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Contracting-Out or Outsourcing In-House Functions – Doing It Right

Contracting-out or outsourcing in-house functions is many times viewed as a panacea to problems an organization is facing or as a sure way to reduce costs, which is not always what happens.

Here are some considerations in planning to implement the contracting-out or outsourcing of an-house function. Use these considerations as a starting point; the steps you end-up taking should be specific to the process at-hand and your particular circumstances.

  • Document your objectives and list the reasons why you want to do it, e.g.
    • Not a core competency of the organization. Be specific why you believe this.
    • Too many mistakes. Be sure about this. And be sure you have adequately worked on improving the process so that it is more efficient and effective.
    • Can be done for less money (you think?) by an outside vendor. Be very rigorous in your analysis in coming to this conclusion.
  • What are your expectations for the outsourcing? What are they; are they realistic? Do they reflect stakeholders at various organization levels and operating areas? Are there conflicting expectations within your organization? These need to be resolved as it can significantly impair outsourcing success.
  • Document the process you want to outsource – in detail. This is important. Before you outsource you must have full knowledge of the process. Inevitably, by documenting the process you will identify certain elements of which you were not aware; or better ways to do it.
    • Identify and analyze important process challenges such as multiple hand-offs, bottlenecks, etc.
    • Identify key points in the process that can be milestones for managing your vendor and the transition process.
    • Are there assets that will be transferred to the vendor?
    • Will the vendor be using any of your assets, e.g. computers, IT systems, office space, desks, etc.?
    • If using your IT system, develop protocols for its access and the security of your system, data, etc.
    • Start to develop decision criteria for selecting a vendor. Sound knowledge of the process will be invaluable.
    • Identify stakeholders and their roles. Who will be involved in deciding on a vendor, service implementation, providing indirect support, etc?
  • Document your current costs, in detail. Will be needed when you receive bids.
  • Document expected cost savings or improved effectiveness, if any. Quantify as much as possible.
  • Determine the position (not person) in your organization responsible for contract / vendor management. Maybe you will have to create this position. Make sure the position embodies a mix of technical and project management skills. Consider skewing towards project management skills as it is normally easier to obtain technical input as needed.
  • Determine how to maintain adequate knowledge of the technical content of the outsourced processes. Over time you could find yourself beholden to outside vendors because you do not have adequate in-house expertise. You may want to require and implement your staff’s involvement in some elements of the process to help maintain a basic level of technical expertise.
  • Determine the term of the outsourcing agreement. Needs to be long enough for a vendor to ramp-up and iron out challenges that will occur; also to make a profit. You do not want a vendor who is not making an adequate profit as the effect may very well manifest itself in its performance. On the other hand you want to have the opportunity, without waiting too long, to find out if there are other vendors that can do a better and/or less expensive job for you. Also to keep your current vendor “on-its-toes”.
  • Consider talking in advance with a couple of vendors regarding your intention to outsource. Find out how they see your outsourcing, ask for “suggestions” for inclusion in your request for proposal. As them for their perspective as to the adequacy of your budget. This input can help you to develop a RFP that will garner good proposals, and hopefully a good vendor and service.
  • Establish the criteria you will use to select the vendor. You may want to weight the respective criteria.

After the contract is signed

After the contract is signed, the following should occur.

  • Establish a “project implementation office”
  • Develop an implementation and transition plan
  • Develop a mutual understanding of organization cultures
  • Establish formal points of contact between the organizations;
  • Establish invoicing procedures and content
  • Service review at regular points in time

Establish a project implementation office. After the outsourcing contract is signed, ideally before it’s signed, establish a project implementation office. This could be a formal entity within your organization or a responsibility assigned to a current department and/or position. This entity will be responsible for successfully transitioning the service to the new provider. It should establish a formal implementation and transition plan in conjunction with the provider.

Develop an implementation and transition plan. This plan should include quantitative objectives for the plan, all steps and milestones to be completed, a timeline, and dates for reporting status to management. The implementation steps should cover when responsibilities for critical elements of the service are formally transferred and the respective positions doing the handing-off/receiving of the responsibilities.

Develop a mutual understanding of organization cultures. Organization culture can sometimes create a lot of problems, particularly when the process/service outsourced is large and complex. How the organizations “do business” should be discussed prior to implanting the outsourcing. A good way to do this is for the outsourcing organization to visit the service provider’s offices and facilities. A tour that includes a description of how the provider organization is organized, viewing people doing the work and interact with each other; and the type of work environment will provide many insights. Ideally the provider should request this type of tour of the outsourcing organization before a proposal is delivered; and if not it should occur before the implementation plan is completed.

Establish formal points of contact between the organizations. The outsourcing contract should identify specific positions in both organizations where contact will occur and the nature of that contact. Particularly important is that the responsibilities and decision making authority of these positions should be defined. This will prevent a lack of clarity regarding responsibilities and authority and also identify any grey areas or overlaps that may not have been known.

Establish invoicing procedures and content. The invoices provided by the service provider should contain information describing the status of the service it is providing and achievements. The outsourcing organization should establish the content of invoices in the contract with the provider. This is important for both organizations. Invoicing becomes an opportunity for the provider to show how well it is providing the service and a tool for the outsourcing organization to evaluate performance.

Service review at regular points in time. Every six months, or at least yearly, there should be comprehensive review of the service(s) being delivered. This evaluation should be more in depth that the progress and activity reports generated by the provider. It should also cover challenges the provider is having that were not known in advance of implementing the contract. These challenges may be the result of changes in the political, administrative and/or societal environments in which the both organizations operate; or changes within the outsourcing organization.

Michael VanBruaene Blog & Website. www.advancingyourorganization.com

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Good post.

I’d also add I think there should be some up-front strategic thinking. In private sector before outsourcing, companies think “is this a strategic asset”? “is this a core competency” I think government should think of that as well – there’s definitely a lot of commodity and not strategic items they should outsource. But other items are too important – say outsourcing pieces of the acquisition process. To me, that’s one of our corest competencies as government – being really good buyers and managers and overseers.

Michael VanBruaene

Thank you. Those are good points. I had not considered to view outsourcing from a strategic perspective, as well as the assets under consideration. Yes. I strongly believe that the quality of management within governmental agencies at all levels is much better that you are given credit for.

Tina M Borger, CPPO

Great post on the importance of not assuming that outsourcing is always the way to go. Analysis is critical, and you’ve provided a good list of what to consider.

Michael VanBruaene

Tina, Steve. Could you steer me to any tools – based on best practices, evaluation criteria and/or outsourcing risks – for assessing outsourcing efforts status? Ideally based on some type of questionnaire that results in a summary of positives and areas for improvement.