Outsourcing debate continues

Outsourcing has been receiving more column inches in recent years than perhaps any other subject associated with purchasing. And the recent NHS deal has continued that trend.

This is an emotive issue, as while there are significant commercial advantages to be exploited, the news has focused

on headcount, particularly the case when outsourcing includes off-shoring. Frequently, utsourcing can bring new skills and approaches and improve performance. But equally it can simply be a way to reduce staff by transferring them off the books. The approach is not new. I used to call it subcontracting but then it was managed by purchasing. Too often, however, outsourcing programmes ignore the basics of good purchasing practice.

Even worse is the trend towards outsourcing purchasing itself. The NHS arrangement with DHL makes the point about understanding the impetus behind a decision. Reducing spend may be the goal, but cost plus margin is unlikely to lower overall cost significantly. Head count reduction could be an issue particularly if you employ large numbers of contract staff. Increased purchasing skills may be short-term objectives to improve spend.

Purchasing should always be making a positive contribution and be cost-neutral as a minimum. If you spend ?3 billion effectively then it should be easy to fund the purchasing group to become increasingly innovative. Internal investment to build skills and capability must create a more sustainable proposition. The more you outsource the less capability you retain to manage the future, with the risk that eventually you even lose the skills to manage the next tender programme.

Public sector outsourcing programmes must be commercially sound and deliver equal or better service. Frequently they do not and, once externally provided, tolerance reduces.

And the sector is particularly affected by the conflict between commercial agreements and policy initiatives. The NHS programme again is a case in point - what happens to the smaller companies and specialists as the commercial organisations seek to optimise their revenues and margins?

We hear a lot about the failure of outsourcing programmes. Failures come when organisations look to control through contracts alone and not by building effective relationships. Outsourcing requires firms to look closely at providers to ensure their ethos and cultures are compatible. After all these providers may be taking over key delivery processes and in some cases dealing directly with customers. They could be operating in ways that taint reputation which is a significant risk to high-profile organisations.

Outsourcing offers a dynamic opportunity to benefit from low-cost providers, access new skill bases, integrate specialist capabilities and drive down costs. At the same time it can reduce head count to achieve short-term targets.

But it asks big questions about effective management and future capability to control direction due to constraints of contracts, or retaining the capability to return functions in-house, or manage transfers between outsource providers.