Myths of outsourcing

Myths and Realities of Outsourcing

Outsourcing has been written about in some management journals as if it was a ‘must do’ process. There has been much hype about the need to focus on core competencies, the drives for cost reduction, the ability to access top quality staff and the latest technology, and therefore gain competitive edge. We refer to these as the myths of outsourcing to highlight the need for a critical stance. Outsourcing can work for some, but not for all. So is outsourcing a case of turning lead into gold, or actually a case of giving away the jewel in your crown?

To assess this we will briefly look at each of the key potential benefits.

1. Cost reduction – there is very mixed evidence regarding cost reduction. There are examples of increased costs, and one study showed 40% of respondents classed cost-savings as ‘mediocre’. The problems with this become clear if you bear in mind that economies of scale are not always possible, systems cannot always be shared, and of course, the supplier has to make money on your contract. It has been suggested that only if your existing activity was very badly managed, and overstaffed, will outsourcing benefit you financially. In most of these cases, getting to grips with the in-house function would offer similar savings.
2. Focus on core competencies – there are problems with this concept because many managers have trouble deciding what a core competence actually is, and furthermore, much of the time saved on managing the activity is re-invested in managing the outsourcing supplier.
3. Access to highly trained staff – although this can happen, there have been complaints that suppliers do not always staff a client function well, and in some cases will actually remove the better client staff from the activity.
4. Performance improvement – some have managed to achieve this, but again there is evidence of difficult or even serious service-level problems.


It could be argued that outsourcing remains popular because of the perception that so many companies are doing it, therefore it must work. There is evidence that companies can be over-optimistic regarding the benefits of outsourcing, or misunderstand the potential of the internal function. Others may outsource for political reasons, it can be a useful way to get rid of an enemy, or a headache. These are often the contracts that fail, although thankfully guidelines are becoming clearer regarding how best to gain benefit from outsourcing. As with many processes, one of the best ways to ensure success is to be aware of potential strengths and weaknesses.

Strengths and Weaknesses

Just considering whether to outsource at all can be an impetus to improve a function and increase your understanding and control of it. If you can control the costs of the function, and have an understanding of where it fits into your business, you can make an informed decision about whether to outsource and are far more likely to achieve cost control and other benefits. There are some good examples where access to high quality management skills, and advanced new technology, can happen, particularly with suppliers who have more experience in your area. Some companies have found an improvement in service quality, especially when the supplier has learnt your business and really understands your specific needs. This can take time and demands a solid relationship between the parties. There are of course situations where economies of scale can be found, and where outsourcing can increase the future flexibility of your enterprise.

Some of the problems surrounding outsourcing are due to the ‘hidden’ costs that occur at each phase of the lifecycle, it takes time and skill to develop benchmarks, negotiate with suppliers and develop a solid contract. The transition can involve a lot of disruption, a slow down in reaction time, prolonged supplier learning, and much time invested in managing relationships. The time and effort spent on supplier relationships can vary – a recent survey showed that some senior managers suggested the relationship was adversarial, with almost continual fighting over objectives and contract interpretation. These costs tend to increase the more suppliers or vendors you have to deal with, but experience in outsourcing can reduce these, and they will be a smaller percentage of larger contracts. There are also issues regarding the level of control you have over the activity, in theory, using the market as you do when outsourcing, can never give as much control as using ‘hierarchy’, when you keep things in-house. Sometimes this is not a problem, but with critical business functions it can be.

The extent to which you will experience strengths or weaknesses of outsourcing depends upon having a clear understanding of what you want to achieve, a good contract, and an awareness of the circumstances that will influence success.


Influencing circumstances

There are of course many factors that will influence the potential success or failure on an outsourcing strategy. Large companies can have more bargaining power with the suppliers, but they may be less able to make use of a supplier’s economies of scale. Small enterprises may experience relationship difficulties as they have less to bargain with and are possibly less experienced in relationship management. The function you are considering outsourcing will also influence, for example, there is evidence that IS managers perceive a high success with outsourcing systems operations and telecommunications, but not with outsourcing applications development, end-user support, or management. The environment within which the business operates will also influence results, a more dynamic environment can make planning for the future difficult. Experience in outsourcing, your own and that of your supplier, will increase the potential of success. Outsourcing processes tend to improve as the vendor gains an understanding of your own company.

Increasingly now, the key factors will be how the outsourcing lifecycle is managed, and how effectively your enterprise is organized to negotiate and manage the contracts and relationships. Very different skills are needed of the managers in charge, and a clear understanding of how the organizational structure will look after outsourcing is required (Gartner Group).

Outsourcing is most likely to be beneficial when the function concerned is of low competitive advantage and likely to remain so. Similarly, if your internal capability is weak, and hard to improve outsourcing may be an option. However it will be important to assess and understand why the function is weak to enable you to manage the outsourcing process. Another aspect to consider is how inter-dependent the function is with other aspects of the business, sometimes outsourcing one part of a process can lead to problems because of the complexity of the linkages.

Making a decision regarding whether to outsource or remain in-house is difficult. It has been suggested you should consider whether the Internal capability of the enterprise to perform is weak, moderate or strong, and whether the potential for an activity to yield competitive advantage is weak or strong. Based on that you can make decisions about whether you should outsource, get in a bit of additional capability, partner with someone else or carry on in-house.

(see ‘Linking Outsourcing to Business Strategy’ Richard C. Insinga and Michael J. Werle, Academy of Management Executive, Vol 14-4 November 2000)

There is an increase in more partnership based or collaborative relationships between larger enterprises and outsourcing vendors, and these should be considered where possible.

Management tips – how to increase the chance of success

There are many sources of information now regarding how to improve the chances of an outsourcing contract leading to successful outcomes. These include outsourcing consultancies, practitioner and academic literature, and websites such as The Outsourcing Institute. I will briefly summarise the suggestions.

• Consider carefully what you want to achieve and why you are thinking of outsourcing
• Do get your own operations in order first, do not outsource a problem or something you don’t understand.
• Do invest in a good contract that can minimise risk yet maximise flexibility
• Do invest in developing your internal management to ensure they have the skills to manage contracts and supplier relationships.
• Set clear benchmarks and realistic expectations
• Do not focus on price alone.
• Consider the potential advantages and disadvantages of shorter contracts and multiple suppliers.
• Plan to manage, set up clear structures and monitor and evaluate performance.
• Consider also how you can retain and develop knowledge
• Do communicate fully with all staff and ensure the transition is managed with tact and consideration.

More on this in our chapter on outsourcing in the book due out in November 2007:

Taplin, Ruth (ed) Outsourcing and Human Resource Management: An International Survey. Routledge.