Imagine this: A small business with 50 employees outsources its payroll function to a third party. All is well with the arrangement until the day the outsource provider's computer systems fail and the company's employees don't get paid. The work floor is militant and the union orders all its members to strike. The action takes place just as the company is supposed to fulfil a major contract. The production line for other clients is also adversely affected.
With its workforce out on strike, the company is rendered impotent until the issue is resolved. With every passing day, its reputation is further sullied.
Deciding to outsource a function of the business, and then signing a contract with a third party to provide those services is only the beginning of the relationship, not the end.
Thinking that once the contract is signed it can be placed in a bottom drawer and responsibility for the arrangement is now totally with the third party is a common mistake made by small and medium-sized businesses (SMEs).
"While having a formal understanding is highly recommended, the best outsourcing relationships are not the ones where the two parties are constantly poring over the contract," says Andrew Friars, managing director, business process outsourcing Asia-Pacific at Accenture.
"In this sense, the best outsourcing relationships are the ones where the contract is put in the bottom drawer and the partners in the relationship concentrate on working together."
Outsourcing a business function is fraught with a variety of risks. Before making the decision, the business owner must determine whether the function or the service is a core competency, and if so, whether outsourcing this function is a risk or an opportunity.
If it's an unrecognised opportunity, the company will be inadvertently selling off a competency that makes it special and provides it with a competitive edge.
Potentially, there are financial, legal and communication issues with staff and suppliers which can make the decision quickly regretted if not handled well.
But the biggest risk of all lies in the failure of the company to manage properly the relationship with the provider of the outsourced service.
"Ideally, someone in the company will be given the role of managing those relationships or it will be part of their portfolio of work," says Friars. "When I'm negotiating how the relationship is going to be set up, I always ask for the most senior people available with the other party to oversee the contract, because the quality of that relationship will determine the quality of the outcomes."
Managing this relationship is critical because it affects the proper governance of both organisations.
"I see the relationship between outsourcing and governance as being hand-in-hand," says Friars. "In this context, governance means the strategic, tactical and operational aspects of management of the outsourcing relationship."
Although contracts formalising outsourcing arrangement have traditionally included clauses defining expected behaviours, conduct and ethics to ensure both parties are accountable, some companies take it extremely seriously.
"I have seen contracts with logistics companies and Accenture in which the contract details activities that we would just never perform in an office environment, but we understand that's the other company's way of doing business," he says. "So we signed up to the same levels of occupational, health and safety standards as the client even though we worked in an office."
A more practical example lies in data privacy. "If you have a company where data privacy is important, the outsource provider will be looking at data that relates to the operation of a third party," says Friars.
"All our staff are trained in privacy laws and their legal and technical obligations in handling a client's private and proprietary information. There are measures to ensure information isn't sent out of the company, and staff are regularly asked about how they are using the information.
"In many cases, the company providing the outsourced services is better at managing issues such as security of proprietary information, better than the company itself."
The best approach to establishing and managing an outsourced business function is, firstly, to be very clear about the outcomes expected from sending the function out-of-house.
After deciding on a provider, both parties should agree to a set of key performance indicators so that both are accountable for the duration of the arrangement.
"Make these KPIs outcome-based," says Friars. "For example, a KPI for outsourced payroll is that employees are paid on a certain day at a certain time, rather than a KPI which rewards the outsource provider for calculating the salaries correctly.
"Clear measures, open conversation and a transparent partnership backed by a contract are the key ingredients of a successful relationship."
Australian Financial Review
© Fairfax Business Media
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