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Current Feature
In these Feature Articles, a series of guest contributors look at
different aspects of industrial and economic change.
Here Olle
Hammarström, from the Swedish National Institute for Working Life, looks
at whether outsourcing really delivers on expectations and why contract
renewal time could be important for trade unionists.
Outsourcing
– Does it pay off?
Outsourcing is a new phenomenon in
some industries. In others, however, it has been going on for many years
and outsourcing contracts are beginning to come up for renewal. It is time
to asses the outcome of the original decision to outsource. Has it worked
out as expected? Is it time to renew the outsourcing contract, find a new
vendor to provide the product/service or to bring back the operation to
the home company?
Compass Consulting is a consulting company
specialising as an advisor to companies on outsourcing and related issues.
Compass helps to assess if outsourcing is an option, to draw up contracts
and to assist in evaluating expiring contracts. In an internal database,
Compass has recorded some 8,000 outsourcing cases from 32 countries.
An
internal report from Compass shows that 58% of the companies that have
tried outsourcing are dissatisfied. The major part of the disappointment
comes from the relationship between the outsourcing company and the
service provider. The outsourcing company underestimates the costs of the
management, information and coordination that is required.
Either
the parent organisation devotes too few resources to managing the vendor,
or the people who are put in charge of the relationship lack the skills,
training or inclination to make the relationship succeed. Analyses of over
300 outsourcing contracts, conducted by Warwick Business School in the UK,
have found that internal management accounts for between 4% and 8% percent
of the overall costs of outsourcing. For offshore outsourcing, it is
common for the cost to be as high as 12%. The high costs for internal
management are often neglected when outsourcing is considered.
One
reason why outsourcing looks less attractive when the contract is up for
renewal is the common practice of “back-loading”. Back-loading refers to
the practice of structuring the outsourcing contract to deliver
unsustainably low margins in the early years (so as to attract the client
into the relationship) and then compensating for this with higher margins
towards the end of the contract.
Many decisions to outsource seem
to be based on an underestimation of the costs and efforts involved in the
process. For trade unionists who have failed to stop an original decision
to outsource there is a good reason to follow the performance of
outsourcing contract. The contract renewal time can be an opportunity to
bring jobs that have been outsourced back into the home company.
Olle
Hammarström
Respond to the Current
Feature
If you would like to respond to the Current Feature,
click here.
Previous
Features
Structural
change: the good old days - and today (Olle Hammarström)
Managing
change: European strategies for local responses (Valeria Pulignano)
On
outsourcing (Olle Hammarström)
Updated
22 September 2005 DS
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Download the TRACE Topic Sheets
The Topic Sheets comprise a set of information sheets on different aspects of restructuring, together with a Glossary, Bibliography and an Education Pack with activity sheets and trainer’s notes.
For more information and to download the Topic Sheets, follow the link above. |
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