Sorcery or outsourcery? – feature

Nearly every conversation concerning the pros and cons of outsourcing gets around to the concept of 'core' and 'non-core' business. Facilities Management (FM) companies argue that by outsourcing the non-core parts of your business you are free to concentrate on the core parts of your business. On the other hand, those advocating the retention of in-house management of support services argue that external contractors don't have the same level of loyalty or accountability of an in-house operation.

These may sound like simple alternatives facing the person or organisation contemplating outsourcing the management of a part of their operation. However, if the potential outsourcer doesn't fully understand the actual interdependence between the core business and the support services behind it, they will inevitably run headlong into problems with Corporate Governance.

What is core business?

The core parts of an organisation are the ones that are governed by laws, regulations and community expectations. They are the ones that when 'push comes to shove,' the Council, Board, Vice Chancellor, CEO and Senior Management will be held responsible and made accountable for. In short they are the parts of your business encapsulated in this growing responsibility called Corporate Governance.

Poor Corporate Governance is the single most common cause of the recent major corporate collapses. It is also responsible for damaging the reputation of some of our most important public and social institutions.

When a University cannot process enrolments due to the failed implementation of its student administration system it is not the lecturers who are held accountable - it's the Vice Chancellor and the board or council. When a hospital features in the media for the alleged presence of rats it isn't the nurses or doctors who are held accountable - it's the CEO and the board. When a legal firm allegedly destroys documents prejudicial to its client's case it isn't the administration officers with their fingers on the shredder who are held accountable - it's the senior partners and the board. When an insurance giant takes its eye off the checks and balances of financial management it isn't the self-employed broker who ends up in court in a blaze of media scrutiny it's the MD, CEO and the board.

You can't outsource responsibility

You see, the lecturers don't administer the student enrolment system, the nurses don't do the cleaning, the accountants aren't responsible for document management, and the lawyers don't operate the central print and copying function. More often than not the management of these 'non-core' support services has been outsourced. But no matter how much you outsource the control of a function you can never outsource the responsibility.

So why would anyone jeopardise the core parts of a business by outsourcing the very support services integral to these parts of the organisation?

The smarter organisations take an holistic approach to corporate governance. They actually make the connection between the core parts of their business and the quality of support required for these areas to function effectively and ethically. They actually recognise and value the expertise within these support areas. Rather than outsource them they are making in-house service providers even more accountable.

The core parts of any business need a whole system of support services to keep them functioning effectively. Without stable, well resourced, integrated and accountable support services - including printing/copying - it is only a matter of time before the 'core' business will be compromised.

Facilities Management

FM companies also believe organisations require strong, stable and well-resourced support services. Champions of the FM model point out that they can bring with them a wealth of knowledge and expertise perhaps not currently available within an organisation. This may indeed be the case. The smarter organisation addresses the real issue of professional development for its staff. In doing so it ensures its own staff can be held directly accountable for their actions.

Regardless of whether an organisation provides the service in-house or contracts it to someone else on their behalf, its senior managers are still ultimately accountable. It will still be their names and reputation that feature in the media. So much so, that senior managers are deciding that if they are still ultimately accountable then they should ensure the service is as close to their accountability regime as possible. And that is why many organisations are either moving away from the idea of outsourcing or will start to bring services back in-house.

The outsourcing service provider's core business is not the same as the organisation's core business. When the pressure is on, the value systems of both entities will come into conflict. You just have to hope your contractor is up front at an early enough stage.

What exactly are you outsourcing?

In short, control over parts of your business. For example, outsourcing the print, copying and publishing operation doesn't transfer the risk of a copyright breach. It doesn't transfer the risk of losing control over your Intellectual Property and document management either. In fact, it increases the level of risk. You still have to manage your copyright obligations, your Intellectual Property responsibilities, your Privacy Protocols and, if you're very switched on, a raft of Service Level Agreements. That these things are now one step removed from your direct line of accountability increases your level of risk when an irregularity arises.

When analysing any major corporate collapse, a typical pattern that emerges is the time delay between the occurrence and detection of irregularities. When you have outsourced a part of your business, you have added another step between the irregularity and its detection. Time delay is a fundamental component of corporate governance.

The remedy is continuous scrutiny and auditing of your processes, systems, behaviour and contractors. Scrutiny and auditing is a lot easier, cost effective and immediate when what you are managing is in-house.

An issue for some organisations who have outsourced their operations is that they have not learnt the art and expertise in managing a multi-million dollar contract. With the greatest respect to my colleagues who are purchasing officers, they often do not have the time or expertise to manage a contract requiring such a high degree of specialist industry information. Without a water-tight Service Level Agreement that is managed by a person with specialist expertise, there is a greater chance that the time lapse between identifying and remedying a problem could be financially disastrous.

Outsourcing, in-sourcing, right sourcing?

The biggest tragedy and most unforgivable act of short-sightedness is to outsource an effective and valuable service because of a blind philosophical addiction to economic rationalism. History is littered with examples of how such an approach invariably sows the seeds of failure.

Outsourcing has been used as a performance management strategy to get rid of ineffective staff, to counter union-dominated work places riddled with demarcation disputes, provide quick cash injection ahead of financial year end or to impress the shareholders in the Annual Report.

But maybe you don't have to outsource the entire function permanently. An option may be to outsource the management of this function temporarily until you can build the knowledge, expertise and technology internally. This approach may suit an organisation that has not invested in technology for several years, possibly decades.

This strategy requires a great deal of trust and courage and is high risk. But it can actually provide some benefits. It's the 'teaching to fish' approach. After say, 6-12 months, the external contractor should be able to walk away leaving your organisation self-sufficient. A key element of this strategy is to have a strong Service Level Agreement including unambiguous milestones, non-disclosure clauses and strict hand-back time lines.

It is right that the issue of core business gets raised in any conversation about outsourcing. However, investing in your own staff builds up ownership, long-term loyalty, local knowledge and a commitment to safeguarding the assets of your organisation. The further away from the management of any part of a business the more vulnerable the business is. And that's where issues of corporate governance come into play.

The three degrees of outsourcing

When consideration is given to outsourcing functions within any business, thought should be given to:
1) Making sure the interdependence between core business and support services is well understood.
2) The organisation should make sure it understands just what is being outsourced.
3) An organisation can outsource the management of a support service but it can't outsource the responsibility.


Martin Booth works at Box Hill TAFE and is Vice President of the National In-Plant Print and Publishing Association (NIPPA).