by Jennifer Ulrich
The typical big business model has evolved drastically over the past several decades. Outsourcing, once a taboo topic, is now more commonplace in some industries than internal headcount. The concept just makes sense in certain spaces, like financial services and pharmaceuticals for example, two highly regulated environments. It started with more transactional or tactical roles and responsibilities such as payroll or purchasing functions where the knowledge transfer is minimal and the risk is low. Companies are shifting further into this outsourcing model and now contracting more core functions and even strategic aspects of the business such as finance and IT, and sourcing. The following article will examine this move and what level of risk, if any, exists as it pertains to one industry or another. Potential risk mitigation will also be discussed.
One thing to keep in mind when reading this article is that not all businesses define “core” and “strategic” roles the same way. For the purposes of this article, ”core” depends on what the core function of the business is. In IT, for example, “core” functions include the management of systems that are critical to the business’s operations. “Strategic” roles are defined as those in which the owners have an impact on the direction of the organization or where critical business functions exist.
Within the pharmaceutical industry it is common to outsource functions like data center management, product manufacturing, and marketing agencies. While these are vital functions in and of themselves, the business will likely benefit cost- and competency- wise from external expertise as opposed to onboarding internal staff to accomplish these tasks. More transactional functions like accounts payable are also often outsourced, as the knowledge to perform the duties of these roles is easily transferrable and there is little risk involved in the actual tasks being carried out. More recently, as the impact of patent cliffs becomes more severe, pharmaceutical companies are looking to external resources to supplement their core and strategic functions. Core functions such as tax and accounting, including the management of the internal processes and systems, are being handed over to external contractors. And while measures are being taken to ensure protection of privacy and data, business continuity suffers as contractors shift from client to client. This is not to say that contractors are always the wrong choice, if the relationship is managed well and there is little movement between roles, this can be a solid structure. Things like cost and management of the external resources should be carefully evaluated before choosing to pursue this option. When developing relationships with suppliers the business should ensure that mutually beneficial language is built into such clauses as termination, liability terms, performance management, business continuity, and work ownership, among others.
Within the financial services industry almost all core functions are outsourced, from customer service to transaction and payment processing services. The only internal roles remaining are those that involve high-level decision making and those within the credit approval process. However, this does not mean that there is not a great deal of risk involved in outsourcing so many roles. According to Brad Carlson, Supplier Relationship Management Consultant at Source One, “It’s about going in eyes wide open.” If the business is outsourcing a core service, or any service for that matter, they should be the experts in it. They should know the risks in the process as well as those involved in the outsourcing of the function. The business owner should understand all aspects of the appropriate controls and be able to test them adequately with little to no failure. Metrics are also a critical component when outsourcing a service to a third party provider, even onshore resources should have established SLAs and KPIs to measure them against. In the end, the business still owns all of the risk; they are the ones who will suffer the most for a third party supplier’s failure.
As previously noted, depending on the business model, outsourcing can be a strategic move itself. By onboarding subject matter experts in their field, especially for shorter term initiatives, a business can reap the benefits of a temporary staff augmentation without the management and capital burdens brought on with a full-time, permanent resource. Strategic Sourcing is a function that is well suited for an outsourced function, mostly when led by a strong internal team and supplemented with knowledgeable, on-demand resources from a third party. Business owners in such capacities as procurement and purchasing should look for a sourcing partner that can adapt seamlessly into the culture and perform internal procedures while helping the internal team to streamline processes and reduce costs.