Business and Finance

Myths of outsourcing

Several misconceptions have built up around outsourcing (also known as external service delivery) but if handled well, they need not cause controversy and the same quality of service to the public can be maintained. The Irish Business and Employers Confederation has identified four significant myths and how these can be addressed.

People BlurredOutsourcing inevitably leads to job losses

External service delivery is part of the Irish Government Public Service Reform Plan, which sets out the reductions in public sector numbers, but this is only a narrow view of the overall debate. The external services industry in Ireland is strong and viewed as an area for expansion in terms of job creation. Wages are competitive and companies enjoy a high level of employee satisfaction.

The Irish Government’s Action Plan for Jobs calls on all government departments to “identify further potential non-core activities suitable for external service delivery which could in turn offer opportunities for Irish based BPOs [business process outsourcing organisations]”.

Ireland is a centre of excellence for business process outsourcing and shared services, which focus on key knowledge-intensive services. The various categories of externally delivered services can also be delivered by existing companies, both indigenous and multi-national, based in Ireland. Services that can be performed by these companies can be transferred to potential international clients, through internationally traded services or by attracting them to locate in Ireland.

Contracting can dictate not only what services are to be carried out but also where they are delivered. Partnering with the private sector in performing public services can also result in significant job creation.

The outsourcing of business services by South Tyneside Council saw 450 council workers transfer to the new service entity under Transfer of Undertakings (Protection of Employment) Regulations but its private sector partner (BT) committed to create an average of 750 jobs in the borough over the lifetime of the contract.

In addition, the partnership approach can see companies bidding together in consortia which, depending on the nature of the project, may involve innovative SMEs, supporting the enterprise base even further. Essentially, government can play its part in developing this sector by making a commitment to availing of these services and, in turn, creating sustainable employment.

Student using mouse Outsourcing leads to loss of control and service levels

In an external service partnership, the state remains in control in three ways: specifying outcomes; holding providers to account; and re-tendering contracts. The skills needed to contract out activities are vital to ensuring the success of projects. Specifications during the tendering phase will help to determine the desired outcomes and performance will be measured and monitored through service level agreements that can be augmented through independent audits. Service level agreements assure arms-length control and, properly framed, no loss of control.

Co-operation between the public and private sectors brings together skills and ideas in designing and developing better services for the end-user.

Partnerships must provide tax-payers with value for money but this does not necessarily mean opting for the cheapest option during the tender phase. The best long-term option should be the priority and the focus must remain on quality.

Service providers can guarantee compliance to required standards, especially those relating to security and confidentiality. Service providers should employ proven world class methodologies. An existing example in the Republic is provided by the critical emergency call answering service (ECAS), also operated by BT. This is required to adhere to a number of internationally recognised standards to provide evidence of its approach to quality, information security management and its ability to operate on a continual basis. ECAS has been audited and certified to the ISO9001:2008, ISO27001:2005 and BS25999-2:2007 standards.

The performance metrics used to measure the success of external service arrangements will vary depending on the service being contracted (e.g. managed services, facilities management, ICT services, business process outsourcing) and the reasons for which it was outsourced (e.g. cost saving, productivity, internally unavailable skills). The design of the individual metrics will be specific to each individual situation and their design may require specific expertise.

stocks 15008774_l Outsourcing is another type of privatisation

Outsourcing or other external service delivery mechanisms do not represent privatisation. Privatisation involves the sale of publicly owned assets to the private sector. Outsourcing is about the state moving from the role of direct operator to one of organiser, regulator and controller. The services remain public.

In their ‘More with Less’ report for the Social Market Foundation, Ian Mulheirn and Barney Gough explain that companies are not “competing to win customers in markets, they are competing for contracts for the market”.

Outsourcing arrangements allow the private sector to provide and operate public assets or services for a set period under a contractual agreement. The contract is constantly supervised and monitored by the procuring entity, allowing for significant public sector control. At the end of the contract period, the assets will revert entirely to direct public control, pending the establishment of a new arrangement through a competitive process.

Euro coins Outsourcing will eventually prove to be the more expensive option

Benchmarking, a value-for-money assessment and a competitive procurement process will result in lower costs and increased productivity, enforced through service level agreements. Private sector partners are able to produce some services more efficiently, due to economies of scale, competitive pressures, skills and expertise. Accenture’s Michael J Salvino and Charles Sutherland write that specialist companies can “use their scale, analytics capabilities and insights to help create innovations that can drive better decision making, continuous operation improvements, enhance product development processes and more profitable customer relationships”. They are also in a “better position to make the ongoing investments needed to improve operations within that industry”.

The up-front cost of partnering with external providers may appear more expensive than retaining the service in-house. Therefore, transparency on the true costs of direct service provision, combined with traditional procurement methods, is required. The National Audit Office has found that two thirds of public sector projects are completed late, over budget or do not deliver the outcomes expected. External service delivery is not a panacea and, in some instances, it may not provide the optimum solution. However, a robust and transparent benchmarking process should be applied to the full cost of public service provision. Based on this analysis, alternative approaches to service delivery, including external provision models, should be considered.

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