The Outsourcing Decision - Key Notes

The Outsourcing Decision

Key Issues

Outsourcing decisions should weigh service delivery options against predefined criteria to achieve end-user satisfaction.
Stakeholders must be involved from the outset in defining required services and acceptable performance levels.
Understand service markets before determining service delivery options.
Consider various service delivery options (managing agent, contractor, managed budget, total facility management), each with strengths and weaknesses.
Identify key service provision attributes (hard and soft measures) to evaluate service delivery options.
Consider the desired degree of flexibility in service delivery.
Consider direct and indirect costs of outsourced service delivery for accurate financial comparison.
Employing a total facility management service provider doesn't eliminate the need for contract management and end-user interface management.
Novel solutions like fully serviced workspaces exist.
Re-evaluate outsourcing arrangements periodically against service provision attributes, involving market testing.

Introduction

Outsourcing decisions should weigh available options against predefined criteria.
Choice between outsourced and insourced service delivery requires a thorough examination of requirements and a firm baseline for expressing needs.
Consider attributes of each service and options for service delivery.
Cost is often a primary motivation for considering outsourcing.
The decision should be revisited periodically as market conditions change.
BS 8572 covers aspects of outsourcing.

Establishing the Baseline

Base outsourcing decisions on the best available information.
Outsourcing should be driven by decision-making, not drive it.
A well-defined baseline supports comparison between planned and actual performance.
Differentiate between absolutely necessary and desirable services.
Consider phasing or deferral of services.
Considerations form part of the organization's sustainable space provision.

Considerations for Defining the Baseline:

Relationship to business objectives.
Drivers and constraints.
Portfolio and sustainable space provision.
Risks and opportunities.
Stakeholder engagement and communication.
End-user requirements.
Scope of services and supplies.
Attributes of service provision.
Options for service delivery.
Current arrangement(s) for service delivery.
Markets for services.

Relationship to Business Objectives

Facility management supports core business objectives.
Provide a statement on business objectives and operations, including planned expansion, or closure details (conversion, mothballing, or disposal).
Include targets, key milestones, and details that help outline the procurement process.
Milestones help in understanding progress towards achieving critical success factors.
Alignment between service delivery objectives and business objectives is essential.

Drivers and Constraints

Understand factors driving or constraining the business.
Internal drivers include personnel, work, and information.
External drivers include resource availability, competition, finance, and credit.
Focus on controllable internal drivers while monitoring external ones.
Be aware of the impact of technology and societal changes.

Risks and Opportunities

Identify, assess, and treat factors that can impact service delivery, considering both negative (risks) and positive (opportunities) impacts.
Establish criteria for judging significant negative impacts.
Establish criteria for determining the worth of opportunities to improve satisfaction and value.
Record all risks in a register.
Quantify cost and time impacts where possible.
Understand which party is best able to handle a particular risk.
Questionnaires and checklists can help identify potential risks.
Conduct qualitative and quantitative risk assessments, including contingency in budgets and schedules.

Stakeholders as Qualified End-Users

Engage stakeholders to define needs through surveys and reviewing specifications.
Recognize diversity in stakeholder needs and accommodate them.
Prioritize stakeholder needs.
Control stakeholder input and changes after agreeing on the service specification.
Use value management to guard against over-specification.
Apply value engineering principles to eliminate attributes that add cost but no value.
Involve stakeholders in discussions about facility management arrangements.
Maintain effective communication between the organization and service providers.

Effective Communication and Stakeholder Involvement:

Maintain a clear understanding between the organization, end-users, and service providers of operational requirements and obligations.
End-users can provide feedback on service satisfaction.
Questionnaires that seek opinions and attitudes are preferable.
Prioritize stakeholders' needs and reconcile competing priorities.

Scope of Services

Outline the extent of services and supplies needed, identifying each separately.
Summarize expectations of end-users and other stakeholders for each service and supply.
Define and delimit services to avoid gaps and arguments, controlling scope creep.
An all-encompassing statement of needs should be produced, including a definition of each service, relationships with other services, and contingency planning.
Use the facility management strategy as a reminder of the context.
Map services to pinpoint gaps and overlaps.

Sourcing Policy

Decide on the extent of insourcing vs. outsourcing.
Integrate co-sourced service delivery and costs.
Ensure seamless delivery to end-users regardless of the service source.
Review outsourcing decisions every three years.
Review service provider performance annually.
Outsourcing and offshoring can save costs.

Offshoring Considerations:

Do not outsource core competence or move it abroad.
The distinction between core and non-core business may be blurred.

Statutory and Regulatory Considerations

Recognize that engaging service providers does not absolve the organization of obligations related to health, safety, security, environment, employment rights, and public procurement.
Consider national and international standards, industry standards, and manufacturers' recommendations.

Attributes of Service Provision

Identify attributes of service provision to evaluate options for service delivery.
Determine criteria before discussing options.
Prioritize criteria:
- End-user service.
- Uniqueness of service.
- Priority of service, flexibility, and speed of response.
- Direct cost.
- Management and indirect cost.
- Control.
Exercising an outsourcing option does not relieve the organization of the need to manage the relationship with the service provider.

End-User Service

Establish the scope and standard of required services, alongside soft measures like courtesy, responsiveness, and presentation.

Uniqueness of Service

Consider special demands of the service, such as specialist plant and equipment or legislative requirements.

Priority, Flexibility, and Responsiveness

Clearly express the priority of services so that critical services can be highlighted and the required level of response taken into account.
Undertake a risk assessment for high-priority services; use questionnaires and checklists to identify risks.
Consider the level of flexibility required for each service and the speed with which a service provider can respond to orders or requests.
$Table 7.1 Risk scores.$
Risks attracting a total score of 5 or more would be unacceptable.

Direct Cost

Direct cost is easy to ascertain in the case of an outsourced service.
For insourcing, the direct cost calculation includes salaries and benefits, but there might not be the same certainty because of unknown productivity and performance.

Management Implications and Indirect Cost

Identify all costs, both direct and indirect.
Indirect costs include those incurred in the internal management of service contracts and the ongoing training, induction, and development of in-house personnel.

Control

Consider providers’ capabilities and effort needed to manage them.
The facility manager manages the output of the service provider.
Consider the expertise available within the organization for the management of these services if insourced.
The level of control that can be achieved is closely correlated with the nature of service delivery and the contractual relationship established between the organization and the service provider.

Options for Service Delivery

Consider which option, or combination of options, most closely matches its identified needs.
Options include:
- Separate company/business unit.
- Managing agent.
- Managing contractor.
- Managed budget.
- Total facility management.
- Off the shelf/agency contracted employment of personnel through a manpower agency.
- Insourcing.
Each option presents risks.

The Managing Agent

Appoint an external organization to manage its facility.
The managing agent will perform better and more reliably if performance criteria are laid down.
Managing agent and service providers can be selected based on tendering.
The managing agent approach offers flexibility for the organization to find and then hold on to the combination of contracts that suits it best.
Managing agents can be made responsible for ensuring that the scope of service contracts is such that gaps do not occur.
The organization might be moderately exposed from a risk perspective.
The organization might find that the number of administration costs increases as the number of separate contracts rises.

The Managing Contractor

There is one contract between the organization and the appointed service provider (contractor).
There should be a reduction in documentation and lower transaction costs.
Gaps in service provision should be eliminated.
By using a managing contractor to undertake some or all of the work, with the support of subcontractors, the organization is able to mitigate much financial risk.
The organization is, despite the limitation of being in just one contract, largely able to see where its money is being spent because open-book accounting is usually adopted.
However, it might be difficult for the organization to get a true account of expenditure where the contractor delivers services directly.

The Managed Budget

A managing contractor takes responsibility for the payment of all suppliers and provides a consolidated invoice at the end of each month.
The management fee is based on a combination of the resources as deployed and the value of budgeted expenditure.
Through the removal of supply chain mark-up and remuneration based upon a management fee, the friction that might otherwise build up between the two main parties is alleviated.
There is also the further advantage of fewer transactions to be processed, thereby reducing administration for the organization.

Total Facility Management

The organization is able to pass the full responsibility for managing its facility to a single service provider for a fixed price.
The reality can be that the service provider subcontracts all or most of the work.
Difficulties can arise because terms and conditions that are embodied in the contract between the organization and the service provider might allow for situations that are not subsequently recognized in the contract with the subcontractor or vice versa.
Market pressures have driven the questioning of such contractual arrangements and the conflicts of interest that arise through the application of a percentage-based mark-up.

Changes and Serviced Facilities

For some organizations, such as those experiencing rapid expansion, it might not be so much a matter of bringing service providers into their facilities, but a case of establishing their business in a fully serviced facility.
The number of serviced office providers has increased in the marketplace and can provide greater levels of flexibility using a menu of prices geared to levels of service delivery.
Evidence suggests that the old habits of liberal space usage are quickly reformed when the true cost is revealed.

Single Versus Multiple Services

Some organizations can choose from amongst the following arrangements:
1. Single-service providers, with as many service providers as there are services.
2. Multiple-service providers, where two or more services are bundled and delivered by each of one or more service providers.
3. A combination of the above.
There are implications in choosing any of the arrangements.
One other arrangement open to the organization is the total facility management service provider.
The selection of the most appropriate arrangement or combination should take proper account of the resources and costs involved in managing the relationship with service providers.

Evaluating Options

The option evaluation matrix; objectivity and transparency.
Each service should have a separate matrix, where the attributes are entered as rows in the matrix and the options are placed against them in columns.
$Table 7.2 Evaluating options for service delivery based on attributes of service provision.$
Common sense needs to apply when interpreting the total scores.

Markets for Facility-Related Services

Markets are dynamic and specific to a location or region.
Matching the current and likely future requirement for services with their availability in the market and keeping the situation under regular review.
There will be physical limits to any market from which service providers will be drawn.
The organization should therefore investigate the current state of the market in terms of prospective service providers and the extent to which they cover the services required by the organization.
Contact service providers directly to understand supply and demand.
Engage existing and prospective service providers in discussion about service provision and options.

Conclusions

The organization must decide upon the route that satisfies end-user requirements, whilst providing best value.
Thorough preparation takes time and so contemplating the decision of whether or not to outsource means planning well ahead and building in adequate time.
The decision to outsource can be made rationally and objectively, based on attributes of service provision that are relevant and transparent.
The organization can evaluate the suitability of the options open to it - see Table 7.2.
Limited and periodic market reviews are useful for information gathering, but habitual market testing is not considered best practice and can be counterproductive.
In defining its approach to service delivery, where the recommended action is to outsource, the organization has, in effect, defined the basis of its procurement strategy.