Outsourcing can improve efficiency and increase a business’s flexibility, but
how much of your company’s work should you hive off? And how do you find the
right partner: will they be in China, India or just down the road?
David Molian, lecturer at the Bettany centre for entrepreneurial
performance, Cranfield School of Management: Never hand over a strategic
part of your business unless it is done in a close partnership and you can
play a significant role in the partner’s business. If you are a small firm
working with a large outsourcing partner, you don’t have much leverage, so
finding ways to make sure your outsourcer delivers what you want is going to
require time and effort.
Chris Batty, managing director, Lestercast, a Leicester manufacturer of
metal castings: We have a partner in China who produces our high-volume
orders for the automotive industry. I employ 45 people: I would need 1,000 –
and the risks of a business of that size tied to automotive ... I wouldn’t
be able to sleep. By outsourcing we are protecting ourselves, protecting our
employees.
The automotive sector has dived. Our turnover will go down about 40% but we
won’t have to make anyone redundant. Our Chinese partner takes the risk. We
have put a lot of effort into the relationship. We are their second-largest
customer and will turn over £1.5m with them, even though the sector is down.
David Barlow, fleet director, Hill Hire: The service level agreement
you negotiate with an outsourcing partner is critical. Both sides should
feel that as the service or product develops, they have headroom. Make sure
you have measurable targets. These should be achievable but stretch the
supplier to enhance the service or product - the outsourcer’s reward being
that as you develop, so do they.
Build a picture for the supplier of how your outsourcing success will ensure
stable and/or incremental business for them. Negotiate hard on final price
but be conscious that an underfunded service provider will always be looking
to earn revenue in other ways or escape from the contract.
Phanish Puranam, co-director of the Aditya Birla India Centre at London
Business School: Outsourcing overseas has obvious difficulties due to
the differences in culture and regulation. But there are compensating
features. The first is scalability. Suppose you are a small business
thinking of taking on two or three people to do the accounting or run a
small call centre. Many offshore outsourcers can take on business of that
size whereas onshore companies typically cannot because they have a larger
fixed cost of setup.
The second advantage is that the cost difference is dramatically large. If you
net out all the costs of relocating, you are still left with a clear saving
of 20%-25% over onshore outsourcing.
The third advantage is that the level of sophistication of some offshore
vendors in some areas is much higher than that of the onshore vendors. In IT
it is clearly the case. Indian companies have been doing this for longer on
a larger scale, so they often beat onshore companies in terms of
efficiencies. If you need market research, for instance, an outsourcer in
China or India will employ a bright MBA student to pull together the data.
Knowledge-based offshoring could play a critical role for many technology
start-ups. Many companies in India have scientists well qualified to take on
routine research and development lab work. In life sciences, technology and
engineering, they will work as a complementary team.
All of this involves a steep learning curve. I have rarely heard people who
have done offshoring report success on the first attempt.
Sunil Parekh, business development director, Capgemini outsourcing
services: Outsourcing today is about identifying where a specialist can
add value to your business. A manufacturer may decide their expertise lies
in defining the brand and the product, then outsource “the grunt” of
production to a specialised facility.
