History of outsourcing:

In 1923, Henry Ford said: "If there is something we are not able to do more efficiently, cheaper, and better than the competition it does not make sense to do it, and we should hire somebody who will be better in doing the job than we are". The true beginning of the outsourcing era should however be dated back to 1980s.

Harvard Business Review defined outsourcing as the greatest discovery of the last 75 years. Research conducted by the Fortune magazine unambiguously indicates that leading companies actively use outsourcing in their activities in order to achieve economic results. In Poland, outsourcing has been used since the 1990’s, though its origins were not associated with this name. They were frequently just contracts for providing services supporting the core business, such as cleaning or security. However, some characteristics of these – seemingly simple – external contracts already then showed that outsourcing cooperation may bring more advantages than only short-term savings. Still, it must be acknowledged that a search for savings was the first crucial reason for seeking outside contractors.

 

The beginnings of a market economy in Poland were characterized by unusually low work efficiency, especially where this work did not directly affect the achievement of production targets. Keeping infrastructure (office buildings, shop floors) clean and operational as well as ensuring security were executed by means of numerous internal services. Work organization had little in common with process optimization. Technological base did not support the efficacy of actions. “Incentive schemes” involved mainly social guarantees for employees, promoting those with the longest seniority, not the most efficient. Not surprisingly, managers of many companies decided to look for providers of services which until then they had managed by themselves.

 

Case study 1. – Practical process of outsourcing development at the example of ZG Polkowice-Sieroszowice The beginnings of outsourcing cooperation within the scope of cleaning services between KGHM and Impel can be traced back to the year 1996, when service provision to the facilities owned by the Polkowice-Sieroszowice mine commenced. In order to ensure a smooth transition from the model of internal services to outsourcing, the customer decided to include a requirement of maintaining 3-year employee guarantees for the transferred staff. Of course, organizational optimization and what follows – cost optimization – could only be carried out after these guarantees expired. Hence, in 2000 a revision of market offers was done, as a result of which a contractor offering the lowest price was selected for the next period. After another 2-year experience of cooperation with a service provider selected on the grounds of a price criterion, the management of the Polkowice-Sieroszowice mine came to the conclusion that they needed additional benefits because low prices were inextricably linked with a lower than expected standard. The next procedure of optimal offer selection resulted in reemploying Impel in 2002. It might be useful to mention that compared with 1996, following restructuring activities, Impel was able to offer a 35% lower price for the same scope of the contract. It was the effect of reducing the number of staff necessary to provide the service – from 260 to 150, made possible due to technological changes introduced by Impel, including investments in equipment as well as training and increasing employees’ efficiency.   Another milestone in the history of outsourcing of cleaning services in Polkowice-Sieroszowice was the year 2006, when whole KGHM decided on another verification of offers by terminating contracts with the former service providers and announcing tenders. This time, the offer valuation criteria included not only the price, but also references and financial securities guaranteeing stability of cooperation on the part of the service provider. From among 7 competitive offers, IMPEL again turned out to be the best choice.   The above example clearly shows a change in the point of view on the benefits sought by the customer: from the need to transfer employees dealing with support services for the core business, through the pressure on cost reduction resulting in the selection of the cheapest contractor, through searching for a stable partner.

The choice of a proper external company has always been the more difficult, the bigger the scale of the intended contract. Wherever numerous groups of employees came into play, an all-important issue became the necessity of competent management of implementation activities so as to guarantee the fulfilment of employee commitments and at the same time to spin off the service to an external company and obtain savings for the company-customer.

 

One of the most essential differences in the process of shaping outsourcing as a management solution between Poland and the United States was the fact that here outsourcing developed as a tool for restructuring existing ineffective company structures, whereas in many American firms, from the very beginning it has been an element of a business plan of a new activity. Hence, the pioneers of outsourcing in Poland are companies which, from the start, focused not only on efficient realization of tasks in their core competence, but also emphasized competence in staff management. Only such a partner could guarantee to the business customer that an economically justified decision of outsourcing of a given support area will not be burdened with side effects in the form of intensive and troublesome employee protests.

 

Case study 2. – Takeovers During the long-standing cooperation, the IMPEL Group companies have taken over more than 630 people from KGHM, out of which over 90% are still their employees. Employee groups for whom the statutory employment period in accordance with the company collective bargaining agreement of the previous employer finished, transferred to the collective bargaining agreement of these Impel Group companies which effected the takeover. The employment relationship with the others ceased due to their retirement or disability retirement, due to notices from employees (e.g. connected with a change of residence), and also – in justified cases – as a consequence of notices from the employer.   The possibility of maintaining the employment of the taken-over staff in the Impel Group is caused by a dynamic development of the IMPEL Group companies. Employees leaving restructured contracts find employment in other facilities, where new workplaces are created. Of course, all the taken-over employees, according to the positions they had occupied, were equipped with professional equipment and underwent necessary training.   The difficulty consisted in changing the employees’ attitude: they were no longer KGHM employees, but Impel employees providing a service to KGHM. Interestingly, the new service provider had to convince to this status quo not only the taken-over staff, but also the customer.

It is worth noticing that the role of a service provider in the process of an outsourcing solution implementation is not confined to the formal takeover, equipment and training of the taken-over staff. A role of no small importance to the success of the whole process is played by the ability to change the employees’ attitudes. After all, they often have – especially at the beginning of the implementation, when employee guarantees are still valid – the same tasks and the same employment conditions.

 

However, they are not employees of the parent company, but employees of the service provider. Their job description is no more regulated by a former manager’s orders, but by provisions of the contract between two firms. And very often the former superior remains the contract supervisor on the part of the customer... Doubts, uncertainty, stress – all of these are experienced by the taken-over line employees  and consequently influence the way of working. The bigger the experience of an outsourcing company, the smaller the risk of losing economic and organizational benefits from spinning off services at the implementation stage.

 

Of course, outsourcing of services does not only involve staff management. A properly selected partner takes care not only of the daily functioning of the contract, but continually develops his competencies, broadens specialist knowledge, strengthens relationships with reliable suppliers and invests in technology. It is often a technology dedicated to the execution of a specific contract; it happens that a supplier’s investments concern elements of the customer’s infrastructure. Of course, the bigger the supplier’s potential, the bigger advantages to the Customer: a strong position of such a firm against its suppliers makes it possible to obtain modern technology, optimally tailored to the end customer’s needs, on beneficial conditions which are impossible to be negotiated on one’s own. A supplier with stable financial background can, from the time of contract implementation, use a target technology, treating it as an investment, whereas firms without their own financing would first have to “earn” for potential improvements.

 

Case study 3. – Investments in technologies and training   Reductions in the costs of providing a service are possible thanks to investments in the development of technologies. A specific feature of contracts for services in the area of back office is their provision on the customer’s premises. It means that the contractor’s infrastructure used for the execution of the contract is located in the serviced outlets. It is not particularly important in the case of mobile, simple elements of the employees’ equipment; however, investments in systems of technical protection or kitchen facilities is a more difficult issue. First of all, they are expensive investments, therefore likely to be executed only by companies with good financial standing. For that reason, the requirement of making an investment by the customer as a rule eliminates small firms, with enough liquidity to conduct only current operations.   Secondly, the aspect of cooperation stability acquires additional significance. It is self-evident that the longer the time horizon of the intended cooperation, the more realistically one can plan the organizational and cost optimization of the contract, allowing for investments in technology. Here it again makes sense to recall the benefits of a partnership between the customer’s companies and the provider. If the customer decides to accept a higher price in expectation of higher-quality services, quick-profit-oriented service providers may use this situation to maximize the profit from the contract in a short term, reconciling themselves to the thought of the end of cooperation. On the other hand, service providers-partners will strive to improve their ability to provide profitable services at a level expected by the customer, without “economizing” on technology. As a good example may serve investments made by the IMPEL Group companies during cooperation with entities belonging to KGHM: their total value exceeded PLN 3 million.

Apart from the potential of financing investments and competence in management of groups of employees providing services on the customer’s premises, outsourcing brings one more, very important benefit from the customer’s point of view: experience of an external company, coming from cooperation with other customers. While customers’ individual expectations may differ quite significantly, their actual needs turn out to be fairly similar, providing that competent market segmentation is used. This is why organizational solutions for services such as security, cleaning or technical maintenance of facilities well-tried e.g. with “industrial” sector customers  can be often practically applied in the whole industry, contributing to optimization of functioning of outsourcing contracts.

The present
The historical question “whether to use outsourcing” has been replaced by: “How to construct outsourcing cooperation so that it can bring the expected results?”

Benefits from using outsourcing in the first year of activity:

•   opportunity to focus on the core business – 72%
•   cost reduction – 63%
•   streamlining of production processes as well as service provision in terms of time, quality, accuracy etc. – 40%
•   change in the company’s way of conducting business – 35%
•   promoting an organizational culture aimed at continuous improvement of its business – 32%
•   access to innovative organizational and technical solutions, acquisition of knowledge that can be used in other areas of the company’s business, improvement of organizational capability for effective operations within the scope of mergers and acquisitions, streamlining the decision-making process in the company*.

 

Case study 4. – Example benefits obtained by KGHM from outsourcing   Outsourcing of areas which are not core business brings especially considerable benefits in the case of a significant scale of a contract and dispersal of facilities belonging to the customer’s enterprise: then, the possibility of supervising the whole of the separated area by means of a set of uniform criteria, e.g. SLA, does not require involving additional, dedicated organizational resources on the part of the customer, and the freed potential can be engaged in the development of the company’s core business.   Cost reduction is another benefit obtained by KGHM from spinning off support services to the IMPEL Group companies. Apart from direct savings resulting from restructuring activities carried out by the contractor, the customer also benefits from the fact that the spun-off services are not subject to yearly company remuneration indexation because all the currently employed employees are subject to the service provider’s collective bargaining agreement, not the customer’s.   In the area of streamlining production processes, process supervision has been replaced by external service supervision, concurrently changing fixed costs into variable costs, beneficial in terms of the company’s economics.

“The evolution of attitudes to outsourcing is happening very quickly. Only five years ago nobody thought about business processes outsourcing (BPO), which is slowly becoming a reality.”

Witold Rogowski, Accenture.

 

The Conference Board research of 2007 shows the following mistakes, most frequently made by companies in the area of outsourcing:

 

- Polish enterprises do not have specified plans concerning outsourcing;
- every fourth manager confirms the fact of choosing only those providers who offer themselves to companies;
- only few enterprises establish precisely the role of outsourcing when creating the company’s development strategy;
- outsourcing decisions in companies are taken by unsuitable people or not prepared for this process;
- a business case analysis is skipped;
- enterprises do not make use of providers’ potential in the process of preparing outsourcing decisions.

 

Price: „Paradoxes connected with the price concern both the outsourcing of basic services such as support and more complicated ones. Reducing a tender to an auction forces companies to seek savings where they can be the biggest, thus in services of the biggest added value”. Antoni Bielewicz, Business and Strategy, Computerworld 16/2007

 

Besides, companies are often not aware of the actual cost level of a given area. It is because in many enterprises budgets are grouped functionally (e.g. remuneration budget, health and safety materials budget, training budget), and allocation to actual expenses connected with the execution of tasks of a specific area (e.g. security) is difficult.

 

Hence the frequent pressure of customers on price reduction of services by service providers: when comparing market prices to a company’s own budget items, the customer’s representatives often take into account “current” costs. Investment expenditures on infrastructure improvement, spread out over years, are usually forgotten in such comparisons, just like the costs of improving employees’ qualifications or costs associated with incentive schemes.

 

However, a provider who agrees to such an approach and offers a price which does not take into account long-term cooperation, can at most offer a makeshift solution. The onset of the customer’s dissatisfaction with the quality of provided services is then a question of time.

 

The Future
Gartner Inc. predicts that in the nearest time, outsourcing cooperation with a consortium in which the leading entity will be responsible for the whole of the spun-off area will gain in popularity in the world. Such a solution allows the customer to limit resources necessary to manage even a very wide area of support. This trend means promoting a belief among entrepreneurs that using the knowledge and know-how of market leaders involves many more tangible benefits for the customer’s business than a historical pursuit of the cheapest solution.

 

At present we are observing the next development phase of the idea and practice of outsourcing. The market is opening to supply chain management. At the same time, after years of experiments with dividing orders between many contractors and yearly tenders, Customers come back to the model of long-term cooperation with one, reliable provider. It is an economically justified decision: after all, each tender means measurable, considerable costs on the part of the Customer, and besides, one must remember not only about costs connected with conducting the tender procedures, but also about unavoidable costs of losing competence at the beginning stage of introducing a new provider.

 

From an analysis of long-term contracts it follows that from the point of view of obtaining benefits, it is better for a customer to have a set of indicators thanks to which he can assess current activities of a selected service provider and set goals in the area of process streamlining than to maintain providers’ competitiveness  by their frequent changes. Thanks to that, one can be sure that the customer will avoid drawbacks resulting from possessing a wide range of contractors of the same groups of services (diversity of reporting standards, levels of technological and perceived quality), maintaining at the same time the possibility of motivating a selected provider to continuous improvement of the functioning of an area entrusted to him.

 

Dorota Dałkowska,

Strategy and Marketing Consultant (AION) 

*source – The Conference Board research