The costs associated with training and retaining in-house expertise for niche talent are no longer worth it, say 52 per cent of Canadian executives polled in a recent survey commissioned by financial consultancy Richter. Consequently, many are turning to third parties to provide specialized functions, from business consulting, to IT and financial services.
The Angus Reid survey commissioned by Richter, entitled The Canadian BizHealth Report, surveyed 500 senior executives across the country and points to a boom in “borrowed expertise,” according to Richter.
“We’re seeing a maturing of [the outsourcing] industry,” says Walid Hejazi, an associate professor at the University of Toronto’s Rotman School of Management. “In the past, it was relatively difficult to get a consulting firm to have the proper skill set. They are now able to develop an expertise that may supply more than one company.”
As a result, outsourcing has become more than just a cost cutting measure. Today’s service providers can offer a formidable array of highly specialized services. Because they focus exclusively on expertise, these organizations can provide a level of quality that few in-house teams can match.
There are other advantages. Outsourcing frees up internal resources and allows organizations to focus on core competencies, as opposed to managing teams whose expertise may be incompatible with the company’s underlying objectives.
It can also circumvent high training and retention costs, which have been exacerbated in recent years by increased poaching from other organizations. “SMEs are having challenges keeping people,” says Mitch Silverstein, CA, CPA and partner at Richter. “They are investing all this money, and then [employees] are leaving.”
Rob Bracey, president at Toronto-based IT service provider Quartet, says his clients can make very exacting demands, thanks to the nature of provider contracts, and the plethora of data these organizations make available to their clients. “To hold an employee accountable as closely as my clients hold me accountable is very difficult,” he says. “I have service penalties, they can fire me.”
Mr. Bracey says many service providers share accountability with their clients. Some of Quartet’s clients, for example, are on guaranteed cost reduction contracts, meaning they share the benefits of reduced operating costs that result from Quartet’s familiarity with their operations.
Those concerned about shipping jobs overseas will be encouraged by the plethora of made-in-Canada solutions. Patriotism aside, there are many business advantages of going local. “If a firm like mine is going to help you adopt a sophisticated IT platform, you have to have some sort of cultural symbiosis,” says Mr. Bracey. “It’s very difficult to get aligned, culturally and strategically when you’re 10,000 miles away.”
The question for many is which competencies to keep in-house and which to outsource.
Dr. Hejazi says companies should preserve their core competencies, and consider outsourcing everything else.
There are no hard-and-fast rules for what constitutes a core competency. An accountant, for example, may think his organization provides auditing when, in the context of their business, it could be considered a generic service. “A core competency includes the brand and reputation, and the interaction with the client,” Dr. Hejazi says; in other words, any resource or skill unique to a company.
Because there are so many options available, outsourcing contracts tend to be unique, and consequently require careful oversight. It should be a given that there will be a learning curve as both parties adjust to the relationship.
Trust is also critical. For one, it is essential to go with a provider that goes to bat for their clients when unexpected situations arise. “Just because you outsource something, it doesn’t mean you’re outsourcing responsibility,” says Jim Menzies, national leader of manufacturing and distribution at Grant Thornton. “Responsibility still remains with you, at least in the eyes of the customer.”
In some cases, the obligation is a legal one. For example, under Canada’s privacy legislation, legal responsibility for keeping data private remains with the collector of the data even when it is hosted on the premises of an outsourcer.
Making objectives clear to providers, and ensuring that regular reporting takes place are key to maintaining a positive relationship. Organizations can’t simply throw their problems over the wall and expect good results. “If you outsource a mess, it will come back to bite you,” says Dr. Hejazi.
Companies considering outsourcing should be aware that the practice has evolved rapidly in recent years. Providers offer far more flexible arrangements, are increasingly competitive, and provide the opportunity for a back and forth, collaborative process. “It’s win-win and I would argue that we need to facilitate more of this,” says Dr. Hejazi.
WHAT IT ISN’T
Outsourcing can be an emotional topic, and is frequently misunderstood. Here are three common misconceptions:
Outsourcing ships jobs overseas: While some industries, such as manufacturing, have had jobs siphoned off by China and other developing nations, The Rotman School of Management’s Walid Hejazi says the majority of the world’s outsourcing is local. What’s more, the flight of low-level jobs is bound to slow as global markets equalize.
Outsourcing is a zero sum game: In the past, outsourcing contracts were inflexible, all-or-nothing propositions. As the industry has matured, today’s outsourcers are far more accommodating, and strive to develop collaborative agreements.
Outsourcing means losing control: Rather than trying to micromanage a highly specialized in-house team, organizations can make explicit demands from their providers, complete with deadlines, metrics, and means of recourse.