Most outsourcing decisions are based on economic returns or savings compared to cost. In today's environment, the real reason companies should outsource is because they need to focus management time and resources. Clear benefits of outsourcing are cost savings and service improvements, but the real driver needs to be management focus.
Companies need to focus management time and attention on their core competencies and maintain efforts to continuously improve those core functions. Organizational histories show how performance deteriorates when company leaders and managers begin to focus on non-core activities. Profit performance declines and productivity weakens. Functions outside of the core should be outsourced to free management time and organizational resources to work on the highest priority activities—core competencies.
To select specific functions for outsourcing, conduct an internal baseline analysis and market research initiative. This process will also help the company identify internal needs and service requirements for functions or processes, the cost structure of functions or processes that are candidate for outsourcing, and find qualified providers that can meet service and cost needs of the company.
To establish a baselining and market research initiative, follow these five steps:
- Establish a baselining analysis team: This team is responsible for collecting and analyzing data, and preparing baseline summary documents for each function.
- Define data requirements and analysis methodology: The goal of this step is to understand current functions, determine current requirements, understand high-level selection criteria, and obtain agreement from the leadership team.
- Develop a baseline model: The baseline model involves collecting data about the processes, mapping the process, developing issues lists, developing cost and service baselines, comparing internal baselines against industry best practices for validation, and preparing a summary document for each process considered a candidate for outsourcing.
- Perform market evaluation of service providers: This step is accomplished by identifying potential providers, preparing Requests for Information (RFIs) for high-level due diligence, and evaluating RFI responses.
- Develop specific outsourcing recommendations: The team determines the feasibility of outsourcing specific functions or processes, identifies those functions or processes that meet company financial return objectives, prioritizes the list of potential service providers, obtains consensus on the prioritized list, and prepares for the next steps in the outsourcing process.