Concept:
Non-core business activities are outsourced to external service providers, thus reducing fixed overheads. The service provider, being a specialist in the field, should be able to provide a more cost effective service, and the management team is then able to devote 100{46f50405784e568ae7eabd7aaea8eaa43f0606bd4f4f3efe6f4c06f8d5f7b225} of their time to the core business activities.
Functions which are frequently outsourced include:
- Auditing.
- Building/engineering work – project management.
- Technical support.
- IT.
- Human resources.
- Training.
- Payroll.
- Legal advice.
Outsourcing also enables Managers to have a better understanding of costs, and to ensure they only pay for services as they are needed.
External service providers can also bring an external perspective to the Company and can enable smaller companies to “punch above their weight” by having access to highly skilled and specialist people. Through Service Level Contracts the quantity and quality of service provided can also be controlled.
Example:
Cost savings from outsourcing can be considerable. In this real example a Confectionery business decided to outsource their central HR and Training functions to specialist HR and Training companies:
| Central HR Department annual costs (1 x HR Director, 1 x Training Manager, 2 x HR Support Staff) | – £135,000 |
| Outsourced HR Support 60 days/year (Includes expenses and ad-hoc Project/Legal work) | – £50,000 |
| 7 x external Training Programmes a year | – £35,000 |
| Total Cost | – £85,000 |
| Annual Saving | – £50,000 |
Are there any direct functions that you should be outsourcing?
What are the potential risks versus likely benefits?