As companies endeavour to cut costs more are turning to outsourcing. But it’s not all about saving cash. John Sanders looks at the other benefits and pitfalls of hiring outside help. And asks just how far businesses can go.

The theory is simple: get outside experts to do your non-core activities, leaving you to do what you do best. In practice defining your core activities, identifying suitable partners and switching work is rarely easy. And even then you still have to spend time monitoring outsourced work to avoid problems.

But with good preparation you can reduce the risks, says Stuart Staples, sales director at outsourced customer contact centre specialist Conduit. “Spend some time with the companies on your shortlist, meet the people on the ground who run their operations and talk to their clients. You have to live with these people. Its going to be like a marriage.” Quality can be a problem, as many companies found in the past when they outsourced call centres overseas.

The reversal of that trend is one reason why Conduit is expanding its contact centre operations in Cardiff. “Virtually every client we see now says they wouldn’t consider India for voice activities because of the impact on brands and customer experience.” says Staples. He believes that any function that can go into a contact centre can be outsourced. “The people we employ are the same people companies employ in their own operations. What makes a difference is how you manage those people, the processes that sit around the, how you measure them and how you evolve.”

On the other hand Staples say some contact centre operations are too small to outsource to a company like Conduit, which is part of the InfoNXX groups and takes calls for Vodafone and Sky. “We are a medium to large-scale player. We’re not good at supporting five or ten agent operations. You need to put a lot of effort into making the relationship work.”

In broader terms, finance and accounting, human resources and facilities management are all candidates for outsourcing says Phillip Rees, partner and head of commercial for law firm Hugh James London and Cardiff, adding that many companies could add data hosting and the print side of their information needs to that lists. Smaller companies stand to benefit just as much as large organisations from outsourcing transactional tasks.

Andy Turner, managing director of Flintshire outsourcing adviser Tender Dynamics, pays £23.50 a month for payroll services. He says smaller businesses that don not use such services “are wasting a lot more money in real terms than they would ne by paying someone else to do it.” Some large organisations are pushing the boundaries in defining non-core activities and looking at elements beyond the ones that are usually outsourced. Virgin and Dwr Cymru, the Welsh water utility, are two companies that outsource more.

In the private sector it is possible to outsource everything bar your brand and business strategy – and management consultancies come close to doing the latter. But Chris Penn, BT’s public sector director for Wales, recommends that in such cases businesses should adopt sophisticated models to ensure appropriate flexibility and safeguards are in place. Rees adds that businesses – for example IFAs and other sin the financial sector – should consider and regulatory impact from outsourcing including data protection issues. Some responsibilities cannot by law be handed over to third-party service providers.

“If you’re doing it in a regulated environment, make sure you have covered your regulatory responsibilities,” he says. He also says organisations should be clear about where their intellectual property and knowledge sits. “For a smaller business those ideas makes it tick. They are locked up in people’s heads. So if you’re going to outsource any function and lost some people, lake sure you can capture the knowledge to control it, because once it’s gone, it’s gone.” Rees draws a distinction between business process outsourcing and outsourcing individual tasks. If an organisation outsources an entire process, it loses the knowledge abut how the process works, making it hard to bring it back in-house.

Noel Bruton, a specialist consultant in IT support management, in Ceredigion, aggress outsourcing increase the chances of losing trained employees who understand your business. “You are letting go of all that knowledge – and it won’t be easy to get it back if you change your mind.” Bruton adds that interest in outsourcing has waned in the IT helpdesk sector as more organisations appreciate the importance of cutting computer downtime.

In many cases, he says the efficiency of a computer user “is considered to be a core business activity. So there’s less of a tendency to outsource your IT support.” Realising too late that you have let go of essential skilled staff is only one possible downside. Another common problem is underestimating the time needed to prepare and implement the process. “If you get into complications, your supplier may not know exactly what you want. Then you get a mismatch in the contract and in the service levels.” Says Rees.

Service level agreements should be well thought out, and based on accurate information and clear to all involved. However, organisations frequently underestimate the amount of work the outsourcing company will have to do – generally because they have little idea themselves. “Most organisations don’t have a clue how much IT support is done is their companies – even if they think they log all their calls.” says Bruton.

They also underestimate the amount of management time needed to make contracts run smoothly. “They are not divesting themselves of management. They are just changing the style of management.” On the other hand, Bruton, who has advised the European Investment Bank on outsourcing tenders, warns some try to retain too much control in areas such as staff recruitment and assessment. “Then you have two managers staff are reporting to and that created confusion.”

Outsourcing contracts should also be fair to both sides and allow them to make a reasonable profit. Contracts need to set clear targets, but should be flexible enough to cater for changing circumstances. These could be the result of market conditions legislative or other factors. Penn says: “If you define a transactional process that you want to outsource too tightly, the costs of change can be heavy.

You need to think about the contract model you have. The more sophisticated the area you’re outsourcing, the more thought you need to give to the contract.” Tools are available to help manage more complex projects. Hugh James works with a software company to provide an electronic package to asses the impact of outsourcing. Similarly, Conduit offers its clients a secure online monitoring service.

Many outsourcing contracts run well. Conduit says it can save clients up to 30 or even 50 per cent on contact centre operations where the biggest cost determinants are production minutes, agent time and average handling time per call. Staples attribute the company’s success in controlling costs to its experienced management, high productivity and robust planning and scheduling. A diligent outsourcer should also provide more transparency than an on-house operation, he adds, “because on an almost hourly basis we have to report our performance to our clients.” Saving money is the obvious benefit, “If you get service levels right, it will pay benefits. That’s the upside.” says Rees. However, he says the benefits do not always receive the credit they deserve.

In may cases people who drive an outsourcing project move on. As a result, the board does not get to hear just how well an outsourced contract is running. In contrast, well-handled outsourcing results in greater transparency and helps businesses get a better handle on costs and manage change more effectively. Functions such as personnel are often spread around an organisation, says Penn, “but you don’t see that until you move it to outsourcing.” Economies of scales are another plus. BT, for example, provides clients with access to its £100m data centre in Cardiff from as little as £15,000 a year. “Your £15k is accessing £100m of capital investment,” says Penn.

Outsourcing should lead to greater flexibility, too. It enables companies to release capital by selling equipment or buildings. “It takes away the fixed costs from you business model. You can rent a building rather than buying.” says Turner. Even where contracts include penalties for making changes, your liability is capped and is often less than paying unnecessary wage or fixed costs. On the labour side, outsourcing helps adjust staffing levels to cope with sudden peaks and troughs in demand. “You contract for a service level from an outsourcing company. How they provide that is up to them. If you do it indoors, hire staff and if they don’t turn up one morning, you’re stuffed.

If you’ve outsourced, you don’t have to worry about how the service level is produced.” says Bruton. Similarly, once organisations outsource a task, they no longer have to consider career development, pay and promotion of staff, but you potentially lose the knowledge and IP mentioned earlier. Apart from the ors and cons, economic cycle’s influence trends in outsourcing. History suggests the early signs of an economic downturn will prompt more organisations to choose between investing or outsourcing because of the pressure to conserve cash, says Staples.

Rees believes this is particularly true of straightforward functions such as finance and accounting, where the potential cost savings are more apparent and fairly easy to achieve. He expects to see more emphasis on self-contained functions within an organisation being outsourced on a cost management basis. On the other hand, economic uncertainty generally discouraged companies from taking big, strategic outsourcing decisions in areas such as IT or the front office. “Organisations will slow down on those activities during a crunch. But they will look at old-fashioned cost cutting outsourcing,” says Rees. BT’s Pen has not yet seen any marked change in attitudes towards outsourcing.

Moreover, he says management should always have outsourcing on the agenda. He singles out changes in technology, culture, legislation or business models as factors most likely to prompt a company to outsource. Whatever the trigger, though, he urges people to look beyond just transactional aspects of outsourcing. “To get the most value out of outsourcing, it often needs o more of a partnership, so it’s further up the value chain. It requires long term relationships and for both sides to build trust and respect for one another. And that takes time.”