Making Outsourcing Work

The Continuing Staffing Trend -- Outsourcing

The largest single expense item for many companies today is contingent labor services, whether the services are called temporaries, associates, contractors, 1099s, consultants or one of the many titles commonly applied.

Why contingent labor? The answer lies in the not so quiet revolution that has occurred in business: companies have learned that focusing their internal resources on activities that add corporate value while outsourcing supporting functions maximizes the return on their labor dollars. How do firms decide what functions are core functions and which functions could/should be outsourced? A simplified method is this -- if the only time you take notice of a business service is when it isn't working properly, it's probably a good candidate for outsourcing.

The "IT Lite" strategy, developed by the GartnerGroup and often referenced in the public domain, is a perfect example of the current trend as applied to deploying Information Technology resources. The strategy suggests that a company focus internal IT resources on forward-looking, value-add initiatives. Senior managers drive IT innovation in business, and align IT strategy to support corporate initiatives. Mid-level management and core technical staff support business change initiatives. The rest is outsourced. Functions such as legacy application support, cyclical test functions, help desk, desktop deployment services, etc., are outsourced to firms that specialize in those services and bring economies of scale to bear. The result is that otherwise fixed-costs become variable costs. Combined with service level agreements, overall costs typically decrease while quality increases. An added bonus is that capacity can be increased or decreased as needed, eliminating the holding and/or layoff costs associated with regular full-time staff in slow times.

Sounds great! Everybody wins! So what's the catch?

The catch is that managing the procurement of contingent resources can be a major challenge. Different areas of a firm typically require different personnel resources from many different vendors. It is not unusual for a large, diversified firm to maintain relationships with hundreds of temporary service firms, requiring legal and procurement contracts with each firm. The cost to maintain those contracts is high. Managing the utilization of minority/woman/veteran-owned small businesses is difficult. Service levels and labor rates are difficult to control, and procurement organizations often bear the oversight burden. Suppliers who want to supply their services can deluge line managers with phone calls. What can be done to relieve the burden?

Managed Services to the Rescue

There are two primary methods companies employ to streamline the acquisition process -- approved vendor lists and managed service firms, or a combination of both.

Vendor lists can work well, especially when associated with pricing by labor category, but often limit exposure to potential innovation from new vendors.

Managed service firms act as a general contractor, subcontracting all other suppliers used by the client organization, greatly simplifying the work of the procurement organization -- one invoice, one check each month. The administrative burden for the end-user client is greatly reduced.

Again, everything sounds great, but communication problems arise more often than not. Vendor lists tend to limit competition and create barriers to innovation by potential new vendors. Without automated processes, Managed Service Providers seldom communicate efficiently with line managers or secondary vendors. With the advent of the Internet, software systems are available that address both issues very effectively.

Wonderful! What does it cost?

Assuming a client organization spends enough money on temporary resources each year, the answer is nothing. That's correct, zero dollars.

How does this work? The answer is simple -- the Managed Service Provider administering the automated system charges a small fee to the secondary vendors using the system, typically 3-4% of the revenues that flow through the system. In turn, part of that revenue goes to the software vendor supplying the automated system. The question then comes to mind -- why would secondary suppliers be willing to pay the ~3% of revenues to the Managed Service Provider? If you speak to a secondary supplier's sales person, their answer is that they don't want to pay. The real answer, however, is that it saves the service provider money too.

Here's how it works at most temporary service firms: Approximately 10% of a temporary service firm?s revenue is allocated to the cost of compensating their sales force. With a vendor neutral, automated system in place, the secondary supplier no longer needs a senior sales person to service the client any longer, trading the majority of the 10% salesperson cost for a 3% managed service provider cost. Part of the savings goes to the secondary supplier, part to lower rates for the client.

So, the salesperson won?t be happy and may need to go into recruiting instead, but you the client, the managed service provider, and secondary suppliers all win.

All Managed Service Systems are Not Alike

There are significant differences in automation products available today. The features presented in the preceding table represent a best-of-breed system.

The best advice is to understand your companies? workflow before selecting a vendor, and make sure their system accommodates your processes.

Another caution -- avoid getting locked into a proprietary system if at all possible. Once your staff gets used to one automated system, it is difficult to take it away. Target managed service providers that utilize vendor-neutral software. This will allow you to switch or even eliminate the Managed Service Provider if you are not getting the service you desire, but without having to give up the software system your staff are now trained to use and maintain your historical data.