Out and about
How can you get the best deal when outsourcing business processes and functions, and what effect has the recession had on the market? EN investigates.
“You’re only as secure as your weakest supplier and you can’t outsource risk,” warns John Redeyoff, head of the “365 Assured division” at IT security company NCC.
“There is often a good business case for outsourcing and people are very much focused on the cost-benefit analysis, but are they giving adequate thought to the security implications?”
Redeyoff is talking about the outsourcing of various IT functions, including at the most extreme end of the spectrum remote hosting of all of a company’s systems. But, he makes clear, his concerns extend to all other suppliers – call centres for example – that hold or process data on behalf of clients.
He has, he is the fi rst to admit, a vested interest here: he says his company is leading an industry working group that is attempting to develop a standard against which suppliers can be assessed and certifi ed. And NCC would rather like its 365 Assured daily security testing programme to form part of that certifi cation process. None of this necessarily makes his point less valid.
He continues, “I recently asked a bunch of IT security managers what they do about supplier security and their two main answers were, ‘we audit them’, which is time consuming, and ‘we put it into the contract that they have to be secure’.
“But by the time you take the contract off the shelf it’s too late – a contract provides insurance but not assurance, recourse not protection. Every day organisations lose data through their suppliers – but it’s the client that gets it in the neck and suffers reputational damage.”
This is a concern. But the financial argument for outsourcing can in many cases be so strong as to outweigh any such fears. Take Outsourcery, an IT hosting business that provides hardware and software (the whole kit and caboodle, according to joint chief executive Piers Linney), hosting its clients’ software and data remotely. Clients pay a monthly fee per user, per application.
Linney says that the average start-up that doesn’t outsource its IT infrastructure would spend between £5,000 and £20,000 getting itself set up. This might be a bit of an exaggeration, but if his estimated cost of £50 per month for the same business to outsource its IT is accurate, then we’re looking at a big saving.
For others the fl exibility offered by outsourced IT is the main attraction. Keepmoat, the social housing developer, outsources a number of IT functions to third-party provider Star. Some of these functions, head of IT Andrew Newton explains, are those for which the company does not have the necessary expertise in-house. But another reason for the company’s decision to outsource was the ability to ensure that all of its divisions are supported to the same level, so that those with less experienced IT teams are not disadvantaged.
Using Star, he continues, also enables the Keepmoat Group’s construction arms to set up new site offi ces much more quickly than if the IT infrastructure all had to be installed in-house. Each new office also gets the same standard as the rest of the organisation.
Of course outsourcing has been around for a lot longer than IT networks (and, indeed, many smaller companies’ experience of outsourced IT in the 1990s was not a happy one), and traditionally smaller businesses have relied on third party suppliers for everything from motor fleets to cleaning to payroll. Again, the argument usually comes down to money – a specialist will usually have better economies of scale than all but the biggest companies can bring to bear on non-core functions.
Adam Scott, the human resources manager for “survival technology” (liferafts, clothing for military aircrew – that sort of thing) manufacturer RFD Beaufort, explains that his company has outsourced the payroll for its 60 salaried staff to accountancy fi rm Hurst for more than ten years.
“I think we pay them less than £1,000 a year,” he says. “It’s not even worth our while having a part-time member of staff to do that. I think most medium-sized organisations would outsource their payroll – it’s just the very small companies with only a handful of staff and the much larger organisations for whom it makes financial sense to do it in-house.”
When outsourcing any function, though – from IT with its security and “uptime” concerns to mail order fulfi lment – service is paramount. But, when looking for a good outsourcer, where should you start?
Martyn Hart, chairman of the National Outsourcing Association, says, “If you’re a small business your options are limited – you could go to your local chamber of commerce for recommendations, or you might see an advert or an article.”
You should also, he says, insist on references, and take them up. “Say you want four references,” he suggests.
“Tell the supplier you want four references – two from companies they are confi dent will give them a glowing report, one that has had problems that have been solved, and one that has left them.
“And, even with the star references, make sure you ask some probing questions.”
Hart also says that, when appointing an outsourcer, size is important. “Look for a supplier that is similar in size to you,” he says. “You want a company that will appreciate you as a client – which might not be the case if you are just one small client among hundreds of others – but obviously not so small that it can’t get the necessary economies of scale.”
Keepmoat is a £570 million-turnover organisation – not exactly small but not an international giant either. Star, meanwhile, has 250 employees and 3,500 business customers – so, while obviously much smaller in absolute terms than Keepmoat, in terms of IT outsourcers it’s probably in the same ballpark.
For Keepmoat’s Newton the size of his supplier was certainly important. “They offer a more focused service than the bigger players might,” he says diplomatically.
The financial terms of any outsourcing contract obviously need to be right but, with many “non-core” functions (IT, secretarial services, HR etc) nonetheless critical to the day-to-day operation of any business, the level of service also needs to be right.
Hart, whose day job is at the consulting and research giant Gartner, says that contracts should include service level agreements which, he says, should be kept fairly simple: “Focus on six or ten things based on what makes your business work.”
He also, unsurprisingly, says that when it comes to larger contracts you should employ a specialist consultant: “For contracts above about £250,000, if you haven’t done it before, then you will probably need advice and should find a consultant.
“For contracts up to £500,000 you would probably go with a self-employed consultant but if it’s a bigger contract you should go to a bigger consulting company. Make sure they have a good research side [er, you wouldn’t be thinking of Gartner would you? –ed] – often that can replace the need for competitive tendering.
“Pick lousy advisors and you’ll get a lousy contract. So find a consultant who is relevant to you, who works in your industry, and who you can get on with. It’s about relationships.”
The same holds true, of course, to the outsourced service provider too – it’s usually wise to look for an organisation with demonstrably successful experience of working with clients of your size and in your industry.
It is also, Hart says, a twoway street. “Get to know your outsourcer,” he says. “Don’t just see them once a year for the meeting to assess them against the service level agreement.
“Make it important to them that you are a happy customer. Offer, for instance, to be a reference site.”
Getting the best service at the right price is important, but during the recession something interesting has been happening to the outsourcing market.
While most of the suppliers of services to whom EN spoke were bullish, saying that clients were looking to save more money than ever, there is also an opposite trend in some quarters – driven by fear and a desire to minimise redundancies.
Chris Harland, head of outsourcing at fi nancial services and accountancy firm Tenon, says, “There has been a retrenchment in outsourcing in the last 12 months, along with the rest of the economy.
There is reduced confi dence so, talking to business owners, we hear that they are worried about control and cost so they are bringing things like management accounting back in-house.
“Part of outsourcing is discretionary – and businesses are choosing not to take cost out of their own teams but rather to cut back on outsourcing. It’s the opposite of the normal argument for outsourcing.”
All of which should mean that, if entrepreneurs do decide to outsource aspects of their business at the moment, there will in many cases be spare capacity among suppliers.
As the economy eventually recovers and businesses look to rebuild with pared-to-the-bone staffi ng this could well change – but for now there should be a deal to be done.
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