Outsourcing: Companies get the fashion and cut back to the core

The key is deciding what functions can or should be handed over to Outsourcing companies, and then getting the contract right.

What exactly is the core of a business - a manufacturing company, for instance? It is not the transport of products, cleaning the premises, security or catering; nor is it the warehousing or the computer department; probably not routine accounting.

So those specialist functions can be bought in, as can answering the phone - there are call centres all over the world to deal with that. Perhaps so can the making of products, and purchasing. The sales ledger and collecting money are already often handed to factors and invoice discounters.

Companies could be looked on as multinational when it accomplishes all those functions, and it would be efficient to leave it to specialists. That also has the advantage of transferring fixed overheads to variable, getting the benefit of efficiencies of scale, and allowing management to focus on what affects the profits.

There is also a better chance all those activities keep up to date with the latest developments. It may therefore be possible to outsource selling to people who concentrate on that, and lots of organisations leave the marketing, public relations and advertising to experts. Can one then buy in design, even for products?

With all that work outsourced there is little point in having an in-house personnel department, or even human relations. That means not a lot is left within the business. It is all very well to say one should stick to one's knitting, but just where are those needles and wool?

It may be little more than the board of directors, and as a result what you have is the much-discussed virtual company. In theory that should make it flexible, efficient and swift to react.

That is the theory behind the continuing popularity of outsourcing and facilities management. It is forcing directors to think hard about just what is the essence of a company, or deciding what separates it from competitors and where the essence of its lead and uniqueness comes from.

Fashion is still swinging in the direction of reducing the core to the absolute minimum. So much so that facilities management and outsourcing companies are turning away business because it is coming at them faster than they can grow to take it on.

"We are bidding for less than half the opportunities we see available," said Paul Pindar, chief executive of Capita. The public sector still has work as the Government is under pressure to provide better value service but at the moment the main growth is from the financial services sector, especially insurance.
A few years ago "we might have had a nice interesting conversation about outsourcing", he said, but now the companies call with an urgent demand for a contract. "The two most common themes are measurably improving service quality and increasing value for money."

That is backed by an Outsourcing Institute survey which found that cost reduction was the top reason for putting work to subcontractors. Concentrating on the company's main business came second.

Mr Pindar reckons the current market is £3 billion to £4 billion and puts the potential at nearer £67 billion to £70 billion, so there is still a long way to go. The only problem is keeping pace with the acquisition of additional staff. "You stress the organisation to the point we can't be sure we would be doing a good job."

At some stage the pendulum will swing back and a management guru will make piles of money from writing books explaining that companies work best when every detail is under their own control and they save money by doing their own work.
In the meantime, however, the thesis is that management should focus on the front end which produces sales, and leave back-office work to specialists.

According to one management expert it is like centralisation of sending responsibility to the operating outposts - there is no single right answer but the best strategy is to change the structure round at least every seven years to keep people on their toes.

In the meantime it looks as if facilities management and outsourcing are set for years of continuing growth, and as corporate experience of the practice grows, the mistakes get fewer and less disastrous. The main advice of the professionals is first to decide what can be - or should be - handed over to outsiders and then to get the contract right.

That means setting tight but achievable performance targets, insisting on flexible prices, having regular break-points in the contract, and organising reviews. That may ensure the system works, even if the company changes its mind about where the core of the business lies.

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