To outsource or not to outsource, that is the question?



By Mark Atterby

Shared-services-roadsign-007Folks have been arguing for years about the relative merits and benefits of outsourcing as opposed to shared services. This debate is not going away time soon. Each model has its distinct benefits as well as disadvantages and it is up to the business leaders of organisations to decide which is best for them.

In the past, outsourcing to a third part tended to happen when an organisation was looking for fundamental change…

Does it really need to be an either or situation. Peter Low from Deloitte believes, “Many organisations are best served by a combination of outsourcing and shared services, even within a single business function. Also, many activities can be managed effectively either way. Ultimately, success is not just determined by the approach you choose, but how well you execute it”.

Outsourcing versus shared services

In the past, outsourcing to a third part tended to happen when an organisation was looking for fundamental change, wanted to move quickly and saw cost reduction as a top priority. Other reasons for adopting the outsourcing model, includes:

  • Greater cost savings. Superior systems, processes, technologies and economies of scale – as well as easier access to offshore labor – should enable third party vendor to do the work more efficiently.
  • Outsourcing tends to be implemented faster.
  • Outsourcing helps avoid future investments such as costly system upgrades.
  • Outsourcing provides greater flexibility by turning fixed costs into variable costs.

Adopting a shared services approach is more relevant when control is a top priority and the tasks and processes involved are quite unique to the organisation. Success depends on having adequate systems, processes, talent and management capacity available. Without it it is hard for shared services to compete with outsourcing. 

Adopting a shared services approach is more relevant when control is a top priority…

  • A shared services approach gives you more control over processes and outcomes, which reduces risk. This is especially important for key activities that are strategic to the business or bound by strict compliance requirements.
  • Your business requirements are unique – and so are the systems and processes needed to support them. They are competitive differentiators and should be kept in house.
  • Shared services are more responsive to business needs because they are part of the same enterprise and have a closer relationship with the business units.
  • With shared services, you don’t have to share your strategies and other proprietary information with an outside party.

Hybrid Model

Peter Bender-Samuel, from Everest Group, highlights that using the term ‘hybrid’ to refer an organisation that uses both outsourcing and shared services is not that helpful. Utlising both models is simply a mixed model.

A hybrid sourcing model should combine the benefits of both outsourcing and shared services into a single model. By combining the strengths of both models allows the creation of greater value not available with either of them alone.

Several large global banks are using a hybrid strategy to control their concentration level of risk. If, for example, a shared services location overheats with escalating costs and labour that the location becomes unsustainable, the bank can use an existing third party outsourcer to quickly scale up the skills in a different location.

What’s right for your business

Kerry Hallard, Director National Outsourcing Association, UK, comments,The debate has moved on. We now throw global business services into the ring where shared services and outsourcing are complimentary, governed by a global framework. The right model depends on the vision, culture and business imperative of the company at the time.”

Outsourcing versus shared services, people have been arguing for years about the relative merits each. Yet the debate today is more relevant than ever. In some cases, organisations are unhappy with their previous decisions and are looking for a new approach.

But more often than not, decision-makers are simply revisiting the subject in light of changing business conditions, such as new business strategies, new leadership, a major event such as a merger.

Outsourcing and shared services transform an organisation with advantages including all-year-round availability, flexible cost models, and multi-lingual capabilities across a variety of sectors, resulting in the delivery of services to clients and their customers at a cost, quality and timeliness that no other alternative can compete with.

June 24, 2014

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