his book that provide examples of good company-supplier relationships.

Once the outsourcing starts, you must transfer all the management of the outsourcing function to your supplier. One of the most common impediments to outsourcing success is a buyer who interferes in the management of the outsourced projects. Your supplier needs to be free to make management decisions. If you interfere, it places the supplier in the position of having the responsibility to produce without the authority to manage the function completely.

Your job is not management but quality control. Develop with the supplier a clear definition of expectations and create metrics to measure whether these expectations are being met, but don’t measure what you don’t care about. You must take a business rather than technical point of view in your relationship with the outsource company. If the business aspects of the outsourced function are being met, the outsourcing is a success. Details about how things are accomplished are the responsibility of the supplier. Be especially careful about requiring quality that is beyond the business scope of your contract with the supplier. Your company may have contracted for a lower quality of work than you are accustomed to providing. (This situation most often occurs when the outsourcing contracts are written by people not well versed in information-development processes and quality requirements.) By trying to enforce your own standards of quality under these circumstances, you invite significant changes in scope that create enormous cost overruns.

Bendor-Samuel comments: “In outsourcing you get what you inspect, not what you expect.” If you find that your expectations are not being met, it is not time to dump your supplier. Rather, work with your supplier to solve problems that have developed. Remember, it was a costly process to bring the supplier on in the first place and fixing the problems with the help of the supplier is usually the most cost effective way to get back on track. If your supplier is making a fair profit, they will be very concerned about fixing any problems that develop.

Remember that outsourcing information development is neither good nor evil. Whether outsourcing is a viable option for your company depends on the details of your department and your company’s business requirements. You may find that you need a consultant to analyze your needs, to help with creating an RFQ, and to help evaluate the proposals from suppliers.