Mnister of Labour, Emeka Wogu
In today’s business environment, outsourcing business processes to a third party has relatively become commonplace as the practice appears to give organisations the opportunity to lower costs, improve performances and focus on core competencies.
Typically, an outsourcing deal involves the transfer of employees of an organisation to the outsourcing business partner and often times the functions being outsourced is considered the non-core to the organisation.
The term outsourcing which became popular in the 21st century has become a feature of any modern economy. This is because outsourcing is believed to offer greater budget flexibility and control as well as help firms to perform well in their core competencies while mitigating the shortage of skill or expertise in the areas where they want to outsource.
More importantly, the decision-making process for most organisations involve internal analysis and evaluation, needs assessment and vendor selection, implementation and management.
In the Nigerian work environment, trends such as outsourcing and contract staffing are on the upward swing. Increasingly, companies decide to outsource key business processes to meet specific strategic objectives and as such outsourcing in traditional areas such as customer care, Information Technology (IT), financial services and manufacturing is growing rapidly.
When a key business process is outsourced it falls into a category of service provider called business process outsourcer (BPO). Large multinational companies are investing in captive BPO units in supplier countries in multiple locations in a bid to reduce risk and control quality.
Chief executives of organisations are involved to ensure the long-term success of strategic outsourcing decisions. On their part, suppliers understand that they must compete globally and that outsourcing will play a more transformational and strategic role for the client and this have brought about increasing global competition and pressure on margins from emerging lower-cost outsourcing destinations.
Challenges of Outsourcing
Despite the benefits inherent in contracting some business functions to service providers, many outsourcing businesses fail because most organisations fail to complete necessary due diligence work before the outsourcing relationship begins.
They also neglect to take sufficient care of the relationship thereby adopting an “out of sight, out of mind” approach once outsourcing begins. Given this scenario, outsourcing is seen to impede the work of many organisations though it is not brought to the public domain when organisations experience production delays caused by outsourcing.
Risk Advisory Services Professional and Denise Mainquist, Managing Director, ITPAC Consulting, Richard Mosher, emphasised that the potential risks when outsourcing a key process are greatly increased because the outsourcing company gives up a significant amount of control over how that service is delivered to customers.
They maintained that successful outsourcing should involve balancing the risks and benefits of obtaining external expertise in support of a set of tasks that are beyond the capabilities of internal staff or cannot be performed cost effectively in-house.
According to them, while a decision to outsource may help offset identified risks, the ultimate responsibility for effective performance of the function and for compliance with legal and regulatory requirements still resides with the organisation. Moreso the organisation remains responsible for risks and is required to monitor the outsourced process to ensure risks are addressed appropriately.
“An organisation might outsource numerous activities to a third party: IT services and infrastructure, help desk services, and transaction processing, to name just a few. And although these arrangements have the potential to deliver significant value, the organisation typically has little or no control over the service provider’s internal processes.
“Consequently, any organisation that decides to outsource part of its operations puts its reputation, along with any data processed or customer interactions performed on its behalf, in the hands of a third party.
“Successful outsourcing involves balancing the risks and benefits of obtaining external expertise in support of a set of tasks that are beyond the capabilities of internal staff or cannot be performed cost effectively in-house. And while a decision to outsource may help offset identified risks, the ultimate responsibility for effective performance of the function and for compliance with legal and regulatory requirements still resides with the organisation,” they stated.
A highly collaborative relationship based on effective contract management and trust adds value to an outsourcing relationship. So any organisation that outsources business or technical functions must effectively manage the relationship in order to enhance performance and productivity.
Several factors contribute to the failure of outsourcing relationship and these include service failures-a situation where service providers fail to provide the level of service or expertise required t meet the needs of the outsourcing organisation.
Another reason is that both parties fail to make the most of the relationship at the expense of one another. Often time, both parties enter the relationship with different expectations regarding the services to be provided and such disagreements may reach a level where the relationship can no longer continue.
Another major factor is poor communication and inability of the service provider to achieve mutual understanding particularly with support staff. Outsourcing has like never before compounded the already bad situation of suspicion of management by staff, the regular feature of most corporate setting.
This also applies to staff members within the outsourcing organisation and service organisation staff members. Therefore failure by service providers and outsourcing organisations to ensure adequate understanding can in turn cause the outsourced function to fail or to lose some of the outsourcing organisation’s customer base.
Executive Director, 7Up Bottling Company Plc, Mr. Femi Mokikan, expressed the view that effective communication is needed to ensure adequate understanding of the outsourcing environment.
Mokikan, who is also a human resource expert, maintained that most service providers do not know how to manage the relationship with support staff adding that this has been a great challenge for human resource practitioners.
According to him, in terms of managing employees, most service providers have very little idea adding that what most companies do is to use their own human resources to help service providers manage their employees relationship.
“There are structures, guidelines and rules that must be followed before you can be licensed to be an outsource agents. Of course, within the environment where they work, the fact is they are not employees of a principal company, they are employees of a third party, that third party has its own terms and conditions of employment which is applicable to every outsourced employee. The principal company also has its own staff with conditions and terms of employment which is applicable to its own staff alone.
“But the reality is that because they work in the same environment there are bound to be some disaffection that demoralises employees of third party and so they use this as a stepping stone and what has made it so prominent these days is the fact that the unemployment situation in the country is so terrible that anybody will go for anything just to keep body and soul together.
“What many companies have done is for the Human Resource (HR) practitioners of the principal company to take up additional responsibility to help the third party to manage their employees,” he said.
Speaking further, he stressed the need for any organization that outsources business or technical functions to actively manage the relationship such that a thriving relationship that benefits both can be formed.
Evaluation of Outsourcing
Though different scholars have definite views regarding the business of outsourcing, there is no question that outsourcing has come to stay. The practice has become a popular choice in business and industry as organisations are considering and utilising outsourcing.
According to the global agency industry body, the International Confederation of Private Employment Agencies (ICPEA), the industry’s global annual sales revenue increased from €83 billion in 1996 to €203 billion in 2009 and the number of agency workers has more than doubled over the same period. So, what is required is how to get the best out of outsourcing.
That is the decision-making process which involves examining the need for outsourcing and identifying the implementation strategy.
Organisations should remember that outsourcing does not mean abdicating management responsibility. Therefore, companies should avoid acting compulsively when deciding on an alternative solution. If the requirements, expectations, and needed resources are not clearly understood, outsourcing does not improve the situation and may even cause it to become worse.
Also, Managing Consultant, StreSERT Services Limited, Roselyn Onalaja said for an organisation to successfully outsource, a total commitment by both outsourcer and client is needed for both parties to derive the benefits of outsourcing.
“Service providers must be open and honest in all dealings and should be able to communicate both the positives and the challenges to their clients and their internal executive staff. There must be clearly spell out expected performance, outcomes and timeliness for both provider and buyer in Service Level Agreement (SLA),” she said.
She called for an urgent review of the Labour Act in line with best global practice while also calling on regulators to monitor the operations of service providers by regulators in order to sanitise the industry.
* Additional information from Internal Auditor