Outsourcing and insourcing activities
Companies should continuously evaluate its organizations and investigate if organizational development is required. Tools that can be used in this process can be EFQM Business Excellence, INK Management, Business Process Management, Six Sigma etcetera.

Outsourcing to developing countries is a buzz-word and many companies are triggered to outsource activities to specialized companies and/or low-cost countries. If executed well outsourcing activities can be worthwhile and your company can become more profitable. However there are also many examples where outsourcing activities have been a failure and resulted in high losses, even bankruptcy. Therefore Business Advice - America Central and BA2C advice to analyze your situation before starting-up an outsourcing process. Business Advice America Central can assist your company in this process.

Main characteristics of Outsourcing

• Activities that were executed in-house are transferred to a third party;
• Company sources (in some case including employees) are transferred to a third party;
• During a long time (contract duration) there will be an intensive relationship between outsourcing parties involved;
• While transferring the activity to a third party the company faces a new cost and risk profile

Outsourcing can be partial or turn-key. With turn-key outsourcing the responsibility of the total execution (including co-ordination) is with the (third) outsourcing party. With partial outsourcing part of the activity is outsourced while the co-ordination of the activities remains in general the responsibility of the client company. In both situations it is very important to have a clear understanding of who is doing what activity, who is responsible for what activity and service/quality levels.

Advantages of outsourcing

• Availability of finance and management focus on companies key activities;
• Optimal usage of knowledge, sources, and experience of third party;
• Flexibility, differences of workload are the responsibility of third party;
• More insight/more clear primary processes in the company;
• View from/input of third independent party that might improve the client company.

Disadvantages of outsourcing

• Dependency of third parties;
• Continuous control of the supplier relationship is required;
• Communication and organisation problems between the outsourcing and client parties;
• Risk is lost of confidential and strategic information;
• Depending of the power relationship between parties it might be difficult to deal with bonuses and penalties.

Main reasons for outsourcing

• Minimizing control and overhead cost;
• Focus on key-activities;
• Availability of world-class capacity and experience of third party;
• Availability of (financial) sources for other company purposes;
• Availability of sources of third party;
• Speeding-up of re-engineering advantages;
• Reducing risk;
• Financial support from third party.

Typical outsourcing process

Strategic Phase
In this phase your company evaluates and investigates if, why and what activities can and should be outsourced (or in-sourced). Key drivers in this process are QUALITY, TIME and COSTS.
During the strategic phase the competence and cost of the potential outsourcing partners will be assessed and evaluated according to pre-defined evaluation criteria. Based on this analysis & evaluation an outsourcing partner can be selected and contract negotiations can start.

Transition Phase
During the transition phase the contracts between the company and outsourcing partners will be signed and activities will be transferred to the outsourcing partner. Some aspects that should be taken care of in the contracts are:

• Activities and volume of activities to be executed;
• Conditions of the contract;
  • Service Level Agreements:
  • Main purpose of the outsourcing activity;
  • Objectives of the outsourcing activity;
  • Evaluation method and criteria of outsourcing partner;
  • Key Performance Indicators.
• Prices, rates, bonus/males structure;
• Continuation process after termination of the contract;
• Dispute coordination, organization & resolution;
• Communication and reporting scheme;
• Management and control of the activity.

Operations Phase
The operations phase consists of relationship maintenance and contract termination. During the contract the relationship between client and supplier should be maintained in order to make the outsourcing a success. Both partners have to work closely together in order to benefit from the outsourcing relationship. Without the specific outsourcing benefits Business Advice America Central and BA2C in general suggest to enter a "normal" client-supplier relationship. Therefore it is important that both parties are aware of the outsourcing objectives of client and outsourcing parties, implement good communication procedures, respect each other and gain trust between parties.

After the contract is finished/terminated it is important that the both the client and outsourcing parties can continue independently with each of the companies individual activities and businesses. Therefore during contract negotiations the termination of the contract including the disentanglement of the processes should be very well defined. If this is not taken care of both client and outsourcing parties risk lots of problems and costs and a discontinuation of activities, legal problems etcetera after contract termination.

Procurement Portfolio Analysis (Power of Client versus supplier/outsourcing party and visa versa)
When defining what supplier relationship is best for a specific situation or if activities should be executed in-house Business Advice America Central and BA2C advice to execute a procurement portfolio analysis. This analysis provides information to define and develop a procurement strategy. In a procurement portfolio analysis the following aspects are evaluated:

• Influence of a specific product/service on the financial result of the company;
• Risk of no supply/delivery of products/services

In the so-called Kraljic Procurement Portfolio Matrix this information can be visualized. An example of the Kraljic Procurement Portfolio Matrix

<figure Kraljic Procurement Portfolio Matrix>

A Procurement & Supplier Portfolio analysis gives you an understanding of the relative power structure between client, suppliers and outsourcing partners. This understanding is in the view of Business Advice America Central and BA2C very important in order to be able to develop a procurement and outsourcing strategy. Four general basis strategies for procurement are:

• Strategic co-operation;
• Competitive bidding;
• Securing supply and delivery;
• E-procurement solutions.

Business Advice America Central
Consultants of Business Advice America Central have assisted several clients with the preparation and implementing procurement and outsourcing strategy and outsourcing deals. In case you would like to receive more information or would like to discuss how Business Advice America Central can assist your organisation please contact Business Advice America Central.