Consultancy Services

OUTSOURCING

When a public agency negotiates an arrangement with a third party to perform services or work, which absent those arrangements would be performed by the public agency's own employees, the service or work is said to be outsourced or "contracted out".
In recent years this approach to services has been encouraged by many state and local governments as a means of reducing costs, improving efficiency, or better managing the growth of government work forces. In many cases, outsourcing has not been the panacea legislators and governmental executives have anticipated, yet virtually all public agencies have invested in one degree or another in outsourcing services. At Longwood, our food services operation has been outsourced for over 40 years, while other areas like our bookstore and our housekeeping management services have been contracted out more recently.

Outsourcing has been used very successfully by private industry for many, many years. So it follows that a look private industry thinking pursuant to contracting out would be productive in understanding both its strengths and limitations when applied to public agency scenarios. Private industry has used outsourcing as a strategy in the following instances, and often in tandem:

1. To Reduce or Eliminate Liability: This is called shifting the risk. When legal risks become reality, they can be very costly and time-consuming. Consequently, a third party may be engaged contractually to not just do the work, but bear the brunt of liability exposure if liability issues develop. Good example in private hospital systems are high risk services, such as emergency room services, anesthesiology, and life support services. A negligent act occurs in the ER and the Hospital, its Board of Directors and employees are substantially insulated from the exposure.

2. To Obtain Special Expertise or Resources Unavailable Within the Company: 
Not all companies can be expert in every area of operations. Smaller companies in particular, have limited resources and wish to stack them in areas we call "core-competency" areas today. Special services which aren't used sufficiently to justify developing in-house expertise can be contracted out with the company frequently enjoying the ability to leverage big league resources from the contractor when needed. A good example of this is legal services. Most small and middle sized companies don't have sufficient legal work to employ a full time in-house counsel. On the other hand, when they need legal advice, they want the best legal advice and they want it from someone who knows the company and its business. Consequently, contracting with a firm paid a minimal annual retainer allows a knowledge base to be developed by the law firm retained, but allows the company to basically pay as they go on a negotiated hourly rate once the retainer has been exhausted. You get better service and better cost-effectiveness.

3. To Permit Service Collapsibility: 
Sometimes outsourcing is used as a transitional business strategy, where a service is needed for only a short period of time, as a stop-gap, or if market, economic, or strategic circumstances have sufficient uncertainty as to require further evaluation as a long-term strategy before a fuller investment is made. It allows a service to be shut down quickly or assigned resources to be shifted quickly. Collapsibility is highly valued in private industry. A good example of this would be a multi-color copy service, where a vendor is contracted to provide the service for 90 days, in order to establish actual utilization patterns and consider long-term operating costs against projected revenues, without incurring long-terms investment costs prematurely.

4. For Convenience: 
Occasionally, services are so ancillary to the business' primary services or so remote from the home business that it would not be efficient to move employees or establish a full-service office dependency. An example might be an out of country mail distribution center to serve as an advance marketing effort for introduction of a product into the Russian market.

5. To Eliminate Having to Deal with a Problem Operating Area: Sometimes areas are very high in turn-over, or have historically involved more workers compensations injuries, or accounted for more grievances that other areas of the company. There are times when a company will throw up its hands and remove the distraction or the drain from its resources by outsourcing the area. Transportation services are notoriously difficult to make profitable, and occupations which involve relatively low pay, little training and no benefits can be awfully frustrating for any employer.

Inge Fryklund, writing in Business Forum Magazine's Winter/Spring 1994 issue suggested "Six Basic Rules" for Outsourcing, which go hand in hand with this reasoning:

Rule One: 
Privatization (outsourcing) should always be the answer to a question, not a premise or goal. In other words, you shouldn't be outsourcing, just to outsource. You should be trying to manage or resolve some operational issue by it.

Rule Two: 
To determine whether privatization (outsourcing) would be cost effective, identify all the direct and indirect costs of the current operation and the proposed substitute arrangement.

Rule Three: 
Do not privatize (outsource) unless the expected gains of privatizing exceed the transaction costs of contracting.

Rule Four: 
Be aware of the public policy implications of privatization (outsourcing), especially for public agencies.

Rule Five: 
The real benefits of privatization (outsourcing) come from leveraging private sector resources and expertise.

Rule Six: 
Government can never contract away blame or responsibility. Note: This, I question, but provide it to be fair in the representation of Mr. Fryklund's ideas. The doctrine of governmental and charitable immunity, as well as contractually negotiated waivers of liability in American law do make it possible to do just that under very specific circumstances.

Alternatives should always be considered when wrestling with business dilemmas or difficult operating issues. Outsourcing is one such alternative. When considering it, however, bear in mind that contracts must be actively administered to be effective, and the loss of a certain amount of control in their service by using a contractor should be expected. In a similar vein, long-term initial contracts are strongly disfavored. Relationships are built, not simply contracted. There are two times when a contracted relationship is likely to go sour. In the very beginning, or after a period of years when the parties start taking each other for granted. Periodic rebidding for cost-competitiveness is always wise, and it also let's the principal periodically reassess the company or the agency's needs in changing times. If services are rebidded too frequently, however, continuity of services can easily be lost. The balance is delicate.

Saving huge amounts of money on contracted deals should not be expected. There are other very good reasons to contract. The contractor is in the business to make money. The public agency engaging a contractor has to realize this. The contractor can normally save you some money through greater efficiency, but not by hand over fist. If the deal looks too good to be true, you can rest assured that it is. Look at the labor cost rates, look at the scope of the services, look at vague language, and look at add-ons like emergency labor rates, etc. before signing on the dotted line.

Be cognizant that big is not always best when contracting. You want big league resources, but you also want to be a first tier customer. Pay close attention to the average account size for the vendor as well as who you will actually have managing your account. Being a big fish in a little pond is sometimes better than being a little fish in a big pond.

The Director of Human Resources, as well as the Material Management Director are available to lend assistance or provide guidance to departments or offices wishing to consider outsourcing alternatives as a part of their business solution.